INTRI

CON CORPORATION

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

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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.

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 $ i 24.25 per share, without interest, subject to any required withholding of taxes.

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  i 127,836 shares of Intricon common stock held by the Rollover Shareholders to IIN Holdings, in exchange for equity interests of IIN Holdings.

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 $ i 1,032 through the quarter ended  March 31, 2022.

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.

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.

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 $ i 682 from certain customers in Legacy OEM to Value Based ITEC for the three months ended March 31, 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 March 31, 2022:

Timing of revenue recognition for the three months ended March 31, 2021:

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

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, one customer accounted for  i 68% of the Company’s consolidated net revenue.

Two customers combined accounted for  i 56% and  i 44% of the Company’s consolidated accounts receivable at March 31, 2022 and December 31, 2021, respectively.

Two customers accounted for  i 100% of the Company’s consolidated contract assets at March 31, 2022 and December 31, 2021.

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

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.

Income tax expense for the three months ended March 31, 2022 was $ i 15 compared to $ i 90 for the same period in 2021. 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 March 31, 2022.

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

Inventories:

Inventories consisted of the following at:

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:

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:

The customer list was established as a part of purchase accounting related to our EMS acquisition in 2020. 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.

Investment in Partnerships:

Investment in partnerships consisted of the following:

The Company has a  i 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.

Contingent Consideration Liabilities:

Contingent consideration for the Emerald Medical Services earnout liability consisted of the following:

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:

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:

As of March 31, 2022, the Company had no debt under its existing credit facilities and was in compliance with all applicable covenants.

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 March 31, 2022 are as follows:

The maturity dates of our investments as of December 31, 2021 are as follows:

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 $ i 1,882 and $ i 2,943, respectively.

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, one that expires in 2022, one that expires in 2023, one that expires in 2027, one leased facility in California that expires in 2024, one leased facility in Singapore that expires in 2025, one leased facility in Indonesia that expires in 2027, and one 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 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. 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  i 0.2 years for its finance leases, and  i 3.7 years for its operating leases. As of March 31, 2022, the Company has a weighted-average discount rate of  i 5.56% for its finance leases and  i 4.82% for its operating leases. As of December 31, 2021, the Company has a weighted-average lease term of  i 0.4 years for its finance leases, and  i 3.3 years for its operating leases. As of December 31, 2021, the Company has a weighted-average discount rate of  i 5.56% for its finance leases, and  i 4.98% for its operating leases. Operating cash flows for the period ended March 31, 2022, and 2021 from operating leases were $ i 585 and $ i 609, respectively. Financing lease assets are classified as property, plant and equipment within the condensed consolidated balance sheet.