Interlink Electronics(LINK) - 2022 Q1 - Quarterly Report

PART I -- FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Presents Interlink Electronics' unaudited condensed consolidated financial statements and detailed notes on accounting policies and components Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | ASSETS | March 31, 2022 | December 31, 2021 | | :-------------------- | :------------- | :---------------- | | Cash and cash equivalents | $8,130 | $10,777 | | Marketable securities | $2,335 | — | | Accounts receivable, net | $1,300 | $1,080 | | Inventories | $799 | $814 | | Total current assets | $12,957 | $13,067 | | Total assets | $13,532 | $13,779 | | LIABILITIES AND STOCKHOLDERS' EQUITY | March 31, 2022 | December 31, 2021 | | Accounts payable | $333 | $338 | | Accrued liabilities | $251 | $507 | | Total current liabilities | $764 | $1,037 | | Total liabilities | $778 | $1,074 | | Total stockholders' equity | $12,754 | $12,705 | | Total liabilities and stockholders' equity | $13,532 | $13,779 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands, except per share data) | | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Revenue, net | $1,991 | $1,568 | | Cost of revenue | $750 | $694 | | Gross profit | $1,241 | $874 | | Total operating expenses | $1,223 | $934 | | Income (loss) from operations | $18 | $(60) | | Other income (expense), net | $155 | $10 | | Income (loss) before income taxes | $173 | $(50) | | Income tax expense (benefit) | $31 | $(7) | | Net income (loss) | $142 | $(43) | | Net income (loss) applicable to common stockholders | $42 | $(43) | | Earnings (loss) per common share – basic and diluted | $0.01 | $(0.01) | Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) | | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) | $142 | $(43) | | Foreign currency translation adjustments | $7 | $(12) | | Comprehensive income (loss) | $149 | $(55) | Condensed Consolidated Statements of Stockholders' Equity Condensed Consolidated Statements of Stockholders' Equity (in thousands) | | Preferred Stock Amount | Common Stock Amount | Additional Paid-in-Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders' Equity | | :------------- | :--------------------- | :------------------ | :------------------------- | :-------------------------------------------- | :------------------ | :------------------------- | | Balance at Dec 31, 2021 | $2 | $7 | $62,552 | $96 | $(49,952) | $12,705 | | Net income | — | — | — | — | $142 | $142 | | Preferred stock dividends | — | — | — | — | $(100) | $(100) | | Foreign currency translation adjustment | — | — | — | $7 | — | $7 | | Balance at Mar 31, 2022 | $2 | $7 | $62,552 | $103 | $(49,910) | $12,754 | | Balance at Dec 31, 2020 | — | $7 | $57,966 | $37 | $(49,170) | $8,840 | | Net (loss) | — | — | — | — | $(43) | $(43) | | Foreign currency translation adjustment | — | — | — | $(12) | — | $(12) | | Stock-based compensation expense | — | — | $5 | — | — | $5 | | Balance at Mar 31, 2021 | — | $7 | $57,971 | $25 | $(49,213) | $8,790 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(367) | $(1) | | Net cash used in investing activities | $(2,185) | $(12) | | Net cash used in financing activities | $(100) | — | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | $5 | $(9) | | Net decrease in cash and cash equivalents | $(2,647) | $(22) | | Cash, cash equivalents and restricted cash, beginning of period | $10,782 | $6,125 | | Cash, cash equivalents and restricted cash, end of period | $8,135 | $6,103 | Notes to Condensed Consolidated Financial Statements Note 1 – The Company and its Significant Accounting Policies Outlines Interlink's business, global operations, fiscal year, and significant accounting policies, including revenue, R&D, and leases - Interlink Electronics, Inc. designs, develops, manufactures, and sells force-sensing technologies, including sensor components, subassemblies, modules, and products for cursor control and 3D user inputs. Its HMI technology platforms are used in consumer electronics, automotive, industrial, and medical markets[21] - The company operates globally with corporate headquarters in Irvine, California, a Global Product Development and Materials Science Center in Camarillo, California, a manufacturing facility in Shenzhen, China, an engineering R&D center in Singapore, and distribution in Hong Kong. A new R&D center in the UK is expected in 2022[22] - Revenue is recognized when customers obtain control of promised goods or services, typically upon shipment when title and risk of loss transfer. The company establishes reserves for potential customer returns or warranty repairs based on historical experience[30][31][32] - Engineering, research and development costs are expensed as incurred, primarily consisting of compensation for R&D employees, depreciation, amortization, and overhead[35] - As of March 31, 2022, there were no stock-based compensation awards outstanding[39] - The company operates in one reportable segment: the manufacture and sale of force sensing technology solutions[46] - Leases are accounted for under ASC 842, with arrangements classified as operating or financing leases and recorded on the balance sheet as right-of-use assets and lease liabilities. Short-term leases (12 months or less) are excluded[49][50] - Future results are subject to risks including rapid industry change, product performance, customer loss, international business impacts (e.g., foreign currency, political instability), supply shortages, manufacturing disruptions, environmental directives, intellectual property, talent retention, and capital raising[51] - Public health threats, such as COVID-19, could adversely affect business operations, including potential shutdowns or disruptions to suppliers, distributors, and resellers[52] Note 2 – Details of Certain Financial Statement Components This note provides a detailed breakdown of the company's inventories, property, plant and equipment, and intangible assets, including their carrying values and associated depreciation and amortization expenses Inventories (in thousands) | Inventories | March 31, 2022 | December 31, 2021 | | :------------------------ | :------------- | :---------------- | | Raw materials | $459 | $447 | | Work-in-process | $201 | $209 | | Finished goods | $139 | $159 | | Total inventories | $799 | $814 | Property, plant and equipment, net (in thousands) | Property, plant and equipment, net | March 31, 2022 | December 31, 2021 | | :------------------------------------------------ | :------------- | :---------------- | | Furniture, machinery and equipment | $1,702 | $1,696 | | Leasehold improvements | $445 | $444 | | Less: accumulated depreciation | $(1,857) | $(1,802) | | Total property, plant and equipment, net | $290 | $338 | Intangible assets, net (in thousands) | Intangible assets, net | March 31, 2022 | December 31, 2021 | | :------------------------------------ | :------------- | :---------------- | | Patents and trademarks | $658 | $658 | | Less: accumulated amortization | $(542) | $(527) | | Total intangible assets, net | $116 | $131 | | Future amortization expense on existing intangible assets (in thousands) | | Years ending December 31, 2022 (remainder of year) | $40 | | Years ending December 31, 2023 | $42 | | Years ending December 31, 2024 | $27 | | Years ending December 31, 2025 | $7 | | Total | $116 | Accrued Liabilities (in thousands) | Accrued Liabilities | March 31, 2022 | December 31, 2021 | | :--------------------------------- | :------------- | :---------------- | | Accrued wages and benefits | $113 | $402 | | Accrued vacation | $96 | $82 | | Other accrued liabilities | $24 | $23 | | Total accrued liabilities | $251 | $507 | Note 3 – Marketable Securities This note details the company's marketable securities, which are equity securities classified as available-for-sale and carried at fair value. It also reports unrealized gains and recent purchases - Marketable securities consist of equity securities classified as available-for-sale (AFS), carried at fair value. Unrealized gains and losses are reported in earnings within 'other income (expense), net'[60] - During the three months ended March 31, 2022, the company purchased $2.179 million of marketable equity securities[60] - As of March 31, 2022, marketable equity securities had a fair value of $2.335 million (historical cost $2.179 million), with gross unrealized gains of $156 thousand[60] Note 4 – Earnings Per Share This note provides the computation of basic and diluted earnings per share for the three months ended March 31, 2022, and 2021, detailing the net income applicable to common stockholders and weighted average shares outstanding Earnings Per Share (in thousands, except per share data) | | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Net income (loss) | $142 | $(43) | | Less: Preferred stock dividends | $(100) | — | | Net income (loss) applicable to common stockholders | $42 | $(43) | | Weighted average common shares outstanding – basic | 6,602 | 6,601 | | Dilutive potential common shares from stock options, restricted stock units, and convertible preferred stock | — | — | | Weighted average common shares outstanding – diluted | 6,602 | 6,601 | | Earnings (loss) per common share, basic | $0.01 | $(0.01) | | Earnings (loss) per common share, diluted | $0.01 | $(0.01) | | Shares subject to anti-dilutive Series A Convertible Preferred Stock excluded from calculation | 400 | 400 | Note 5 – Significant Customers, Concentrations of Credit Risk, and Geographic Information This note details revenue concentration from significant customers, geographic distribution of net revenues and long-lived assets, and concentrations of credit risk in accounts receivable Net revenues from customers equal to or greater than 10% of total net revenues | | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :----------------------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Customer A | 35 % | * % | | Customer B | * % | 19 % | | Customer C | 15 % | * % | | Customer D | * % | 17 % | | Customer E | 11 % | * % | Net revenues by geographic area (in thousands) | Net revenues by geographic area | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :--------------------------------------------- | :-------------------------------- | :-------------------------------- | | United States | $1,001 | $270 | | Asia and Middle East | $811 | $1,112 | | Europe and other | $179 | $186 | | Revenue, net | $1,991 | $1,568 | - At March 31, 2022, one customer accounted for 55% of total accounts receivable. The allowance for doubtful accounts was $0 at both March 31, 2022, and December 31, 2021[64] Long-lived assets (in thousands) | Long-lived assets | March 31, 2022 | December 31, 2021 | | :------------------------------- | :------------- | :---------------- | | United States | $461 | $536 | | Asia | $114 | $176 | | Total long-lived assets | $575 | $712 | Note 6 – Related Party Transactions This note details transactions with related parties, Qualstar Corporation and BKF Capital Group, both controlled by Interlink's CEO. These transactions include facilities agreements, consulting services, and expense reimbursements - Interlink has facilities and consulting agreements with Qualstar Corporation, a related party where Steven N. Bronson (Interlink's CEO) is also CEO and a director. Transactions include splitting rent/lease costs and providing operational, sales, marketing, general, and administrative services[66][67] Qualstar Transactions (in thousands) | Qualstar Transactions | Due from Qualstar (2022) | Due to Qualstar (2022) | Due from Qualstar (2021) | Due to Qualstar (2021) | | :----------------------------------- | :----------------------- | :--------------------- | :----------------------- | :--------------------- | | Balance at January 1, | $85 | $8 | $52 | $34 | | Billed (or accrued) to Qualstar by Interlink | $185 | — | $208 | — | | Paid by Qualstar to Interlink | $(251) | — | $(145) | — | | Billed (or accrued) to Interlink by Qualstar | — | $22 | — | $24 | | Paid by Interlink to Qualstar | — | $(22) | — | $(57) | | Balance at March 31, | $19 | $8 | $115 | $1 | - Interlink also has facilities and consulting agreements with BKF Capital Group, Inc., another related party controlled by Steven N. Bronson. These agreements involve sharing office facilities and providing operational and general and administrative services[68] BKF Capital Transactions (in thousands) | BKF Capital Transactions | Due from BKF Capital (2022) | Due to BKF Capital (2022) | Due from BKF Capital (2021) | Due to BKF Capital (2021) | | :-------------------------------------- | :-------------------------- | :------------------------ | :-------------------------- | :------------------------ | | Balance at January 1, | $12 | — | — | — | | Billed (or accrued) to BKF Capital by Interlink | $39 | — | $2 | — | | Paid by BKF Capital to Interlink | $(48) | — | $(2) | — | | Billed (or accrued) to Interlink by BKF Capital | — | $30 | — | — | | Paid by Interlink to BKF Capital | — | $(30) | — | — | | Balance at March 31, | $3 | — | — | — | Note 7 – Income Taxes This note discusses the company's income tax expense, the impact of domestic and foreign pre-tax earnings, limitations on Net Operating Losses (NOLs) due to an ownership change, the valuation allowance against deferred tax assets, and the treatment of Global Intangible Low-Taxed Income (GILTI) - Income tax expense as a percentage of income before income taxes was 17.9% for Q1 2022, compared to a benefit of 14.0% for Q1 2021, primarily influenced by the mix of domestic and foreign pre-tax earnings and NOL utilization[69] - All remaining federal and state NOLs are subject to annual limitations due to an IRC Section 382 ownership change in February 2010[70] - A valuation allowance was deemed necessary against federal and state deferred tax assets at December 31, 2021, primarily due to cumulative domestic losses over the preceding three-year period[71] - Of the $8.1 million cash balances at March 31, 2022, $2.4 million was held by foreign subsidiaries, with the intent to permanently reinvest these funds outside the U.S.[73] Note 8 – Commitments and Contingencies This note details the company's commitments and contingencies, including operating lease agreements for various facilities globally, the absence of material litigation, product warranty provisions, intellectual property indemnities, and director/officer indemnification agreements - The company leases facilities under non-cancellable operating leases expiring through fiscal 2023, with current and long-term lease liabilities of $114 thousand and $14 thousand, respectively, and right-of-use assets of $119 thousand as of March 31, 2022[74][82] Future minimum lease payments (in thousands) | | | | :------------------------------------------ | :--- | | Years ending December 31, 2022 (remainder of year) | $95 | | Years ending December 31, 2023 | $38 | | Total undiscounted future non-cancelable minimum lease payments | $133 | | Less: imputed interest | $(5) | | Present value of lease liabilities | $128 | - Operating lease costs incurred were approximately $61 thousand for the three months ended March 31, 2022, compared to $82 thousand for the same period in 2021[83][84] - As of March 31, 2022, the company was not party to any material legal proceedings[85] - The company generally warrants its products against defects for one year from shipment, with warranty reserves established at the time of sale. Historically, warranty returns have not been material[86] - Interlink indemnifies certain customers and contract manufacturers against third-party intellectual property infringement claims, and has indemnification agreements with its directors and executive officers, which are not limited in amount or duration[87][88] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's analysis of Interlink's financial condition and results, covering business, policies, performance, liquidity, and cash flows Overview Interlink Electronics, Inc. specializes in designing, developing, manufacturing, and selling force-sensing technologies, including its proprietary FSR® technology, for Human Machine Interface (HMI) solutions across various markets. The company is expanding its product portfolio to include hybrid solutions and IoT applications, supported by a global operational footprint - Interlink designs, develops, manufactures, and sells force-sensing technologies, incorporating proprietary materials, firmware, and software into standard sensor-based products and custom solutions[95] - The company's patented Force-Sensing Resistor (FSR®) technology has been commercialized for over 35 years, enabling rugged and reliable HMI solutions in consumer electronics, automotive, industrial, and medical markets[96][97] - Interlink is expanding its standard product portfolio and developing new technology platforms, including hybrid solutions that combine force sensing with capacitive technologies to address performance issues and capture new opportunities in the rapidly growing Internet-of-Things (IoT) market[99] - Global operations include headquarters in Irvine, CA, a Global Product Development and Materials Science Center in Camarillo, CA, a manufacturing facility in Shenzhen, China, an R&D center in Singapore, and an expected R&D center in the UK in 2022[100] Critical Accounting Policies and Estimates Management confirms that there have been no material changes to the critical accounting policies and estimates previously disclosed in the Annual Report on Form 10-K - There have been no changes to critical accounting policies and estimates described in the Annual Report on Form 10-K that have had a material impact on the condensed consolidated financial statements[102] Recently Issued and Adopted Accounting Pronouncements The company has reviewed all recently issued accounting pronouncements and concluded that they are either not applicable or not expected to have a material impact on its financial statements - All recently issued accounting pronouncements have been reviewed and are concluded to be not applicable or not expected to be material to the financial statements[103] Results of Operations Interlink reported a significant increase in net revenue and a return to net income for the three months ended March 31, 2022, compared to the prior year. This improvement was driven by strong growth in the medical and standard product markets, favorable product and customer mix, and production efficiencies, despite a decline in the consumer market Results of Operations (in thousands, except percentages) | | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Revenue, net | $1,991 (100.0%) | $1,568 (100.0%) | | Cost of revenue | $750 (37.7%) | $694 (44.3%) | | Gross profit | $1,241 (62.3%) | $874 (55.7%) | | Total operating expenses | $1,223 (61.4%) | $934 (59.6%) | | Income (loss) from operations | $18 (0.9%) | $(60) (-3.8%) | | Other income (expense), net | $155 (7.8%) | $10 (0.6%) | | Income (loss) before income taxes | $173 (8.7%) | $(50) (-3.2%) | | Income tax expense (benefit) | $31 (1.6%) | $(7) (-0.4%) | | Net income (loss) | $142 (7.1%) | $(43) (-2.7%) | Revenue, net by market (in thousands, except percentages) | | Three months ended March 31, 2022 | Three months ended March 31, 2021 | $ Change | % Change | | :-------------------------------------------------------- | :-------------------------------- | :-------------------------------- | :---------------- | :---------------- | | Industrial | $574 (28.8%) | $538 (34.3%) | $36 | 6.7 % | | Medical | $703 (35.3%) | $43 (2.7%) | $660 | 1,534.9 % | | Consumer | — (—%) | $449 (28.6%) | $(449) | (100.0)% | | Automotive | $3 (0.2%) | — (—%) | $3 | 100.0 % | | Standard | $711 (35.7%) | $538 (34.3%) | $173 | 32.2 % | | Revenue, net | $1,991 (100.0%) | $1,568 (100.0%) | $423 | 27.0 % | - Gross profit increased by $367 thousand (42.0%) to $1.241 million, with gross margin improving from 55.7% to 62.3% due to increased revenue, favorable product/customer mix, and production efficiencies[109] - Engineering, research and development expenses increased by $46 thousand (21.2%) to $263 thousand, driven by increased engineering headcount and product-development activities[110] - Selling, general and administrative expenses rose by $243 thousand (33.9%) to $960 thousand, primarily due to increased professional services costs and the absence of the $186 thousand PPP loan forgiveness benefit recognized in the prior year[111] Liquidity and Capital Resources Interlink maintains a strong liquidity position with $8.1 million in cash and cash equivalents and $12.2 million in working capital as of March 31, 2022, with no indebtedness. The company pays monthly dividends on its Series A Convertible Preferred Stock and believes existing cash will be sufficient for current operations, while also outlining potential future capital raising options - As of March 31, 2022, the company had cash and cash equivalents of $8.1 million, working capital of $12.2 million, and no indebtedness[115] - Of the $8.1 million cash balance, $2.4 million was held by foreign subsidiaries, with the intent to permanently reinvest these funds outside the U.S.[115] - The company has 200,000 shares of 8.0% Series A Convertible Preferred Stock ($5.0 million liquidation preference) and commenced paying monthly cumulative cash dividends in November 2021[116] - Management believes existing cash and cash equivalents will be sufficient for current operations, but may seek additional capital through equity, equity-linked, or debt financing if circumstances change[117] Cash Flow Analysis For the three months ended March 31, 2022, Interlink experienced a net decrease in cash primarily due to significant cash used in investing activities for marketable securities purchases and cash used in operating activities, partially offset by net income Cash Flow Analysis (in thousands) | | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(367) | $(1) | | Net cash used in investing activities | $(2,185) | $(12) | | Net cash used in financing activities | $(100) | — | - Net cash used in operating activities was $367 thousand for Q1 2022, primarily due to cash used in changes in operating assets and liabilities, despite net income[120] - Net cash used in investing activities was $2.185 million for Q1 2022, mainly driven by $2.179 million in purchases of marketable securities[123] - Net cash used in financing activities was $100 thousand for Q1 2022, consisting of dividend payments on Series A Convertible Preferred Stock[124] Off-Balance Sheet Arrangements The company states that it does not have any off-balance sheet arrangements - The company does not have any off-balance sheet arrangements[125] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section states that there are no quantitative and qualitative disclosures about market risk applicable to the company for the reporting period - This item is not applicable[126] Item 4. Controls and Procedures Details evaluation of disclosure and internal controls over financial reporting, concluding effectiveness with no material changes Evaluation of Disclosure Controls and Procedures Management, with the participation of the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of March 31, 2022, concluding they were effective at a reasonable assurance level - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were designed at a reasonable assurance level and were effective as of March 31, 2022[128][130] Changes in Internal Controls over Financial Reporting There were no changes in the company's internal control over financial reporting during the period ended March 31, 2022, that materially affected, or are reasonably likely to materially affect, these controls - There was no change in internal control over financial reporting during the period ended March 31, 2022, that materially affected, or is reasonable likely to materially affect, internal control over financial reporting[131] Limitations on Effectiveness of Controls and Procedures The company acknowledges that its internal control over financial reporting, despite being well-designed and operated, can only provide reasonable, not absolute, assurance due to inherent limitations such as human diligence, judgment lapses, and potential breakdowns - Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that objectives will be met[133] - Internal control over financial reporting is subject to lapses in judgment and breakdowns resulting from human failures, and controls may become inadequate if conditions change[133] PART II -- OTHER INFORMATION Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - There have been no material changes to the risk factors during the three months ended March 31, 2022, as previously set forth in Item 1A of the Annual Report on Form 10-K[136] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including corporate governance documents, certifications from executive officers, and XBRL-related documents - Exhibits include Articles of Incorporation, Certificate of Designations of Series A Preferred Stock, Bylaws, and amendments[137] - Certifications of Principal Executive Officer and Principal Financial Officer pursuant to the Sarbanes-Oxley Act of 2002 are included[137] - XBRL Instance Document and Taxonomy Extension Documents (Schema, Calculation, Definition, Label, Presentation Linkbase) are filed[137] Signatures The report was duly signed on behalf of Interlink Electronics, Inc. by Ryan J. Hoffman, Chief Financial Officer, on May 5, 2022 - The report was signed by Ryan J. Hoffman, Chief Financial Officer (Principal Financial and Accounting Officer), on May 5, 2022[140]