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 The leading web portal for pharmacy resources, news, education and careers November 18, 2017
Pharmacy Choice - Pharmaceutical News - INTRICON CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations - November 18, 2017

Pharmacy News Article

 5/15/17 - INTRICON CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

Headquartered in Arden Hills, Minnesota, IntriCon Corporation (together with its
subsidiaries referred to as the "Company", "IntriCon," "we", "us" or "our") is
an international company engaged in designing, developing, engineering,
manufacturing and distributing body-worn devices. In addition to its operations
in Minnesota, the Company has facilities in Illinois, Singapore, Indonesia,
United Kingdom and Germany.

In December 2016, the Company's board of directors approved plans to discontinue its cardiac diagnostic monitoring business. The Company sold the cardiac diagnostic monitoring business on February 17, 2017 to Datrix, LLC. For all periods presented, the Company classified this business as discontinued operations, and, accordingly, has reclassified historical financial data presented herein.

The consolidated financial statements include the accounts of the Company and
its consolidated subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation. The Company evaluates its voting
and variable interests in entities on a qualitative and quantitative basis. The
Company consolidates entities in which it concludes it has the power to direct
the activities that most significantly impact an entity's economic success and
has the obligation to absorb losses or the right to receive benefits that could
be significant to the entity.

On January 19, 2017, the Company announced that it had exercised its option to
acquire the remaining 80 percent stake in Hearing Help Express. The transaction
is expected to close in 2017. The results of Hearing Help Express are
consolidated into the Company's financial statements as of October 31, 2016.

In April 2017, we entered into an agreement to acquire a 49 percent stake in
Soundperience. Soundperience has designed state of the art, self-fitting hearing
aid technology. The company's self-fitting hearing aid technology is being used
in the German market today, most notably though our Signison joint venture with
Soundperience. Both Soundperience and Signison will be accounted in the
Company's financial statements using the equity method.

Information contained in this section of this Quarterly Report on Form 10-Q and
expressed in U.S. dollars is presented in thousands (000s), except for per share
data and as otherwise noted.

Market Overview

IntriCon serves the body-worn device market by designing, developing,
engineering, manufacturing and distributing micro-miniature products,
microelectronics, micro-mechanical assemblies, complete assemblies and software
solutions, primarily for the emerging value based hearing healthcare market, the
medical bio-telemetry market and the professional audio communication market.
Revenue from the medical bio-telemetry and value hearing health markets is
reported on the respective medical and hearing health lines in the discussion of
our results of operations in "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 13 "Revenue by Market"
to the Company's consolidated condensed financial statements included herein.


Value Based Hearing Healthcare Market

The Company believes the value based hearing healthcare (VBHH) market offers
significant growth opportunities. In the United States alone, there are
approximately 37.5 million adults that report some degree of hearing loss. In
adults, the most common cause of hearing loss is aging and noise. In fact, by
the age of 65, one out of three people have hearing loss. The hearing-impaired
population is expected to grow significantly over the next decade due to an
aging population and more frequent exposure to loud sounds that can cause
noise-induced hearing loss. It is estimated that hearing aids can help more than
90 percent of people with hearing loss, however the current market penetration
into the U.S. hearing impaired population is approximately 20 percent, a
percentage that has remained essentially unchanged for the last four decades.
The primary deterrents to greater penetration are cost and access. The average
cost of a hearing aid in the US market today is over $2,400 per device, more
than double the cost from twelve years ago. Approximately 70 percent of the
hearing impaired have hearing loss in both ears (referred to as a binaural
loss), driving the total cost to almost $5,000 on average for a set of hearing

We believe a perfect vortex of factors has come together over the last few years
to enable the emergence of a market disruptive, high-quality, low cost
distribution model, including, continued consolidation of retail (causing
escalating hearing aid prices), consumer outcry, consumer education,
advancements in technology (such as behind-the-ear devices, advanced digital
signal processing, low-power wireless, and self-fitting software) as well as
regulatory actions and pronouncements by the U.S. Food and Drug Administration,
the President's Council of Advisors on Science and Technology and the National
Academies of Science, Engineering and Medicine.

Today in the US market, the conventional channel pushes all hearing impaired
through the same bloated, costly channel. However, a very large portion of the
hearing-impaired market - mostly notably those with mild to moderate losses -
could be properly severed with the proper combination of high quality, outcome
based devices, advanced fitting software and consumer services/care best
practices - all at much lower cost. We believe fundamental change is needed and
are excited about the opportunity that we created through thoughtful hard work
and planning: a chance to deliver superior outcomes-based affordable hearing
healthcare, by combining state-of-the-art devices and software technology, along
with best practices customer service and at a much lower cost directly to
consumers across the country, many of whom have not been able to afford care

In early January 2016, the U.S. Food and Drug Administration (FDA) weighed in on
low hearing aid penetration rates with an announcement that highlighted
statistics from the National Institute on Deafness and Other Communication
Disorders. They found that 37.5 million U.S. adults aged 18 and older report
some form of hearing loss. However, only 30 percent of adults over 70, and 16
percent of those aged 20 to 69, who could benefit from wearing hearing aids,
have ever used them. Based on these statistics, the FDA has reopened the public
comment period on draft guidance related to the agency's premarket requirements
for hearing aids and personal sound amplifiers (PSAPs). In April 2016, the FDA
hosted a public workshop to gather stakeholder and public input on draft
guidance related to the agency's premarket requirements for hearing aids and
PSAPs. The FDA's intent is to consider ways in which regulation can support
further device penetration into the hearing market. In December 2016, the FDA
announced important steps to better support consumer access to hearing aids. The
agency issued a guidance document explaining that it does not intend to enforce
the requirement that individuals age 18 and older receive a medical evaluation
or sign a waiver prior to purchasing most hearing aids, effective immediately.
It also announced its commitment to consider creating a category of
over-the-counter (OTC) hearing aids that could deliver new, innovative and
lower-cost products to millions of consumers. Further guidance is expected
in 2017.

The Company is in the final stages of commercializing its PhysioLink? 2 wireless
technology, which will be incorporated into product platforms serving the
traditional and value based hearing healthcare markets. This technology is an
integrated platform that incorporates IntriCon's Audion? 8 amplifier and
Bluetooth low energy, enabling wireless connectivity from any Bluetooth
enabled device over distances up to five meters.

We are also currently developing our third generation PhysioLink? technology,
leveraging industry leading wireless IC technology to enable concurrent audio
streaming and data transmission over Bluetooth low energy. This technology will
be incorporated into product platforms serving traditional and value based
hearing healthcare markets, providing end users with an unprecedented experience
through breakthrough audio and wireless performance.


In October of 2016, we purchased 20 percent of Hearing Help Express, Inc., a
direct-to-consumer mail order hearing aid provider. In January 2017, we
exercised an option to acquire the remaining 80% equity interest. Hearing Help
Express is a key next step in our value based hearing healthcare strategy. Over
the last decade, we have invested in the technology and low-cost manufacturing
to design and build superior devices and fitting solutions, to address what we
estimate to be a $1 billion annually value based hearing healthcare market. With
this acquisition, we now have the channel infrastructure to directly reach
consumers and-importantly for millions-the ability to offer high-quality hearing
healthcare at a fraction of the cost. Through our other VBHH initiatives and
tests, we have formed alliances with other key partners, which have given us
experience and vital insight as we move aggressively into a more consumer-facing
role. Hearing Help Express provides an efficient, traditional direct-to-consumer
channel to reach consumers who likely do not have insurance that will cover
hearing devices. This is a channel that we can build on and expand via
technology-and one that is complementary with many of our existing

In April 2017, we entered into an agreement to acquire a 49 percent stake in
Soundperience. Soundperience has designed state of the art, self-fitting hearing
aid technology. Soundperience software applications are the first
psycho-acoustic way of analyzing peripheral hearing and central hearing

The Company's self-fitting hearing aid technology is being used in the German
market today, most notably though our Signison joint venture with Soundperience.
Currently, the technology is PC based and is wired to the hearing aid during
programing. However, the system will be integrated with IntriCon's wireless
hearing aids over the next few months, and initially rolled out in Germany
through our Signison joint venture.

We believe strongly that incorporating self-fitting technology is a critical
step in creating our high-quality, low-cost hearing healthcare ecosystem.
Soundperience's technology has the potential to drastically reduce the price of
hearing aids, drive greater access and increase customer satisfaction.

In other VBHH channels, the Company entered into a manufacturing agreement with
hi HealthInnovations, a UnitedHealth Group company, to become their supplier of
hearing aids. At the beginning of 2012, hi HealthInnovations launched a suite of
high-tech, lower-cost hearing devices for their Medicare and Part D participants
and later in the year announced they were increasing this offering to the over
26 million people enrolled in their employer-sponsored and individual health
benefit plans. In 2012, they expanded their offering to include a hearing aid
discount program for health plans. This program is available nationwide to all
health insurers, including employer-sponsored, individual and Medicare plans.
The insurance model has been successfully demonstrated internationally, where
several countries providing a full insurance program are serving 40 to 70
percent of the hearing-impaired population. Further, research in the U.S. has
shown a fully insured model will encourage an individual to seek treatment at an
earlier stage of hearing loss, greatly increasing the market size and
penetration. The Company also has various international VBHH initiatives. On
November 3, 2015, the Company acquired the assets of PC Werth through its
IntriCon UK subsidiary to gain direct access to the NHS and to have greater
control over its efforts to accelerate new market penetration into the United
Kingdom. IntriCon UK has been appointed as one of the main suppliers to the NHS
Supply Chain's National Framework. The NHS is widely seen as the most efficient
hearing aid delivery system in the world, supplying an estimated 1.4 million
hearing aids annually. We believe IntriCon is well positioned to serve their
needs, and we are developing new technologies to further enhance delivery
efficiencies and product standards in the future.

We also believe there are niches in the conventional hearing health channel that
will embrace our VBHH proposition in the United States and Europe. High costs of
conventional devices and retail consolidation have constrained the growth
potential of the independent audiologist and dispenser. We believe our software
and product offering can provide independent audiologists and dispensers the
ability to compete with larger retailers, such as Costco, and manufacturer owned
retail distributors. In the third quarter of 2015, we announced a joint venture
with The Academy of Doctors of Audiology (ADA) to provide hearing instruments
and educational resources to audiologists and their patients. The joint venture
operates as a limited liability company under the name "earVenture LLC".
EarVenture was officially launched in November 2015 at the ADA conference. To
date, more than 400 of the 1,200 ADA members have registered to join the
earVenture program and we have delivered initial units. In 2016, earVenture
began rolling-out a comprehensive marketing and sales plan to convert those
registered members to consistent customers, as well as solicit non-registered
ADA members to join the program. While we do not view earVenture, near term, as
a meaningful contributor to sales, it continues to provide valuable industry
insights and has the potential for future value by connecting it to our emerging
direct-to-consumer channel.


Medical Bio-Telemetry

In the medical bio-telemetry market, the Company is focused on sales of
bio-telemetry devices for life-critical diagnostic monitoring. Using our nanoDSP
and BodyNet? technology platforms, the Company manufactures microelectronics,
micro-mechanical assemblies, high-precision injection-molded plastic components
and complete bio-telemetry devices for emerging and leading medical device
manufacturers. The medical industry is faced with pressures to reduce the cost
of healthcare. Driven by core technologies, such as the IntriCon Physiolink?
that wirelessly connects patients and care givers in non-traditional ways,
IntriCon helps shift the point of care from expensive traditional settings, such
as hospitals, to less expensive non-traditional settings like the home. IntriCon
currently serves this market by offering medical manufacturers the capabilities
to design, develop, manufacture and distribute medical devices that are easier
to use, are more miniature, use less power, and are lighter. Increasingly, the
medical industry is looking for wireless, low-power capabilities in their

IntriCon currently has a strong presence in the diabetes and other bio-telemetry
markets. For diabetes, IntriCon has partnered with Medtronic to manufacture
their wireless continuous glucose monitors (CGM), sensors, and accessories
associated with Medtronic's CGM system, including the MiniMed Connect, which
links the MiniMed pump and CGM to certain smart devices providing users with a
discrete and real-time view of their blood sugar information. Our Medtronic
business posted record revenue in 2015, led by the MiniLink REAL-Time
Transmitter and related accessories sales, which are incorporated in Medtronic's
MiniMed 530G insulin pump and CGM system. In August 2016, the FDA approved the
MiniMed 630G system which will replace the 530G system. In addition to the
MiniMed 630G system, IntriCon is also designed into the MiniMed 670G system
which was approved by the FDA in September 2016, and is scheduled to be launched
in the spring of 2017. The MiniMed 670G is the world's first hybrid closed loop
insulin delivery system and we are excited to be designed into and supporting
such a revolutionary diabetes management system. Looking ahead, we believe there
are opportunities to expand our diabetes product offering with Medtronic, as
well as move into new markets outside of the diabetes market.

IntriCon has a suite of medical coils and micro coils that it offers to various
original equipment manufacturing (OEM) customers. These products are currently
used in pacemaker programming and interventional catheter positioning

IntriCon manufactures bubble sensors and flow restrictors that monitor and
control the flow of fluid in an intravenous infusion system as well as a family
of safety needle products for an OEM customer that utilizes IntriCon's insert
and straight molding capabilities. These products are assembled using full
automation, including built-in quality checks within the production lines.

Lastly, IntriCon is targeting other emerging biotelemetry and home care markets
that could benefit from its capabilities to develop devices that are more
technologically advanced, smaller and lightweight. To do so, IntriCon is
leveraging its resources in sales and marketing and research and development to
expand its reach to other large medical device and health care companies.

In order to focus financial and operational resources on value hearing health
and the growing DTC opportunity, IntriCon made the strategic decision to divest
its non-core CDM business in 2016. The Company sold the cardiac diagnostic
monitoring business on February 17, 2017 to Datrix, LLC.

Professional Audio Communications

IntriCon entered the high-quality audio communication device market in 2001, and
now has a line of miniature, professional audio headset products used by
customers focusing on emergency response needs. The line includes several
communication devices that are extremely portable and perform well in noisy or
hazardous environments. These products are well suited for applications in the
fire, law enforcement, safety, aviation and military markets. In addition, the
Company has a line of miniature ear- and head-worn devices used by performers
and support staff in the music and stage performance markets. We believe
performance in difficult listening environments and wireless operations will
continue to improve as these products increasingly include our proprietary
nanoDSP, wireless nanoLink and PhysioLink technologies.

Core Technologies Overview

Our core technologies expertise is focused on three main markets: medical
bio-telemetry, value based hearing healthcare and professional audio
communications. Over the past several years, the Company has increased
investments in the continued development of five critical core technologies:
Ultra-Low-Power (ULP) Digital Signal Processing (DSP), Fitting Software, ULP
Wireless, Microminiaturization, and Miniature Transducers. These five core
technologies serve as the foundation of current and future product platform
development, designed to meet the rising demand for smaller, portable, more
advanced devices and the need for greater efficiencies in the delivery models.
The continued advancements in this area have allowed the Company to further
enhance the mobility and effectiveness of miniature body-worn devices.



DSP converts real-world analog signals into a digital format. Through our
nanoDSP? technology, IntriCon offers an extensive range of ULP DSP amplifiers
for hearing, medical and professional audio applications. Our proprietary
nanoDSP incorporates advanced ultra-miniature hardware with sophisticated signal
processing algorithms to produce devices that are smaller and more effective.
The Company further expanded its DSP portfolio including improvements to its
Reliant CLEAR? feedback canceller, offering increased added stable gain and
faster reaction time. Additionally, the DSP technologies are utilized in the
Audion8?, our eight-channel hearing aid amplifier, and the Audion16?, our wide
dynamic range compression sixteen-channel hearing aid amplifier announced in
April 2016. The amplifiers are feature-rich and are designed to fit a wide array
of applications. In addition to multiple compression channels, the amplifiers
have a complete set of proven adaptive features which greatly improve the user

ULP Wireless
Wireless connectivity is fast becoming a required technology, and wireless
capabilities are especially critical in new body-worn devices. IntriCon's
BodyNet? ULP technology, including the nanoLink? and PhysioLink? wireless
systems, offers solutions for transmitting the body's activities to caregivers,
and wireless audio links for professional communications and surveillance
products include diabetes monitoring, and audio streaming for hearing devices.

IntriCon is in the final stages of commercializing its PhysioLink2 and
Physiolink3 wireless technology, which will be incorporated into product
platforms serving the medical, hearing health and professional audio
communication markets. This system is based on 2.4GHz proprietary digital radio
protocol in the industrial-scientific-medical (ISM) frequency band and enables
audio and data streaming and command and control to ear-worn and body-worn
applications over distances of up to five meters. The Physiolink2 technology can
be used to increase productivity in the emerging VBHH channels through in office
wireless programming, remote cloud based fitting and consumer directed
self-fitting of hearing aids. This will provide both greater access and lower
costs for patients. In addition, remote control functions will improve the
patient experience while using the device especially for those with diminished
dexterity. The Physiolink3 technology builds on the Physiolink2 capabilities by
adding wireless streaming at much lower power levels than any technology
currently on the market. This will allow for accessories to enhance the user
experience in noisy environments by allowing audio streaming directly to the
hearing aid.

Fitting Software
The ability to efficiently and effectively fit hearing aids is critical to
building a value based eco-system of hearing healthcare. By developing more
advanced fitting software systems, individuals can benefit from fittings that
conform to their specific loss, while eliminating the need for an in-person
appointment. In addition to the traditional fitting software, IntriFit, used in
the conventional channel, IntriCon has made significant investments in various
advanced fitting software solutions that can enable remote and self-fitting
solutions. IntriCon believes these advanced fitting solutions, along with the
other components of the eco-system, will drive access, affordability and
superior customer satisfaction to the millions individuals that cannot receive
care today, primarily due to high cost and low access. IntriCon will be
introducing our advanced fitting solutions through our various VBHH channels
later in 2017.


IntriCon excels at miniaturizing body-worn devices. We began honing our
microminiaturization skills over 30 years ago, supplying components to the
hearing health industry. Our core miniaturization technology allows us to make
devices for our markets that are one cubic inch and smaller. We also are
specialists in devices that run on very low power, as evidenced by our ULP
wireless and DSP. Less power means a smaller battery, which enables us to reduce
size even further, and develop devices that fit into the palm of one's hand.

Miniature Transducers

IntriCon's advanced transducer technology has been pushing the limits of size
and performance for over a decade. Included in our transducer line are our
miniature medical coils and micro coils used in pacemaker programming and
interventional catheter positioning applications. We believe with the increase
of greater interventional care that our coil technology harbors significant


Forward-Looking and Cautionary Statements

Certain statements included in this Quarterly Report on Form 10-Q or documents
the Company files with the Securities and Exchange Commission, which are not
historical facts, or that include forward-looking terminology such as "may",
"will", "believe", "anticipate", "expect", "should", "optimistic" "continue",
"estimate", "intend", "plan", "would", "could", "guidance", "potential",
"opportunity", "project", "forecast", "confident", "projections", "schedule",
"designed", "future", "discussion", "if" or the negative thereof or other
variations thereof, are forward-looking statements (as such term is defined in
Section 21E of the Securities Exchange Act of 1934 and Section 27A of the
Securities Act of 1933, and the regulations thereunder), which are intended to
be covered by the safe harbors created thereby. These statements may include,
but are not limited to statements in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Notes to the Company's
Condensed Consolidated Financial Statements" such as net operating loss
carryforwards, the ability to meet cash requirements for operating needs, the
ability to meet liquidity needs, assumptions used to calculate future level of
funding of employee benefit plans, the adequacy of insurance coverage and the
impact of new accounting pronouncements and litigation. Forward-looking
statements also include, without limitation, statements as to the Company's
expected future results of operations and growth, strategic alliances and their
benefits, government regulation, potential increases in demand for the Company's
products, the Company's ability to meet working capital requirements, the
Company's business strategy, the expected increases in operating efficiencies,
anticipated trends in the Company's markets, estimates of goodwill impairments
and amortization expense of other intangible assets, the effects of changes in
accounting pronouncements, the effects of litigation and the amount of insurance
coverage, and statements as to trends or the Company's or management's beliefs,
expectations and opinions.

Forward-looking statements are subject to risks and uncertainties and may be
affected by various factors that may cause actual results to differ materially
from those in the forward-looking statements. In addition to the factors
discussed in this Quarterly Report on Form 10-Q, certain risks, uncertainties
and other factors can cause actual results and developments to be materially
different from those expressed or implied by such forward-looking statements,
including, without limitation, the following:

 ? our ability to successfully implement our business and growth strategy;

? risks arising in connection with the insolvency of our former subsidiary, Selas

SAS, and potential liabilities and actions arising in connection with the


? the volume and timing of orders received by the Company, particularly from

Medtronic and hi HealthInnovations;

? changes in estimated future cash flows;

? our ability to collect our accounts receivable;

? foreign currency movements in markets that we serve;

? changes in the global economy and financial markets;

? weakening demand for our products due to general economic conditions;

? changes in the mix of products sold;

? our ability to meet demand;

? changes in customer requirements;

? timing and extent of research and development expenses;

? FDA approval, timely release and acceptance of our products and the products of

our customers;

? competitive pricing pressures;

? pending and potential future litigation;

? cost and availability of electronic components and commodities for our


? our ability to create and market products in a timely manner and develop

products that are inexpensive to manufacture;

? our ability to comply with covenants in our debt agreements or to obtain

waivers if we do not comply;

? our ability to repay debt when it comes due;

? our ability to obtain extensions of our current credit facility or a new credit


? the loss of one or more of our major customers;

? our ability to identify, complete and integrate acquisitions;

? effects of legislation;

? effects of foreign operations;

? our ability to develop new products;

? our ability to recruit and retain engineering and technical personnel;

? the costs and risks associated with research and development investments;

? the recent recessions in Europe and the debt crisis in certain countries in the

European Union;

? our ability and the ability of our customers to protect intellectual property;

 ? cybersecurity threats;

? loss of members of our senior management team; and

? other risk factors set forth in our most recent Annual Report on Form 10-K or

any prior Quarterly Report on Form 10-Q, which are incorporated by reference

   into this Report.

For a description of these and other risks, see Part I, "Item 1A. Risk Factors"
in the Company's Annual Report on Form 10-K for the year ended December 31,
2016, and other risks described elsewhere in this Quarterly Report on Form 10-Q,
or in other filings the Company makes from time to time with the Securities and
Exchange Commission. The Company does not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
the Company.


Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period.

Certain accounting estimates and assumptions are particularly sensitive because
their significance to the consolidated condensed financial statements and the
possibility that future events affecting them may differ markedly. The
accounting policies of the Company with significant estimates and assumptions
include the Company's consolidated and variable interest entities, revenue
recognition, accounts receivable reserves, inventory valuation, goodwill,
long-lived assets, deferred taxes policies and employee benefit obligations.
These and other significant accounting policies are described in and
incorporated by reference from "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and Note 1 to the financial
statements contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 2016.

Results of Operations

Sales, net

Our net sales are comprised of two segments: our body-worn device segment
(consisting of three main markets: medical, hearing health, and professional
audio) and our hearing health direct-to-consumer segment. Below is a summary of
our sales by main markets for the three months ended March 31, 2017 and 2016:

Three Months Ended March 31           2017         2016       Dollars      Percent
Medical                             $ 11,671     $  9,839     $  1,832         18.6 %
Hearing Health                         5,619        6,468         (849 )      -13.1 %
Hearing Health Direct-to-Consumer      1,416            -        1,416     


Professional Audio Communications 1,382 1,757 (375 )

  -21.3 %
Consolidated Net Sales              $ 20,088     $ 18,064     $  2,024         11.2 %

For the three months ended March 31, 2017, we experienced an increase of 18.6%
in net sales in the medical market compared to the same period in 2016.
Medtronic revenues were up year-over-year and we continue to anticipate
Medtronic revenue growth throughout 2017 driven by market share growth for
legacy products and the introduction of new products. IntriCon currently serves
this market by offering medical manufacturers the capabilities to design,
develop and manufacture medical devices that are easier to use, are more
miniature, use less power, and are lighter. IntriCon has a strong presence in
the diabetes market with its Medtronic partnership. The Company believes there
are growth opportunities in this market as well other emerging biotelemetry and
home care markets that could benefit from its capabilities to develop devices
that are more technologically advanced, smaller and lightweight.

Net sales in our hearing health business for the three months ended March 31,
2017 decreased 13.1% compared to the same period in 2016. The decrease for the
three months ended March 31, 2017 was primarily due to decreases in the
traditional hearing health market. The Company remains very optimistic about the
progress that has been made and the long-term prospects of the value based
hearing healthcare market. Market dynamics, such as low penetration rates, an
aging population, and the need for reduced cost and convenience, have resulted
in the emergence of alternative care models, such the insurance channel and PSAP
channel. IntriCon believes it is very well positioned to serve these value based
hearing healthcare market channels. The Company will be aggressively pursuing
larger customers who can benefit from our value proposition. Over the past
several years, the Company has invested heavily in core technologies, product
platforms and its global manufacturing capabilities geared to provide high-tech,
lower-cost hearing devices.

Net sales in our hearing health direct-to-consumer business for the three months
ended March 31, 2017 increased due to the acquisition of 20% equity interest and
control of Hearing Help Express during the fourth quarter of 2016.

Net sales to the professional audio device sector decreased 21.3% for the three
months ended March 31, 2017 compared to the same period in 2016. IntriCon will
continue to leverage its core technology in professional audio to support
existing customers, as well as pursue related hearing health and medical product


Gross profit

Gross profit, both in dollars and as a percent of sales, for the three months ended March 31, 2017 and 2016, was as follows:

                                       2017                        2016                       Change
                                             Percent                     Percent
Three Months Ended March 31    Dollars      of Sales       Dollars      of Sales       Dollars       Percent
Gross Profit                  $   5,676          28.3 %   $   5,098          28.2 %   $     578          11.3 %

The 2017 gross profit increase over the comparable prior year period was primarily due to higher overall sales volumes.

Sales and Marketing, General and Administrative and Research and Development Expenses

Sales and marketing, general and administrative and research and development
expenses for the three months ended March 31, 2017 and 2016 were as follows:

                                       2017                        2016                       Change
                                             Percent                     Percent
Three Months Ended March 31    Dollars      of Sales       Dollars      of Sales       Dollars       Percent
Sales and Marketing           $   2,311          11.5 %   $   1,156           6.4 %   $   1,155          99.9 %
General and Administrative        2,558          12.7 %       2,266          12.5 %         292          12.9 %
Research and Development          1,153           5.7 %       1,165           6.4 %         (12 )        -1.0 %

Sales and marketing expenses increased over the prior year due to the addition
of Hearing Help Express during 2017. General and administrative expenses were
greater than the prior year period primarily due to increased support costs
along with costs at Hearing Help Express. Research and development remained
steady with the prior year three month period.

Interest expense

Net interest expense for the three months ended March 31, 2017 was $182 compared
to $126 for the comparable three month period in 2016. The increase in interest
expense was primarily due to higher interest expense charges along with interest
expenses generated from Hearing Help Express that were not incurred in the
year period.

Other income (expense)

Other income (expense) for the three months ended March 31, 2017 was $56
compared to other income (expense) of $(70) for the same period in 2016. The
change in other income (expense) primarily related to changes in the currency
exchange rates.

Income tax expense

Income tax expense for the three months ended March 31, 2017 was $64 compared to
$34 for the same period in 2016. The expense increase for the three months ended
March 31, 2017 was primarily due to taxable income generated by foreign
operations and a minimum domestic state tax payment made in the current year.

Liquidity and Capital Resources

As of March 31, 2017, we had $380 of cash on hand. Sources of our cash for the
three months ended March 31, 2017 have been from our financing activities, as
described below. The Company's cash flows from operating, investing and
financing activities, as reflected in the statement of cash flows, are
summarized as follows:

                                                    Three Months Ended
                                           March 31, 2017         March 31, 2016
Cash provided by (used in):
Operating activities                      $           (584 )     $           (931 )
Investing activities                                  (367 )                 (642 )
Financing activities                                   639                  1,659
Effect of exchange rate changes on cash                 25                 
Increase (decrease) in cash               $           (287 )     $            186


The most significant items that contributed to the $(584) of cash used in
operating activities was a net loss, increases in accounts receivable and
inventory and a decrease in accrued expenses partially offset by an increase in
accounts payable and add backs for non-cash depreciation and amortization and
stock compensation.

Net cash used in investing activities of $(367) consisted primarily of purchases of property, plant and equipment.

Net cash provided by financing activities of $639 was comprised primarily of
proceeds from long-term borrowings partially offset by repayments of borrowings
under our credit facilities.

The Company had the following bank arrangements:

                                                                                 December 31,
                                                             March 31, 2017          2016

Total borrowing capacity under existing facilities           $        

15,308 $ 15,287

Facility Borrowings:
Domestic revolving credit facility                                     4,078            3,218
Domestic term loan                                                     5,000            5,250
Foreign overdraft and letter of credit facility                        1,247            1,243
Total borrowings and commitments                                      10,325            9,711
Remaining availability under existing facilities             $         4,983     $      5,576

Domestic Credit Facilities

The Company and its domestic subsidiaries are parties to a credit facility with
The PrivateBank and Trust Company. The credit facility, as amended through
31, 2017, provides for:

? a $9,000 revolving credit facility, with a $200 sub facility for letters of

credit. Under the revolving credit facility, the availability of funds depends

on a borrowing base composed of stated percentages of the Company's eligible

trade receivables and eligible inventory, and eligible equipment less a

   reserve; and

? a term loan in the original amount of $6,000.

On March 9, 2017, the Company and its domestic subsidiary, IntriCon, Inc., entered into a Tenth Amendment to the Loan and Security Agreement and Waiver (the "Tenth Amendment") with The PrivateBank and Trust Company. The Tenth Amendment, among other things:

? amended the minimum EBITDA (as defined in the Loan and Security Agreement),

funded debt to EBITDA ratio and fixed charge coverage ratio covenants; and

? waived defaults in the funded debt to EBITDA ratio and fixed charge coverage

   ratio covenants as of December 31, 2016.

Weighted average interest on the revolving credit facility was 6.82% for the
three months ended March 31, 2017 and 4.36% for the year ended December 31,
2016. The outstanding balance of the revolving credit facility was $4,078 and
$3,218 at March 31, 2017 and December 31, 2016, respectively. The total
availability on the revolving credit facility was approximately $4,508 and
$5,121 at March 31, 2017 and December 31, 2016, respectively.


The outstanding principal balance of the term loan, as amended, is payable in
quarterly installments of $250. Any remaining principal and accrued interest is
payable on February 28, 2019. IntriCon is also required to use 100% of the net
cash proceeds of certain asset sales (excluding inventory and certain other
dispositions), sale of capital securities or issuance of debt to pay down the
term loan.

The Company was in compliance with the financial covenants under the facility as of March 31, 2017.

Foreign Credit Facility

In addition to its domestic credit facilities, the Company's wholly-owned
subsidiary, IntriCon, PTE LTD., entered into an international senior secured
credit agreement with Oversea-Chinese Banking Corporation Ltd. that provides for
an asset based line of credit. Borrowings bear interest at a rate of .75% to
2.5% over the lender's prevailing prime lending rate. Weighted average interest
on the international credit facilities was 3.87% and 3.50% for the three months
ended March 31, 2017 and the year ended December 31, 2016, respectively. The
outstanding balance was $1,246 and $1,243 at March 31, 2017 and December 31,
2016, respectively. The total remaining availability on the international senior
secured credit agreement was approximately $476 and $455 at March 31, 2017 and
December 31, 2016, respectively.

Capital Adequacy

We believe that funds expected to be generated from operations, the available
borrowing capacity through our revolving credit loan facilities and the control
of capital spending will be sufficient to meet our anticipated cash requirements
for operating needs and for repayment of maturing debt for at least the next 12
months. If, however, we do not generate sufficient cash from operations, or if
we incur additional unanticipated liabilities, we may be required to seek
additional financing or sell equity or debt on terms which may not be as
favorable as we could have otherwise obtained. No assurance can be given that
any refinancing, additional borrowing or sale of equity or debt will be possible
when needed or that we will be able to negotiate acceptable terms. In addition,
our access to capital is affected by prevailing conditions in the financial and
equity capital markets, as well as our own financial condition. Furthermore, if
we fail to meet our financial and other covenants under our loan agreements,
absent waiver, we will be in default of the loan agreements and our lenders
could take action that would adversely affect our business. There can be no
assurance that our lenders will provide a waiver of any default in our loan
covenants. While management believes that we will be able to meet our liquidity
needs for at least the next 14 months, no assurance can be given that we will be
able to do so.

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