Interlink Electronics (LINK) Risk Analysis

We rely on third-party suppliers for the raw material components of our products. There are no assurances that our suppliers will be able to maintain an adequate supply of these raw materials to enable us to fulfill all of our customers' orders on a timely basis. A failure to obtain an adequate supply of the materials for our products could increase our costs (because purchases on the spot market would likely be more expensive), cause us to fail to meet delivery commitments and/or cause our customers to purchase from our competitors, which could adversely affect our operating results and customer relationships. Additionally, our sourcing operations may also be hurt by health concerns regarding the outbreak of viruses, widespread illness, infectious diseases, contagions and the occurrence of unforeseen epidemics (including the outbreak of the coronavirus and its potential impact on our financial results) in countries in which our products are manufactured. Moreover, negative press or reports about internationally manufactured products may sway public opinion, and thus customer confidence, away from our products. Furthermore, changes in U.S. trade policies, including new restrictions, tariffs or other changes, especially as regards China, could lead to additional costs, delays in shipments, embargos and other uncertainties that could negatively impact our relationships with our international suppliers and materially adversely affect our business. Depending on the continued extent and duration of these constraints and disruptions, our supply chain, results of operations (including sales) or future business could be materially and adversely impacted. These and other issues affecting our international suppliers or internationally manufactured merchandise could have a material adverse effect on our business, results of operations and financial condition. We do not have long-term fixed price contracts for the supply of our raw materials and components. Accordingly, increases in prevailing market prices (including due to increases in transportation, shipping and freight costs) would have an adverse effect on our operations to the extent we were unable to pass on increases to our customers. In some situations, we rely on a single supplier for raw material components of our products. Any disruption in these supplier relationships could prevent us from maintaining an adequate supply of materials and could adversely affect our results of operation and financial position.

Technology, both in our markets and in our customers' markets, is undergoing and will continue to undergo rapid change. In order to maintain our leadership position in our existing markets and to emerge as a leader in new markets, we will have to maintain a leadership position in the technologies supporting those markets. Doing so will require, among other things, that we accomplish the following: - accurately predict the evolving needs of our customers and develop, in a timely manner, the technology required to support those needs;- provide products that are not only technologically sophisticated and well supported but are also available at a price within market tolerances and competitive with comparable products;- establish and effectively defend our ownership on the intellectual property supporting our products; and - enter into relationships with other companies that have developed complementary technology on which our products also depend. There is no assurance that we will be able to achieve any of these objectives in whole or in part.

We consider our intellectual property to be a key element of our ability to compete in our chosen markets. We rely on a combination of patents, trade secrets and proprietary software to establish and protect our intellectual property rights. There is no assurance that patents will be issued from any of our pending applications or that any claims allowed from existing or pending patents will be sufficiently broad to protect our technology. We also cannot assure that any patents issued to us will not be challenged, invalidated or circumvented, or that the rights granted will provide proprietary protection. Litigation may be necessary to enforce our patents, trade secrets and other intellectual property rights, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business, regardless of the final outcome of the litigation. Despite our efforts to maintain and safeguard our proprietary rights, there are no assurances that we will be successful in doing so or that our competitors will not independently develop or patent technologies that are substantially equivalent or superior to our technologies. If any of the holders of these patents assert claims that we are infringing them, we could be forced to incur substantial litigation expenses, and if we were found to be infringing on someone else's patent, we could be required to pay substantial damages, and pay royalties in the future, which would adversely impact our profitability, or be enjoined from infringing in the future, which could materially impede our ability to operate. Our global operations require us to maintain intellectual property in a number of foreign jurisdictions, in particular in connection with our manufacturing facility in Shenzhen, China. This may expose us to material risks of theft or compromise of proprietary technology and other intellectual property, including technical data, business processes, data sets or other sensitive information. There is no assurance that we would be successful in enforcing our legal rights against the offending party in such circumstances.

We face risks associated with security breaches or cyber-attacks of our computer systems or those of our third-party representatives, vendors, and service providers. Armed conflicts in the Middle East and between Russia and Ukraine, and tensions with countries such as Iran and North Korea and resulting geopolitical uncertainties also could result in an increase in cyberattacks that could either directly or indirectly impact our operations. Although we have implemented security procedures and controls to address these threats, such as firewalls, encryption, access controls, and employee training, cybersecurity threats are dynamic and evolving and our systems may still be vulnerable to theft, loss or misuse of data, including proprietary or confidential information, relating to our business, products, employees, suppliers and customers; disruption due to computer viruses and programming errors; attacks by third parties including destruction of data or demanding ransom to return control of our systems and services; or similar disruptive problems. If our systems, or systems owned by third parties affiliated with our company, were breached or attacked, the proprietary and confidential information of our company and our customers could be disclosed and we could incur substantial costs and liabilities, including the following: - expenses to rectify the consequences of the security breach or cyber-attack;- liability for misused or stolen assets or information;- costs of repairing damage to our systems;- lost revenue and income resulting from any system downtime caused by such breach or attack;- loss of competitive advantage if our proprietary information is obtained by competitors as a result of such breach or attack;- increased costs of insurance and cybersecurity protection;- costs of incentives we may be required to offer to our customers or business partners to retain their business; and - damage to our reputation. In addition, any compromise of security from a security breach or cyber-attack could deter customers or business partners from entering into transactions that involve providing confidential information to us. As a result, any compromise to the security of our systems could have a material adverse effect on our business, reputation, financial condition, and operating results.

Our HMI and gas-sensing solutions may not be successful in new markets. Various target markets for our products and solutions may develop more slowly than anticipated or participants in those markets could choose to utilize competing technologies. The markets for certain of our HMI products depend in part upon the continued development and deployment of wireless and other technologies, which may or may not address the needs of the users of these products. The markets for our gas and environmental sensors rely heavily on our customers' investment in the required infrastructure for new devices or instruments and also on their competency and execution in development. The performance of any sensor depends on the quality of its implementation and may vary depending on design decisions, tradeoffs, or lack of experience. While we perform extensive engineering services for our customers and support them with reference materials and open-source designs, we cannot guarantee our customers' success, and this remains a risk for our portfolio. Our ability to generate significant revenue from new markets will depend on various factors, including the following: - the development and growth of these markets;- the ability of our technologies and product solutions to address the needs of these markets;- the price and performance requirements of our customers and the preferences of end users;- our ability to provide our customers with solutions that provide advantages in terms of size, power consumption, reliability, durability, performance and value-added features compared with alternative solutions; and - the effectiveness of our sales and marketing efforts in communicating all of these capabilities to the marketplace. The failure of any of these target markets to develop as we expect, or any significant failure on our part to serve these markets, will impede our sales growth and could result in substantially reduced earnings. We cannot predict the size or growth rate of these markets or the market share we will achieve or maintain in these markets in the future.

Our operations are subject to environmental and various other regulations in each of the jurisdictions in which we conduct business. Regulations have been enacted in certain jurisdictions which impose restrictions on waste disposal of electronic products and electronics recycling obligations. If we fail to comply with applicable rules and regulations in connection with the use and disposal of such substances or other environmental or recycling legislation, we could be subject to significant liability or loss of future sales.

Our markets are highly competitive, and we expect competition in our newer markets to increase. Our competitors include companies with similar products or technologies, companies that sell complementary products to our target markets, and our customers themselves, who could choose to manufacture in-house products that they currently buy from us. Our competitors and potential competitors may have established business relationships that afford them a competitive advantage or may create technologies that are superior to ours or that set a new industry standard that will define the successful product for that market. If any of our competitors establish a close working relationship with our customers, they may obtain advance knowledge of our customers' technology choices or may be afforded an opportunity to work in partnership to develop compatible technologies and may therefore achieve a competitive advantage. We may be unable to compete successfully against our current and future competitors.

Historically, we have earned, and believe that in the future we will continue to earn, a substantial portion of our revenue from a relatively small number of customers. In 2023, our top three customers accounted for 22%, 12% and 10% of our net revenues, respectively. If we were to either lose one of our major customers or have a major customer significantly reduce its volume of business with us, our business, results of operations and financial condition would be harmed unless we were able to replace such demand with other orders promptly. We expect to continue to be dependent on our major customers, the number and identity of which may change from period to period. Because our customers generally do not provide us with firm, long-term volume purchase commitments, our customers, including our largest customers upon whom we may become dependent, can reduce or terminate altogether their business with us at any time, whether because they choose an alternate supplier, see reduced demand for their products, or otherwise.

We generally do not sell products to end-users. Instead, we sell component products that our customers incorporate into their products, and we depend on our customers to successfully manufacture and distribute products incorporating our component products and to generate consumer demand through their marketing and promotional activities. We do not control or influence the manufacture, promotion, distribution, or pricing of the products that incorporate our solutions. As a result of this, our success depends almost entirely upon the widespread market acceptance of our customers' products that incorporate our solutions. Even if our technologies successfully meet our customers' price and performance goals, our sales would decline or fail to develop if our customers do not achieve commercial success in selling their products that incorporate our solutions. Our customers generally do not provide us with firm, long-term volume purchase commitments, opting instead to issue purchase orders that they can cancel, reduce, or delay at any time. In order to meet the expectations of our customers, we must provide innovative solutions on a timely and cost-effective basis. This requires us to match our design and production capacity with customer demand, maintain satisfactory delivery schedules, and meet performance goals. If we are unable to achieve these goals for any reason, our sales may decline or fail to develop, which would result in decreasing revenue.

The political landscape in the United States is characterized by increasing polarization, uncertainty, and volatility. Political developments, including changes in leadership, shifts in policy priorities, and legislative gridlock, with increased risks of federal government shutdowns or debt defaults, could have significant implications for our business operations, regulatory environment, and financial performance. The unpredictability of the political environment poses challenges in anticipating and mitigating risks effectively. Uncertainty surrounding government policies and regulations, including those related to taxation, trade, healthcare, environmental protection, and labor practices, may impact our costs, operations, and market competitiveness. Changes in government spending priorities or fiscal policies could also affect demand for our products/services, particularly in sectors dependent on government contracts or funding. Furthermore, political instability and social unrest may disrupt supply chains, distribution networks, and consumer confidence, leading to operational disruptions, decreased consumer spending, and market volatility. Heightened geopolitical tensions or domestic conflicts may also contribute to economic uncertainty and market fluctuations.

Our revenue from international sales represents a substantial portion of our overall sales, and this trend will continue for the foreseeable future. The majority of our international manufacturing is currently performed in China and Scotland. Our international operations involve a number of risks, including with respect to: - import-export license agreements, tariffs, taxes and other trade barriers;- staffing and managing foreign operations;- securing credit and funding;- maintaining an effective system of internal controls at our foreign facilities;- collecting foreign receivables;- transfer pricing and other tax uncertainties;- currency exchange fluctuations;- reduced protection of intellectual property rights;- the impact of outbreaks, and threat or perceived threat of outbreaks, of epidemics and pandemics, including, without limitation, the coronavirus outbreak, on our sourcing and manufacturing operations as well as consumer spending;- political and economic instability, and terrorism; and - transportation risks. Any of the above factors could adversely affect our operating results.

The persistent challenges stemming from the COVID-19 pandemic continue to pose significant risks to our business operations, financial performance, and outlook. While there have been advancements in managing the spread of the virus and increasing vaccination rates, uncertainties remain regarding its long-term effects and potential resurgence. The ongoing pandemic has the potential to continue to disrupt global supply chains, affect consumer behavior, cause significant volatility and disruption of financial markets and prompt regulatory responses, any and all of which can adversely impact our operations and financial position. Because the severity, magnitude and duration of the pandemic and its economic consequences are uncertain, vary by region, and are rapidly changing and difficult to predict, its full impact on our operations and financial performance, as well as its impact on our near-term ability to successfully execute our strategic objectives, remains similarly uncertain and difficult to predict. As the situation evolves, we face the risk of additional disruptions due to new variants of the virus, changes in public health guidelines, or unforeseen events that could further exacerbate operational challenges. Moreover, economic recovery remains uneven across regions, which may continue to influence consumer spending patterns and market dynamics. Further, the pandemic's ultimate impact depends in part on many factors not within our control and which may vary by region (heightening the uncertainty as to the ultimate impact COVID-19 may have on our operations and financial performance), including, without limitation: restrictive governmental and business actions that have been and continue to be taken in response (including travel restrictions, work from home requirements, and other workforce limitations); economic stimulus, funding and relief programs and other governmental economic responses; the effectiveness of governmental actions; economic uncertainty in key global markets and financial market volatility; levels of economic contraction or growth; the impact of the pandemic on health and safety; the pace of recovery if and when the pandemic subsides; and how significantly the number of cases increases as economies begin to open and restrictive governmental and business actions are relaxed. In addition, the COVID-19 pandemic subjects our operations and financial performance to several risks, including the following: - Operations-related risks: Our business is facing increased operational challenges including a heightened need to protect employee health and safety, office shutdowns, workplace disruptions, and restrictions on the movement of people, both at our own offices and at those of our clients and suppliers. During the early years of the pandemic, we experienced lower demand and volume for products and services, client requests for engagement deferrals or other contract modifications, and other circumstances related directly and indirectly to the pandemic that adversely impacted our business. While these factors have begun to decline and projected demand for our products has stabilized, there can be no assurance that we will not again experience significant declines in product sales due to COVID-19. - Client-related risks: Our clients have been and will continue to be disrupted by quarantines and restrictions on employees' ability to work and office closures. Such disruptions have and may continue to restrict our ability to provide products and services to our clients and have also and may continue to reduce demand for our products and services. In addition, the COVID-19 pandemic adversely affected the global economy and the economies and financial markets of many countries, and a re-emergence of the pandemic could result in further economic downturns affecting demand for our products and services and impact our operations. - Employee-related risks: We have experienced and may in the future experience disruptions to our operations resulting from quarantines, self-isolations, or other movement and restrictions on the ability of our employees to perform their jobs that may impact our ability to deliver our products and services in a timely manner or meet milestones or customer commitments. The full extent of the effect of the pandemic on us, our customers, our supply chain and our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration and severity of the outbreak or subsequent outbreaks. We may continue to experience the effects of the pandemic even now that its severity has waned, and our business, results of operations and financial condition could continue to be affected. In particular, if COVID-19 re-emerges with serious and widespread impact on public health, particularly in the United States, Singapore, China, and the United Kingdom where our operations are most concentrated, and results in a prolonged period of travel, commercial, social and other similar restrictions, we could experience, among other things: - Adverse impacts on our operations and financial results caused by government and regulatory measures to contain or mitigate the spread of the virus, temporary closures of our facilities or the facilities of our customers or suppliers, which could impact our ability to timely meet our customers' orders or negatively impact our supply chain;- The failure of third parties on which we rely, including our suppliers, customers and external business partners, to meet their respective obligations to us, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties including bankruptcy or default;- Disruptions or restrictions on our employees' ability to work effectively, due to illness, quarantines, travel bans, shelter-in-place orders or other limitations;- Interruptions to the operations of our business if the health of our executives, management personnel and other employees are affected, particularly if a significant number of individuals are impacted;- Litigation, manufacturing delays and harm to our reputation resulting from any accident, illness, or injury to our employees related to COVID-19 that could negatively affect our business, results of operations and financial condition;- Changes in prices of products and services impacted by worldwide demand and by the pandemic, which price increases could materially increase our operating costs and adversely affect our profit margin;- Increased cybersecurity and privacy risks and risks related to the reliability of technology to support remote operations;- Sudden and/or severe declines in the market price of our common stock; and - Costs incurred and revenues lost during and from the effects of the COVID-19 pandemic that likely will not be recoverable. The COVID-19 pandemic may also affect our operations and financial results in a manner that is not presently known to us or that we currently do not expect to present significant risks to our operations or financial results. The degree to which COVID-19 impacts our results will depend on future developments, and there is no certainty that measures we have taken or will take will be sufficient to mitigate the risks posed by the virus. Additional impacts and risks may arise that we or our customers, suppliers, and other partners are not aware of or able to respond to effectively, and which may adversely affect us. The impact of COVID-19 can also exacerbate other risks discussed in this Risk Factors section and throughout this report. Investors should carefully evaluate the potential implications of ongoing COVID-19 challenges on our financial performance, operational resilience, and competitive position when making investment decisions. The extent and duration of these challenges remain uncertain, and our ability to effectively manage them will be critical to our long-term success.