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
We operate in two principal sensor technology divisions: force/touch sensors, and gas sensors. Our Force-Sensing Resistor (FSR®) and related technologies, including membrane keypads, graphic overlays and printed electronics, are used extensively in human-machine interface (“HMI”) devices, while our gas sensors and instruments are used in environmental and air quality monitoring across a broad range of applications. We design, develop, manufacture and sell a range of technologies that incorporate our proprietary materials technology, firmware and software into a portfolio of standard products and custom solutions.
Force/Touch Sensors
HMI and Force-Sensing Technology . Our HMI and force-sensing technology is used in sensor components, subassemblies, modules and products that support effective, efficient cursor control and novel three-dimensional user inputs and is 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 38 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.
Membrane Keypads, Graphic Overlays and Printed Electronics . Through our acquisition in March 2023 of Calman Technology Limited, we offer membrane keypads, graphic overlays and printed electronics for use in fields such as medical devices and defense systems.
Gas-Sensing Technology
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.
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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 customers are some of the world’s largest companies and most recognizable brands. Our technology has been deployed in the consumer electronics, industrial automation, automotive, medical, defense and environmental monitoring markets. Our global presence in the United States, China, United Kingdom, Hong Kong, Singapore and Japan allows us to provide local sales and engineering support services to our existing and future customers. We manufacture our products in a state-of-the-art facility in Shenzhen, China, and in our advanced and proprietary facilities in Newark, California and Irvine, Scotland. 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. Having built 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, in 2020 we made the strategic decision to relocate a majority of R&D and product development efforts to Camarillo, California, where we have established a Global Product Development and Materials Science Center. Combined with the advanced and proprietary facilities in Silicon Valley and Scotland that were acquired in connection with the SPEC/KWJ and Calman transactions, we believe this will allow us to grow our business and be more closely aligned with current and future large-tier customers. We also plan to explore potential strategic relationships with companies and technology institutes that will support our growth initiatives.
We were incorporated in California in 1985. In 1996, we re-incorporated into a Delaware corporation and, in 2012, we again changed our domicile from Delaware to Nevada by completing a merger with a newly formed Nevada corporation named Interlink Electronics, Inc. Our principal executive office is located at 15707 Rockfield Boulevard, Suite 105, Irvine, California 92618 and our telephone number is (805) 484-8855. Our website address is www.interlinkelectronics.com. We make available our annual financial statements, quarterly financial statements, and other significant reports and amendments to such reports, free of charge, on our website as soon as reasonably practicable after such reports are prepared.
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, 2023. 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,
2023
2022
2023
2022
$
%
$
%
$
%
$
%
(in thousands, except percentages)
Revenue, net
$
3,075
100.0
%
$
1,851
100.0
%
$
10,402
100.0
%
$
5,882
100.0
%
Cost of revenue
1,616
52.6
%
979
52.9
%
5,295
50.9
%
2,817
47.9
%
Gross profit
1,459
47.4
%
872
47.1
%
5,107
49.1
%
3,065
52.1
%
Operating expenses:
Engineering, research and development
588
19.1
%
319
17.2
%
1,765
17.0
%
912
15.5
%
Selling, general and administrative
963
31.3
%
743
40.1
%
3,201
30.8
%
2,476
42.1
%
Total operating expenses
1,551
50.4
%
1,062
57.4
%
4,966
47.7
%
3,388
57.6
%
Income (loss) from operations
(92)
(3.0)
%
(190)
(10.3)
%
141
1.4
%
(323)
(5.5)
%
Other income (expense):
Other income (expense), net
26
0.8
%
207
11.2
%
154
1.5
%
704
12.0
%
Income (loss) before income taxes
(66)
(2.1)
%
17
0.9
%
295
2.8
%
381
6.5
%
Income tax expense
59
1.9
%
11
0.6
%
230
2.2
%
121
2.1
%
Net income (loss)
$
(125)
(4.1)
%
$
6
0.3
%
$
65
0.6
%
$
260
4.4
%
Comparison of Three Months Ended September 30, 2023 and 2022
Revenue, net by the markets we serve is as follows:
Three Months Ended September 30,
2023
2022
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Industrial
$
988
32.1
%
$
535
28.9
%
$
453
84.7
%
Medical
831
27.0
%
450
24.3
%
381
84.7
%
Consumer
56
1.8
%
537
29.0
%
(481)
(89.6)
%
Standard
1,200
39.0
%
329
17.8
%
871
264.7
%
Revenue, net
$
3,075
100.0
%
$
1,851
100.0
%
$
1,224
66.1
%
We sell our custom products into the industrial, medical and consumer 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. Products for the industrial, medical and automotive markets 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 the three months ended September 30, 2023 compared to the same quarter in 2022 in the industrial and medical markets and for our standard products, and were down in the consumer and automotive markets. The increase in revenue from our industrial market customers is due to increased demand from customers in this market and also due to sales to new industrial market customers resulting from our acquisitions of SPEC/KWJ and Calman. The increase in revenue from our medical market customers is primarily due to sales to new medical market customers resulting from our acquisitions of SPEC/KWJ and Calman. The increase in revenue for our standard products is also primarily due to the addition of new customers resulting from our acquisitions of SPEC/KWJ and Calman. The decrease in revenue from our consumer market customers is primarily due to fluctuations in the timing of receipt and
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fulfilment of orders from some of our larger consumer products 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 demand and production plans.
Three Months Ended September 30,
2023
2022
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Gross profit
$
1,459
47.4
%
$
872
47.1
%
$
587
67.3
%
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 during the three months ended September 30, 2023 was up compared to the three months ended September 30, 2022 due primarily to higher revenues (resulting from our acquisitions of SPEC/KWJ and Calman). Gross margin percentage declined slightly due to changes in product and customer mix.
Three Months Ended September 30,
2023
2022
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Engineering, research and development
$
588
19.1
%
$
319
17.2
%
$
269
84.3
%
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 support of our technology roadmap and in order to develop our standard sensor solutions, as well as custom design development aimed at addressing our customers’ unique design challenges. Engineering and R&D costs for the three months ended September 30, 2023 were up compared to the three months ended September 30, 2022 due to increased engineering employee headcount following our acquisition of SPEC/KWJ in December 2022, the inclusion in the current year period of approximately $26,000 of non-cash amortization expense on intangible assets acquired in the SPEC/KWJ acquisition, and increased prototyping and product-development activities this year as compared to the prior year.
Three Months Ended September 30,
2023
2022
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Selling, general and administrative
$
963
31.3
%
$
743
40.1
%
$
220
29.6
%
Selling, general and administrative expenses consist primarily of compensation expenses for employees in the sales, marketing, finance and executive functions, legal and other professional fees, communication expenses and facilities costs. Selling, general and administrative expenses for the three months ended September 30, 2023 were up compared to the three months ended September 30, 2022 due to increased employee headcount following our acquisitions of SPEC/KWJ in December 2022 and Calman in March 2023.
Three Months Ended September 30,
2023
2022
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Other income (expense), net
$
26
0.8
%
$
207
11.2
%
$
(181)
87.4
%
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, 2023 was comprised of $31,000 of interest income and $5,000 of foreign
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currency transaction losses, while other income (expense), net for the three months ended September 30, 2022 was comprised of $181,000 of gains on marketable securities, $24,000 of foreign currency transaction gains, and $2,000 of other non-operating income.
Three Months Ended September 30,
2023
2022
Change
% of
% of
in % of
Pre-tax
Pre-tax
Pre-tax
Amount
Income
Amount
Income
$ Change
Income
(in thousands, except percentages)
Income tax expense
$
59
89.4
%
$
11
64.7
%
$
48
24.7
%
Income tax expense 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 generally 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% tax rate) and the United Kingdom (25% tax rate), while our domestic losses do not benefit our effective tax 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, 2023 and 2022
Revenue, net by the markets we serve is as follows:
Nine Months Ended September 30,
2023
2022
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Industrial
$
3,173
30.5
%
$
2,131
36.2
%
$
1,042
48.9
%
Medical
3,871
37.2
%
1,776
30.2
%
2,095
118.0
%
Consumer
350
3.4
%
993
16.9
%
(643)
(64.8)
%
Standard
3,008
28.9
%
982
16.7
%
2,026
206.3
%
Revenue, net
$
10,402
100.0
%
$
5,882
100.0
%
$
4,520
76.8
%
Revenues were up in the nine months ended September 30, 2023 compared to the first nine months of 2022 in the industrial and medical markets, and for our standard products, and were down in the consumer and automotive markets. The increase in revenue from our industrial market customers is due to increased shipments resulting from increased demand by customers in this market, and also due to sales to new industrial market customers resulting from our acquisitions of SPEC/KWJ and Calman. The increase in revenue from our medical market customers is primarily due to a continued increase in orders from and shipments to our largest medical customer, whose purchasing volume increased following the COVID-19 pandemic, and also due to sales of our force-sensing technologies to new medical market customers and also due to sales of our new gas-sensing and membrane keypads products resulting from our acquisitions of SPEC/KWJ and Calman. The increase in revenue for our standard products is primarily due to the addition of new customers resulting from our acquisitions of SPEC/KWJ and Calman. The decrease in revenue from our consumer market customers is primarily due to fluctuations in the timing of receipt and fulfilment of orders from some of our larger consumer products customers, and cyclicality in their product designs that cause our products to be included in or excluded from their programs from time to time. 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 demand and production plans.
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Nine Months Ended September 30,
2023
2022
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Gross profit
$
5,107
49.1
%
$
3,065
52.1
%
$
2,042
66.6
%
Gross profit during the nine months ended September 30, 2023 was up compared to the nine months ended September 30, 2022 due to higher revenues (resulting in large part from our acquisitions of SPEC/KWJ and Calman), while gross margin percentage was down due to higher materials and components costs on certain orders and unfavorable changes in product and customer mix.
Nine Months Ended September 30,
2023
2022
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Engineering, research and development
$
1,765
17.0
%
$
912
15.5
%
$
853
93.5
%
Engineering and R&D costs for the nine months ended September 30, 2023 were up compared to the nine months ended September 30, 2022 due to increased engineering employee headcount following our acquisition of SPEC/KWJ in December 2022, the inclusion in the current year period of approximately $108,000 of non-cash amortization expense on intangible assets acquired in the SPEC/KWJ acquisition, and increased prototyping and product-development activities this year as compared to the prior year.
Nine Months Ended September 30,
2023
2022
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Selling, general and administrative
$
3,201
30.8
%
$
2,476
42.1
%
$
725
29.3
%
Selling, general and administrative expenses for the nine months ended September 30, 2023 were up compared to the nine months ended September 30, 2022 due to increased employee headcount following our acquisitions of SPEC/KWJ in December 2022 and Calman in March 2023, and increased legal and other professional fees.
Nine Months Ended September 30,
2023
2022
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Other income (expense), net
$
154
1.5
%
$
704
12.0
%
$
(550)
(78.1)
%
Other income (expense), net for the nine months ended September 30, 2023 was comprised of $129,000 of interest income, $19,000 of foreign currency transaction gains, and $6,000 of other non-operating income, while other income (expense), net for the nine months ended September 30, 2022 was comprised of $562,000 of gains on marketable securities, $139,000 of foreign currency transaction gains, and $3,000 of other non-operating income.
Nine Months Ended September 30,
2023
2022
Change
% of
% of
in % of
Pre-tax
Pre-tax
Pre-tax
Amount
Income
Amount
Income
$ Change
Income
(in thousands, except percentages)
Income tax expense
$
230
78.0
%
$
121
31.8
%
$
109
46.2
%
Income tax expense 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.
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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 September 30, 2023, we had cash and cash equivalents of $5.2 million, working capital of $8.0 million and no indebtedness. Cash and cash equivalents consist of cash and money market funds. Of our $5.2 million of cash, $1.6 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 (the “Preferred Stock”) that have an aggregate liquidation preference of $5.0 million. We pay, when, as and if declared by our board of directors, monthly cumulative cash dividends on the Preferred Stock at an annual rate of 8.0%; this 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 Preferred Stock are payable monthly in arrears on the 15th day of each calendar month. Our board of directors has declared cash dividends on the Preferred Stock each month since the Preferred Stock was issued in October 2021, and we expect that the board will continue to declare, and we will continue to pay, cash dividends on the Preferred Stock each month while the Preferred Stock is outstanding, subject to applicable limitations 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,
2023
2022
(in thousands)
Net cash provided by (used in) operating activities
$
155
$
(385)
Net cash (used in) investing activities
(4,322)
(6,021)
Net cash (used in) financing activities
(650)
(300)
Net Cash Provided By (Used In) Operating Activities
For the nine months ended September 30, 2023, the $155,000 of cash provided by operating activities was attributable to net income of $65,000, adjusted for non-cash charges of $292,000 and offset by cash used in changes in operating assets and liabilities of $202,000.
Accounts receivable increased from $1.2 million at December 31, 2022 to $1.6 million at September 30, 2023 due to higher shipments during the third quarter of 2023 compared to the third quarter of 2022, and the addition of accounts receivable from our March 2023 acquisition of Calman. Many of our customers pay promptly and accounts receivable are generally related to the most recent shipments. Inventories increased from $2.1 million at December 31, 2022 to $2.9 million at September 30, 2023. Inventory balances fluctuate depending on the timing of materials purchases and product shipments, and also increased due to our March 2023 acquisition of Calman. Prepaid expenses and other current assets decreased from $321,000 at December 31, 2022 to $226,000 at September 30, 2023 due primarily to the receipt of the amount collected from the SPEC/KWJ acquisition escrow resulting from the reduction in the purchase price upon finalization of their closing-date working capital. Accounts payable and accrued liabilities increased from $841,000 at December 31, 2022 to $1.4 million at September 30, 2023, primarily due to purchase consideration that remains payable to the prior owners of Calman, offset by other factors such as the timing of payment for purchases of materials, compensation accruals, and other outside services, and the addition of Calman’s accounts payable and accrued liabilities to our consolidated balances.
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For the nine months ended September 30, 2022, the $385,000 of cash used in operating activities was attributable to net income of $260,000, adjusted for non-cash charges of $201,000 and unrealized gains on marketable securities of $562,000 and cash used in changes in operating assets and liabilities of $284,000.
Net Cash Used In Investing Activities
Net cash used in investing activities of $4.3 million for the nine months ended September 30, 2023 consisted of $4.3 million used to acquire the equity interests of Calman (which is net of $1.6 million of cash acquired), and $44,000 used for purchases of property, plant, and equipment. 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 $9,000 of property, plant, and equipment.
Net Cash Used In Financing Activities
Net cash used in financing activities of $650,000 for the nine months ended September 30, 2023 consisted of $350,000 used for repurchases of 32,120 shares of common stock and $300,000 used for payments of dividends on our Preferred Stock. Net cash used in financing activities of $300,000 for the nine months ended September 30, 2022 was for payments of dividends on our Preferred Stock.
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.