Interlink Electronics(LINK) - 2022 Q4 - Annual Report

Special Note Regarding Forward-Looking Statements This section cautions that forward-looking statements are subject to risks, and actual results may differ materially - Forward-looking statements are identified by words such as "believe," "may," "will," "potentially," "estimate," "continue," "anticipate," "intend," "could," "would," "project," "plan," and "expect"[5] - Actual results, performance, or achievements may differ materially from forward-looking statements due to known and unknown risks, uncertainties, and other important factors[5] - Key risks include the impact of the COVID-19 pandemic, ability to fund operations, future financial results, capital resources, hiring plans, business strategy, market penetration, competitive advantages, intellectual property, customer relationships, employee retention, competition, future acquisitions, and compliance with legal and export regulations[6] PART I Business Overview Interlink operates in force-sensing HMI and gas-sensing technologies, providing proprietary solutions for diverse markets, expanding into gas-sensing via a 2022 acquisition - Interlink operates in two principal divisions: force-sensing resistors/Human Machine Interface (HMI) technology and gas-sensing technology[12] - The company designs, develops, manufactures, and sells proprietary force-sensing technologies, including FSR® technology, for HMI solutions in consumer electronics, automotive, industrial, and medical markets[13][14][15] - Interlink entered the gas-sensing market in December 2022 through the acquisition of SPEC Sensors, LLC and KWJ Engineering, Inc. for approximately $2.2 million, offering electrochemical gas-sensing products[18] - The market for gas sensors is growing rapidly, driven by demand in various industries, green initiatives, government mandates, and the availability of smaller, lower-cost, connected sensors[19] Company Profile and Operations Interlink Electronics, Inc. specializes in force-sensing and gas-sensing technologies, serving a worldwide customer base from its California headquarters and global facilities - Interlink operates in force-sensing resistors/HMI technology and gas-sensing technology divisions[12] - Global operations include headquarters in Irvine, CA; development in Camarillo, CA; SPEC-KWJ facility in Newark, CA; manufacturing in Shenzhen, China; and an R&D center in Singapore[20] - The company was incorporated in California in 1985, then Delaware in 1996, and finally Nevada in 2012[21] Industry Landscape and Market Trends The HMI industry has shifted from industrial to consumer electronics, driving demand for touch-sensitive designs, while the gas-sensing market expands into IoT and health monitoring - HMI technologies, initially industrial, became ubiquitous in consumer electronics with touch-sensitive smartphones, driving demand for sleek, touch-sensing designs across various devices[25] - Printed force sensors account for approximately 30% of the printed sensor market, with the total market for printed, flexible, and organic electronics projected to grow from $41.2 billion in 2020 to $74 billion in 2030[26] - The gas-detection industry is expanding beyond traditional safety applications to new areas like breath analysis, food transport, wearable monitors, and IoT, driven by demand for smaller, lower-cost, high-performance sensors[30] Strategic Objectives and Growth Initiatives Interlink aims to be a global leader in multi-sensing HMI and gas-sensing solutions by expanding market presence, strengthening customer relationships, pursuing a multi-technology roadmap, and evaluating acquisitions - Primary objective is to be the global leader in multi-sensing HMI and gas-sensing solutions for automotive, consumer electronics, medical, industrial automation, and environmental monitoring markets[32] - Key strategic initiatives include expanding presence in existing and new markets, strengthening relationships with current customers, pursuing a multi-technology roadmap (resistive, piezo, capacitive, haptics), and evaluating inorganic growth opportunities through acquisitions[36] Technology Platforms and Product Offerings Interlink's FSR® technology provides thin, durable, low-power force-sensing solutions, while SPEC Sensors offers miniaturized, low-power electrochemical gas sensors for various applications - Interlink's patented FSR® sensor technology is thin, durable, low-power, and force-sensitive, offering advantages over capacitive sensors in harsh environments and for continuous variable control[35][38] - The company offers a comprehensive portfolio of standard HMI solutions, including single-zone FSR® sensors, force-sensing linear potentiometers (FSLP), integrated mouse modules, and is adding piezoelectric sensors[39][41] - Gas-sensing products, primarily from SPEC Sensors, focus on smaller, low-power, low-cost electrochemical sensors for applications like carbon monoxide and ozone detection, and air quality monitoring[40][43][44] - Specific gas-sensing products include Eco Sensors™ branded ozone monitors, in-line carbon monoxide monitors, and a line of screen-printed electrochemical gas sensors for various gases[48] Intellectual Property Protection Interlink protects its intellectual property through patents, copyrights, trade secrets, trademarks, and non-disclosure agreements, with 24 patents held and 16 pending as of December 31, 2022 - Intellectual property is protected through patents, copyrights, trade secrets, trademarks, and non-disclosure agreements[45] - As of December 31, 2022, the company held 24 patents and had 16 pending, categorized into sensors (8 patents, expiring 2024-2032), sensing systems (5 patents, expiring 2029-2038), and human interface devices (11 patents, expiring 2024-2036)[50] - Proprietary screen-printing techniques for FSR® sensors, conducted in-house, are considered a significant trade secret due to the considerable domain knowledge and expertise required[47][49] Competitive Landscape Interlink operates in highly competitive force-sensing/HMI and gas-sensing markets, differentiating itself with disruptive force-sensing technology and smaller, lower-cost, customizable gas sensors - Markets for force-sensing/HMI and gas-sensing are highly competitive and subject to rapid technological advancement and significant price competition[51][55] - In force-sensing/HMI, Interlink offers disruptive technology replacing outdated switches and complements commoditized capacitive sensing with hybrid solutions for unique challenges[53] - In gas-sensing, the company competes with smaller, thinner, lower-cost, and customizable sensors, combined with custom electronics and calibration, maintaining an advantage in ozone sensing and in-line CO monitors[54] Sales Channels and Cycle Interlink sells globally through direct sales, representatives, and distributors, with a long sales cycle for custom solutions and varying product lifespans across markets - Products are sold through direct sales employees, outside sales representatives, and distributors (e.g., Digi-Key Electronics, Grainger, Cole Parmer)[56] - The sales cycle for custom solutions can range from months to several years, involving design opportunity, design win (often as a sole-source supplier), and mass production phases[57][58][63] - Product lifespans vary: consumer electronics (6 months-5 years), industrial/automotive (3-10 years), and medical (over 20 years)[58] Customer Base and Revenue Concentration Interlink serves a diverse global customer base, with international sales accounting for 55% of revenue in 2022, but experiences high revenue concentration from a few key customers - Customers include leading electronics companies, luxury and mid-market car companies, medical and industrial equipment firms, and IoT market entrants[59] - International sales accounted for 55% of net revenues in 2022 (down from 71% in 2021), with Japan (24%), China (15%), and Taiwan (6%) being significant contributors[61] Customer Revenue Concentration (in thousands) | Customer | % of Net Revenues (2022) | % of Net Revenues (2021) | | :--------- | :----------------------- | :----------------------- | | Customer A | 24.9% | 14.7% | | Customer B | 17.8% | 9.4% | | Customer C | 9.3% | 14.7% | Manufacturing and Supply Chain Interlink operates ISO-certified manufacturing in China and California, relying on single-source suppliers for critical materials, while ensuring products comply with RoHS and REACH standards - Manufacturing facilities are located in Shenzhen, China (ISO 9001, 14001, 13485 certified) and Newark, California (SPEC-KWJ facility)[64][20] - Materials are purchased from outside suppliers, with certain components sourced from single-suppliers (e.g., Henkel, DuPont, Solvay, SABIC, 3M), which increases supply risk[65]