Interlink Electronics(LINK) - 2023 Q2 - Quarterly Report

PART I -- FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, acquisitions, and other financial components Condensed Consolidated Balance Sheets The balance sheet shows a decrease in cash and cash equivalents, an increase in accounts receivable, inventories, and goodwill, and a significant increase in total liabilities from December 31, 2022, to June 30, 2023 | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | | Cash and cash equivalents | $5,106 | $10,091 | | Accounts receivable, net | $2,147 | $1,178 | | Inventories | $2,940 | $2,112 | | Goodwill | $4,545 | $650 | | Total assets | $16,079 | $14,983 | | Total liabilities | $2,223 | $1,135 | | Total stockholders' equity | $13,856 | $13,848 | Condensed Consolidated Statements of Operations For the three months ended June 30, 2023, the company reported significant revenue growth and a return to operating income, leading to a substantial increase in net income, while the six-month period saw revenue growth but a decrease in net income Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue, net | $4,049 | $2,040 | $7,327 | $4,031 | | Gross profit | $2,061 | $952 | $3,648 | $2,193 | | Income (loss) from operations | $406 | $(151) | $233 | $(133) | | Net income | $381 | $112 | $190 | $254 | | Earnings (loss) per common share – basic and diluted | $0.04 | $0.00 | $0.00 | $0.01 | Condensed Consolidated Statements of Comprehensive Income (Loss) Comprehensive income for the three and six months ended June 30, 2023, significantly improved compared to the prior year, primarily driven by positive foreign currency translation adjustments Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $381 | $112 | $190 | $254 | | Foreign currency translation adjustments | $13 | $(156) | $195 | $(149) | | Comprehensive income (loss) | $394 | $(44) | $385 | $105 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity remained relatively stable, with net income and positive foreign currency translation adjustments largely offsetting preferred stock dividends and common stock repurchases during the six months ended June 30, 2023 - Total stockholders' equity at June 30, 2023, was $13,856 thousand, a slight increase from $13,848 thousand at December 31, 2022[16] - For the six months ended June 30, 2023, the company recorded $195 thousand in foreign currency translation adjustments, a positive change compared to a $(149) thousand loss in the same period of 2022[16][17] - Common stock repurchases amounted to $(177) thousand for the six months ended June 30, 2023[16] Condensed Consolidated Statements of Cash Flows Cash flows from operating activities turned negative for the six months ended June 30, 2023, while investing activities continued to be a significant use of cash, primarily due to the acquisition of Calman Technology Limited, and financing activities also used more cash due to common stock repurchases Condensed Consolidated Statements of Cash Flows (in thousands) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by (used in) operating activities | $(245) | $28 | | Net cash (used in) investing activities | $(4,310) | $(6,036) | | Net cash (used in) financing activities | $(377) | $(200) | | Net (decrease) in cash, cash equivalents and restricted cash | $(4,985) | $(6,375) | | Cash, cash equivalents and restricted cash, end of period | $5,106 | $4,407 | - Investing activities in H1 2023 included a $4,278 thousand outflow for the acquisition of Calman Technology Limited, net of cash acquired, compared to $6,027 thousand for purchases of marketable securities in H1 2022[19] - Financing activities in H1 2023 included $177 thousand for repurchases of common stock, in addition to $200 thousand for preferred stock dividends[19] Notes to Condensed Consolidated Financial Statements These notes provide comprehensive details on the company's business, significant accounting policies, recent acquisitions, marketable securities, earnings per share calculations, changes in stockholders' equity, customer and geographic concentrations, related party transactions, income tax impacts, and various commitments and contingencies Note 1 – The Company and its Significant Accounting Policies Interlink Electronics operates in force/touch and gas sensor technology divisions, serving global markets with proprietary solutions, with financial statements prepared under U.S. GAAP, and revenue recognized upon customer control of goods, while also highlighting risks related to industry changes, international operations, and supply chain disruptions - Interlink Electronics, Inc. operates in two principal sensor technology divisions: force/touch sensors (Force-Sensing Resistor (FSR®), membrane keypads, graphic overlays, printed electronics for HMI) and gas sensors (environmental and air quality monitoring, carbon monoxide, ozone detection)[21][22] - The company serves a worldwide customer base from locations in California, China, Scotland, Singapore, Hong Kong, and Japan[23] - Revenue is recognized in accordance with ASC 606 when the customer obtains control of promised goods or services, typically upon shipment and transfer of title and risk of loss[28][29] - As of June 30, 2023, there were no stock-based compensation awards outstanding[36] - The company operates in one reportable segment: the manufacture and sale of force/touch sensors and gas sensors[44] - Future results are subject to risks including rapid industry change, product performance, customer loss, international business impacts (foreign currency, trade policies, political instability), supply chain shortages, and intellectual property enforcement[49][50] Note 2 – Details of Certain Financial Statement Components This note provides a detailed breakdown of inventories, property, plant and equipment, intangible assets, and accrued liabilities, showing changes between June 30, 2023, and December 31, 2022, with significant increases in raw materials and intangible assets Inventories (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :--------------- | :------------ | :---------------- | | Raw materials | $2,539 | $1,635 | | Work-in-process | $200 | $192 | | Finished goods | $201 | $285 | | Total | $2,940 | $2,112 | Property, Plant and Equipment, net (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :------------------------- | :------------ | :---------------- | | Furniture, machinery and equipment | $1,905 | $1,688 | | Leasehold improvements | $405 | $417 | | Less: accumulated depreciation | $(1,973) | $(1,921) | | Total property, plant and equipment, net | $337 | $184 | Intangible Assets, net (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :------------------------- | :------------ | :---------------- | | Patents, tradenames, and trademarks | $705 | $658 | | Developed technology | $134 | — | | Customer relationships | $96 | — | | Non-compete agreements | $26 | — | | Order backlog | $22 | — | | In-process research and development | $29 | — | | Less: accumulated amortization | $(688) | $(582) | | Total intangible assets, net | $324 | $76 | - Amortization expense for intangible assets significantly increased to $94 thousand for Q2 2023 (from $13 thousand in Q2 2022) and $106 thousand for H1 2023 (from $28 thousand in H1 2022)[56] Note 3 – Acquisitions The company completed two significant acquisitions: SPEC Sensors and KWJ Engineering in December 2022, and Calman Technology Limited in March 2023, expanding its sensor offerings and manufacturing capabilities, resulting in substantial goodwill and intangible asset recognition - Acquired substantially all assets of SPEC Sensors, LLC and KWJ Engineering, Inc. in December 2022 for a revised purchase price of $2,102,313[57] - Goodwill of $246 thousand was recognized from the SPEC/KWJ acquisition, primarily due to expected synergies and assembled workforces, and is expected to be tax deductible[59][60] - Acquired all outstanding shares of Calman Technology Limited in March 2023 for GB£4,127,000 (approximately $4,912,000)[61] - Goodwill of $4,052 thousand was recognized from the Calman acquisition, primarily for expected synergies and assembled workforce, and is not expected to be tax deductible[63][64] Pro Forma Consolidated Statement of Operations (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | | :--------------- | :--- | :--- | | Revenue | $8,088 | $8,177 | | Net income (loss) | $677 | $908 | Note 4 – Marketable Securities The company held no marketable equity securities as of June 30, 2023, and had no purchases or sales of such securities during the current three and six-month periods, a change from significant activity in the prior year - As of June 30, 2023, the company had no marketable equity securities[65] - No marketable securities were purchased or sold during the three and six months ended June 30, 2023[65] - In the six months ended June 30, 2022, the company purchased $6.0 million of marketable securities and recognized $225 thousand in gross realized and unrealized gains[65] Note 5 – Earnings Per Share The computation of basic and diluted earnings per share shows an increase for the three months ended June 30, 2023, but a decrease for the six-month period, primarily influenced by net income and preferred stock dividends Earnings Per Share (in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) applicable to common stockholders | $281 | $12 | $(10) | $54 | | Earnings (loss) per common share, basic | $0.04 | $0.00 | $0.00 | $0.01 | | Earnings (loss) per common share, diluted | $0.04 | $0.00 | $0.00 | $0.01 | - 400 thousand shares of Series A Convertible Preferred Stock were anti-dilutive and excluded from the calculation of diluted EPS for all periods presented[66] Note 6 – Stockholders' Equity The company engaged in common stock repurchase activities during May 2023, including a private transaction and the initiation of a broader stock repurchase program for up to 100,000 shares - In May 2023, the company repurchased 5,500 shares of common stock for $50,050 ($9.10 per share) in a private transaction[67] - A Stock Repurchase Program was approved in May 2023 to repurchase up to 100,000 shares of common stock[68] - During the three months ended June 30, 2023, 13,903 shares were repurchased for approximately $127,000 under the program[68] Note 7 – Significant Customers, Concentrations of Credit Risk, and Geographic Information This note details the concentration of revenue from key customers and geographic regions, highlights the shift in revenue distribution, and outlines the geographic location of long-lived assets, particularly the increase in Europe due to acquisitions Net Revenues from Significant Customers (% of total net revenues) | Customer | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Customer A | 23% | 24% | 27% | 30% | | Customer B | 13% | * (Less than 10%) | * (Less than 10%) | * (Less than 10%) | | Customer C | 11% | 25% | * (Less than 10%) | 20% | Net Revenues by Geographic Area (in thousands) | Region | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | United States | $1,947 | $995 | $4,100 | $1,996 | | Asia and Middle East | $1,128 | $969 | $1,954 | $1,780 | | Europe and other | $974 | $76 | $1,273 | $255 | | Revenue, net | $4,049 | $2,040 | $7,327 | $4,031 | - At June 30, 2023, two customers accounted for 29% and 18% of total accounts receivable, with an allowance for doubtful accounts of $0[72] Long-Lived Assets by Geographic Location (in thousands) | Region | June 30, 2023 | December 31, 2022 | | :------------- | :------------ | :---------------- | | United States | $782 | $935 | | Europe | $4,527 | — | | Asia | $325 | $344 | | Total long-lived assets | $5,634 | $1,279 | Note 8 – Related Party Transactions The company engages in various transactions with Qualstar Corporation and BKF Capital Group, both related parties due to common control by Steven N. Bronson, including shared facilities, consulting services, and expense reimbursements - Steven N. Bronson, the company's Chairman, President, and CEO, also controls Qualstar Corporation and BKF Capital Group, Inc., making them related parties[74][76] - Agreements with Qualstar and BKF Capital include sharing office facilities and providing operational, sales, marketing, and general and administrative consulting services[74][76] - Interlink and Qualstar/BKF Capital reimburse each other for expenses paid on behalf of the other entity[74][76] Note 9 – Income Taxes The company's income tax expense is influenced by the mix of domestic and foreign earnings and losses, with a valuation allowance on federal and state deferred tax assets due to a 2010 ownership change, causing the effective tax rate to fluctuate - The effective income tax rates are generally higher than blended statutory rates due to income tax expense on taxable income in certain jurisdictions and the inability to benefit from domestic losses due to a valuation allowance on net operating loss (NOL) carryforwards[77] Income Tax Expense as a Percentage of Income Before Income Taxes | Period | 2023 | 2022 | | :------------------------------- | :--- | :--- | | Three Months Ended June 30, | 18.9% | 41.4% | | Six Months Ended June 30, | 47.4% | 30.2% | - All remaining federal and state NOLs are subject to annual limitations due to an IRC Section 382 ownership change in 2010[78] - A valuation allowance on federal and state deferred tax assets was deemed necessary at June 30, 2023, and December 31, 2022, but not on foreign deferred tax assets[79] - The company has elected to account for Global Intangible Low-Taxed Income (GILTI) as a period cost[80] Note 10 – Commitments and Contingencies This note details the company's operating lease agreements for various global facilities, outlining lease liabilities, right-of-use assets, and future minimum payments, while also addressing potential liabilities from litigation, product warranties, intellectual property indemnities, and specific indemnification clauses for directors and officers, including the CEO's employment agreement - The company leases facilities under non-cancellable operating leases expiring through fiscal 2025, with a weighted average remaining lease term of 1.1 years as of June 30, 2023[82][91] Lease Liabilities and Right-of-Use Assets (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------- | :------------ | :---------------- | | Current lease liabilities | $157 | $131 | | Long-term lease liabilities | $77 | $46 | | Right-of-use assets | $225 | $172 | Future Minimum Lease Payments (undiscounted, in thousands) | Years ending December 31, | Amount | | :------------------------ | :----- | | 2023 (remainder of year) | $83 | | 2024 | $141 | | 2025 | $24 | | Total undiscounted future non-cancelable minimum lease payments | $248 | - Operating lease costs for the six months ended June 30, 2023, were approximately $250 thousand, compared to $122 thousand in the prior year[93] - The company was not party to any legal proceedings as of June 30, 2023[94] - The CEO's employment agreement includes severance and change in control obligations, such as base compensation, bonus payments, and immediate full vesting of unvested equity/options upon certain termination events or a change in control[99][100] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and future outlook, including an overview of business segments, critical accounting policies, and detailed analysis of revenue, gross profit, operating expenses, and cash flows, highlighting significant revenue growth driven by recent acquisitions and increased demand in key markets Overview Interlink Electronics operates in force/touch and gas sensor technologies, expanding its offerings and global presence through recent acquisitions of Calman Technology Limited and SPEC Sensors/KWJ Engineering, and is investing in R&D to meet market demand and align with large-tier customers - The company operates in two principal sensor technology divisions: force/touch sensors (HMI, FSR®, membrane keypads, graphic overlays, printed electronics) and gas sensors (electrochemical, environmental and air quality monitoring)[104][105][107] - Acquisitions of Calman Technology Limited (March 2023) and SPEC Sensors/KWJ Engineering (December 2022) expanded product offerings and manufacturing capabilities[106][107] - The company serves a diverse global customer base across consumer electronics, industrial automation, automotive, medical, defense, and environmental monitoring markets[108] - Significant investment in R&D, including relocating product development to Camarillo, California, and leveraging acquired facilities, aims to provide leading-edge solutions and support growth initiatives[109] Critical Accounting Policies and Estimates The company's critical accounting policies and estimates, which involve significant judgments and assumptions in preparing financial statements, remain consistent with those disclosed in its Annual Report on Form 10-K, with no material changes impacting the current condensed consolidated financial statements - The preparation of consolidated financial statements requires management to make estimates and assumptions that affect reported amounts[111] - There have been no material changes to the critical accounting policies and estimates described in the Annual Report on Form 10-K filed on March 29, 2023[112] Recently Issued and Adopted Accounting Pronouncements The company has reviewed all recently issued accounting pronouncements and determined that none are applicable or expected to have a material impact on its financial statements - All recently issued accounting pronouncements have been reviewed[113] - Concluded that they are not applicable or not expected to be material to the financial statements[113] Results of Operations The company experienced substantial revenue growth for both the three and six months ended June 30, 2023, primarily driven by recent acquisitions and increased demand in the medical and industrial markets, with gross profit also increasing, but net income for the six-month period declined due to lower other income, despite improved operating income Consolidated Statements of Operations Data (in thousands, except percentages) | Metric | Q2 2023 | Q2 2022 | % Change (YoY) | H1 2023 | H1 2022 | % Change (YoY) | | :-------------------------------- | :------ | :------ | :------------- | :------ | :------ | :------------- | | Revenue, net | $4,049 | $2,040 | 98.5% | $7,327 | $4,031 | 81.8% | | Cost of revenue | $1,988 | $1,088 | 82.7% | $3,679 | $1,838 | 100.2% | | Gross profit | $2,061 | $952 | 116.5% | $3,648 | $2,193 | 66.3% | | Engineering, research and development | $650 | $330 | 97.0% | $1,177 | $593 | 98.5% | | Selling, general and administrative | $1,005 | $773 | 30.0% | $2,238 | $1,733 | 29.1% | | Total operating expenses | $1,655 | $1,103 | 50.0% | $3,415 | $2,326 | 46.8% | | Income (loss) from operations | $406 | $(151) | N/A | $233 | $(133) | N/A | | Other income (expense), net | $64 | $342 | (81.3)% | $128 | $497 | (74.2)% | | Income (loss) before income taxes | $470 | $191 | 146.1% | $361 | $364 | (0.8)% | | Income tax expense (benefit) | $89 | $79 | 12.7% | $171 | $110 | 55.5% | | Net income (loss) | $381 | $112 | 240.2% | $190 | $254 | (25.2)% | - Revenue growth in Q2 2023 and H1 2023 was primarily driven by increased shipments to industrial and medical market customers, resulting from higher demand and sales to new customers acquired through SPEC/KWJ and Calman[117][126] - Gross profit for Q2 2023 increased by 116.5% to $2,061 thousand, with gross margin improving to 50.9% due to higher revenues, lower material costs, and favorable product/customer mix[118] - Engineering and R&D expenses increased by 97.0% in Q2 2023 and 98.5% in H1 2023, mainly due to increased employee headcount from the SPEC/KWJ acquisition, non-cash amortization, and higher product-development activities[119][128] - Other income (expense), net, decreased significantly in both Q2 2023 and H1 2023, primarily due to the absence of marketable securities gains present in the prior year and lower foreign currency transaction gains[122][132] Liquidity and Capital Resources As of June 30, 2023, the company had $5.1 million in cash and cash equivalents and $8.3 million in working capital, with no indebtedness, and while current cash balances are believed to be sufficient for operations, the company may seek additional capital through financing arrangements if circumstances change - As of June 30, 2023, the company had $5.1 million in cash and cash equivalents and $8.3 million in working capital, with no indebtedness[134] - $1.3 million of the cash balance was held by foreign subsidiaries, with methods available for repatriation without significant tax effects[134] - The company has 200,000 shares of 8.0% Series A Convertible Preferred Stock outstanding, with an aggregate liquidation preference of $5.0 million, paying monthly cash dividends[135] - Existing cash and cash equivalents are believed to be sufficient for current operations, but additional capital may be required through equity, equity-linked, or debt financing if circumstances change[136] Cash Flow Analysis For the six months ended June 30, 2023, operating activities used cash, while investing activities continued to be a significant outflow, primarily due to the acquisition of Calman Technology Limited, and financing activities also used cash for preferred stock dividends and common stock repurchases Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by (used in) operating activities | $(245) | $28 | | Net cash (used in) investing activities | $(4,310) | $(6,036) | | Net cash (used in) financing activities | $(377) | $(200) | - Cash used in operating activities for H1 2023 was $245 thousand, primarily due to changes in operating assets and liabilities, including increases in accounts receivable and inventories, and an increase in accounts payable and accrued liabilities[138][139] - Net cash used in investing activities for H1 2023 was $4.3 million, predominantly for the acquisition of Calman Technology Limited, net of cash acquired[141] - Net cash used in financing activities for H1 2023 was $377 thousand, consisting of $177 thousand for common stock repurchases and $200 thousand for preferred stock dividends[142] Off-Balance Sheet Arrangements The company explicitly states that it does not have any off-balance sheet arrangements - The company does not have any off-balance sheet arrangements[143] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section is marked as 'Not Applicable,' indicating that the company has no material market risk disclosures to report for the period - The section is marked as 'Not Applicable'[144] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of June 30, 2023, concluding they were effective at a reasonable assurance level, and no material changes in internal control over financial reporting were identified during the period - The CEO and CFO evaluated the effectiveness of disclosure controls and procedures as of June 30, 2023, and concluded they were effective at a reasonable assurance level[147] - There was no change in internal control over financial reporting during the period ended June 30, 2023, that materially affected, or is reasonably likely to materially affect, internal control over financial reporting[148] - Management acknowledges that control systems provide only reasonable, not absolute, assurance and are subject to human diligence, judgment lapses, and breakdowns[150] PART II -- OTHER INFORMATION Item 1A. Risk Factors This section refers to the comprehensive risk factors detailed in the company's Annual Report on Form 10-K filed on March 29, 2023, and confirms that no material changes to these risks occurred during the three months ended June 30, 2023 - Refers to risk factors contained in Item 1A of the Annual Report on Form 10-K filed on March 29, 2023[152] - No material changes to such risk factors occurred during the three months ended June 30, 2023[152] Item 6. Exhibits This section lists all exhibits accompanying the Form 10-Q, including corporate governance documents, officer certifications, and XBRL financial data files, with specific notes on the filing status of certain exhibits - Exhibits include Articles of Incorporation, Certificate of Designations of Series A Preferred Stock, Bylaws, and various certifications (31.1, 31.2, 32.1)[154] - XBRL Instance Document and Taxonomy Extension Schema, Calculation, Definition, Label, and Presentation Linkbase Documents are included[154] - Exhibit 32.1 (Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350) is furnished and deemed not filed with the SEC[154] Signatures The report was duly signed on behalf of Interlink Electronics, Inc. by its Chief Financial Officer, Ryan J. Hoffman, on August 10, 2023 - The report was signed by Ryan J. Hoffman, Chief Financial Officer, on behalf of Interlink Electronics, Inc[156] - The signing date of the report was August 10, 2023[156]