What happened

Shares of IntriCon Corporation (NASDAQ:IIN) were down 11.7% at 12:34 p.m. EDT on Thursday, continuing a downhill run that has seen the stock price fall 18.1% in the past two trading days. This comes after two announcements about plans to issue and sell 1.5 million new shares of its stock.

So what

The first announcement for a planned secondary public offering was on Tuesday, sending shares down more than 7%, followed by Wednesday's announcement of its pricing for the offering, $55 per share. Here's the rub: IntriCon shares were trading on the market for more than $68 before the new public offering was announced. 

Woman frowns and rubs her forehead as chart shows a big drop in price in the background.

Image source: Getty Images.

So there you have it: The company, to some extent, undermined the market value of its own stock by pricing the public offering at a 23% discount to the market value at the time of the announcement. This is particularly true since the prospectus had assumptions based on an offering price of $63.95 per share, 16% higher than the $55 offering price announced less than 24 hours later. 

To further muddy the water, the company also said that it would be using some of the proceeds from the offering to repurchase 500,000 shares from company insiders, including CEO Mark Gorder, three directors, four vice presidents, and CFO Scott Longval. This would substantially reduce insider ownership of IntriCon.

Now what

First things first. IntriCon investors are going to face dilution as the result of this offering. Assuming 1 million net new shares outstanding (since 500,000 of the shares are essentially a wash with the insider repurchases), existing investors will lose about 14% of their equity stake in the company. That in and of itself explains the basis for the $55 price for the new offering. 

Next, there's a generally positive takeaway from the method that insiders are using to cash out part of their equity holdings through this offering. To start, it was announced as part of the offering, a high level of transparency for management and the board about their intentions to sell. Second, and maybe more important, they agreed to sell their shares for the price the company realized from the offering, a substantial discount to market price.

Here's the kicker: The stock that insiders are selling is from equity awards, which investors should remember is part of the compensation for management and board members. And it's not unreasonable to expect insiders to profit from a company's stock appreciation, particularly when it's part of how they are paid. 

Lastly, IntriCon shares have surged an incredible 190% over the past 12 months, and an even more incredible 1,000% over the past two years, as its business as a supplier for medical device giant Medtronic PLC and other device makers has grown. By taking advantage of the tremendous run-up of its shares, the company will be able to pay off all its debt and still have a nice cash balance on its books, while key insiders will also be able to profit from the run-up in a transparent way. 

That's not to say IntriCon is necessarily a buy on this dip; its stock remains quite expensive by traditional valuation measures, trading for about 100 times trailing earnings, and almost 69 times forward projections. Its prospects are also heavily tied to its role as a supplier to other medical device makers, giving it less control over its future. 

That's not to say it can't be a winning stock from here, considering its market cap of $409 million, and tiny sales base of barely over $101 million over the past 12 months. It has big room to grow much bigger, but like most micro-cap stocks, will almost certainly be volatile. Keep that in mind if you decide to buy. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.