INTERLINK ELECTRONICS INC 10-K

ITEM 5. MARKET FOR REGISTRANTS’ COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information for Common Stock Our common stock is listed on the OTC Pink marketplace of the OTC Markets Group under the symbol “LINK.” Over-the-counter market quotations reported by the OTC Markets Group reflect inter-dealer quotations, without retail markups, markdowns, or commissions, and do not necessarily represent actual transactions. Holders of Record As of December 31, 2020, we had 21 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. Dividend Policy We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future, if at all. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant. Purchases of Equity Securities by the Issuer and Affiliated Purchasers None. Recent Sales of Unregistered Securities None. ITEM 6. SELECTED FINANCIAL DATA Not applicable. 25 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes to the consolidated financial statements included later in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” Overview Interlink Electronics, Inc. designs, develops, manufactures and sells a range of force-sensing technologies that incorporate our proprietary materials technology, firmware and software into a portfolio of standard products and custom solutions. These include sensor components, subassemblies, modules and products that support effective, efficient cursor control and novel three-dimensional user inputs. Our HMI technology platforms are deployed in a wide range of markets including consumer electronics, automotive, industrial, and medical. The application of our HMI technology platforms includes vehicle entry, vehicle multi-media control interface, rugged touch controls, presence detection, collision detection, speed and torque controls, biological monitoring and others. Interlink has been a leader in the printed electronics industry for 30 years with the commercialization of our patented FSR® technology that has enabled rugged and reliable HMI solutions. Our solutions have focused on handheld user input, menu navigation, cursor control, and other intuitive interface technologies for the world’s top electronics manufacturers. We sell our products globally to a diverse array of customers that include the Fortune 500 as well as start-ups, design houses, original design manufacturers, OEMs and universities. Our technology has been deployed in the consumer electronics, industrial automation, automotive and medical markets. Our global presence in the United States, China, Hong Kong, Singapore and Japan, allows us to provide local sales and engineering support services to our existing and future customers. Our products are manufactured by our wholly-owned subsidiary in a state-of-the-art facility in Shenzhen, China. We control 100% of the manufacturing and shipping process which enables us to respond quickly to customer product demand and design requirements. We have invested significantly in the expansion of our technology platforms through our own internal development to ensure we provide the market with leading-edge HMI solutions that are seamless to deploy and perform flawlessly. We spent the last three years building a research and development (R&D) organization in Singapore to develop new product offerings that will meet the market’s growing demand for touch technology and smart surfaces. We are now shifting a majority of R&D and product development efforts to Camarillo, California, where we are establishing a Global Product Development and Materials Science Center. We believe an increased presence in the U.S. will allow us to grow our business and be more closely aligned with current and future large-tier customers. We also plan to explore potential strategic relationships with companies and technology institutes that will support our growth initiatives. 26 Results of Operations The following table sets forth certain consolidated statements of operations data for the periods indicated. The percentages in the tables are based on net revenues. Year ended December 31, 2020 2019 $ % $ % (in thousands, except percentages) Revenue, net $ 6,888 100.0 % $ 7,305 100.0 % Cost of revenue 2,986 43.4 3,995 54.7 Gross profit 3,902 56.6 3,310 45.3 Operating expenses: Engineering, research and development 918 13.3 916 12.5 Selling, general and administrative 2,874 41.7 2,608 35.7 Total operating expenses 3,792 55.1 3,524 48.2 Income (loss) from operations 110 1.6 (214 ) (2.9 ) Other income (expense): Other income (expense), net (92 ) (1.3 ) 39 0.5 Income (loss) before income tax expense 18 0.3 (175 ) (2.4 ) Income tax expense (benefit) (95 ) (1.4 ) 282 3.9 Net income (loss) $ 113 1.6 % $ (457 ) (6.3 )% Impact of COVID-19 on Results of Operations The COVID-19 pandemic has adversely affected our operating results for the year ended December 31, 2020, with the impact of the pandemic being more significant in the second half of 2020. COVID-19 has resulted in many of our customers delaying orders or cancelling them altogether due to disruptions in their supply chain and reduced demand for their products. Revenues were lower in 2020 because of a significant reduction of shipments to our largest medical customer, which could not install the devices that use our products in hospitals due to COVID-19 restrictions. This medical customer accounted for 15.5% of revenue in 2020 and 36.8% of revenue in 2019, and thus its reduction in purchases resulted in a significant decline in revenue for 2020 when compared to the prior year. We experienced a similar decline in sales to other customers due to disruptions in their businesses. To mitigate the effects of COVID-19 on our business, we have been working with key customers to reach agreement on the timing for shipment of products on orders previously delayed or cancelled. This has allowed us to accelerate into 2020 the shipment of certain orders previously delayed for shipment in 2021. These efforts have helped us to reduce the amount of lost revenue for 2020 from the pandemic. While the impact of COVID-19 is by no means over, orders for our products have begun to stabilize and we do not anticipate further significant declines in product sales to continue. Comparison of the Years Ended December 31, 2020 and 2019 Revenue, net by the markets we serve is as follows: Year ended December 31, 2020 2019 Amount % of Net Revenue Amount % of Net Revenue $ Change % Change (in thousands, except percentages) Industrial $ 1,681 24.4 % $ 1,978 27.1 % $ (297 ) (15.0 )% Medical 1,082 15.7 2,688 36.8 (1,606 ) (59.7 ) Consumer 1,196 17.4 404 5.5 792 196.0 Standard 2,929 42.5 2,235 30.6 694 31.1 Revenue, net $ 6,888 100.0 % $ 7,305 100.0 % $ (417 ) (5.7 )% 27 We sell our custom products into the industrial, medical and consumer markets. We previously sold custom products in the automotive market and continue to pursue opportunities in that sector. We sell our standard products through various distribution networks. The ultimate customer for standard products may come from different markets which are often unknown to us at the time of sale. Each market has different product design cycles. Products with longer design cycles often have much longer product life-cycles. Industrial and medical products generally have longer design and life-cycles than consumer products. We currently have products with life-cycles that have exceeded twenty years and are ongoing. Revenues were down in 2020 compared to 2019 in the industrial and medical markets, and were up in the consumer market and for our standard products. The decrease in revenue from our industrial market customers is due to decreased purchasing volume by these customers for use in their ongoing product lines resulting from changes in demand by their customers. The decrease in revenue from our medical market customers is primarily due to significant reduction of shipments to our largest medical customer, which could not install the devices that use our products in hospitals due to COVID-19 restrictions. The increase in revenue from our consumer market customers is due to an increase in purchase levels on corresponding products and programs. The increase in revenue on our standard products is due to cyclical purchasing pattern of some of our larger customers who took delivery of bulk quantities during 2020. In the normal cycle, some of our larger customers purchase in bulk quantities and absorption of these products can straddle several financial reporting periods. In all markets, the timing of orders from our customers is not always predictable and can be concentrated in varying periods during the year to coincide with their project and building plans. Year ended December 31, 2020 2019 Amount % of Net Revenue Amount % of Net Revenue $ Change % Change (in thousands, except percentages) Gross profit $ 3,902 56.6 % $ 3,310 45.3 % $ 592 17.9 % Our gross profit and gross margin are impacted by various factors including product mix, customer mix, volume, material costs, manufacturing efficiencies, facilities costs, compensation costs and provisions for excess and obsolete inventories. Although variable costs decreased consistent with the decrease in revenues, gross profit and gross margin improved primarily due to changes in product and customer mix, offset by the impact of tariffs imposed on our China manufactured items. Year ended December 31, 2020 2019 Amount % of Net Revenue Amount % of Net Revenue $ Change % Change (in thousands, except percentages) Engineering, research and development $ 918 13.3 % $ 916 12.5 % $ 2 0.2 % Engineering and R&D expenses consist primarily of compensation expenses for employees engaged in research, design and development activities. Our R&D team focuses both on internal design development, as well as design development aimed at addressing customer design challenges, in order to develop our HMI solutions. Our engineering and R&D costs were flat when compared with the prior year. While we reduced costs and headcount at our Singapore R&D center in 2020 as part of the transfer of the lab to Camarillo, California, our engineering and R&D costs were flat on a year-over-year basis because of a 2019 research incentive grant from the Singapore government that reduced expenses for 2019. Year ended December 31, 2020 2019 Amount % of Net Revenue Amount % of Net Revenue $ Change % Change (in thousands, except percentages) Selling, general and administrative $ 2,874 41.7 % $ 2,608 35.7 % $ 266 10.2 % Selling, general and administrative expenses consist primarily of compensation expenses, legal and other professional fees, facilities expenses and communication expenses. Selling, general and administrative expenses increased as compared with the prior year driven by an increase in sales, marketing, finance and administrative personnel, and an increase in costs associated with being a public reporting company following registration in mid 2020 of our common stock. 28 Year ended December 31, 2020 2019 Amount % of Pre-tax Income Amount % of Pre-tax Income Change % Change (in thousands, except percentages) Income tax expense (benefit) $ (95 ) (527.8 )% $ 282 (161.1 )% $ (377 ) n/a Tax expense reflects statutory tax rates in the jurisdictions in which we operate adjusted for normal book/tax differences. For 2020, the Company recorded an income tax benefit for net losses in the U.S. that can be carried back for a refund of prior year taxes that were paid at higher U.S. tax rates and carried forward to offset future taxable income. For 2019, the tax expense was largely comprised of tax incurred on a dividend from our China subsidiary. Our effective tax rate is directly affected by the relative proportions of revenue and income before taxes in the jurisdictions in which we operate. Based on the expected mix of domestic and foreign earnings, we anticipate our effective tax rate to remain similar to the newly stated U.S. statutory rate of 21% primarily due to a significant portion of our earnings originating in the higher rate China jurisdiction (25%), offset by lower rate jurisdictions in Singapore (17%) and Hong Kong (16.5%). State income taxes also have an impact in the U.S. Discrete tax events may cause our effective rate to fluctuate on a quarterly basis. Certain events, including, for example, acquisitions and other business changes, which are difficult to predict, may also cause our effective tax rate to fluctuate. We are subject to changing tax laws, regulations, and interpretations in multiple jurisdictions. Corporate tax reform continues to be a priority in the U.S. and other jurisdictions. Additional changes to the tax system in the U.S. could have significant effects, positive and negative, on our effective tax rate, and on our deferred tax assets and liabilities. Liquidity and Capital Resources Cash requirements for working capital and capital expenditures have been funded from cash balances on hand and cash generated from operations. As of December 31, 2020, we had cash and cash equivalents of $6.125 million, working capital of $7.454 million and no indebtedness except for a loan of $0.186 million we received from Silicon Valley Bank pursuant to the Paycheck Protection Program. Cash and cash equivalents consist of cash and money market funds. We did not have any short-term or long-term investments as of December 31, 2020. Of the $6.125 million of cash balances on hand, $1.754 million was held by foreign subsidiaries. If these funds are needed for our operations in the U.S., we have several methods to repatriate the funds without significant tax effects, including repayment of intercompany loans or distributions of previously taxed income. Other distributions may require us to incur U.S. or foreign taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate cash to fund our U.S. operations. The Company received a loan from Silicon Valley Bank in the aggregate principal amount of $0.186 million pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted in March 2020. The loan is evidenced by a promissory note, dated April 21, 2020, issued by us to the lender, which matures on April 20, 2022, and bears interest at a rate of 1.00% per annum, payable monthly following an initial deferral period as specified under the PPP. We may prepay the note at any time prior to maturity with no prepayment penalties. Proceeds from the loan were used to fund designated expenses, including certain payroll costs, group health care benefits and other permitted expenses, in accordance with the PPP. Under the terms of the PPP, up to the entire amount of principal and accrued interest may be forgiven to the extent loan proceeds are used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business Administration under the PPP. The full amount of the loan principal and interest was forgiven in February 2021. We believe that our existing cash and cash equivalents balance will be sufficient to maintain our current operations considering our current financial condition, obligations, the proceeds of the PPP loan and other expected cash flows. If our circumstances change, however, we may require additional cash. If we require additional cash, we may attempt to raise additional capital through equity, equity-linked or debt financing arrangements. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of indebtedness, we could be subject to fixed payment obligations and could also be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to raise additional needed funds, we may also take measures to reduce expenses to offset any shortfall. 29 Cash Flow Analysis Our cash flows from operating, investing and financing activities are summarized as follows: Year ended December 31, 2020 2019 (in thousands) Net cash provided by operating activities $ 39 $ 2 Net cash (used in) investing activities (90 ) (233 ) Net cash provided by (used in) financing activities 186 (6 ) Net Cash Provided by Operating Activities For the year ended December 31, 2020, the $39 thousand in net cash provided by operating activities was attributable to net income of $113 thousand, adjusted for non-cash charges of $532 thousand, and cash used in changes in operating assets and liabilities of $606 thousand. For the year ended December 31, 2019, the $2 thousand in net cash provided by operating activities was primarily attributable to non-cash charges and cash used in changes in operating assets and liabilities that offset the net loss. Net loss of $457 thousand, plus adjustments for non-cash charges of $518 thousand, including the non-cash charges related to lease accounting, resulted in a net increase in cash of $61 thousand. Net changes in operating assets and liabilities of $59 thousand that decreased cash was primarily due to the timing of shipments and payments during the period. Accounts receivable increased from $730 thousand at December 31, 2019 to $1,113 thousand at December 31, 2020 due to higher shipments during the fourth quarter of 2020 compared to the fourth quarter of 2019. Many of our customers pay promptly and accounts receivable is generally related to the most recent shipments. Inventories decreased from $927 thousand at December 31, 2019 to $866 thousand at December 31, 2020. Inventory balances fluctuate depending on the timing of materials purchases and product shipments. Prepaid expenses and other current assets increased from $330 thousand at December 31, 2019 to $392 thousand at December 31, 2020. Accounts payable and accrued liabilities increased from $520 thousand at December 31, 2019 to $578 thousand at December 31, 2020 primarily due to the timing of payment for purchases of materials and other services provided. Net Cash Used in Investing Activities Net cash used in investing activities of $90 thousand for the year ended December 31, 2020 consisted primarily of legal costs related to securing patents on new products and processes developed thereunder. Net cash used in investing activities of $233 thousand for the year ended December 31, 2019 consisted of $141 thousand for capital expenditures for the expansion of our R&D center in Singapore and $92 thousand related to securing patents. Net Cash Provided by (Used in) Financing Activities Net cash provided by financing activities of $186 thousand for the year ended December 31, 2020 related to our PPP loan. Net cash used in financing activities of $6 thousand for the year ended December 31, 2019 related to repurchase of shares of our common stock. 30 Transactions with Related Parties For a discussion of transactions with related parties, see Note 9, Related Party Transactions , of the notes to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. Off-Balance Sheet Arrangements As of December 31, 2020 and 2019, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. Critical Accounting Policies and Estimates We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statements presentation, financial condition, results of operations, and cash flows will be affected. We believe that the assumptions and estimates associated with revenue recognition, inventory valuation, accounts receivable, stock-based compensation expense and income taxes have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, see the notes to our consolidated financial statements. Revenue Recognition In accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), we recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The guidance defines a five-step process to achieve this core principle and, in doing so, judgment and estimates may be required within the revenue recognition process including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Generally, we recognize revenue when there is persuasive evidence that an arrangement exists, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to our customers upon shipment. In limited circumstances where either title or risk of loss pass upon destination or acceptance or when collection is not reasonably assured, we defer revenue recognition until such events occur. We input orders based upon receipt of a customer purchase order, confirm pricing through the customer purchase order, validate credit worthiness through past payment history or other financial data and record revenue upon shipment of goods and when risk of loss and title transfer. All customers have warranty rights, and some customers have explicit or implicit rights of return. We record reserves for potential customer returns and warranty rights. Inventory Valuation Inventories are stated at lower of cost or net realizable value (“NRV”) and consist of materials, labor and overhead. Inventory costs are determined using standard costs which approximate actual costs under the first-in, first-out method. We evaluate inventories for excess quantities and obsolescence. Our evaluation considers market and economic conditions, technology changes, new product introductions, and changes in strategic business direction, and requires estimates that may include elements that are uncertain. In order to state the inventory at lower of cost or NRV, we maintain reserves against individual stocking units. Inventory write-downs, once established, are not reversed until the related inventories have been sold or scrapped. If future demand or market conditions are less favorable than our projections, a write-down of inventory may be required, and would be reflected in cost of goods sold in the period the revision is made. 31 Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are recorded at the invoice amount and presented net of the allowance for doubtful accounts. They do not bear interest. We evaluate the collectability of accounts receivable at each balance sheet date using a combination of factors, such as historical experience, credit quality, age of the accounts receivable balances, and economic conditions that may affect a customer’s ability to pay. We include any accounts receivable balances that are determined to be uncollectible in the overall allowance for doubtful accounts using the specific identification method. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Stock-Based Compensation We account for stock-based compensation under ASC Topic 718, Compensation-Stock Compensation , which requires us to record related compensation costs in the statement of operations. Calculating the fair value of stock-based compensation awards requires the input of highly subjective assumptions, including the expected life of the awards and expected volatility of our stock price. Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period. Our estimates of expected volatilities are based on weighted historical implied volatility. The expected forfeiture rate applied in calculating stock-based compensation cost is estimated using historical data and is updated annually. The assumptions used in calculating the fair value of stock-based awards involve estimates that require management judgment. If factors change and we use different assumptions, our stock-based compensation expense could change significantly in the future. In addition, if our actual forfeiture rate is different from our estimate, our stock-based compensation expense could change significantly in the future. Income Taxes We account for income taxes using the asset and liability method in accordance with ASC Topic 740, Income Taxes , which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, we must make estimates and judgments in determining the provision for taxes for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits, and deductions, and in the calculation of certain tax assets and liabilities that arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as the interest and penalties related to uncertain tax positions. In addition, the Company operates within multiple tax jurisdictions and is subject to audit in these jurisdictions. Significant changes in these estimates may result in an increase or decrease to our tax provision in a subsequent period. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Our foreign subsidiaries are subject to foreign income taxes on earnings in their respective jurisdictions. Earnings of our foreign subsidiaries are generally included in our U.S. federal income tax return as they are earned. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not determinable beyond a “more likely than not” standard, we establish a valuation allowance. To the extent we establish a valuation allowance or increase or decrease this allowance in a period, we include an expense or benefit within the tax provision in the statement of operations. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. If we determine that a tax position will more likely than not fail to be sustained on audit, the second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various hypothetical outcomes. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors such as changes in facts or circumstances, changes in tax law, new audit activity, and effectively settled issues. Determining whether an uncertain tax position is effectively settled requires judgment. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period in which a change in judgment occurs. Recently Issued and Adopted Accounting Pronouncements For a discussion of recently adopted accounting pronouncements, see Recently Issued Accounting Pronouncements in Note 1, The Company and its Significant Accounting Policies , of the notes to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 32