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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

T ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

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

incorporation or organization)

(I.R.S. Employer Identification No

1260 Red Fox Road

Arden Hills, Minnesota

55112

(Address of principal executive offices)

(Zip Code)

Registrant's telephone number, including area code

(651) 636-9770

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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes £ No T

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes £ No T

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 T 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 T 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. (Check one):

Large accelerated filer £Accelerated filer T

Non-accelerated filer £Smaller reporting company T

Emerging growth company £

1


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 has filed a report on and attestation to its management’s assessment of

the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.

7262(b)) by the registered public accounting firm that prepared or issued its audit report.   T

Indicate by check mark whether the registrant is a shell company (as defined by rule 12b-2 of the Act). Yes £ NoT

The aggregate market value of the voting common shares held by non-affiliates of the registrant on June 30, 2020 was $113,106,778. Common shares held by each officer and director and by each person who owns 10% or more of the outstanding common shares have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of outstanding shares of the registrant’s common shares on March 1, 2021 was 8,998,536.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's definitive proxy statement for the 2021 annual meeting of shareholders are incorporated by reference into Part III of this report; provided, however, that the Audit Committee Report and any other information in such Proxy Statement that is not required to be included in this Annual Report on Form 10-K, shall not be deemed to be incorporated herein or filed for the purposes of the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended.


2


Table of Contents

Page

No.

PART I

Item 1.

Business 

5

Item 1A.

Risk Factors

11

Item 1B.

Unresolved Staff Comments

18

Item 2.

Properties

18

Item 3.

Legal Proceedings

18

Item 4.

Mine Safety Disclosures

19

Item 4A.

Information about our Executive Officers

20

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

20

Item 6.

Selected Financial Data

21

Item 7.

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

22

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

29

Item 8.

Financial Statements and Supplementary Data

30

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

64

Item 9A.

Controls and Procedures

64

Item 9B.

Other Information

64

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

65

Item 11.

Executive Compensation

65

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

65

Item 13.

Certain Relationships and Related Transactions, and Director Independence

66

Item 14.

Principal Accounting Fees and Services

66

PART IV

Item 15.

Exhibits, Financial Statement Schedules

66

Item 16.

Form 10-K Summary

70

SIGNATURES

71

3


Forward-Looking Statements

Certain statements included or incorporated by reference in this Annual Report on Form 10-K or the Company’s other public filings and releases, 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”, “scheduled”, “designed”, “seek”, “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 “Business,” “Legal Proceedings”, “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to the Consolidated Financial Statements”, such as the Company’s ability to compete, strategic alliances and their benefits, the adequacy of insurance coverage, government regulation, potential increases in demand for the Company’s products, net operating loss carryforwards, the ability to meet cash requirements for operating needs, the ability to meet liquidity needs, assumptions used to calculate future levels of funding of employee benefit plans, the adequacy of insurance coverage, the impacts of new accounting pronouncements and litigation.

Forward-looking statements also include, without limitation, statements as to the effects of the COVID-19 pandemic, the Company's expected future results of operations and growth, 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 body-worn device markets, the effect of compliance with environmental protection laws and other government regulations, estimates of goodwill impairments and amortization expense of other intangible assets, estimates of asset impairment, 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 risks, uncertainties and other factors that can cause actual results and developments to be materially different from those expressed or implied by such forward-looking statements, including, without limitation, the risk factors discussed in Item 1A of this Annual Report on Form 10-K.

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.

Available Information

The Company files or furnishes its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information with the Securities and Exchange Commission (“SEC”). The Company’s reports, proxy and information statements and other SEC filings are available on the SEC’s website as part of the EDGAR database (http://www.sec.gov).

The Company maintains an internet website at www.intricon.com. The information on the website is not and should not be considered part of this annual report on Form 10-K and is not incorporated by reference in this document. This website is, and is only intended to be, for reference purposes only.

The Company makes available free of charge on or through its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.

In addition, we will provide, at no cost (other than for exhibits), paper or electronic copies of our reports and other filings made with the SEC. Requests should be directed to:

Corporate Secretary

Intricon Corporation

1260 Red Fox Road

Arden Hills, Minnesota 55112


4


PART I

ITEM 1. Business

Company Overview

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 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.

The Company is a Pennsylvania corporation formed in 1930 and operates today through subsidiaries. The Company’s core business of body-worn devices was established in 1993 through the acquisition of Resistance Technologies Inc., now known as Intricon, Inc. The Company’s common stock trades on the Nasdaq Global Market under the symbol “IIN.” The Company is headquartered in Arden Hills, Minnesota and operates globally with facilities in Minnesota, Illinois, California, Singapore, Indonesia and Germany.

Over the past year the Company has embarked on a transformation strategy to accelerate growth through expansion of its product and service offerings and geographic footprint. Aligned with this strategy the Company acquired Emerald Medical Services Pte., LTD (“EMS”), a Singapore based, joint development provider of complex catheter applications, in May 2020.

Information contained in this Annual Report on Form 10-K and expressed in U.S. dollars or number of shares are presented in thousands (000s), except for per share data and as otherwise noted.

For a full discussion of the general development of the Company’s business, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. https://investorrelations.intricon.com/node/13001/html

Business Highlights

Major Events in 2020

In March 2020, the World Health Organization categorized COVID-19 (coronavirus) as a pandemic and the President of the United States declared the outbreak a national emergency. There were and continue to be many uncertainties regarding the COVID-19 pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how it will impact its employees, customers, suppliers, vendors, and business partners. The Company remains fully operational as we abide by local COVID-19 safety regulations globally. To achieve this the Company has certain employees working remotely and has adopted significant protective measures as recommended by the Center for Disease Control (CDC) for our on-site employees. Additionally, the Company has taken steps to monitor and work closely with our suppliers to maintain uninterrupted supply of critical materials.

On May 18, 2020, the Company acquired all of the outstanding shares of EMS pursuant to a Share Purchase Agreement between Intricon, EMS and the direct and indirect owners of EMS. EMS, based in Singapore, is a provider of joint development medical device manufacturing services for complex catheter applications.

On May 20, 2020, the Company announced a strategic restructuring plan designed to offset near-term COVID-19 business impacts and accelerate the Company’s future long-term growth by focusing resources on the highest potential growth areas. The plan, which was approved by the Company’s Board of Directors, was completed as of June 30, 2020.

On October 1, 2020, Scott Longval became president and chief executive officer of the Company, succeeding Mark Gorder, who retired effective September 30, 2020. Mr. Gorder remains a member of the Company’s Board of Directors. On February 5, 2021, the Company announced the appointment of Ellen Scipta as chief financial officer effective February 8, 2021, replacing Mr. Longval who had retained such position through that date.


5


Market Overview:

Intricon serves as a JDM to leading medical device OEMs by designing, developing, engineering, manufacturing and distributing micromedical products, microelectronics, micro-mechanical assemblies, complete assemblies and software solutions. Revenue from these markets is reported on the respective diabetes, other medical, hearing health value based direct-to-end-consumer, hearing health value based indirect-to-end-consumer, hearing health legacy OEM, and professional audio lines in the discussion of our results of operations in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 23 “Revenue by Market” to the Company’s consolidated financial statements included herein.

 

The Company manufactures microelectronics, micro-mechanical assemblies, high-precision injection-molded plastic components and complete body-worn devices for leading and emerging medical device manufacturers. Intricon currently serves this market by offering medical device manufacturers the capabilities to design, develop, manufacture, package and distribute medical devices that are easier to use, smaller, lighter and use less power. Increasingly, the medical device industry is looking to outsource the manufacturing, assembly and packaging of their products.

The Company is committed to increasing investments to support its medical business development efforts. In early 2019, the Company hired a vice president of medical business development, and in connection with the EMS acquisition, has engaged one of the former owners of EMS as a corporate development consultant in an effort to leverage our core competencies and diversify our medical revenue base. The Company believes it has significant opportunities to serve the emerging home care markets through its already developed core competencies and capabilities to develop devices that are more technologically advanced, smaller and lightweight.

Diabetes

Intricon currently has a strong presence in the diabetes market by working with Medtronic to manufacture their wireless continuous glucose monitors (CGM), sensor assemblies, and accessories associated with Medtronic’s insulin pump and CGM system. In September 2016, the FDA approved Medtronic’s current generation insulin pump system, the MiniMed 670G system. The MiniMed 670G was the world’s first hybrid closed loop insulin delivery system. In September 2020, Medtronic announced FDA approval for the MiniMed 770G Insulin Pump System with smartphone connectivity. This latest system by Medtronic expands the benefits of hybrid closed loop therapy to younger children living with type 1 diabetes and makes it easier to access and share real-time CGM and pump data. The system will enable caregivers to see user data remotely on their smartphones, with proactive in-app notices sent when glucose levels are out of range. The data can also be shared automatically with clinicians and educators to help facilitate more effective telehealth visits and product trainings. This connectivity also gives Medtronic the ability to provide upgrades to future technology via software updates which will enhance device features. The Company is excited that our components are designed into and support such a revolutionary diabetes management system. Looking ahead, the Company believes there are opportunities to expand our diabetes product offering with Medtronic, as well as move into new markets outside of the diabetes market.

  

Peripheral Vascular, Interventional Pulmonology and Electrophysiology

Intricon has a suite of micro-coil technology that it offers to various OEM customers. These products are currently used in surgical navigation clinical applications, such as interventional pulmonology and electrophysiology. On May 18, 2020, Intricon acquired EMS, which provides joint engineering and manufacturing services for complex medical devices, including catheters covering a range of applications for cardiology, peripheral vascular, neurology, radiology and pulmonology. EMS’s production capability consists of design, development, manufacturing, testing and non-sterile packaging services. The acquisition expands Intricon’s micro-coil capabilities, including the ability to offer complete full-length catheter-based devices in surgical navigation and accelerates diversification into potential new end-markets.

Drug Delivery 

Intricon manufactures bubble sensors and flow restrictors that monitor and control the flow of fluid in an intravenous infusion system. In addition, Intricon has automated the production of a family of safety needle products for an OEM customer that utilizes Intricon’s insert and precision miniature molding capabilities. These products are assembled using full automation, including built-in quality checks within the production lines.

 

Value-Based Hearing Healthcare

In the United States alone, there are approximately 40 million adults that report some degree of 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. Along with this, the legacy hearing aid distribution channel is made up of five large hearing aid manufacturers who utilize brick-and-mortar and licensed audiologists to sell devices while controlling the channel dynamics. As a result, the average cost of a hearing aid sold in the US market today is over $2,400 per device, more than double the cost from fifteen 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 aids.

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The Company believe several factors have come together over the last few years to enable the emergence of a market disruptive, high-quality, low-cost distribution model. These factors include the 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) and pending regulatory change to allow the sale of over-the-counter (“OTC”) hearing aids. 

The Company believes the value-based hearing healthcare (VBHH) market offers significant growth opportunities. To best approach this market opportunity, the Company has sharpened its focus to identify potential high-profile branding partners that value Intricon’s ability to deliver superior hearing aids, self-fitting software and customer care to the U.S. market.

Legacy OEM Hearing Health Channel

The Company also believes there are niches in the legacy hearing health channel that will embrace outcomes-based products and technologies in the United States and Europe. High costs of legacy devices and retail consolidation have constrained the growth potential of the independent audiologist and dispenser. Intricon believes its specific software and product offering can provide independent audiologists and dispensers the ability to compete with larger retailers, and manufacturer owned retail distributors.  

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 focused on emergency response needs and military applications. The line includes several communication devices that are extremely portable and perform well in noisy and/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. 

Core Technical Capabilities Overview:

Over the past several years, the Company has increased investments in the continued development of critical core competencies, including micro-coil winding and assembly, microelectronics assembly, interventional catheter assembly, precision miniature molding, ultra-low power (ULP) digital signal processing (DSP) and wireless communications, as well as self-fitting software for hearing health. These core competencies serve as the foundation of current and future product platform development. While our core competencies are impressive individually, the Company believes that its differentiating value proposition is its ability to integrate various competencies into innovative solutions for challenging clinical applications.

Micro-coil Winding and Assembly

Electromagnetic micro-coils are a core technical capability at Intricon. Working with a complete range of ultra-fine wires and ferromagnetic core materials, we use our proprietary modeling and engineering systems to design and produce micro-coils that meet electromagnetic goals such as induction, resistance, sensitivity and localization performance. We also routinely work within size constraints dictated by the design of the medical device, utilizing our capabilities of winding down to 58 AWG wire (.00991 mm or .00039 inches), about one-third the diameter of a human hair. Finished micro-coils often are small enough to fit through the eye of a needle.

Bonding the coil wire to slightly larger diameter wire (often a twisted pair that runs the length of the device), provides full-length connectivity. Intricon can also assemble the entire device, and many of these programs include embedded ROM chips that calibrate the location of the micro-coil within the finished device so that the device can plug in directly to the navigational systems used by physicians. Today, our micro-coils are used in a wide range of medical applications in tip location sensing such as diagnostic applications, active implants and therapeutic applications such as electrophysiology atrial fibrillation (AF) mapping and ablation.

Microelectronics Assembly

Intricon has decades of experience in microelectronics design and assembly combined with a focus on joint development manufacturing. Our engineers work with our business partners to guide designs to ensure the highest performance and manufacturability. Intricon has state-of-the-art high-speed surface mount technology (SMT) pick-and-place machines to populate flex circuits and/or printed circuit boards. Automated computer-controlled testing equipment is used to download programs and perform electrical testing to verify that all requirements are met. Both proprietary automation equipment and low-cost/highly-skilled hand assembly are available at our facilities in the United States, Singapore and Indonesia.

Interventional Catheters

Intricon provides expertise and capabilities in advanced catheter and delivery systems and extrusion to support state-of-the-art, minimally invasive clinical procedures. Expertise includes tight tolerance, thin wall extrusions, braided and coiled catheter shafts with deflectable tip options while working with a full range of high-performance materials.

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Full-length connectivity and fine wire bonding bring to life new and unique interventional devices that can be embedded with a range of sensors, electromagnetic micro-coils or various microchips at the distal tip. Intricon also packages and ships fully-assembled devices. Clinical applications for Intricon interventional catheters and delivery systems include cardiology, peripheral vascular, neurovascular, oncology, structural heart and more.

Precision Miniature Molding

Intricon has decades of experience in precision miniature medical molding and routinely achieves tolerances of ±.0005 inches in compliance with ASTM and Society of the Plastics Industry (SPI) standards, while utilizing scientific injection molding practices. Intricon works with a broad range of materials such as polyether ether ketone, nylon, polypropylene, liquid crystal polymer, acrylic, polyoxymethylene, polycarbonate and other materials. Intricon has particular expertise with insert-molding techniques which are often employed to reduce human error and lower labor costs compared to manual assembly.

ULP DSP and Wireless Communication  

With more than 20 years of experience designing and manufacturing components and devices for hearing health, electrocardiogram (ECG) monitoring patches and continuous glucose monitoring (CGM), Intricon is at the forefront of digital signal processing and wireless communications solutions that use industry-standard protocols like Bluetooth® and Bluetooth Low Energy (BLE) as well as proprietary wireless technologies developed by Intricon.

Self-Fitting Software 

The ability to efficiently and effectively “fit” hearing aids to an individual patient’s hearing loss 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 (AccuFit, used in the conventional channel), Intricon has made significant investments in various advanced fitting software solutions, including its purchase of the source code for the Sentibo Smart Brain self-fitting software, 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 of individuals that cannot receive care today, primarily due to high cost and low access. 

 

Market Development:

Intricon intends to allocate more capital and resources in marketing and sales to increase revenue by leveraging its existing core competencies and technologies platforms in order to accelerate the diversification of its revenue base within its core markets of diabetes, peripheral vascular, interventional pulmonology, electrophysiology and hearing healthcare. In addition, the Company believes this will allow it to advance its technology portfolio, advance new product platforms, and strengthen its position as a leading JDM.

The Company is committed to increasing investments to support its medical business development efforts. In early 2019, the Company hired a vice president of medical business development, and in connection with the EMS acquisition, has engaged one of the former owners of EMS as a corporate development consultant in an effort to leverage our core competencies and diversify our medical revenue base.

Currently, Intricon sells some of its hearing device products directly to domestic hearing instrument manufacturers, and distributors and partnerships through an internal sales force. As a result of the investments in Hearing Help Express in 2016 and 2017, the Company began marketing and selling hearing aid devices directly to consumers through direct mail advertising, internet and a call center. In February 2020, however, the Company announced its decision to pivot its Hearing Help Express focus entirely towards supporting product development and testing in order to best capture the near-term benefits. As a result of this re-positioning, the advertising and marketing budget related to Hearing Help Express has decreased significantly in 2020. Sales of other medical and professional audio communications products are also made primarily through an internal sales force.

Internationally, sales representatives employed by Intricon GmbH, a wholly-owned German subsidiary, solicit sales from European hearing instrument, medical device and professional audio communications manufacturers and suppliers.

Intricon markets its high-performance microphone products to the radio communication and professional audio industries and has several larger competitors who have greater financial resources. Intricon holds a small market share in the global market for microphone capsules and other related products.

Product Liability. As a supplier of consumer and medical products and parts, Intricon is subject to claims for personal injuries allegedly caused by its products. The Company maintains what it believes to be adequate insurance coverage.


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Employees. As of December 31, 2020, the Company had a total of 762 full time equivalent employees, of whom 61 are executive and administrative personnel, 13 are sales personnel, 46 are engineering personnel and 642 are operations personnel.

Intricon Corporation is committed to creating an inclusive work environment where all team members demonstrate respect for each other and participate in a community of integrity, trust and collaboration. Team members are integral to fulfilling our mission to improve, extend and save lives by advancing innovative micromedical technologies through joint development and manufacturing partnerships with industry leading medical device companies. The Company is committed to the health, safety and overall well-being of our employees. Intricon has implemented numerous health standards and protocols to protect its employees from infectious disease including COVID-19.

Intricon’s Values

Intricon is committed to maintaining our history as an ethical and moral leader in our business operations and everyday interactions. Intricon remains true to the following values that guide us in how we define ourselves and how we behave.

•Integrity and Humility

•Discipline and Accountability

•Collaboration and Inclusiveness

•Agility and Innovation

Our Commitment to a Diverse and Respectful Workplace

It is Intricon’s goal is to foster a diverse and vibrant workforce that supports and reflects the communities in which we live and work. We believe that innovative ideas come from having diverse and unique perspectives, and that different ideas, backgrounds, experiences and knowledge contribute to a better outcome for all. Intricon is committed to creating an environment where all team members are free to express their opinions and ideas in a productive and respectful manner.

Our hiring, retention and development activities seek to promote a diverse and more equitable team member community. We value and embrace diversity across the spectrum of backgrounds and experiences, including but not limited to race, ethnicity, gender, gender identity and expression, sexual orientation, disability and religion.

Our Commitment to Discrimination Prevention and Equal Employment Opportunities

Intricon is committed to providing equal employment opportunities and has established policies to support that commitment. All qualified applicants and employees will be considered for employment and advancement without regard to race, creed, religion, color, national, ethnic or social origin, sex, marital or family status, disability, sexual orientation, gender identity and expression, age, pregnancy, genetic information or any other protected class under applicable federal, state or local law. This policy applies to all employment practices and terms and conditions of employment, including but not limited to promotions, transfers, compensation, discipline, terminations, training and participation in Company sponsored benefits or programs.

Intricon prohibits discrimination and harassment based on the above stated categories. Any team member who engages in discrimination or harassment; who permits team members to engage in such conduct; or who retaliates or permits retaliation against a team member who reports such conduct is in violation of this policy and will be subject to disciplinary action, up to and including termination of employment. Intricon has implemented policies, procedures and training to ensure any potential discrimination or harassment is reported and appropriately investigated and corrected, if appropriate. Team members have been instructed and have acknowledged their duty to immediately report any non-compliance with our policy and our commitment to a respectful workplace free of discrimination or harassment. Team members have been made aware of the appropriate reporting channels.

Research and Development. Intricon conducts research and development activities primarily to improve its existing products and proprietary technology. The Company is committed to investing in the research and development of proprietary technologies, that enhance our position as a JDM. The Company believes the continued development of key proprietary technologies will be a catalyst for long-term revenues and margin growth. The following research and development expenditures for the three most recent years are net of any customer and grant reimbursements:

Year Ended December 31,

Dollars

Percent of Revenue

2020

$

5,248

5.1%

2019

3,830

3.4%

2018

4,671

4.1%

Intricon owns numerous United States patents which cover various product designs and processes. Although the Company believes that these patents collectively add value to the Company, the costs associated with the submission of patent applications are expensed as incurred given the uncertainty of the patents providing future economic benefit to the Company.


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Regulation. Most, if not all, of our business operates in marketplaces subject to extensive and rigorous regulation by the FDA, by comparable agencies in foreign countries and other regulatory agencies. In the United States, the FDA regulates the design control, development, manufacturing, labeling, record keeping, distribution, installation, service and post-market surveillance procedures for medical devices.

 

United States Food and Drug Administration

 

FDA regulations classify medical devices based on intended use and perceived risk to public health as either Class I, II or III devices. Class I devices are subject to general controls, Class II devices are subject to special controls and Class III devices are subject to special controls and pre-market approval (“PMA”) requirements. While most Class I devices are exempt from pre-market submission, it is necessary for most Class II devices to be cleared by a 510(k) pre-market notification prior to marketing. A “cleared” 510(k) establishes that the device is “substantially equivalent” to a predicate device which was legally marketed prior to May 28, 1976 or which itself has been found to be substantially equivalent, through the 510(k) process, after May 28, 1976. It is “substantially equivalent” if it has the same intended use and the same technological characteristics as the predicate. The 510(k) pre-market notification must be supported by data establishing the claim of substantial equivalence to the satisfaction of the FDA. The FDA has 90 days to complete the review of a 510(k) submission, and clearance is typically granted within four months, however obtaining a 510(k) clearance can sometimes take significantly longer. If the product is notably new or different and substantial equivalence cannot be established, the FDA will require the manufacturer to submit a PMA application for a Class III device that must be reviewed and approved by the FDA prior to sale and marketing of the device in the United States. The process of obtaining PMA approval can be expensive, uncertain, lengthy and frequently requires anywhere from one to several years from the date of FDA submission, if approval is obtained at all. A “De Novo” application may be submitted for a new type of Class II device for which there is no predicate. The FDA controls the indicated uses for which a product may be marketed and strictly prohibits the marketing of medical devices for unapproved uses. The FDA can require the manufacturer to withdraw products from the market for failure to comply with laws or the occurrence of safety risks.

Our facilities are subject to FDA inspection on a routine basis. The Company is required to adhere to the Current Good Manufacturing Practices (“GMP”) requirements set forth in the Quality System Regulations published by the FDA, which require manufacturers, including third-party manufacturers, to follow design, testing, control, documentation and quality procedures during the manufacturing process.

Intricon’s wireless and non-wireless hearing aids are air-conduction devices and, as such, are Class I and Class II medical devices. Air-conduction hearing aids are exempt from the 510(k) pre-market notification process. These hearing aids may be marketed either through distribution channels owned, in whole or in part, by Intricon or through non-affiliated distribution channels. In the latter sense, Intricon acts as the contract manufacturer to the distributing organization, assisting in design, development and manufacturing. The Company’s manufacturing operations are subject to periodic inspections by the FDA, whose primary purpose is to ensure the Company’s compliance with the Quality System Regulations published by the FDA and other applicable government standards. Strict regulatory action may be initiated in response to identified deficiencies or to product performance problems. Intricon believes that our Quality Management Systems and all regulated operations are in compliance with the requirements of the FDA regulations. Our most recent FDA inspection was conducted in May of 2019. No issues (observations) arising from this inspection were noted.

International Regulation

 

International regulatory bodies have established varying regulations governing product standards, packaging and labeling requirements, import restrictions, tariff regulations, duties and tax. Many of these regulations are similar to those of the FDA. The Company believes it is in compliance with the regulatory requirements in the foreign countries in which our medical devices are marketed, as evidenced by our continuous certification to the ISO 13485 granted by our notified body, British Standards Institution (BSI). A notified body is an organization designated by a European Union (EU) country to assess the conformity of certain products before being placed on the market.

Medical device law in the EU requires that our quality management system conforms to international quality standards and that our medical devices conform to “essential requirements” set forth by the Medical Device Directive (“MDD”). In order to keep pace with accelerating technical reality and manufacturing risks, medical device law in the EU is changing rapidly. Effective May 5, 2017, the MDD has been replaced with a broader, more reaching Medical Device Regulation (“MDR”) with a four-year transition period and comes into effect on May 26, 2021. Intricon intends to comply with the MDR prior to the end of the transition period.

Intricon manufacturing facilities are audited at least annually by an International Organization for Standardization (“ISO”) registrar to verify conformity of its quality management systems and products to the relevant standards and regulations. The ISO registrar for our US facilities is BSI while the registrar for our Asian facilities is SGS United Kingdom Ltd.


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Technical documentation, including the essential requirements matrix, for each product placed on the market in the EU is audited by our European notified body (also BSI). Successful audits verify conformance to the essential requirements set forth by the MDD for the class of medical devices produced and result in a CE certificate. This entitles us to place the “CE” mark on our devices sold and distributed in Europe. In 2014, Intricon obtained "CE" certification for our own hearing aid devices and we are supplying these devices into the European market. Intricon’s hearing aids may also bear the CE mark of our customers who then assume regulatory responsibilities for those devices they place on the EU market under their own name.

Our European authorized representative, CE Partner 4U, reviews and retains our technical documentation and registers our products as required with applicable authorities in all EU member states. CE Partner 4U also advises Intricon of any changes to relevant laws that will impact the marketability of our products. In addition, CE Partner 4U aids Intricon in conducting required post-market surveillance activities for our products sold and distributed in the EU.

Data Privacy and Security Law

The Company is subject to domestic and foreign data privacy and security laws, regulations, and customer-imposed controls as a result of accessing and processing confidential, personal, and/or sensitive data. Our failure to comply with these laws or significant changes in the laws could significantly impact our business and our future business plans.

ITEM 1A. Risk Factors

The following risks should be considered when evaluating the Company’s business and any forward-looking statements made is this Annual Report on Form 10-K or elsewhere. Any of the risks discussed in this Annual Report on Form 10-K or the Company’s other SEC filings could materially adversely affect the Company’s business and operating results.

Risks Related to Our Business

The Company’s business, financial condition and results of operations for 2021 and beyond could be materially adversely affected by the ongoing COVID-19 (coronavirus) outbreak and/or subsequent pandemics.

The outbreak of the novel coronavirus has evolved into a global pandemic. COVID-19 has spread throughout the world, including North America, Asia and Europe. The full extent to which the COVID-19 pandemic impacts Intricon’s future business, operating results and financial condition will depend on future developments that are highly uncertain, cannot be accurately predicted and may be beyond our control. We cannot predict the duration or scope of the COVID-19 pandemic or subsequent pandemics, the efficacy or availability of vaccines, surges in infections or the severity of any variants, actions that may be taken by governments and businesses in response to the pandemic, or the impacts of the pandemic on healthcare systems. These impacts and associated responses of the COVID-19 pandemic could materially adversely impact our business, financial condition and results of operations in a number of ways, including but not limited to:

Reduced revenues as a result of disruptions in our operations, supply chain or in demand by our customers, including our major customers.

Reduced revenues or earnings may require us to perform impairment assessments of our long-lived assets, goodwill and other assets and result in charges to earnings;

Diminished ability, or inability, to complete clinical trials and other activities required to achieve regulatory clearing for our products under development due to lack of access to healthcare facilities, healthcare providers and patients;

Potential delays in the over-the-counter hearing aid regulations required to be promulgated by the U.S. Food and Drug Administration due to COVID-19 priorities, which delay will likely have an adverse impact on our hearing health business over the course of 2021 and beyond.

The duration of future disruptions to our customers and to our supply chain, and related financial impact to us, cannot be estimated at this time. If such disruptions continue for an extended period of time, the impact could have a material adverse effect on our business, results of operations and financial condition.

The loss of one or more of our major customers could adversely affect our results of operations.

The Company is dependent on a small number of customers for a majority of our revenues. In fiscal year 2020, Medtronic, our largest customer accounted for approximately 63 percent of our net revenue. A significant decrease or delay in sales or loss of any of our major customers could have a material adverse effect on our business and results of operations. Our revenues are largely dependent upon the ability of customers to develop and sell products that incorporate our products. No assurance can be given that our major customers will not experience financial, technical, regulatory or other difficulties or delays that could adversely affect their operations and, in turn, our results of operations.

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Several of our customers in the hearing health market have undergone mergers or acquisitions, resulting in a smaller customer base with larger customers. If the Company is unable to maintain satisfactory relationships with the current customer base, it may adversely affect our operating profits and revenue.

We have in the past and may in the future explore acquisitions that complement or expand our business. Acquisitions pose significant risks, including the potential impairment of goodwill and intangible assets, and may materially adversely affect our business, financial condition and operating results.

As part of our business strategy, the Company has in the past and may in the future pursue acquisitions of other businesses or technologies that the Company believes could complement, enhance or expand our current business or product lines, diversify our revenue base, allow for geographic expansion or that might otherwise offer growth opportunities. We may have difficulty finding these opportunities or, if we do identify these opportunities, we may not be able to complete the transactions for various reasons, including a failure to secure financing.

Our prior acquisitions have resulted, and future acquisitions may result, in the recording of goodwill and intangible assets subject to potential impairment in the future if we are not able to realize the value paid, adversely affecting our operating results. For example, in 2017, we completed the acquisition of Hearing Help Express and in 2020 we completed the acquisition of EMS. We recorded goodwill and intangible assets in connection with this each of these acquisitions. Refer to Notes 6 and 7 in the Company’s consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional information.

Acquisitions involve a number of risks, including: the diversion of our management’s attention from our existing business to integrate the operations and personnel of the acquired or combined business or joint venture; possible adverse effects on our operating results during the integration process; unanticipated liabilities and litigation; and our possible inability to achieve the intended objectives or achieve the anticipated benefits of the transaction. In addition, the Company may not be able to successfully or profitably integrate, operate, maintain and manage our newly acquired operations or employees. Future acquisitions also may result in dilutive issuances of equity securities or the incurrence of additional debt.

Downturns in the domestic economic environment could cause a severe disruption in our operations.

Adverse changes in the economy could negatively affect our business, which could exacerbate many of the risk factors we have identified including, but not limited to, the following:

Liquidity:

The domestic economic environment, including credit markets, could worsen and reduce liquidity and this could have a negative impact on financial institutions and the country’s financial system, which could, in turn, have a negative impact on the business of our customers and on our business.

Investments held by the Company are subject to market conditions which could decline in value and reduce liquidity.

If interest rates rise, this could disrupt domestic and world markets and could adversely affect the economy as a whole and our liquidity, costs of borrowing and results of operations.

Demand:

Any downturn in the economy or a return to recession could result in lower sales to our customers. Additionally, our customers may not have access to sufficient cash or short-term credit to obtain our products or services.

Prices:

In the event of a downturn, certain markets could experience deflation, which would negatively impact our average prices and reduce our margins.

Our failure, or the failure of our customers, to obtain required governmental approvals and maintain regulatory compliance for regulated products would adversely affect our ability to generate revenue from those products.

The markets in which we and our customers operate are subject to extensive and rigorous regulation by the FDA and by comparable agencies in foreign countries. For medical devices sold and distributed in the United States by Intricon and our customers, the FDA regulates the design control, development, manufacturing, labeling, record keeping, and surveillance procedures.

 


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The process of obtaining marketing clearance or approvals from the FDA for new products and new applications for existing products can be time-consuming and expensive, and there is no assurance that such clearance/approvals will be granted, or that the FDA review will not involve delays that would adversely affect our ability to commercialize additional products or additional applications for existing products. Some of our products in the research and development stage may be subject to a lengthy and expensive pre-market approval process with the FDA. The FDA has the authority to control the indicated uses of a device. Products can also be withdrawn from the market due to failure to comply with regulatory standards or the occurrence of unforeseen problems. The FDA regulations depend heavily on administrative interpretation, and there can be no assurance that future interpretations made by the FDA or other regulatory bodies, with possible retroactive effect, will not adversely affect us.

The Company is in the process of preparing the Sentibo Smart Brain self-fitting software technology for submission to the FDA for approval. This technology is crucial to our development of the over-the-counter market for our hearing aids. Any delays in FDA approval could have an adverse impact on our entry into this market.

 

The registration system for our medical devices in the EU requires that our quality system conform to international quality standards. Manufacturing facilities and processes under which our hearing aid devices and OEM components and assemblies are produced, are inspected and audited by various certifying bodies. These audits verify our compliance with applicable requirements and standards. Further, the FDA, various state agencies and foreign regulatory agencies inspect our facilities to determine whether the Company is in compliance with various regulations relating to quality systems, such as manufacturing practices, validation, testing, quality control, product labeling and product surveillance. A determination that the Company is in violation of such regulations could lead to imposition of civil penalties, including fines, product recalls or product seizures, suspensions or shutdown of production and, in extreme cases, criminal sanctions, depending on the nature of the violation.

Further, to the extent that any of our customers to whom we supply products become subject to regulatory actions or delays, our sales to those customers could be reduced, delayed or suspended, which could have a material adverse effect on our sales and earnings.

Implementation of our growth strategy may not be successful, which could affect our ability to increase revenues.

Our growth strategy includes developing new products and entering new markets, as well as identifying and integrating acquisitions. Our ability to compete in new markets will depend upon a number of factors including, among others:

ability to stay competitive by developing quality products that are technologically advanced and inexpensive to manufacture;

our ability to create demand for products in new markets;

our ability to strengthen our sales and marketing presence;

our ability to successfully identify, complete and integrate acquisitions; and

our ability to fund growth.

The failure to do any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. In addition, we may face competition in these new markets from various companies that may have substantially greater research and development resources, marketing and financial resources, manufacturing capability and customer support organizations.

Our need for continued investment in research and development may increase expenses and reduce our profitability.

Our industry is characterized by the need for continued investment in research and development. If we fail to invest sufficiently in research and development, our products could become less attractive to existing and potential customers and our business and financial condition could be materially and adversely affected. As a result of the need to maintain or increase spending levels in this area and the difficulty in reducing costs associated with research and development, our operating results could be materially harmed if our research and development efforts fail to result in new products or if revenues fall below expectations. In addition, as a result of our commitment to invest in research and development, management believes that research and development expenses as a percentage of revenues could increase in the future.


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The Company is subject to risks arising from its international sales and operations.

We derived approximately 27 percent of our 2020 revenues from customers located outside of the U.S. In 2020, we operated in Singapore, Indonesia, and Germany. Approximately 7 percent of our revenues were derived from our facilities in these countries in 2020. As of December 31, 2020, approximately 12 percent of our long-lived assets are located in these countries. Political or economic instability in foreign countries could have an adverse impact on our results of operations due to disruption of production or diminished revenues in these countries. Our future revenues, costs of operations and profit results could be affected by a number of factors related to our international operations, including changes in foreign currency exchange rates, changes in economic conditions from country to country, changes in a country's political condition, trade protection measures, licensing and other legal requirements and local tax issues. Unanticipated currency fluctuations in the Euro, Singapore dollar and other currencies could lead to lower reported consolidated revenues due to the translation of this currency into U.S. dollars when we consolidate our revenues and results from operations.

The Company is subject to tax legislation in numerous countries; changes in tax laws or challenges to our tax positions could adversely affect our business, results of operations and financial condition.

The Company is a global corporation with a presence in the United States, Singapore, Indonesia and Germany. As such, the Company is subject to tax laws, regulations and policies of the U.S. federal, state and local governments and of comparable taxing authorities in other country jurisdictions. Changes in tax laws, as well as other factors, could cause us to experience fluctuations in our tax obligations and effective tax rates in 2020 and thereafter and otherwise adversely affect our tax positions and/or our tax liabilities. There can be no assurance that our effective tax rates, tax payments, tax credits or incentives will not be adversely affected by these or other initiatives.

Our success depends on our senior management team and the Company’s ability to retain them as well as continued service of our engineering and technical personnel.

We are highly dependent upon the continued services and experience of our senior management team, including Scott Longval who was appointed in October 2020 as president and chief executive officer to replace Mark S. Gorder, who retired at the end of September 2020. We depend on the services of Mr. Longval and the other members of our senior management team to, among other things, continue the development and implementation of our business strategies and maintain and develop our client relationships. Certain members of our management team are approaching retirement and the Company must locate and employ suitable replacements from within or outside the Company. If we fail to successfully and timely attract and hire replacements for members of senior management as they retire with persons with the appropriate level of expertise, we could experience adverse impacts on our business and results of operations. Any significant leadership change and accompanying senior management transition, such as the recent change in our president and chief executive officer, and the hiring of other new leaders in key roles, involves inherent risk and any failure to ensure a smooth transition could hinder our strategic planning, execution and future performance.

We do not maintain key-man life insurance for any members of our senior management team.

There is intense competition for qualified engineering and technical personnel in our markets. We may not be able to continue to attract and retain engineers or other qualified personnel necessary for the development and growth of our business. The failure to retain and recruit key technical personnel could cause additional expense and potentially have an adverse effect on our results of operations.

Our business could be adversely affected by disruption at our sites or those of our major customers or suppliers.

Our main headquarters and manufacturing facilities are located in the Minneapolis, Minnesota area. In addition, we have manufacturing facilities in Singapore and Batam. We rely on these facilities to house our operations, manufacture our products and store finished goods. Severe weather, natural disasters and other calamities, such as pandemics (including COVID-19), earthquakes, tsunamis and hurricanes, fires and explosions, accidents, mechanical failures, unscheduled downtimes, civil unrest, strikes, transportation interruptions, unpermitted discharges or releases of toxic or hazardous substances, other environmental risks, sabotage or terrorist attacks, could severely disrupt our operations, or those of our major customers and suppliers. While the Company has taken steps to manage operational risks and while insurance coverage may reimburse, in whole or part, site disruption could have a material adverse effect on our business, financial condition and results of operations. Any significant disruption to our sites for any reason also could adversely affect our sales and customer relationships.


14


Risks Related to Our Intellectual Property and Cybersecurity

We and/or our customers may be unable to protect our and their proprietary technology and intellectual property rights or keep up with that of competitors.

Our ability to compete effectively against other companies in our markets depends, in part, on our ability and the ability of our customers to protect our and their current and future proprietary technology under patent, copyright, trademark, trade secret and unfair competition laws. We cannot assure that our means of protecting our proprietary rights in the United States or abroad will be adequate, or that others will not develop technologies similar or superior to our technology or design around the proprietary rights we own or license. In addition, we may incur substantial costs in attempting to protect our proprietary rights.

We attempt to protect and maintain proprietary technology and intellectual property through confidentiality agreements and patents. Despite the steps taken by us to protect our proprietary rights, it may be possible for unauthorized third parties to copy or reverse-engineer aspects of our and our customers’ products, develop similar technology independently or otherwise obtain and use information that we or our customers regard as proprietary. The process of identifying and managing patent disputes is time consuming and costly. Accordingly, our ability or our customer’s ability to maintain a competitive advantage over competitors may be diminished.

If we become subject to material intellectual property infringement claims, we could incur significant expenses and could be prevented from selling specific products.

We may become subject to material claims that we infringe the intellectual property rights of others in the future. We cannot assure that, if made, these claims will not be successful. Any claim of infringement could cause us to incur substantial costs defending against the claim even if the claim is invalid and could distract management from other business. Any judgment against us could require substantial payment in damages and could also include an injunction or other court order that could prevent us from offering certain products.

Moreover, in recent years, individuals and groups that are non-practicing entities, commonly referred to as “patent trolls,” have purchased patents and other intellectual property assets for the purpose of making claims of infringement in order to extract settlements. From time to time, we may receive threatening letters or notices or may be the subject of claims that our solutions and underlying technology infringe or violate the intellectual property rights of others. Responding to such claims, regardless of their merit, can be time consuming, costly to defend in litigation, divert management's attention and resources, damage our reputation and brand, and cause us to incur significant expenses.

Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.

Global cybersecurity threats can range from uncoordinated individual attempts to gain unauthorized access to our information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats. While we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, insurance, vulnerability assessments, continuous monitoring of our IT networks and systems, maintenance of backup and protective systems and user training and education), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of a material cybersecurity incident include reputational damage, loss of customers, litigation with customers and other parties, loss of trade secrets and other proprietary business data, diminution in the value of our investment in research, development and engineering, and increased cybersecurity protection and remediation costs, which in turn could adversely affect our competitiveness and results of operations.

15


Risks Related to Litigation and Environmental Liabilities

The Company is subject to numerous asbestos-related lawsuits, which could adversely affect our financial position, results of operations or liquidity.

The Company is a defendant along with a number of other parties in lawsuits alleging that plaintiffs have or may have contracted asbestos-related diseases as a result of exposure to asbestos products or equipment containing asbestos sold by one or more named defendants. These lawsuits relate to the discontinued heat technologies segment which we sold in March 2005. Due to the non-informative nature of the complaints, we do not know whether any of the complaints state valid claims against us. Certain insurance carriers have informed us that the primary policies for the period August 1, 1970-1978 have been exhausted and that the carriers will no longer provide defense and insurance coverage under those policies. However, we have other primary and excess insurance policies that we believe afford coverage for later years. Some of these other primary insurers have accepted defense and insurance coverage for these suits, and some of them have either ignored our tender of defense of these cases, or have denied coverage, or have accepted the tenders but asserted a reservation of rights and/or advised us that they need to investigate further. Because settlement payments are applied to all years a litigant was deemed to have been exposed to asbestos, the Company believes we will have funds available for defense and insurance coverage under the non-exhausted primary and excess insurance policies. However, unlike the older policies, the more recent policies have deductible amounts for defense and settlements costs that we will be required to pay; accordingly, we expect that our litigation costs will increase in the future as the older policies are exhausted. Further, many of the policies covering later years (approximately 1984 and thereafter) have exclusions for any asbestos products or operations, and thus do not provide insurance coverage for asbestos-related lawsuits. If our insurance policies do not cover the costs and any awards for the asbestos-related lawsuits, we will have to use our cash or obtain additional financing to pay the asbestos-related obligations and settlement costs. There is no assurance that we will have the cash or be able to obtain additional financings on favorable terms to pay asbestos related obligations or settlements should they occur. The ultimate outcome of any legal matter cannot be predicted with certainty. In light of the significant uncertainty associated with asbestos lawsuits, there is no guarantee that these lawsuits will not materially adversely affect our financial position, results of operations or liquidity. As of December 31, 2020, we have $129 and $721 recorded within other accrued liabilities and other long-term liabilities, respectively, within our Consolidated Balance Sheet for estimated future claims. An insurance receivable of $129 and $721 is recorded within other current assets and other assets, net, respectively, within our Consolidated Balance Sheet for estimated insurance recoveries.

Environmental liability and compliance obligations may affect our operations and results.

Our manufacturing operations are subject to a variety of environmental laws and regulations as well as internal programs and policies governing:

air emissions;

wastewater discharges;

the storage, use, handling, disposal and remediation of hazardous substances, wastes and chemicals;

employee health and safety;

If violations of environmental laws occur, we could be held liable for damages, penalties, fines and remedial actions. Our operations and results could be adversely affected by any material obligations arising from existing laws, as well as any required material modifications arising from new regulations that may be enacted in the future. We may also be held liable for past disposal of hazardous substances generated by our business or former businesses or businesses we acquire. In addition, it is possible that we may be held liable for contamination discovered at our present or former facilities.

Risks Related to Our Common Stock

The market price of our common stock has been and is likely to continue to be volatile and there has been and could be limited trading volume in our stock.

Over the last several years, stock markets in general, as well as the market price of our common stock, has been volatile and is likely to continue to be volatile and there has been limited trading volume in our stock. which may make it difficult for shareholders to sell common stock when they want to and at prices they find attractive. For example, our stock traded between a low sale price of $9.84 and a high sale price of $19.70 in 2020.

16


Our common stock market price could be subject to wide fluctuations in response to a variety of factors, including the following:

operating results that vary from our financial guidance or the expectations of securities analysts and investors;

performance of the major end markets we target including regulatory or other delays affecting our or our customers’ products;

the timing and announcement of strategic developments, acquisition, or other material events by us or our competitors;

adverse or unfavorable publicity about our products, technologies or us;

downgrades of our stock by securities analysts or other unfavorable commentary or research;

additions or departures of key personnel; and

changes in general market conditions, global financial markets, and global economies.

These broad fluctuations and limited trading volume may materially adversely affect the market price of our common stock, and your ability to sell our common stock.

Most of our outstanding shares are available for resale in the public market without restriction. The sale of a large number of these shares could adversely affect the share price and could impair our ability to raise capital through the sale of equity securities or make acquisitions for common stock.

“Anti-takeover” provisions may make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to shareholders.

The Company is a Pennsylvania corporation. Anti-takeover provisions in Pennsylvania law and our charter and bylaws could make it more difficult for a third party to acquire control of us. These provisions could adversely affect the market price of the common stock and could reduce the amount that shareholders might receive if the Company is sold. For example, our charter provides that the board of directors may issue preferred stock without shareholder approval. In addition, our bylaws provide for a classified board, with each board member serving a staggered three-year term. Directors may be removed by shareholders only with the approval of the holders of at least two-thirds of all shares outstanding and entitled to vote.

Risks Related to Being a Public Company

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential shareholders and customers could lose confidence in our financial reporting, which could harm our business, the trading price of our stock and our ability to retain our current customers or obtain new customers.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, referred to as Section 404, the Company is required to include in our Annual Reports on Form 10-K, reports of our management and our independent registered public accounting firm on our internal control over financial reporting. While we have reported no “material weaknesses” in the Form 10-K for the fiscal year ended December 31, 2020, we cannot guarantee that we will not have material weaknesses in the future. Compliance with the requirements of Section 404 is expensive and time-consuming. If in the future we fail to complete this evaluation in a timely manner, or if we determine that we have a material weakness, we could be subject to regulatory scrutiny and a loss of public confidence in our internal control over financial reporting. In addition, any failure to establish an effective system of disclosure controls and procedures could cause our current and potential investors and customers to lose confidence in our financial reporting and disclosure required under the Securities Exchange Act of 1934, which could adversely affect our business and the market price of our common stock.


17


ITEM 1B. Unresolved Staff Comments

Not applicable.

ITEM 2. Properties

The Company leases eight facilities, five domestically and three internationally, as follows:

a 47,000 square foot manufacturing facility in Arden Hills, Minnesota, which also serves as the Company’s headquarters. At this facility, the Company manufactures body-worn devices, other than plastic component parts. Annual base rent expense, including real estate taxes and other charges, is approximately $530. This lease expires in January 2022.

a 49,000 square foot manufacturing facility in Arden Hills, Minnesota at which the Company manufactures body-worn devices, and plastic component parts. Annual base rent expense is approximately $427. This lease expires in July 2023.

a 46,000 square foot building in Vadnais Heights, Minnesota at which Intricon produces plastic component parts for body-worn devices. Annual base rent expense, including real estate taxes and other charges, is approximately $407. This lease expires in December 2022.

a 8,100 square foot facility in DeKalb, Illinois which houses Hearing Help Express’s sales and administrative offices and warehouse. Annual base rent expense is approximately $96. The Company is also responsible for its pro rata share of common area costs, real estate taxes and insurance costs. This lease expires in March 2022.

a 3,300 square foot facility in Riverside, California which houses Emerald Extrusion Services’ administrative offices and warehouse. Annual base rent expense is approximately $34. This lease expires in January 2022.

a 49,000 square foot facility in Singapore which houses production facilities, warehouse and administrative offices. Annual base rent expense, including real estate taxes and other charges, is approximately $856. This lease expires in October 2025.

a 33,000 square foot facility in Indonesia which houses production facilities, warehouse and administrative offices. Annual base rent expense, including real estate taxes and other charges is approximately $139. This lease expires in September 2024.

a 2,000 square foot facility in Germany which houses sales and administrative offices. Annual base rent expense, including real estate taxes and other charges, is approximately $32. This lease expires in June 2022.

See Note 13 to the Company’s consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

ITEM 3. Legal Proceedings

Asbestos Litigation

The Company is a defendant along with a number of other parties in lawsuits alleging that plaintiffs have or may have contracted asbestos-related diseases as a result of exposure to asbestos products or equipment containing asbestos sold by one or more named defendants. These lawsuits relate to the discontinued heat technologies segment which was sold in March 2005. Due to the non-informative nature of the complaints, the Company does not know whether any of the complaints state valid claims against the Company. Certain insurance carriers have informed the Company that the primary policies for the period August 1, 1970-1978 have been exhausted and that the carriers will no longer provide defense and insurance coverage under those policies. However, the Company has other primary and excess insurance policies that the Company believes afford coverage for later years. Some of these other primary insurers have accepted defense and insurance coverage for these suits, and some of them have either ignored the Company’s tender of defense of these cases, or have denied coverage, or have accepted the tenders but asserted a reservation of rights and/or advised the Company that they need to investigate further. Because settlement payments are applied to all years a litigant was deemed to have been exposed to asbestos, the Company believes that it will have funds available for defense and insurance coverage under the non-exhausted primary and excess insurance policies. However, unlike the older policies, the more recent policies have deductible amounts for defense and settlements costs that the Company will be required to pay; accordingly, the Company expects that its litigation costs will increase in the future. Further, many of the policies covering later years (approximately 1984 and thereafter) have exclusions for any asbestos products or operations, and thus do not provide insurance coverage for asbestos-related lawsuits. The Company does not believe that the asserted exhaustion of some of the primary insurance coverage for the 1970-1978 period will have a material adverse effect on its financial condition, liquidity, or results of operations. Management believes that the number of insurance carriers involved in the defense of the suits, and the significant number of policy years and policy limits under which these insurance carriers are insuring the Company, make the ultimate disposition of these lawsuits not material to the Company's consolidated financial position or results of operations. As of December 31, 2020, we have $129 and $721 recorded within other accrued liabilities and other long-term liabilities, respectively, within our Consolidated Balance Sheet for estimated future claims. An insurance receivable of $129 and $721 is recorded within other current assets and other assets, net, respectively, within our Consolidated Balance Sheet for estimated insurance recoveries.

18


TCPA Litigation

On October 9, 2019, plaintiff Mark Hoffman (“Hoffman”) filed a putative class action lawsuit against defendant Hearing Help Express, Inc. (“HHE”), a subsidiary of the Company, in the Federal District Court for the Western District of Washington based on specific provisions of the federal Telephone Consumer Protection Act (“TCPA”). HHE’s investigation revealed third-party lead generator Triangular Media Corp. (“Triangular”) provided Hoffman’s information to HHE only after he participated in Triangular’s interactive telephonic screening process. Hoffman claims he did not provide the requisite prior express written consent for autodialed telemarketing calls regarding hearing aids to be placed to his cellphone. He also claims he did not provide the requisite permission for telemarketing calls to his number registered on the Do-Not-Call (“DNC”) registry. Since the initial complaint was filed, Hoffman has amended his complaint several times to add additional parties, including Triangular, Triangular’s alleged owner, an alleged entity related to Triangular called LeadCreations.Com, LLC, Intricon, Inc., and Intricon Corporation. With respect to HHE, Hoffman seeks to certify a class of certain automated outbound telemarketing calls HHE allegedly made without prior consent, or to those numbers on the DNC registry, in the last four years. Hoffman also seeks to hold the Company vicariously liable for all of the calls HHE made without prior consent. The potential exposure under the TCPA is $500 per call, or $1,500 per call if the violation is deemed willful or knowing. The parties were engaged in discovery. However, the case is now stayed pending the United States Supreme Court’s ruling in another TCPA case – Duguid v. Facebook, No. 19-51 (argued Dec. 8, 2020) given the impact the Duguid opinion could have on this case. A ruling by the United States Supreme Court is expected this summer. The Company believes that HHE has strong legal and factual defenses in this proceeding. HHE and the Company intend to continue defending themselves vigorously in the pending lawsuit. While the Company is unable to predict the outcome of this proceeding, the Company believes that the ultimate outcome of this matter will not have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations.

Other Litigation Matters

The Company is also involved from time to time in other lawsuits arising in the normal course of business. While it is not possible to predict with certainty the outcome of these matters, management is of the opinion that the disposition of these lawsuits and claims will not materially affect the Company’s consolidated financial position, liquidity, or results of operations.

ITEM 4. Mine Safety Disclosures

Not applicable.


19


ITEM 4A. Information about our Executive Officers

The names, ages and offices (as of March 1, 2021) of the Company's executive officers were as follows:

Name

Age

Position

Scott Longval

44

President and Chief Executive Officer

Ellen Scipta

48

Chief Financial Officer

Michael P. Geraci

62

Senior Vice President, Sales and Marketing

Dennis L. Gonsior

62

Senior Vice President, Global Operations

Mr. Longval was appointed as the Company’s President and Chief Executive Officer and a director effective October 1, 2020. Prior to that Mr. Longval served as Executive Vice President (since January 2019) and Chief Operating Officer (since April 2019). Mr. Longval also served as Chief Financial Officer from July 2006 through February 8, 2021 and, prior to that, as the Company’s Corporate Controller from September 2005. Prior to joining the Company, Mr. Longval was Principal Project Analyst at ADC Telecommunications, Inc., a provider of innovative network infrastructure products and services, from March 2005 until September 2005. From May 2002 until March 2005, he was employed by Accellent, Inc., formerly MedSource Technologies, a provider of outsourcing solutions to the medical device industry, most recently as Manager of Financial Planning and Analysis. From September 1998 until April 2002, he was employed by Arthur Andersen, most recently as experienced audit senior. Mr. Longval received a Bachelor of Science degree in Accounting from the University of St. Thomas.

Ms. Scipta has served as the Company’s Chief Financial Officer since February 2021. Previously, Ms. Scipta served in various financial positions at Bio-Techne, a Minneapolis, Minnesota based manufacturer and retailer of life sciences and diagnostic products, since 2015, most recently as Vice President, Finance. Prior to that, Ms. Scipta was employed by CHS Inc., a diversified global agribusiness cooperative, since 2011, most recently as Director of Enterprise Strategy. Ms. Scipta held strategy and financial positions with Best Buy Co., Inc. (2005-2011) and Target Corporation (2002-2005) and was a strategy consultant with Price Waterhouse Coopers LLC (1999-2001). Ms. Scipta holds a Master of Business Administration from the Kelley School of Business, Indiana University, and a Bachelor of Science degree in Aeronautical and Astronautical Engineering from Purdue University.

Mr. Geraci joined the Company in October 1983. He has served as the Company’s Vice President of Sales and Marketing since January 1995. Mr. Geraci received a Bachelor of Science degree in Electrical Engineering from Bradley University and a Master of Business Administration from the University of Minnesota – Carlson School of Business.

Mr. Gonsior joined the Company in February 1982. He has served as the Company’s Vice President of Operations since January 1996. Mr. Gonsior received a Bachelor of Science degree from Saint Cloud State University.

PART II

ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common stock is listed on the Nasdaq Global Market under the ticker symbol “IIN”.

The closing sale price of the Company’s common stock on March 1, 2021, was $24.77 per share.

At March 1, 2021, the Company had 285 shareholders of record of common stock. Such number does not reflect shareholders who beneficially own common stock in nominee or street name.

The Company currently intends to retain any future earnings to support operations and to finance the growth and development of its business and does not intend to pay cash dividends on its common stock for the foreseeable future. Any payment of future dividends will be at the discretion of the Board of Directors and will depend upon, among other things, the Company’s earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends, and other factors that the Board of Directors deems relevant. Terms of the Company’s banking agreements prohibit the payment of cash dividends without prior bank approval.

See “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters — Equity Compensation Plans” of this Annual Report on Form 10-K for disclosure regarding our equity compensation plans.


20


ITEM 6. Selected Financial Data

Year Ended December 31,

2020

2019

2018 (a)

2017 (a)

2016 (a)(b)

Revenue, net

$

102,773

$

113,493

$

113,948

$

86,954

$

65,231

Gross profit

26,175

30,986

36,231

25,270

14,817

Operating expenses

29,250

33,026

27,856

21,686

15,962

Interest income (expense), net

331

920

(314)

(716)

(553)

Other income (expense), net

316

(743)

(815)

(406)

(644)

(Loss) income from continuing operations before income taxes and discontinued operations

(2,428)

(1,863)

7,246

2,462

(2,342)

Income tax expense

(61)

(201)

(484)

(8)

(217)

(Loss) income from continuing operations before discontinued operations

(2,489)

(2,064)

6,762

2,454

(2,559)

Loss on disposal of discontinued operations

-

(1,116)

-

(164)

-

Loss from discontinued operations, net of income taxes

-

(597)

(1,215)

(1,170)

(2,541)

Net (loss) income

(2,489)

(3,777)

5,547

1,120

(5,100)

Less: Income (loss) allocated to non-controlling interest

35

-

-

(938)

(157)

Net (loss) income attributable to shareholders

$

(2,524)

$

(3,777)

$

5,547

$

2,058

$

(4,943)

Basic (loss) income per share attributable to shareholders:

Continuing operations

$

(0.28)

$

(0.23)

$

0.89

$

0.50

$

(0.37)

Discontinued operations

-

(0.20)

(0.16)

(0.20)

(0.39)

Net (loss) income

$

(0.28)

$

(0.43)

$

0.73

$

0.30

$

(0.76)

Diluted (loss) income per share attributable to shareholders:

Continuing operations

$

(0.28)

$

(0.23)

$

0.78

$

0.46

$

(0.37)

Discontinued operations

-

(0.20)

(0.14)

(0.18)

(0.39)

Net (loss) income

$

(0.28)

$

(0.43)

$

0.64

$

0.28

$

(0.76)

Weighted average number of shares outstanding during year:

Basic

8,894

8,748

7,599

6,852

6,497

Diluted

8,894

8,748

8,630

7,307

6,497

Other Financial Highlights

Year Ended December 31,

2020

2019

2018 (a)

2017 (a)

2016 (a)(b)

Working capital (c)

$

50,611

$

53,349

$

62,897

$

8,985

$

8,456

Total assets

121,296

113,593

115,248

54,474

43,758

Long-term debt

-

-

-

9,321

9,284

Equity

91,199

90,492

91,974

21,439

19,011

Depreciation and amortization

4,622

3,277

2,891

2,134

2,023

(a)In 2019, the Company classified its United Kingdom operations as discontinued operations. The Company revised its financial statements for all periods to reflect the discontinued operations.

(b)In 2016, the Company classified its cardiac diagnostic monitoring operations as discontinued operations. The Company revised its financial statements for 2016 to reflect the discontinued operations.

(c)Working capital is equal to current assets less current liabilities.

21


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Company Overview

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 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.

Overall Results

For fiscal year 2020, the Company experienced a 9.4 percent decrease in net revenues driven by a combination of factors including the timing of certain international orders filtering through various local regulatory requirements, delays in orders due to uncertainty surrounding the COVID-19 pandemic as well as lower sales as a result of the 2020 Hearing Help Express restructuring. The Company derived net revenue of $7,361 in 2020 from Emerald Medical Services Pte., Ltd., (“EMS”), acquired in May 2020. The Company posted a net loss of $2,524 or $.28 per diluted share in 2020 compared to a net loss of $3,777 or $.43 per diluted share in 2019.

Business Highlights

In March 2020, the World Health Organization categorized COVID-19 (coronavirus) as a pandemic and the President of the United States declared the outbreak a national emergency. There were and continue to be many uncertainties regarding the COVID-19 pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how it will impact its employees, customers, suppliers, vendors, and business partners. The Company remains fully operational as we abide by local COVID-19 safety regulations globally. To achieve this the Company has certain employees working remotely and has adopted significant protective measures as recommended by the Center for Disease Control (CDC) for our on-site employees. Additionally, the Company has taken steps to monitor and work closely with our suppliers to maintain uninterrupted supply of critical materials.

On May 18, 2020, the Company acquired all of the outstanding shares of EMS pursuant to a Share Purchase Agreement between Intricon, EMS and the direct and indirect owners of EMS. EMS, based in Singapore, is a provider of joint development medical device manufacturing services for complex catheter applications.

On May 20, 2020, the Company announced a strategic restructuring plan designed to offset near-term COVID-19 business impacts and accelerate the Company’s future long-term growth by focusing resources on the highest potential growth areas. The plan, which was approved by the Company’s Board of Directors, was completed as of June 30, 2020.

On October 1, 2020, Scott Longval became president and chief executive officer of the Company, succeeding Mark Gorder, who retired effective September 30, 2020. Mr. Gorder remains a member of the Company’s Board of Directors. On February 5, 2021, the Company announced the appointment of Ellen Scipta as chief financial officer effective February 8, 2021, replacing Mr. Longval who had retained such position through that date.

Results of Operations: 2020 Compared with 2019

Consolidated Net Revenue

Our net revenue is comprised of the following markets: medical, hearing health, and professional audio. Below is a summary of our revenue by main markets for the years ended December 31, 2020 and 2019:

Change

2020

2019

Dollars

Percent

Diabetes

$

59,311

$

68,606

$

(9,295)

-13.5%

Other Medical

19,726

13,487

6,239

46.3%

Hearing Health Value Based DTEC

4,430

6,120

(1,690)

-27.6%

Hearing Health Value Based ITEC

5,558

8,910

(3,352)

-37.6%

Hearing Health Legacy OEM

8,968

9,892

(924)

-9.3%

Professional Audio Communications

4,780

6,478

(1,698)

-26.2%

Total Net Revenue

<