Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements. These forward-looking statements speak only as of the date of this Form 10-Q and are subject to uncertainties, assumptions and business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth below in Part II, Item 1A, “Risk Factors,” and in our other reports filed with the Securities and Exchange Commission. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances described in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Form 10-Q to conform these statements to actual results or to changes in our expectations, except as required by law.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.
Overview
Interlink Electronics, Inc. (“we”, “us”, “our”, “Interlink” or the “Company”) 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 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 Force-Sensing Resistor (“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 invented FSR® technology and pioneered commercialization of printed electronics manufacturing, paving the way for industry-wide adoption of force sensing technology. Our extensive knowledge and experience with this technology, along with the firmware we incorporate in our HMI solutions, differentiates us from other providers of HMI solutions. We, along with our customers, incorporate our FSR® and force sensing sensors and modules into end user products. Our sensors and modules are used in electronics devices and systems where user input must be converted into useful output data. Our force sensing technology solution platforms enabled industry-first implementations in gaming, smartphone, rugged notebook, automotive cockpit and automotive entry applications. Consumer and end-user demand for enhanced user experience is driving the need for innovative multi-modal HMI technologies and applications. Force sensing input provides a critical novel modality that drives a paradigm shift in HMI.
Market requirements for innovative solutions that enable smaller, thinner devices, lower power consumption, highly refined designs, better navigation and more intuitive usability in all environments, are also driving increased demand for our products. Industry is moving towards the use of multi-modal HMI in the home, industrial, medical and automotive spaces. Interlink delivers cutting edge, high performance HMI solutions for customers who wish to replace outdated switches and knobs in these environments.
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Significant market opportunities are rapidly emerging for us to improve upon the functionality of standard capacitive sensors which are widely available and competitively priced. Inadvertent activation, where users unintentionally activate a control, is a common problem with capacitive technology. In contrast, force sensing solutions require a deliberate application of force to operate. We have had recent success in using our force sensing solutions in combination with capacitive technologies to minimize the latter’s performance issues, enabling force sensing solutions to complement competitive technologies and provide hybrid solutions and open up new opportunities for growth. We continue to simultaneously expand our standard product portfolio and develop new technology platforms to grow existing markets and capture emerging markets. This portfolio expansion will incorporate other complimentary sensing technologies. This broader portfolio of technologies will allow us to use our expertise in integrating multiple sensing technologies for applications in the rapidly growing Internet-of-Things (“IoT”).
Interlink serves our world-wide customer base from our corporate headquarters in Irvine, California (Orange County area) and from our facility in Camarillo, California (Ventura County). We have established a Global Product Development and Materials Science Center in our Camarillo footprint. This facility has a state-of-the-art printed electronics development laboratory as well as materials science lab. Our engineering team is based in this center where we work with our U.S. and global customers on developing, engineering, prototyping and implementing our advanced HMI and sensing solutions. We also maintain a small embedded software and IoT application development center in Singapore, and we expect to launch an engineering, research and development center in the United Kingdom. We manufacture all our products in our printed electronics manufacturing facility in Shenzhen, China, which has been in operation since 2006. In addition, we maintain a global distribution and logistics center in Hong Kong, a technical sales office in Japan, and several manufacturer representatives and distributors in strategic locations in our key markets, all of which allows us to support our global customer base. We sell our products in a wide range of markets, including consumer electronics, automotive, industrial and medical. Our customers are some of the world’s largest companies and most recognizable brands.
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.
A description of our critical accounting policies that represent the more significant judgments and estimates used in the preparation of our financial statements was provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2022. There have been no changes to our critical accounting policies and estimates described in the Form 10-K that have had a material impact on our condensed consolidated financial statements and related notes.
Recently Issued and Adopted Accounting Pronouncements
We reviewed all recently issued accounting pronouncements and concluded they are all not applicable or not expected to be material to our financial statements.
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Results of Operations
The following table sets forth certain unaudited condensed consolidated statements of operations data for the periods indicated. The percentages in the table are based on net revenues.
Three months ended June 30,
Six months ended June 30,
2022
2021
2022
2021
$
%
$
%
$
%
$
%
(in thousands, except percentages)
Revenue, net
$
2,040
100.0
%
$
2,064
100.0
%
$
4,031
100.0
%
$
3,632
100.0
%
Cost of revenue
1,088
53.3
%
937
45.4
%
1,838
45.6
%
1,631
44.9
%
Gross profit
952
46.7
%
1,127
54.6
%
2,193
54.4
%
2,001
55.1
%
Operating expenses:
Engineering, research and development
330
16.2
%
232
11.2
%
593
14.7
%
449
12.4
%
Selling, general and administrative
773
37.9
%
762
36.9
%
1,733
43.0
%
1,479
40.7
%
Total operating expenses
1,103
54.1
%
994
48.2
%
2,326
57.7
%
1,928
53.1
%
Income (loss) from operations
(151)
(7.4)
%
133
6.4
%
(133)
(3.3)
%
73
2.0
%
Other income (expense):
Other income (expense), net
342
16.8
%
(29)
(1.4)
%
497
12.3
%
(19)
(0.5)
%
Income before income taxes
191
9.4
%
104
5.0
%
364
9.0
%
54
1.5
%
Income tax expense (benefit)
79
3.9
%
41
2.0
%
110
2.7
%
34
0.9
%
Net income
$
112
5.5
%
$
63
3.1
%
$
254
6.3
%
$
20
0.6
%
Comparison of Three Months Ended June 30, 2022 and 2021
Revenue, net by the markets we serve is as follows:
Three months ended June 30,
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Industrial
$
738
36.2
%
$
434
21.0
%
$
304
70.0
%
Medical
494
24.2
%
285
13.8
%
209
73.3
%
Consumer
11
0.5
%
449
21.8
%
(438)
(97.6)
%
Automotive
11
0.5
%
—
—
%
11
100.0
%
Standard
786
38.5
%
896
43.4
%
(110)
(12.3)
%
Revenue, net
$
2,040
100.0
%
$
2,064
100.0
%
$
(24)
(1.2)
%
We sell our custom products into the industrial, medical, consumer and automotive 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 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.
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Revenues were up in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 in the industrial and medical markets, and were down in the consumer markets and for our standard products. The increase in revenue from our industrial market customers was due to increased purchasing volume by these customers for use in their ongoing product lines resulting from changes in demand by their customers. The increase in revenue from our medical market customers is due to a continued increase in orders from and shipments to our largest medical customer, whose purchasing volume has increased as COVID-19 restrictions on their hospital installations have begun to subside. The decrease in revenue from our consumer market customers is primarily due to a design change by one of our largest consumer products customers. During 2022, we also sold products in the automotive market for the first time since 2018, as we are again pursuing a program with an automotive manufacturer. 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.
Three months ended June 30,
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Gross profit
$
952
46.7
%
$
1,127
54.6
%
$
(175)
(15.5)
%
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 during the three months ended June 30, 2022 were down compared to the three months ended June 30, 2021 due primarily to higher materials and components costs on certain orders, and an increase in production labor costs due to higher production levels and expanded labor hours.
Three months ended June 30,
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Engineering, research and development
$
330
16.2
%
$
232
11.2
%
$
98
42.2
%
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 HMI solutions, as well as design development aimed at addressing our customers’ unique design challenges. Engineering and R&D costs for the three months ended June 30, 2022 were up compared to the three months ended June 30, 2021 due to increased engineering employee headcount and increased prototyping and product-development activities that coincide with supporting new and expanded customer programs and new products.
Three months ended June 30,
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Selling, general and administrative
$
773
37.9
%
$
762
36.9
%
$
11
1.4
%
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 the three months ended June 30, 2022 were substantially unchanged compared to the three months ended June 30, 2021.
Three months ended June 30,
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Other income (expense), net
$
342
16.8
%
$
(29)
(1.4)
%
$
371
nm
%
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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 items. Other income (expense), net for the three months ended June 30, 2022 was comprised of $225 thousand of unrealized gains on marketable securities, and $117 thousand of foreign currency transaction gains, while other income (expense), net for the three months ended June 30, 2021 was comprised of $18 thousand of foreign currency transaction losses, and $11 thousand of other non-operating expenses.
Three months ended June 30,
2022
2021
Change
% of
% of
in % of
Pre-tax
Pre-tax
Pre-tax
Amount
Income
Amount
Income
$ Change
Income
(in thousands, except percentages)
Income tax expense (benefit)
$
79
41.4
%
$
41
39.4
%
$
38
2.0
%
Income tax expense (benefit) reflects statutory tax rates in the jurisdictions in which we operate adjusted for permanent book/tax differences. Our effective tax rate is directly affected by the relative proportions of earnings and losses in the jurisdictions in which we operate, including our current limitation on realizing tax benefits on domestic losses due to the valuation allowance on our domestic net operating loss carryforward. Based on the expected mix of domestic and foreign earnings, we anticipate our effective tax rate to remain similar to the 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. In December 2021, the Company’s income tax provision included a valuation allowance against domestic deferred tax assets due to recent history of U.S. taxable losses.
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.
Comparison of Six Months Ended June 30, 2022 and 2021
Revenue, net by the markets we serve is as follows:
Six months ended June 30,
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Industrial
$
1,313
32.6
%
$
973
26.8
%
$
340
34.9
%
Medical
1,197
29.7
%
328
9.0
%
869
264.9
%
Consumer
49
1.2
%
897
24.7
%
(848)
(94.5)
%
Automotive
14
0.3
%
—
—
%
14
100.0
%
Standard
1,458
36.2
%
1,434
39.5
%
24
1.7
%
Revenue, net
$
4,031
100.0
%
$
3,632
100.0
%
$
399
11.0
%
Revenues were up in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 in the industrial and medical markets and for our standard products, and were down in the consumer markets. The increase in revenue from our industrial market customers was due to increased purchasing volume by and shipments to these customers. The increase in revenue from our medical market customers is due to a continued increase in shipments to our largest medical customer, whose purchasing volume has increased as COVID-19 restrictions have begun to subside. The decrease in revenue from our consumer market customers is primarily due to a design change by one of our largest consumer products customers. During 2022, we also sold products in the automotive market for the first time since 2018, as we are again pursuing a program with an automotive manufacturer. 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.
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Six months ended June 30
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Gross profit
$
2,193
54.4
%
$
2,001
55.1
%
$
192
9.6
%
Gross profit during the six months ended June 30, 2022 was up compared to the six months ended June 30, 2021 due to an increase in revenue, while gross margin percentage was down in the corresponding period due primarily to higher materials and components costs on certain orders, and an increase in production labor costs due to higher production levels and expanded labor hours.
Six months ended June 30,
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Engineering, research and development
$
593
14.7
%
$
449
12.4
%
$
144
32.1
%
Engineering and R&D costs for the six months ended June 30, 2022 were up compared to the three months ended June 30, 2021 due to increased engineering employee headcount and increased prototyping and product-development activities that coincide with supporting new and expanded customer programs and new products.
Six months ended June 30,
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Selling, general and administrative
$
1,733
43.0
%
$
1,479
40.7
%
$
254
17.2
%
Selling, general and administrative costs for the six months ended June 30, 2022 were up compared to the six months ended June 30, 2021 due to increased costs of professional services, as well as prior year having included a $186 thousand benefit from forgiveness of the PPP loan.
Six months ended June 30,
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Other income (expense), net
$
497
12.3
%
$
(19)
(0.5)
%
$
516
nm
%
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 items. Other income (expense), net for the six months ended June 30, 2022 was comprised of $381 thousand of unrealized gains on marketable securities, $115 thousand of foreign currency transaction gains, and $1 thousand of other non-operating expenses, while other income (expense), net for the six months ended June 30, 2021 was comprised of $8 thousand of foreign currency transaction losses, and $11 thousand of other non-operating expenses.
Six months ended June 30,
2022
2021
Change
% of
% of
in % of
Pre-tax
Pre-tax
Pre-tax
Amount
Income
Amount
Income
$ Change
Income
(in thousands, except percentages)
Income tax expense (benefit)
$
110
30.2
%
$
34
63.0
%
$
76
(32.8)
%
Income tax expense (benefit) reflects statutory tax rates in the jurisdictions in which we operate adjusted for permanent book/tax differences. Our effective tax rate is directly affected by the relative proportions of earnings and losses in the jurisdictions in which we operate.
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Liquidity and Capital Resources
Cash requirements for working capital and capital expenditures have been funded from cash balances on hand, cash generated from operations, and sales of equity securities. As of June 30, 2022, we had cash and cash equivalents of $4.4 million, working capital of $12.0 million and no indebtedness. Cash and cash equivalents consist of cash and money market funds. Of the $4.4 million of cash balances on hand, $0.9 million was held by foreign subsidiaries. If these funds are needed for our operations in the U.S., we have several methods to repatriate 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.
We have outstanding 200,000 shares of our 8.0% Series A Convertible Preferred Stock that has an aggregate liquidation preference of $5.0 million, for which we 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 a per share liquidation preference of $25.00. Dividends on the Series A Convertible Preferred Stock are 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 in November 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 under Nevada 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 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:
Six Months Ended
June 30,
2022
2021
(in thousands)
Net cash provided by operating activities
$
28
$
234
Net cash used in investing activities
(6,036)
(142)
Net cash used in financing activities
(200)
—
Net Cash Provided By Operating Activities
For the six months ended June 30, 2022, the $28 thousand of cash provided by operating activities was attributable to net income of $254 thousand, adjusted for non-cash charges of $126 thousand, unrealized gains on marketable securities of $381 thousand, and cash provided by changes in operating assets and liabilities of $29 thousand.
Accounts receivable decreased from $1.1 million at December 31, 2021 to $719 thousand at June 30, 2022 due to higher collections the first half 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 at December 31, 2021 to $1.0 million at June 30, 2022. Inventory balances fluctuate depending on the timing of materials purchases and product shipments. Prepaid expenses and other current assets increased from $391 thousand at December 31, 2021 to $475 thousand at June 30, 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 from $845 thousand at December 31, 2021 to $660 thousand at June 30, 2022, primarily due to the timing of payment for purchases of materials, compensation accruals, and other outside services.
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For the six months ended June 30, 2021, the $234 thousand of cash provided by operating activities was attributable to net income of $20 thousand, adjusted for non-cash charges of $164 thousand, non-cash gain on forgiveness of PPP loan of $186 thousand, and cash provided by changes in operating assets and liabilities of $236 thousand.
Net Cash Used In Investing Activities
Net cash used in investing activities of $6.0 million for the six months ended June 30, 2022 consisted of purchases of $6.0 million of marketable securities and $9 thousand of property, plant, and equipment. Net cash used in investing activities of $142 thousand for the six months ended June 30, 2021 consisted of purchases of property, plant, and equipment.
Net Used In Financing Activities
Net cash used in financing activities of $200 thousand for the six months ended June 30, 2022 consisted of payment of dividends on our Series A Convertible Preferred Stock. There was no cash provided by or used in financing activities during the six months ended June 30, 2021.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
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