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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  _____  to  _____

 

Commission File Number: 1-5005

 

INTRICON CORPORATION

(Exact name of registrant as specified in its charter)

 

Pennsylvania

 

23-1069060

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

  
   

1260 Red Fox Road

  

Arden Hills, Minnesota

 

55112

(Address of principal executive offices)

 

(Zip Code)

 

(651) 636-9770

(Registrant’s telephone number, including area code)

 

N/A

 


(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common stock, par value $1.00 per share

IIN

Nasdaq Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒  Yes  ☐  No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ☒  Yes  ☐  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

 

Accelerated filer

Non-accelerated filer ☐

 

Smaller reporting company

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).     Yes  ☒  No

 

The number of outstanding shares of the registrant’s common stock, $1.00 par value, on July 31, 2021 was 9,097,270.

 

 

 

INTRICON CORPORATION

 

I N D E X

 

   

Page

Numbers

     

PART I: FINANCIAL INFORMATION

 
     

Item 1.

Condensed Consolidated Financial Statements (Unaudited) 

 

     
 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2021 and 2020

3

     
 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2021 and 2020

4

     
 

Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020

5

     
 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020

6

     
 

Condensed Consolidated Statements of Equity for the Three and Six Months Ended June 30, 2021 and 2020

7

     
 

Notes to Condensed Consolidated Financial Statements

8

     

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

19

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

     

Item 4.

Controls and Procedures

26

     

PART II: OTHER INFORMATION

27

     

Item 1.

Legal Proceedings

27

     

Item 1A.

Risk Factors

27

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

     

Item 3.

Defaults Upon Senior Securities

27

     

Item 4.

Mine Safety Disclosures

27

     

Item 5.

Other Information

27

     

Item 6.

Exhibits

28

     

Signatures

 

29

 

 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

INTRICON CORPORATION

Condensed Consolidated Statements of Operations

(In Thousands, Except Per Share Amounts)

 

  

Three Months Ended

  

Six Months Ended

 

(unaudited)

 

June 30,

  

June 30,

  

June 30,

  

June 30,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Revenue, net

 $30,215  $23,602  $61,983  $45,105 

Cost of goods sold

  22,343   16,996   45,901   33,927 

Gross profit

  7,872   6,606   16,082   11,178 
                 

Operating expenses:

                

Sales and marketing

  2,021   1,680   4,003   3,673 

General and administrative

  4,070   4,603   8,049   8,019 

Research and development

  1,309   1,209   2,602   2,410 

Other operating expenses (Note 11)

  1,415   -   1,523   - 

Restructuring charges

  -   1,171   -   1,171 

Acquisition costs

  -   493   -   493 

Total operating expenses

  8,815   9,156   16,177   15,766 

Operating loss

  (943)  (2,550)  (95)  (4,588)
                 

Interest (expense) income, net

  (14)  97   (23)  281 

Other (expense) income, net

  (91)  208   (168)  101 

Loss before income taxes

  (1,048)  (2,245)  (286)  (4,206)

Income tax expense

  80   29   170   47 

Net loss

  (1,128)  (2,274)  (456)  (4,253)

Less: Income allocated to non-controlling interest

  51   7   9   7 

Net loss attributable to Intricon shareholders

 $(1,179) $(2,281) $(465) $(4,260)
                 

Loss per share attributable to Intricon shareholders:

                

Basic

 $(0.13) $(0.26) $(0.05) $(0.48)

Diluted

 $(0.13) $(0.26) $(0.05) $(0.48)
                 

Average shares outstanding:

                

Basic

  9,074   8,881   9,034   8,847 

Diluted

  9,074   8,881   9,034   8,847 

 

(See accompanying notes to the condensed consolidated financial statements)

 

 

 

INTRICON CORPORATION

Condensed Consolidated Statements of Comprehensive Loss

(In Thousands)

 

  

Three Months Ended

  

Six Months Ended

 

(unaudited)

 

June 30,

  

June 30,

  

June 30,

  

June 30,

 
  

2021

  

2020

  

2021

  

2020

 

Net loss

 $(1,128) $(2,274) $(456) $(4,253)

Unrealized foreign currency translation adjustment

  1   13   26   26 

Realized pension and postretirement obligations

  12   5   24   10 

Other

  68   -   183   - 

Comprehensive loss

 $(1,047) $(2,256) $(223) $(4,217)

 

(See accompanying notes to the condensed consolidated financial statements)

 

 

 

INTRICON CORPORATION

Condensed Consolidated Balance Sheets

(In Thousands, Except Per Share Amounts)

 

(unaudited)

 

June 30,

  

December 31,

 
  

2021

  

2020

 

Current assets:

        

Cash and cash equivalents

 $6,077  $8,608 

Restricted cash

  658   672 

Short-term investment securities

  23,022   19,793 

Accounts receivable, net of $80 and $210 of reserves, respectively

  9,592   10,115 

Inventories

  22,189   19,513 

Contract assets

  11,618   9,107 

Other current assets

  1,872   1,466 

Total current assets

  75,028   69,274 
         

Property, plant and equipment

  47,320   45,661 

Less: Accumulated depreciation

  33,080   31,484 

Net property, plant and equipment

  14,240   14,177 
         

Goodwill

  13,873   13,714 

Intangible assets, net

  9,791   10,785 

Operating lease right-of-use assets, net

  5,782   6,701 

Investment in partnerships

  592   570 

Long-term investment securities

  3,794   5,085 

Other assets, net

  987   990 

Total assets

 $124,087  $121,296 
         

Current liabilities:

        

Current financing leases

 $7  $21 

Current operating leases

  2,027   2,156 

Accounts payable

  10,102   8,670 

Accrued salaries, wages and commissions

  4,438   3,581 

Other accrued liabilities

  6,059   4,235 

Total current liabilities

  22,633   18,663 
         

Noncurrent operating leases

  3,896   4,726 

Other postretirement benefit obligations

  363   385 

Accrued pension liabilities

  809   907 

Deferred tax liabilities, net

  1,028   1,018 

Other long-term liabilities

  3,403   4,398 

Total liabilities

  32,132   30,097 
         

Commitments and contingencies (Note 11)

          
         

Shareholders’ equity:

        

Common stock, $1.00 par value per share; 20,000 shares authorized; 9,082 and 8,951 shares issued and outstanding, respectively

  9,082   8,951 

Additional paid-in capital

  90,532   89,702 

Accumulated deficit

  (7,275)  (6,810)

Accumulated other comprehensive loss

  (446)  (679)

Total shareholders' equity

  91,893   91,164 

Non-controlling interest

  62   35 

Total equity

  91,955   91,199 

Total liabilities and equity

 $124,087  $121,296 

 

(See accompanying notes to the condensed consolidated financial statements)

 

 

 

INTRICON CORPORATION

Condensed Consolidated Statements of Cash Flows

(In Thousands)

 

  

Six Months Ended

 

(unaudited)

 

June 30,

  

June 30,

 
  

2021

  

2020

 

Cash flows from operating activities:

        

Net loss

 $(456) $(4,253)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

        

Depreciation and amortization

  2,763   2,053 

Equity in loss of partnerships

  112   71 

Stock-based compensation

  1,019   1,712 

Change in fair value of contingent consideration

  90   - 

Change in allowance for doubtful accounts

  (130)  273 

Loss on disposal of assets

  -   173 

Changes in operating assets and liabilities:

        

Accounts receivable

  682   (260)

Inventories

  (2,642)  (3,151)

Contract assets

  (2,510)  2,126 

Other assets

  (474)  161 

Accounts payable

  1,266   (1,366)

Accrued expenses

  2,001   1,912 

Other liabilities

  (385)  (959)

Net cash provided by (used in) operating activities of continuing operations

  1,336   (1,508)

Net cash provided by operating activities of discontinued operation

  -   3 

Net cash provided by (used in) operating activities

  1,336   (1,505)
         

Cash flows from investing activities:

        

Purchases of property, plant and equipment

  (1,300)  (1,952)

Payments for acquisition of a business

  -   (7,128)

Payments for acquisition of other assets

  -   (141)

Purchase of investment securities

  (11,965)  (6,159)

Proceeds from maturities of investment securities

  9,885   15,250 

Investment in partnerships

  (154)  391 

Net cash (used in) provided by investing activities

  (3,534)  261 
         

Cash flows from financing activities:

        

Payment of financing leases

  (18)  (57)

Payments on liabilities for acquisition of intangible assets

  (104)  - 

Exercise of stock options and employee stock purchase plan shares

  250   107 

Withholding of common stock upon vesting of restricted stock units

  (308)  (246)

Payment of contingent consideration liabilities

  (52)  - 

Net cash used in financing activities

  (232)  (196)
         

Effect of exchange rate changes on cash

  (115)  (37)
         

Net decrease in cash

  (2,545)  (1,477)

Cash, cash equivalents and restricted cash, beginning of period

  9,280   9,162 
         

Cash, cash equivalents and restricted cash, end of period

 $6,735  $7,685 
         
         

Non-cash investing and financing:

        

Acquisition of property, plant and equipment in accounts payable

 $318  $213 

Acquisition of a business through liabilities incurred

  -   3,705 

Acquisition of a business through issuance of common stock

  -   982 

 

(See accompanying notes to the condensed consolidated financial statements)

 

 

 

INTRICON CORPORATION

Condensed Consolidated Statements of Equity

(In Thousands)

 

  

Shareholders' Equity, Three and Six Months Ended June 30, 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

  8,951  $8,951  $89,702  $(6,810) $(679) $35  $91,199 

Exercise of stock options, net

  22   22   (15)  -   -   -   7 

Withholding of common stock upon vesting of restricted stock units

  24   24   (265)  -   -   -   (241)

Shares issued under the employee stock purchase plan

  2   2   51   -   -   -   53 

Stock-based compensation

  -   -   453   -   -   -   453 

Net income (loss)

  -   -   -   714   -   (42)  672 

Other

  -   -   -   -   152   (50)  102 

Balances March 31, 2021

  8,999  $8,999  $89,926  $(6,096) $(527) $(57) $92,245 

Exercise of stock options, net

  41   41   91   -   -   -   132 

Withholding of common stock upon vesting of restricted stock units

  39   39   (106)  -   -   -   (67)

Shares issued under the employee stock purchase plan

  3   3   55   -   -   -   58 

Stock-based compensation

  -   -   566   -   -   -   566 

Net (loss) income

  -   -   -   (1,179)  -   51   (1,128)

Other

  -   -   -   -   81   68   149 

Balances June 30, 2021

  9,082  $9,082  $90,532  $(7,275) $(446) $62  $91,955 

 

  

Shareholders' Equity, Three and Six Months Ended June 30, 2020 (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, 2019

  8,781  $8,781  $86,770  $(4,286) $(520) $(253) $90,492 

Exercise of stock options, net

  11   11   4   -   -   -   15 

Withholding of common stock upon vesting of restricted stock units

  22   22   (220)  -   -   -   (198)

Shares issued under the employee stock purchase plan

  5   5   48   -   -   -   53 

Stock-based compensation

  -   -   376   -   -   -   376 

Net loss

  -   -   -   (1,979)  -   -   (1,979)

Comprehensive income

  -   -   -   -   18   -   18 

Balances March 31, 2020

  8,819  $8,819  $86,978  $(6,265) $(502) $(253) $88,777 

Exercise of stock options, net

  18   18   (18)  -   -   -   - 

Withholding of common stock upon vesting of restricted stock units

  14   14   (62)  -   -   -   (48)

Shares issued under the employee stock purchase plan

  3   3   36   -   -   -   39 

Acquisition of Emerald Medical Services

  80   80   902   -   -   -   982 

Stock-based compensation

  -   -   936   -   -   -   936 

Net loss

  -   -   -   (2,281)  -   7   (2,274)

Comprehensive income

  -   -   -   -   18   -   18 

Balances June 30, 2020

  8,934  $8,934  $88,772  $(8,546) $(484) $(246) $88,430 

 

(See accompanying notes to the condensed consolidated financial statements)

 

 

 

INTRICON CORPORATION

 

Notes to Condensed Consolidated Financial Statements (Unaudited) (In Thousands, Except Per Share Data)

 

1.

Managements Statement

 

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.

 

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 six months ended June 30, 2021, the Company operated under one operating segment. This is consistent with disclosures in the Company's Annual Report on Form 10-K for the year ended December 31, 2020

 

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, 2020, 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, 2020. The Company follows these policies in preparation of the condensed consolidated financial statements.

 

8

 
 

2.

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 is not expected to have a material impact on our financial position, results of operations and cash flows. 

 

 

3.

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 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, 2020.

 

During the 2021 second quarter, the Company reclassified first quarter revenue of $682 from certain customers in Legacy OEM to Value Based ITEC for the six months ended June 30, 2021. The following tables set forth, for the periods indicated, timing of revenue recognition by market:

 

Timing of revenue recognition for the three months ended June 30, 2021:

 

  Products and services transferred at point in time  Products and services transferred over time  

Total

 

Diabetes

 $-  $15,247  $15,247 

Interventional Catheters

  4,198   -   4,198 

Other Medical

  2,059   1,451   3,510 

Value Based DTEC

  950   -   950 

Value Based ITEC

  2,570   -   2,570 

Legacy OEM

  2,888   -   2,888 

Professional Audio Communications

  852   -   852 

Total Revenue, net

 $13,517  $16,698  $30,215 

 

Timing of revenue recognition for the six months ended June 30, 2021:

 

  

Products and services transferred at point in time

  

Products and services transferred over time

  

Total

 

Diabetes

 $-  $33,611  $33,611 

Interventional Catheters

  8,000   -   8,000 

Other Medical

  3,649   2,819   6,468 

Value Based DTEC

  1,887   -   1,887 

Value Based ITEC

  4,555   -   4,555 

Legacy OEM

  5,625   -   5,625 

Professional Audio Communications

  1,837   -   1,837 

Total Revenue, net

 $25,553  $36,430  $61,983 

 

Timing of revenue recognition for the three months ended June 30, 2020:

 

  

Products and services transferred at point in time

  

Products and services transferred over time

  

Total

 

Diabetes

 $-  $13,521  $13,521 

Interventional Catheters

  1,146   -   1,146 

Other Medical

  1,849   1,602   3,451 

Value Based DTEC

  1,387   -   1,387 

Value Based ITEC

  1,365   -   1,365 

Legacy OEM

  1,721   -   1,721 

Professional Audio Communications

  1,011   -   1,011 

Total Revenue, net

 $8,479  $15,123  $23,602 

 

Timing of revenue recognition for the six months ended June 30, 2020:

 

  

Products and services transferred at point in time

  

Products and services transferred over time

  

Total

 

Diabetes

 $-  $27,051  $27,051 

Interventional Catheters

  1,146   -   1,146 

Other Medical

  3,035   3,244   6,279 

Value Based DTEC

  2,560   -   2,560 

Value Based ITEC

  2,109   -   2,109 

Legacy OEM

  3,685   -   3,685 

Professional Audio Communications

  2,275   -   2,275 

Total Revenue, net

 $14,810  $30,295  $45,105 

 

9

 

Net revenue by geography is allocated based on shipment and set forth below:

 

  

Three Months Ended

  

Six Months Ended

 

Net Revenue by Geography

 

June 30, 2021

  

June 30, 2020

  

June 30, 2021

  

June 30, 2020

 

United States

 $21,801  $17,228  $45,502  $35,016 

Europe

  1,676   957   2,940   2,144 

Asia

  4,017   2,791   7,485   4,991 

All other countries

  2,721   2,626   6,056   2,954 

Consolidated

 $30,215  $23,602  $61,983  $45,105 

 

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 and six months ended June 30, 2021, and 2020, one customer accounted for 61% and 64%, and 61% and 62%, respectively, of the Company’s consolidated net revenue.

 

Two customers combined accounted for 48% and 69% of the Company’s consolidated accounts receivable at June 30, 2021 and December 31, 2020, respectively.

 

Two customers accounted for the Company’s consolidated contract assets at June 30, 2021 and December 31, 2020, respectively.

 

 
4.

Loss Per Share

 

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

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30, 2021

  

June 30, 2020

  

June 30, 2021

  

June 30, 2020

 

Numerator:

                

Net loss

 $(1,128) $(2,274) $(456) $(4,253)

Less: Income allocated to non-controlling interest

  51   7   9   7 

Net loss attributable to Intricon shareholders

 $(1,179) $(2,281) $(465) $(4,260)
                 

Denominator:

                

Basic – weighted shares outstanding

  9,074   8,881   9,034   8,847 

Weighted shares assumed upon exercise of stock awards

  -   -   -   - 

Diluted – weighted shares outstanding

  9,074   8,881   9,034   8,847 
                 

Basic loss per share attributable to Intricon shareholders:

 $(0.13) $(0.26) $(0.05) $(0.48)

Diluted loss per share attributable to Intricon shareholders:

 $(0.13) $(0.26) $(0.05) $(0.48)

 

Net loss 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.

 

For the three and six months ended June 30, 2021, weighted average options and RSUs outstanding of 567 and 590, respectively, were excluded from the dilutive calculation as their effect would have been antidilutive based on losses in the period. For the three and six months ended June 30, 2020, weighted average options and RSUs outstanding of 882 and 894, respectively, were excluded from the dilutive calculation as their effect would have been antidilutive based on losses in the period.

 

 

5.

Income Taxes

 

Income tax expense for the three and six months ended June 30, 2021 was $80 and $170 compared to $29 and $47 for the same period in 2020. The expense was largely due to our foreign operations. The Company has net operating loss carryforwards for U.S. federal income tax purposes. The Company has recorded a full valuation allowance against US deferred tax assets as of June 30, 2021.

 

The following was the income (loss) before income taxes for each jurisdiction in which the Company has operations for the period:

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30, 2021

  

June 30, 2020

  

June 30, 2021

  

June 30, 2020

 

United States

 $(1,162) $(1,994) $(577) $(3,836)

Singapore

  77   (278)  215   (431)

Indonesia

  23   17   44   35 

Germany

  14   10   32   26 

Loss before income taxes

 $(1,048) $(2,245) $(286) $(4,206)

 

CARES Act

 

On March 27, 2020, in response to the impact of the COVID-19 pandemic in the U.S. and across the globe, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted, which contained certain tax benefits that were not material to the Company.

 

 

6.

Business Combination

 

Emerald Medical Services and Emerald Extrusion Services

 

On May 18, 2020, Intricon Pte. Ltd. (“Buyer”), a wholly-owned subsidiary of the Company, acquired all of the outstanding shares of Emerald Medical Services Pte., Ltd., a Singapore company (“EMS”) for a total purchase price of $11,815. EMS, based in Singapore, is a provider of joint development medical device manufacturing services for complex catheter applications.

 

In addition, the Company has a 54% ownership interest in Emerald Extrusion Services LLC. (“EES), based in California. Based on this controlling financial interest, the Company has consolidated this entity. The remaining ownership is accounted for as a non-controlling interest and reported as part of equity in the condensed consolidated balance sheets.

 

We accounted for the acquisition in accordance with ASC 805, Business Combinations, with identifiable assets acquired and liabilities assumed recorded at their estimated fair value on the acquisition date. During the six months ended June 30, 2021, the Company recorded certain adjustments related to changes in valuation estimates of accounts receivable, inventory, equipment, and deferred taxes as well as changes to the non-controlling interest balance. These purchase accounting adjustments resulted in a $159 increase to Goodwill during 2021. The final purchase price allocation of the fair value of the assets acquired and liabilities assumed as of June 30, 2021 is included in the table below.

 

Current assets

 $3,161 

Property, plant and equipment

  360 

Intangible assets

  6,400 

Goodwill

  4,321 

Noncurrent assets

  169 

Current liabilities

  (1,105)

Noncurrent liabilities

  (1,491)

Total consideration paid

 $11,815 

 

10

 

A portion of the purchase price is in the form of a contingent consideration liability calculated using a scenario-based method utilizing various level 3 inputs including revenue volatility, weighted average cost of capital and discount rate percentages. Level 3 is a fair value measure in which there are no observable inputs used to value an asset or liability and the fair value is determined based on modeling and the use of management estimates and assumptions. The key valuation assumptions included forecasts of future revenues and the selection of the discount rate. 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 within other operating expenses.

 

Quantitative information about Level 3 inputs for fair value measurement of the contingent consideration liability are detailed in “Note 2: Business Combination” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. There have be no significant changes to these inputs as of June 30, 2021. Significant increases or decreases in these inputs in isolation could result in a significant impact on the fair value measurement.

 

The reconciliation of the contingent consideration liability measured and carried at fair value on a recurring basis is as follows:

 

Carrying amount at December 31, 2020

 $3,574 

Change in fair value

  90 

Less payments

  (52)

Carrying amount at June 30, 2021

 $3,612 

 

Since the acquisition, the Company has paid $552 of the original contingent consideration liabilities. As of June 30, 2021, approximately $2,612 remains contingent on future performance.

 

Our condensed consolidated statements of operations for the three and six months ended June 30, 2021 include revenues of $4,198 and $8,000, respectively, and net income of $383 and $631, respectively, attributable to EMS.  Our condensed consolidated statements of operations for the three and six months ended June 30, 2020 include revenues of $1,146 and net income of $48, attributable to EMS for the period from May 19 through June 30, 2020.

 

See Note 2 of our Notes to the Consolidated Financial Statements in our 2020 Annual Report on Form 10-K for more details.

 

 

7.

Selected Balance Sheet Data

 

Inventories:

 

Inventories consisted of the following at:

 

  

Raw materials

  

Work-in process

  Finished products and components  

Total

 

June 30, 2021

                

Domestic

 $12,571  $1,134  $2,756  $16,461 

Foreign

  4,265   1,137   326   5,728 

Total

 $16,836  $2,271  $3,082  $22,189 
                 

December 31, 2020

             

Domestic

 $11,371  $1,499  $2,149  $15,019 

Foreign

  3,393   968   133   4,494 

Total

 $14,764  $2,467  $2,282  $19,513 

 

11

 

Property, Plant and Equipment Geographic Information:

 

The geographical distribution of long-lived assets, consisting of property, plant and equipment is set forth below:

 

  

June 30,

  

December 31,

 
  

2021

  

2020

 

United States

 $12,729  $12,539 

Singapore

  1,340   1,460 

Other

  171   178 

Consolidated

 $14,240  $14,177 

 

Long-lived assets consist of property, plant and equipment. 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.

 

Goodwill:

 

During 2021, the Company recorded certain purchase accounting adjustments for the EMS business combination resulting in an adjustment to goodwill. The changes to the carrying amount of goodwill for the periods presented are as follows:

 

Carrying amount at December 31, 2020

 $13,714 

Purchase accounting adjustment

  159 

Carrying amount at June 30, 2021

 $13,873 

 

Intangible Assets:

 

Definite-lived intangible assets consisted of the following at:

 

  

June 30, 2021

 
  

Gross Carrying Amount

  

Accumulated Amortization

  

Net Carrying Amount

 

Customer list

 $6,400  $(867) $5,533 

Technology intangibles

  6,725   (2,467)  4,258 

Total

 $13,125  $(3,334) $9,791 

 

  

December 31, 2020

 
  

Gross Carrying Amount

  

Accumulated Amortization

  

Net Carrying Amount

 

Customer list

 $6,400  $(467) $5,933 

Technology intangibles

  6,725   (1,873)  4,852 

Total

 $13,125  $(2,340) $10,785 

 

The customer list was established as a part of purchase accounting related to our Emerald acquisition; see Note 6. The estimated useful life is eight 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 five and seven years.

 

12

 

Investment in Partnerships:

 

Investment in partnerships consisted of the following:

 

  

June 30,

  

December 31,

 
  

2021

  

2020

 

Investment in Signison

 $320  $418 

Other

  272   152 

Total

 $592  $570 

 

The Company has a 50% ownership interest in Signison, a German based Company specializing in hearing health services. This is accounted for in the Company’s condensed consolidated financial statements using the equity method for all periods presented.

 

Other Accrued Liabilities:

 

Other accrued liabilities consisted of the following at:

 

  

June 30, 2021

  

December 31, 2020

 

Pension and postretirement benefit obligations

 $188  $188 

Deferred revenue

  229   184 

Current technology intangible liability

  748   1,006 

Current earn-out contingent consideration liability

  1,775   1,090 

Customer funded projects

  550   759 

TCPA litigation accrual (Note 11)

  1,300   - 

Other

  1,269   1,008 

Total

 $6,059  $4,235 

 

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. See Note 6.

 

Other Long-Term Liabilities:

 

Other long-term liabilities consisted of the following at:

 

  

June 30,

  

December 31,

 
  

2021

  

2020

 

Noncurrent technology intangible liability

 $667  $1,039 

Noncurrent earn-out contingent consideration liability

  1,837   2,484 

Other

  899   875 

Total

 $3,403  $4,398 

 

As of June 30, 2021, the Company had no debt under its existing credit facilities and was in compliance with all applicable covenants.

 

13

 
 

8.

Investment Securities

 

The Company invests in commercial paper, corporate notes and bonds with original maturities of less 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, using level 2 inputs.

 

The maturity dates of our investments as of June 30, 2021 are as follows:

 

  

Less than one year

  

1-5 years

  

Total

 

Commercial Paper Original Maturities of 91 Days or More

 $13,389  $-  $13,389 

Corporate Notes and Bonds

  9,633   3,794   13,427 

Total Investments

 $23,022  $3,794  $26,816 

 

The maturity dates of our investments as of December 31, 2020 are as follows:

 

  

Less than one year

  

1-5 years

  

Total

 

Commercial Paper Original Maturities of 91 Days or More

 $7,490  $-  $7,490 

Corporate Notes and Bonds

  12,303   5,085   17,388 

Total Investments

 $19,793  $5,085  $24,878 

 

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 June 30, 2021 and December 31, 2020 was $3,260 and $6,697, respectively.

 

 

9.

Leases

 

The Company’s leases pertain primarily to engineering, manufacturing, sales and administrative facilities, with an initial term of one year or more. The Company has three leased facilities in Minnesota, two that expire in 2022 and one that expires in 2023, one leased facility in Illinois that expires in 2022, two leased facilities in California, one that expires in 2022 and one that expires in 2024, one leased facility in Singapore that expires in 2025, one leased facility in Indonesia that expires in 2024, and one leased facility in Germany that expires in 2022.

 

Certain foreign leases allow for variable lease payments that depend on an index or a market rate adjustment for the respective country and are adjusted on an annual basis. The adjustment is recognized as incurred in the condensed consolidated statement of operations. The facility leases include options to extend for terms ranging from one year to five years. Lease options that the Company is reasonably certain to execute are included in the determination of the ROU asset and lease liability. Our Indonesia lease includes embedded forward starting leases that will begin in 2022 and 2024 for additional square footage, which will result in the recognition of an additional ROU asset and lease liability in those periods of approximately $103 and $72, respectively. The Company also leases equipment that include bargain purchase options at termination. These leases have been classified as finance leases.

 

Operating cash flows for the period ended June 30, 2021, and 2020 from operating leases were $1,211 and $924, respectively. Financing lease assets are classified as property, plant and equipment within the condensed consolidated balance sheet.

 

Discount rates are determined based on 5-year term incremental borrowing rates at inception of the lease. The following table summarizes the weighted-average lease term and discount rates:

 

Weighted-Average Lease Term (Years)

 

June 30, 2021

  

December 31, 2020

 

Finance leases

  0.7   0.8 

Operating leases

  3.4   3.8 

 

 

Weighted-Average Discount Rate

 

June 30, 2021

  

December 31, 2020

 

Finance leases

  5.56%  5.56%

Operating leases

  5.02%  5.06%

 

14

 

The following tables summarizes lease costs by type:

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30, 2021

  

June 30, 2020

  

June 30, 2021

  

June 30, 2020

 

Lease cost

                

Finance lease cost:

                

Amortization of right-of-use assets

 $7  $26  $17  $52 

Interest on lease liabilities

  -   1   1   3 
                 

Operating lease cost

  587   393   1,169   874 

Variable lease cost

  119   148   239   299 

Total lease cost

 $713  $568  $1,426  $1,228 

 

Maturities of lease liabilities are as follows as of June 30, 2021:

 

  

Operating Leases

  

Financing Leases

  

Total

 

2021

 $1,247  $7  $1,254 

2022

  1,993   3   1,996 

2023

  1,394   -   1,394 

2024

  1,049   -   1,049 

2025 and thereafter

  776   -   776 

Total lease payments

  6,459   10   6,469 

Less: Interest

  (536)  (3)  (539)

Present value of lease liabilities

 $5,923  $7  $5,930 

 

 

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 June 30, 2021.

 

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 amended in 2021 to increase the number of shares of common stock that could be awarded under the 2015 plan by 500 shares, subject to shareholder approval, which was obtained on May 4, 2021.

 

For the six months ended June 30, 2021, the Company granted a total of 113 RSUs and 15 PRSUs at a weighted average closing price on the date of grant of $21.35 and $21.78, respectively. 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 PRSUs will vest depending upon the achievement of total revenue in specific markets during 2023 at a threshold level (below which no PRSUs will vest), a target level and a maximum level (at which the maximum number of PRSUs will vest). 

 

The Company has also granted stock options under the plans. For the six months ended June 30, 2021, and 2020, the Company did not grant any options. 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. During the six months ended June 30, 2021, 11 options were forfeited in order to cover the exercise price of the options.

 

15

 

Stock award activity as of and during the six months ended June 30, 2021 was as follows:

 

  

Outstanding Awards

         
  

Stock Options

  

RSUs

  

Total

  Stock Option Weighted-Average Exercise Price (a)  

Aggregate Intrinsic Value

 
                     

Outstanding at December 31, 2020

  690   217   907  $6.51     

Awards granted

  -   128   128   -     

Awards exercised or released

  (73)  (97)  (170)  5.08     

Outstanding at June 30, 2021

  617   248   865  $6.68  $15,326 
                     

Exercisable at June 30, 2021

  617       617  $6.68  $9,743 
                     

Available for future grant at December 31, 2020

          73         
                     

Available for future grant at June 30, 2021

          459         

 

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

 

 

The number of shares available for future grants at June 30, 2021 does not include a total of up to 256 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 $566 and $1,019 of non-cash stock compensation expense for the three and six months ended June 30, 2021 compared to $1,336 and $1,712 for the same periods in 2020. As of June 30, 2021, there was $3,320 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 2.1 years. The total intrinsic value of options exercised during the six months ended June 30, 2021 was $