What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-29 compared with 2022-03-29 · 65 added, 52 removed, 159 unchanged (42% of the section changed)

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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.

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 HMI technology platforms are deployed in a wide range of markets including consumer electronics, automotive, industrial, and medical.

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 35 years with the commercialization of our patented FSR® technology that has enabled rugged and reliable HMI solutions.

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.

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.

Through our acquisition in December 2022 of the business assets of SPEC Sensors, LLC and KWJ 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 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.

Our products are manufactured by our wholly-owned subsidiary in a state-of-the-art facility in Shenzhen, China, and in our production facility in Newark, 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 HMI solutions that are seamless to deploy and perform flawlessly.

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 in Singapore 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 to Camarillo, California, where we established a Global Product Development and Materials Science Center.

We have now shifted a majority of R&D and product development efforts to Camarillo, California, where we established a Global Product Development and Materials Science Center, and our advanced and proprietary facility in Silicon Valley.

We believe this 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 expect to launch an engineering, research and development center in the United Kingdom in 2022.

We also expect to launch an engineering, research and development center in the United Kingdom.

We also plan to explore potential strategic relationships with companies and technology institutes that will support our growth initiatives.

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Total operating expenses

Income (loss) from operations

Loss from operations

Other income (expense):

Other income (expense), net

Income (loss) before income tax expense

Income tax expense (benefit)

Income (loss) before income taxes

Income tax expense

Net income (loss)

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(in thousands, except percentages)

We sell our custom products into the industrial, medical, consumer, and automotive markets.

We sell our custom products into the industrial, medical, consumer, automotive and environmental monitoring markets.

We sell our standard products through various distribution networks.

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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.

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 2021 compared to 2020 in the industrial and consumer markets, and were generally flat in the medical market, and for our standard products.

The increase in revenue from our industrial market customers is due to increased purchasing volume by these customers for use in their ongoing product lines resulting from changes in demand by their customers.

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.

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

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,

(in thousands, except percentages)

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 gross profit increased consistent with the increase in revenues, gross margin declined slightly due to changes in product and customer mix.

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,

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Engineering, research and development

Engineering and R&D expenses consist primarily of compensation expenses for employees engaged in research, design and 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.

Our engineering and R&D costs were down slightly when compared with the prior year.

While headcount and related costs increased in both our Camarillo, California lab and our Singapore R&D center in 2021, our engineering and R&D costs were down on a year-over-year basis because of receipt of a research incentive grant from the Singapore government that reduced expenses for 2021.

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 the Singapore government that reduced expenses in the prior year.

Year ended December 31,

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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 headcount and compensation for sales, marketing, finance and administrative personnel, and an increase in legal and other professional fees.

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,

(in thousands, except percentages)

Income tax expense (benefit)

Other income (expense), net

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

transaction gains, and $41 thousand of interest income, while other income (expense), net for 2021 was comprised of $40 thousand of foreign currency transaction losses, and $10 thousand of other non-operating expenses.

Year ended December 31,

(in thousands, except percentages)

Income tax expense

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 of U.S.

taxable losses.

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.

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.

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%).

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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.

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 of December 31, 2022, we had cash and cash equivalents of $10.1 million, working capital of $12.6 million and no indebtedness.

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Of the $10.1 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 the funds without significant tax effects, including repayment of intercompany loans or distributions of previously taxed income.

if those 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.

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and our current plans do not demonstrate a need to repatriate cash to fund our U.S.

In April 2020, the Company received a loan in the aggregate principal amount of $186 thousand pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

The loan was evidenced by a promissory note, dated April 21, 2020, issued by us to the lender, which was to mature on April 20, 2022, and bore interest at a rate of 1.00% per annum, payable monthly following an initial deferral period as specified under the PPP.

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.

The full amount of the loan principal and interest was forgiven in February 2021.

During the fourth quarter of 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.

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.

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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.

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.

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(in thousands)

Net cash provided by operating activities

Net cash (used in) investing activities

Net cash provided by financing activities

Net Cash Provided by Operating Activities

Net cash provided by (used in) operating activities

Net cash provided by (used in) investing activities

Net cash provided by (used in) financing activities

Net Cash Provided By (Used In) Operating Activities

For the year ended December 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 ended December 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.

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 $237 thousand, and cash used in changes in operating assets and liabilities of $311 thousand.

Accounts receivable decreased slightly from $1,113 thousand at December 31, 2020 to $1,080 thousand at December 31, 2021 due to timing of shipments and cash collections during the fourth quarter of 2021 compared to the fourth quarter of 2020.

Accounts receivable increased from $1.080 million at December 31, 2021 to $1.178 million at December 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 decreased from $866 thousand at December 31, 2020 to $814 thousand at December 31, 2021.

Inventories increased from $814 thousand at December 31, 2021 to $2.112 million at December 31, 2022 due primarily to the inventory acquired in the acquisition of SPEC and KWJ in December 2022;

inventory balances fluctuate depending on the timing of materials purchases and product shipments.

Prepaid expenses and other current assets were generally unchanged during the year.

Accounts payable and accrued liabilities increased from $578 thousand at December 31, 2020 to $845 thousand at December 31, 2021 primarily due to the timing of payment for purchases of materials, compensation, and other services.

Net Cash Used in Investing Activities

Prepaid expenses and other current assets decreased from $391 thousand at December 31, 2021 to $321 thousand at December 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 at December 31, 2021 to $841 thousand at December 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 ended December 31, 2022 consisted of net proceeds from purchase and sales of marketable securities of $2.449 million, net cash used in the December 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 ended December 31, 2021 consisted primarily of capital expenditures related to completion of the Global Product Development and Materials Science Center in our Camarillo footprint.

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 product development.

Net Cash Provided by Financing Activities

Net Cash Provided By (Used In) Financing Activities

Net cash used in financing activities of $350 thousand for the year ended December 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 ended December 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.

Net cash provided by financing activities of $186 thousand for the year ended December 31, 2020 related to our PPP loan.

Transactions with Related Parties

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After all attempts to collect a receivable have failed, the receivable is written off against the allowance.

Assessments of Impairment of Goodwill and Long-Lived Assets

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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis