5. Significant Changes Due to Topic 606

The Company’s significant accounting policies are detailed in “Note 1: Summary of Significant Accounting Policies”. In May 2014, the FASB issued ASU 2014-09 “Topic 606. Revenue from Contracts with Customers” (Topic 606). Topic 606 supersedes the revenue recognition requirements previously set forth in the Accounting Standards Codification (ASC) Topic 605 “Revenue Recognition,” and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted Topic 606 with a date of initial application of January 1, 2018.

The Company applied Topic 606 retrospectively using the practical expedient in ASC 606-10-65-1(f)(3). The Company notes that all previously reported historical amounts are adjusted for the impact of Topic 606.

Sales of Customized Medical Biotelemetry Products - The primary factor impacting the timing of the Company’s reported net income (loss) in the financial statements as a result of the adoption of Topic 606 is the acceleration of revenue and associated cost of goods sold recognized from the sale of customized medical biotelemetry products. For sales of these products, the Company previously recognized revenue at a point in time when the products were completed and shipped to the customer. Under Topic 606, if control of the products is transferred to the customer over the manufacturing process and the criteria for over time revenue recognition are otherwise met, revenue is recognized as products are manufactured utilizing an appropriate measure of progress toward satisfaction of the performance obligation. The Company’s contracts with customers for the production of customized medical biotelemetry products meet the criteria for over time revenue recognition; therefore, the Company utilizes an input method based on actual costs incurred in the manufacturing process to date relative to total expected production costs as a measure of progress toward transfer of control of the products to the customer and recognizes revenue on that basis. Amounts recognized as revenue but not yet shipped or billed to the customer are recorded as contract assets.

Principal vs. Agent Role in Sales under Supply Arrangement - The Company has determined that the nature of its promise to a third-party supplier is a performance obligation to provide the integrated hearing aid products to its customers and that the associated sales contracts meet the control criteria necessary to qualify the Company as the principal in the transactions. As a result, gross reporting of revenues for sales under the supply arrangement is appropriate under Topic 606 and the profit sharing amount due to the third party is reported as cost of goods sold.

Impacts on financial statements

Previously reported amounts for revenue, cost of goods sold, contract assets and contract liabilities have been retrospectively adjusted to provide amounts comparable to the reporting under Topic 606. The following tables summarize the effects of adopting this accounting standard on the Company’s Consolidated Financial Statements.

Consolidated Statement of Operations:


		Twelve Months Ended December 31, 2017, as reported		Effect of Adoption of ASC 606		Twelve Months Ended December 31, 2017, as adjusted		Twelve Months Ended December 31, 2016, as reported		Effect of Adoption of ASC 606		Twelve Months Ended December 31, 2016, as adjusted

Revenue, net	$	88,310	$	2,327	$	90,637	$	68,009	$	971	$	68,980
Cost of goods sold		61,819		2,071		63,890		50,937		1,327		52,264
Gross profit		26,491		256		26,747		17,072		(356)		16,716

Operating expenses:
Sales and marketing		9,447		-		9,447		4,700		-		4,700
General and administrative		10,339		-		10,339		9,154		-		9,154
Research and development		4,458		-		4,458		4,688		-		4,688
Restructuring charges (Note 3)		-		-		-		132		-		132
Total operating expenses		24,244		-		24,244		18,674		-		18,674
Operating income (loss)		2,247		256		2,503		(1,602)		(356)		(1,958)

Interest expense		(716)		-		(716)		(553)		-		(553)
Other expense		(367)		-		(367)		(602)		-		(602)
Income from continuing operations before income taxes and discontinued operations		1,164		256		1,420		(2,757)		(356)		(3,113)
Income tax expense		8		-		8		217		-		217
Income (loss) from continuing operations before discontinued operations		1,156		256		1,412		(2,974)		(356)		(3,330)
Loss on sale of discontinued operations (Note 2)		(164)		-		(164)		-		-		-
Loss from discontinued operations (Note 2)		(128)		-		(128)		(1,770)		-		(1,770)
Net income (loss)		864		256		1,120		(4,744)		(356)		(5,100)
Less: Loss allocated to non-controlling interest		(938)		-		(938)		(157)		-		(157)
Net income (loss) attributable to IntriCon shareholders	$	1,802	$	256	$	2,058	$	(4,587)	$	(356)	$	(4,943)

Basic income (loss) per share attributable to IntriCon shareholders:
Continuing operations	$	0.31	$	0.04	$	0.34	$	(0.43)	$	(0.05)	$	(0.49)
Discontinued operations		(0.04)		-		(0.04)		(0.27)		-		(0.27)
Net income (loss) per share	$	0.26	$	0.04	$	0.30	$	(0.71)	$	(0.05)	$	(0.76)

Diluted income (loss) per share attributable to IntriCon shareholders:
Continuing operations	$	0.29	$	0.04	$	0.32	$	(0.43)	$	(0.05)	$	(0.49)
Discontinued operations		(0.04)		-		(0.04)		(0.27)		-		(0.27)
Net income (loss) per share	$	0.25	$	0.04	$	0.28	$	(0.71)	$	(0.05)	$	(0.76)

Average shares outstanding:
Basic		6,852		6,852		6,852		6,497		6,497		6,497
Diluted		7,307		7,307		7,307		6,497		6,497		6,497

Consolidated Statement of Comprehensive Income (Loss):


		Twelve Months Ended December 31, 2017, as reported		Effect of Adoption of ASC 606		Twelve Months Ended December 31, 2017, as adjusted

Net income	$	864	$	256	$	1,120

		Twelve Months Ended December 31, 2016, as reported		Effect of Adoption of ASC 606		Twelve Months Ended December 31, 2016, as adjusted

Net income (loss)	$	(4,744)	$	(356)	$	(5,100)

Consolidated Statement of Cash Flows:


		Twelve Months Ended December 31, 2017, as reported		Effect of Adoption of ASC 606		Twelve Months Ended December 31, 2017, as adjusted

Net income	$	864	$	256	$	1,120
Inventories		(3,114)		346		(2,768)
Contract assets		-		(1,117)		(1,117)
Accrued Expenses		1,622		515		2,137
		Twelve Months Ended December 31, 2016, as reported		Effect of Adoption of ASC 606		Twelve Months Ended December 31, 2016, as adjusted

Net income (loss)	$	(4,744)	$	(356)	$	(5,100)
Inventories		1,813		(726)		1,087
Contract assets		-		1,082		1,082

Consolidated Balance Sheet:


		December 31, 2017, as reported		Effect of Adoption of ASC 606		December 31, 2017, as adjusted

Inventories	$	15,397	$	(1,689)	$	13,708
Contract assets		-		2,979		2,979
Other accrued liabilities		3,224		515		3,739
Accumulated deficit		(6,831)		775		(6,056)

Consolidated Statement of Equity:


		December 31, 2017, as reported		Effect of Adoption of ASC 606		December 31, 2017, as adjusted

Accumulated Deficit	$	(6,831)	$	775	$	(6,056)
		December 31, 2016, as reported		Effect of Adoption of ASC 606		December 31, 2016, as adjusted

Accumulated Deficit	$	(8,633)	$	519	$	(8,114)
		December 31, 2015, as reported		Effect of Adoption of ASC 606		December 31, 2015, as adjusted

Accumulated Deficit	$	(4,046)	$	875	$	(3,171)

Transaction price allocated to remaining performance obligations - The Company’s remaining performance obligations as of December 31, 2018 primarily include uncompleted production of customized products for which control transfers to the customer over time, certain uncompleted product sales for orders received and future obligations under service plan arrangements recognized over time. The Company has elected to apply the practical expedient provided in ASC 606-10-50-14 and not disclose information about the amount of transaction price allocated to these remaining performance obligations as they all have original expected durations of one year or less.

The following table provides information about receivables, contracts assets, and contract liabilities from contracts with customers.


		December 31, 2018		December 31, 2017, as adjusted

Receivables, included in accounts receivable, less allowance for doubtful accounts	$	11,479	$	9,052
Contract assets		5,624		2,979
Contract liabilities, included in other current liabilities		457		312

Significant changes in contract assets and contract liabilities during the period are as follows:


		For the twelve months ended December 31, 2018
		Contract assets increase (decrease)		Contract liabilities (increase) decrease

Reclassification of beginning contract liabilities to revenue, as a result of performance obligations satisfied	$	-	$	312
Cash received in advance and not recognized as revenue		-		(457)
Contract assets recognized, net of reclassification to accounts receivable		2,645		-
Net Change	$	2,645	$	(145)