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), where we have established a Global Product Development and Materials Science Center. 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 September 30,
Nine months ended September 30,
2022
2021
2022
2021
$
%
$
%
$
%
$
%
(in thousands, except percentages)
Revenue, net
$
1,851
100.0
%
$
2,223
100.0
%
$
5,882
100.0
%
$
5,855
100.0
%
Cost of revenue
979
52.9
%
931
41.9
%
2,817
47.9
%
2,562
43.8
%
Gross profit
872
47.1
%
1,292
58.1
%
3,065
52.1
%
3,293
56.2
%
Operating expenses:
Engineering, research and development
319
17.2
%
105
4.7
%
912
15.5
%
554
9.5
%
Selling, general and administrative
743
40.1
%
928
41.7
%
2,476
42.1
%
2,407
41.1
%
Total operating expenses
1,062
557.4
%
1,033
46.5
%
3,388
57.6
%
2,961
50.6
%
Income (loss) from operations
(190)
(10.3)
%
259
11.7
%
(323)
(5.5)
%
332
5.7
%
Other income (expense):
Other income (expense), net
207
11.2
%
(6)
(0.3)
%
704
12.0
%
(25)
(0.4)
%
Income (loss) before income taxes
17
0.9
%
253
11.4
%
381
6.5
%
307
5.2
%
Income tax expense (benefit)
11
0.6
%
30
1.3
%
121
2.1
%
64
1.1
%
Net income (loss)
$
6
0.3
%
$
223
10.0
%
$
260
4.4
%
$
243
4.2
%
Comparison of Three Months Ended September 30, 2022 and 2021
Revenue, net by the markets we serve is as follows:
Three months ended September 30,
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Industrial
$
485
26.2
%
$
557
25.1
%
$
(72)
(12.9)
%
Medical
372
20.1
%
333
15.0
%
39
11.7
%
Consumer
216
11.7
%
374
16.8
%
(158)
(42.2)
%
Automotive
10
0.5
%
—
—
%
10
100.0
%
Standard
768
41.5
%
959
43.1
%
(191)
(19.9)
%
Revenue, net
$
1,851
100.0
%
$
2,223
100.0
%
$
(372)
(16.7)
%
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 September 30, 2022 compared to the three months ended September 30, 2021 in the medical market, and were down in the industrial and consumer markets and for our standard products. 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 based on increases in installations at their hospital and medical center customer locations. The decrease in revenue from our industrial market customers was 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 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 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.
Three months ended September 30,
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Gross profit
$
872
47.1
%
$
1,292
58.1
%
$
(420)
(32.5)
%
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 September 30, 2022 were down compared to the three months ended September 30, 2021 due primarily to higher materials and components costs on certain orders, and unfavorable changes in product and customer mix.
Three months ended September 30,
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Engineering, research and development
$
319
17.2
%
$
105
4.7
%
$
214
203.8
%
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 September 30, 2022 were up compared to the three months ended September 30, 2021 due to increased engineering employee headcount and increased prototyping and product-development activities, and also due to inclusion in the 2021 period of receipt of a $129 thousand research incentive grant from the Singapore government that reduced expenses in the prior year period.
Three months ended September 30,
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Selling, general and administrative
$
743
40.1
%
$
928
41.7
%
$
(185)
(19.9)
%
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 September 30, 2022 were down compared to the three months ended September 30, 2021 due to lower sales and marketing employee headcount, and lower legal and other professional fees.
Three months ended September 30,
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Other income (expense), net
$
207
11.2
%
$
(6)
(0.3)
%
$
213
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 income and expenses. Other income (expense), net for the three months ended September 30, 2022 was comprised of $181 thousand of gains on marketable securities, $24 thousand of foreign currency transaction gains, and $2 thousand of other non-operating income, while other income (expense), net for the three months ended September 30, 2021 was comprised of $6 thousand of foreign currency transaction losses.
Three months ended September 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)
$
11
64.7
%
$
30
11.9
%
$
(19)
52.8
%
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, 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 and losses, we anticipate our effective tax rate to remain higher than the U.S. statutory rate of 21% primarily due to a significant portion of our consolidating earnings being recorded in the jurisdictions of China (25%), Singapore (17%), and Hong Kong (16.5%), while our domestic losses do not benefit the rate due to the valuation allowance. 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.
Comparison of Nine Months Ended September 30, 2022 and 2021
Revenue, net by the markets we serve is as follows:
Nine months ended September 30,
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Industrial
$
1,797
30.6
%
$
1,529
26.1
%
$
268
17.5
%
Medical
1,569
26.7
%
662
11.3
%
907
137.0
%
Consumer
265
4.5
%
1,271
21.7
%
(1,006)
(79.2)
%
Automotive
24
0.4
%
—
—
%
24
100.0
%
Standard
2,227
37.9
%
2,393
40.9
%
(166)
(6.9)
%
Revenue, net
$
5,882
100.0
%
$
5,855
100.0
%
$
27
0.5
%
Revenues were up in the nine months ended September 30, 2022 compared to the nine months ended September 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 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, offset by shipments of our custom sensors to a new customer in this market. 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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Nine months ended September 30
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Gross profit
$
3,065
52.1
%
$
3,293
56.2
%
$
(228)
(6.9)
%
Gross profit and gross margin percentage during the nine months ended September 30, 2022 were down compared to the nine months ended September 30, 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.
Nine months ended September 30,
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Engineering, research and development
$
912
15.5
%
$
554
9.4
%
$
358
64.6
%
Engineering and R&D costs for the nine months ended September 30, 2022 were up compared to the nine months ended September 30, 2021 due to increased engineering employee headcount and increased costs on prototyping and development activities, and also due to inclusion in the 2021 period of receipt of a $129 thousand research incentive grant from the Singapore government that reduced expenses in the prior year.
Nine months ended September 30,
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Selling, general and administrative
$
2,476
42.9
%
$
2,407
41.1
%
$
69
2.9
%
Selling, general and administrative costs for the nine months ended September 30, 2022 were up slightly compared to the nine months ended September 30, 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 the nine month period in the current year were lower than in the prior year due to lower sales and marketing employee headcount, and lower legal and other professional fees.
Nine months ended September 30,
2022
2021
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Other income (expense), net
$
704
12.0
%
$
(25)
(0.4)
%
$
729
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 income and expenses. Other income (expense), net for the nine months ended September 30, 2022 was comprised of $562 thousand of gains on marketable securities, $139 thousand of foreign currency transaction gains, and $3 thousand of other non-operating income, while other income (expense), net for
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the nine months ended September 30, 2021 was comprised of $15 thousand of foreign currency transaction losses, and $10 thousand of other non-operating expenses.
Nine months ended September 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)
$
121
31.8
%
$
64
20.8
%
$
57
89.1
%
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.
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 September 30, 2022, we had cash and cash equivalents of $3.9 million, working capital of $12.0 million and no indebtedness. Cash and cash equivalents consist of cash and money market funds. Of the $3.9 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:
Nine Months Ended
September 30,
2022
2021
(in thousands)
Net cash provided by (used in) operating activities
$
(385)
$
639
Net cash (used in) investing activities
(6,021)
(142)
Net cash (used in) financing activities
(300)
—
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Net Cash Provided By (Used In) Operating Activities
For the nine months ended September 30, 2022, the $385 thousand of cash used in operating activities was attributable to net income of $260 thousand, adjusted for non-cash charges of $201 thousand, unrealized and realized gains on marketable securities of $562 thousand, and cash used in changes in operating assets and liabilities of $284 thousand.
Accounts receivable decreased from $1.1 million at December 31, 2021 to $958 thousand at September 30, 2022 due to improved collections and days-sales-outstanding for the third 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 at December 31, 2021 to $1.1 million at September 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 $453 thousand at September 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 $692 thousand at September 30, 2022, primarily due to the timing of payment for purchases of materials, compensation accruals, and other outside services.
For the nine months ended September 30, 2021, the $639 thousand of cash provided by operating activities was attributable to net income of $243 thousand, adjusted for non-cash charges of $229 thousand, non-cash gain on forgiveness of PPP loan of $186 thousand, and cash provided by changes in operating assets and liabilities of $353 thousand.
Net Cash Used In Investing Activities
Net cash used in investing activities of $6.0 million for the nine months ended September 30, 2022 consisted of purchases of $6.0 million of marketable securities (net of sales) and $9 thousand of property, plant, and equipment. Net cash used in investing activities of $142 thousand for the nine months ended September 30, 2021 consisted of purchases of property, plant, and equipment.
Net Used In Financing Activities
Net cash used in financing activities of $300 thousand for the nine months ended September 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 nine months ended September 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.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.