INTERLINK ELECTRONICS, INC. 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. operates in two principal divisions: force-sensing technology and gas-sensing technology. We design, develop, manufacture and sell 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 Human Machine Interface ("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, pressure mapping, biological monitoring and others. Interlink has been a leader in the printed electronics industry for over 35 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. Through our acquisition inDecember 2022 of the business assets ofSPEC Sensors, LLC andKWJ Engineering, Inc. , early pioneers in miniaturized, low-cost gas-sensing technologies, we also offer electrochemical gas-sensing technology products and solutions for industry, community, health and home, with uses in fields such as carbon monoxide and ozone detection and air quality monitoring. We sell our products and solutions 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, medical, and environmental monitoring markets. Our global presence inthe United States ,China ,Hong Kong ,Singapore andJapan , 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 inShenzhen, China , and in our production facility inNewark, California . 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 solutions that are seamless to deploy and perform flawlessly. We spent several years building a research and development (R&D) organization inSingapore to develop new product offerings that will meet the market's growing demand for touch technology and smart surfaces. We have now shifted a majority of R&D and product development efforts toCamarillo, California , where we established aGlobal Product Development and Materials Science Center , and our advanced and proprietary facility inSilicon Valley . We believe this increased presence in theU.S. will allow us to grow our business and be more closely aligned with current and future large-tier customers. We also expect to launch an engineering, research and development center in theUnited Kingdom . We also plan to explore potential strategic relationships with companies and technology institutes that will support our growth initiatives. 27 Table of Contents 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,
2022 2021
$ % $ %
(in thousands, except percentages)
Revenue, net $ 7,493 100.0 % $ 7,478 100.0 %
Cost of revenue 3,632 48.5 3,420 45.7
Gross profit 3,861 51.5 4,058 54.3
Operating expenses:Engineering, research and development 1,220 16.3 893
11.9
Selling, general and administrative 3,309 44.2 3,244
43.4 Total operating expenses 4,529 60.4 4,137 55.3 Loss from operations (668) (8.9) (79) (1.1) Other income (expense): Other income (expense), net 2,611 34.8 (50) (0.7)
Income (loss) before income taxes 1,943 25.9 (129)
(1.7) Income tax expense 271 3.6 605 8.1 Net income (loss)$ 1,672 22.3 %$ (734) (9.8) %
Comparison of the Years Ended
Revenue, net by the markets we serve is as follows:
Year ended December 31,
2022 2021
% of Net % of Net
Amount Revenue Amount Revenue $ Change % Change
(in thousands, except percentages)
Industrial $ 2,269 30.3 % $ 2,191 29.3 % $ 78 3.6 %
Medical 1,865 24.9 1,102 14.7 763 69.2
Consumer 363 4.8 1,271 17.0 (908) (71.4)
Automotive 24 0.3 14 0.2 10 71.4
Standard 2,972 39.7 2,900 38.8 72 2.5
Revenue, net $ 7,493 100.0 % $ 7,478 100.0 % $ 15 0.2 %
We sell our custom products into the industrial, medical, consumer, automotive
and environmental monitoring markets. 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, medical, and
environmental monitoring 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 up in 2022 compared to 2021 in the medical market, down in the
consumer market, and generally flat in the industrial and automotive markets,
and for our standard products. The increase in revenue from our medical market
customers is due to an increase in orders from and shipments to our largest
medical customer, whose purchasing volume has increased based on increases in
installations at their hospital and medical center customer locations. The
decrease in revenue from our consumer market customers is primarily due to a
design change by one of our largest consumer products customers, offset by
shipments of our custom sensors to a
28
Table of Contents
new customer in this market. 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,
2022 2021
% of Net % of Net
Amount Revenue Amount Revenue $ Change % Change
(in thousands, except percentages)
Gross profit $ 3,861 51.5 % $ 4,058 54.3 % $ (197) (4.9) %
Our gross profit and gross margin percentage are impacted by various factors
including product mix, customer mix, sales volume, and fluctuations in our cost
of revenues, which are comprised of material costs, direct and indirect
production labor costs, warehousing and logistics costs, facilities costs, and
other costs related to production activities. Gross profit and gross margin
percentage for 2022 were down compared to 2021 due primarily to higher materials
and components costs on certain orders, higher freight and tariff costs on
certain transactions, unfavorable changes in product and customer mix, and
changes in production efficiencies in our manufacturing operations.
Year ended December 31,
2022 2021
% of Net % of Net
Amount Revenue Amount Revenue $ Change % Change
(in thousands, except percentages)Engineering, research and development$ 1,220 16.3 %$ 893
11.9 %
Engineering and R&D expenses consist primarily of compensation expenses for employees engaged in research, design and product development activities, and the cost of those employees' indirect supplies and allocation of facilities expenses. Our R&D team focuses both on internal design development in order to develop our force-sensing and gas-sensing technologies and solutions, as well as design development aimed at addressing our customers' unique design challenges. Engineering and R&D costs for 2022 were up compared to 2021 due to increased engineering employee headcount and increased costs on prototyping and development activities, and also due to inclusion in 2021 of receipt of a$129 thousand research incentive grant from theSingapore government that reduced expenses in the prior year. Year ended December 31, 2022 2021 % of Net % of Net Amount Revenue Amount Revenue $ Change % Change (in thousands, except percentages)
Selling, general and administrative$ 3,309 44.2 %$ 3,244
43.4 %
Selling, general and administrative expenses consist primarily of compensation expenses, legal and other professional fees, facilities expenses and communication expenses. Selling, general and administrative costs for 2022 were up slightly compared to 2021. The prior year period included a$186 thousand benefit from forgiveness of the PPP loan. When comparing selling, general and administrative costs for the periods exclusive of that benefit, costs for 2022 were lower than in the prior year due to lower sales and marketing employee headcount, and lower legal and other professional fees. Year ended December 31, 2022 2021 % of Net % of Net Amount Revenue Amount Revenue $ Change % Change (in thousands, except percentages)
Other income (expense), net$ 2,611 34.8 %$ (50)
0.7 %
Other income (expense), net consists of non-operating income and expenses, such as gains and losses on marketable securities, foreign currency transaction gains and losses, interest income and expense, and other non-operating income and expenses. Other income (expense), net for 2022 was comprised of$2.449 million of gains on marketable securities,$121 thousand of foreign currency 29
Table of Contents
transaction gains, and
Year ended December 31,
2022 2021
% of Pre- % of Pre-
Amount tax Income Amount tax Income Change % Change
(in thousands, except percentages)Income tax expense$ 271 13.9 %$ 605 469.0 %$ (334) n/a Tax expense (benefit) reflects statutory tax rates in the jurisdictions in which we operate adjusted for permanent book/tax differences. For 2022, the Company's tax provision reflects tax expense on its foreign earnings, and tax expense on its domestic earnings net of utilization of a portion of the previously recorded valuation allocance. For 2021, the Company recorded an income tax provision comprised substantially of valuation allowance against domestic deferred tax assets due to recent history ofU.S. taxable losses. 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 statedU.S. statutory rate of 21% primarily due to a significant portion of our earnings originating in the higher rateChina jurisdiction (25%), offset by lower rate jurisdictions inSingapore (17%) andHong Kong (16.5%). State income taxes also have an impact in theU.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 theU.S. and other jurisdictions. Additional changes to the tax system in theU.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, capital expenditures, and acquisition activities have been funded from cash balances on hand, cash generated from operations and marketable securities, and sales of equity securities. As ofDecember 31, 2022 , we had cash and cash equivalents of$10.1 million , working capital of$12.6 million and no indebtedness. Cash and cash equivalents consist of cash and money market funds. We did not have any short-term or long-term investments as ofDecember 31, 2022 . Of the$10.1 million of cash balances on hand,$0.9 million was held by foreign subsidiaries; if those funds are needed for our operations in theU.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 incurU.S. or foreign taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside theU.S. and our current plans do not demonstrate a need to repatriate cash to fund ourU.S. operations. In 2021, we sold 200,000 shares of our 8.0% Series A Convertible Preferred Stock at a price of$25.00 per share for gross proceeds to us of$5.0 million before placement agent fees and transaction expenses. Each share of Series A Preferred Stock is convertible into two shares of our common stock. The designations, rights and preferences of our Series A Convertible Preferred Stock provide that we will pay, when, as and if declared by our board of directors, monthly cumulative cash dividends at an annual rate of 8.0%, which is equivalent to$0.16667 per month and$2.00 per annum per share, based on the$25.00 liquidation preference. Dividends on the Series A Convertible Preferred Stock will accrue daily and be cumulative from, and including, the first day of the calendar month in which the shares are issued and will be payable monthly in arrears on the 15th day of each calendar month. Our board of directors commenced paying dividends on our Series A Convertible Preferred Stock inNovember 2021 , and we expect that our board of directors will continue to declare and pay monthly cash dividends on our Series A Convertible Preferred Stock, subject to the limitations to do so underNevada law. We believe that our existing cash and cash equivalents balance will be sufficient to maintain our current operations considering our current financial condition, obligations, 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 30 Table of Contents 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.
Cash Flow Analysis
Our cash flows from operating, investing and financing activities are summarized
as follows:
Year ended December 31,
2022 2021
(in thousands)
Net cash provided by (used in) operating activities
231
Net cash provided by (used in) investing activities 735
(159)
Net cash provided by (used in) financing activities (350)
4,520
Net Cash Provided By (Used In) Operating Activities
For the year endedDecember 31, 2022 , the$915 thousand in net cash used in operating activities was attributable to net income of$1.672 million , adjusted for non-cash charges of$256 thousand , realized gain on marketable securities of$2.449 million , and cash used in changes in operating assets and liabilities of$394 thousand . For the year endedDecember 31, 2021 , the$231 thousand in net cash provided by operating activities was attributable to net loss of$734 thousand , adjusted for non-cash charges of$819 thousand , non-cash gain on forgiveness of PPP loan of$186 thousand , and cash from changes in operating assets and liabilities of$332 thousand . Accounts receivable increased from$1.080 million atDecember 31, 2021 to$1.178 million atDecember 31, 2022 due to timing of shipments and cash collections during the fourth quarter of 2022 compared to the fourth quarter of 2021. Many of our customers pay promptly and accounts receivable is generally related to the most recent shipments. Inventories increased from$814 thousand atDecember 31, 2021 to$2.112 million atDecember 31, 2022 due primarily to the inventory acquired in the acquisition of SPEC and KWJ inDecember 2022 ; inventory balances fluctuate depending on the timing of materials purchases and product shipments. Prepaid expenses and other current assets decreased from$391 thousand atDecember 31, 2021 to$321 thousand atDecember 31, 2022 . The balance of our prepaid expenses and other assets fluctuates with the timing of payments of insurance premiums, advances, and estimated income taxes. Accounts payable and accrued liabilities decreased slightly from$845 thousand atDecember 31, 2021 to$841 thousand atDecember 31, 2022 ; payables and accrued expenses fluctuate based on the timing of payment for purchases of materials, compensation accruals, and other outside services.
Net Cash Provided By (Used In) Investing Activities
Net cash provided by investing activities of$735 thousand for the year endedDecember 31, 2022 consisted of net proceeds from purchase and sales of marketable securities of$2.449 million , net cash used in theDecember 2022 acquisition of SPEC and KWJ of$1.672 million , and$42 thousand of cash used for purchases of property and equipment. Net cash used in investing activities of$159 thousand for the year endedDecember 31, 2021 consisted primarily of capital expenditures related to completion of theGlobal Product Development and Materials Science Center in ourCamarillo footprint.
Net Cash Provided By (Used In) Financing Activities
Net cash used in financing activities of$350 thousand for the year endedDecember 31, 2022 consisted of payment of$400 thousand of dividends on our Series A Convertible Preferred Stock, offset by$50 thousand of proceeds from issuance of common stock. Net cash provided by financing activities of$4.5 million for the year endedDecember 31, 2021 was from our Series A Convertible Preferred Stock offering in which we raised gross offering proceeds of$5.0 million before reductions for selling commissions and costs. 31
Table of Contents
Transactions with Related Parties
For a discussion of transactions with related parties, see Note 12, Related Party Transactions, of the notes to the consolidated financial statements, and Item 13, Certain Relationships and Related Transactions, and Director Independence, appearing elsewhere in this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
As ofDecember 31, 2022 and 2021, 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 inthe 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").
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.
32
Table of Contents
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are recorded at the invoice amount and presented net of the allowance for credit losses. 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 credit losses using the specific identification method. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.
Assessments of Impairment of
Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed.Goodwill is determined to have an indefinite useful life and is not amortized, but tested for impairment at least annually or more frequently in events and circumstances exist that indicate that a goodwill impairment test should be performed. Intangible assets and property, plant and equipment are carried at cost less accumulated depreciation and amortization, and are tested for impairment whenever events or changes in circumstances indicate their carrying value may not be recoverable. The impairment tests and assessments involve estimates and require management judgment of qualitative and quantitative considerations. If factors change in the future and we use different assumptions, our impairment tests and assessments could change significantly.
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
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.
33
Table of Contents
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.
© Edgar Online, source
