Interlink Electronics(LINK) - 2023 Q3 - Quarterly Report

PART I -- FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements (unaudited) This section presents Interlink Electronics' unaudited condensed consolidated financial statements and related notes, covering balance sheets, income, equity, and cash flows Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity | ASSETS (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :---------------------- | :----------- | :----------- | | Cash and cash equivalents | $5,207 | $10,091 | | Accounts receivable, net | $1,622 | $1,178 | | Inventories | $2,875 | $2,112 | | Total current assets | $9,930 | $13,702 | | Total assets | $15,294 | $14,983 | | LIABILITIES AND STOCKHOLDERS' EQUITY (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------------------------- | :----------- | :----------- | | Accounts payable | $909 | $273 | | Accrued liabilities | $443 | $568 | | Total current liabilities | $1,961 | $1,089 | | Total liabilities | $2,015 | $1,135 | | Total stockholders' equity | $13,279 | $13,848 | | Total liabilities and stockholders' equity | $15,294 | $14,983 | - Cash and cash equivalents decreased significantly from $10,091 thousand at December 31, 2022, to $5,207 thousand at September 30, 2023. Total current assets also decreased from $13,702 thousand to $9,930 thousand[9] - Total liabilities increased from $1,135 thousand at December 31, 2022, to $2,015 thousand at September 30, 2023, primarily driven by an increase in accounts payable and accrued income taxes[9] Condensed Consolidated Statements of Operations This section details the company's financial performance over periods, including revenue, gross profit, and net income or loss | (in thousands, except per share data) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue, net | $3,075 | $1,851 | $10,402 | $5,882 | | Gross profit | $1,459 | $872 | $5,107 | $3,065 | | Income (loss) from operations | $(92) | $(190) | $141 | $(323) | | Net income (loss) | $(125) | $6 | $65 | $260 | | Earnings (loss) per common share – basic and diluted | $(0.03) | $(0.01) | $(0.04) | $(0.01) | - Net revenue for the three months ended September 30, 2023, increased by 66.1% to $3,075 thousand from $1,851 thousand in the prior year period. For the nine months, net revenue increased by 76.8% to $10,402 thousand from $5,882 thousand[11] - The company reported a net loss of $(125) thousand for the three months ended September 30, 2023, compared to a net income of $6 thousand in the same period last year. For the nine months, net income decreased to $65 thousand from $260 thousand[11] Condensed Consolidated Statements of Comprehensive Income (Loss) This section presents the total comprehensive income or loss, including net income and other comprehensive income items | (in thousands) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income (loss) | $(125) | $6 | $65 | $260 | | Foreign currency translation adjustments | $(194) | $(80) | $1 | $(229) | | Comprehensive income (loss) | $(319) | $(74) | $66 | $31 | - Comprehensive loss for the three months ended September 30, 2023, was $(319) thousand, a significant increase from $(74) thousand in the prior year, primarily due to foreign currency translation adjustments[14] Condensed Consolidated Statements of Stockholders' Equity This section outlines changes in stockholders' equity, reflecting net income, dividends, and other equity transactions | (in thousands) | Balance at Dec 31, 2022 | Net Income (Loss) | Preferred Stock Dividends | Foreign Currency Translation Adjustment | Stock-Based Compensation Expense | Repurchases of Common Stock | Balance at Sep 30, 2023 | | :------------- | :---------------------- | :---------------- | :------------------------ | :-------------------------------------- | :------------------------------- | :-------------------------- | :---------------------- | | Total Stockholders' Equity | $13,848 | $65 | $(300) | $1 | $15 | $(350) | $13,279 | - Total stockholders' equity decreased from $13,848 thousand at December 31, 2022, to $13,279 thousand at September 30, 2023, primarily due to preferred stock dividends and common stock repurchases[17] Condensed Consolidated Statements of Cash Flows This section details cash inflows and outflows from operating, investing, and financing activities over specific periods | (in thousands) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------- | :----------------------------- | :----------------------------- | | 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 (decrease) in cash and cash equivalents | $(4,884) | $(6,893) | | Cash and cash equivalents, end of period | $5,207 | $3,889 | - Operating activities generated $155 thousand in cash for the nine months ended September 30, 2023, a significant improvement from $(385) thousand cash used in the prior year period[19] - Investing activities used $4,322 thousand, primarily for the acquisition of Calman Technology Limited, compared to $6,021 thousand used in the prior year, which included purchases of marketable securities[19] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1 – The Company and its Significant Accounting Policies This note describes Interlink Electronics' business operations, global presence, and key accounting policies for interim reporting - Interlink Electronics, Inc. operates in two main sensor technology divisions: force/touch sensors (including FSR® technology, membrane keypads, graphic overlays, and printed electronics for HMI devices) and gas sensors (for environmental and air quality monitoring)[21][22] - The company's global presence includes corporate headquarters in Irvine, California; a Global Product Development and Materials Science Center in Camarillo, California; manufacturing facilities in Shenzhen, China, and Irvine, Scotland; and an R&D center in Singapore[23] - The unaudited interim consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial reporting, with certain information condensed or omitted per Rule 10-01 of Regulation S-X[26] Note 2 – Details of Certain Financial Statement Components This note provides detailed breakdowns of specific financial statement components, including inventories and intangible assets | Inventories (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :------------------------- | :----------- | :----------- | | Raw materials | $2,398 | $1,635 | | Work-in-process | $205 | $192 | | Finished goods | $272 | $285 | | Total inventories | $2,875 | $2,112 | | Intangible assets, net (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------------ | :----------- | :----------- | | Patents, tradenames, and trademarks | $705 | $658 | | Developed technology | $134 | — | | Customer relationships | $96 | — | | Total intangible assets, net | $289 | $76 | - Total inventories increased from $2,112 thousand at December 31, 2022, to $2,875 thousand at September 30, 2023, primarily in raw materials[54] - Intangible assets, net, significantly increased from $76 thousand to $289 thousand, largely due to the addition of developed technology, customer relationships, and non-compete agreements, likely from recent acquisitions[55] Note 3 – Acquisitions This note details the company's recent acquisitions, including SPEC Sensors/KWJ Engineering and Calman Technology Limited - On December 16, 2022, Interlink acquired substantially all assets of SPEC Sensors, LLC and KWJ Engineering, Inc. (SPEC/KWJ), designers and manufacturers of gas sensors, for a final purchase price of $2,102 thousand[56] - On March 17, 2023, Interlink acquired all outstanding shares of Calman Technology Limited, a Scotland-based designer and manufacturer of membrane keypads, graphic overlays, and printed electronics, for approximately $4,912 thousand (GB£4,127,000)[60] Pro Forma Consolidated Statement of Operations (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | $3,075 | $3,866 | $11,163 | $12,042 | | Net income (loss) | $(125) | $(93) | $552 | $815 | Note 4 – Marketable Securities This note provides information on the company's marketable securities, including purchases and sales - As of September 30, 2023, Interlink had no marketable equity securities. During the nine months ended September 30, 2023, no marketable securities were purchased or sold, compared to $6,000 thousand purchased and $15 thousand sold in the prior year period[65] Note 5 – Earnings Per Share This note details the calculation of basic and diluted earnings per common share for the reported periods | (in thousands, except per share data) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income (loss) applicable to common stockholders | $(225) | $(94) | $(235) | $(40) | | Weighted average common shares outstanding – basic and diluted | 6,582 | 6,603 | 6,597 | 6,603 | | Earnings (loss) per common share, basic and diluted | $(0.03) | $(0.01) | $(0.04) | $(0.01) | - Basic and diluted earnings per common share for the three months ended September 30, 2023, was $(0.03), compared to $(0.01) in the prior year. For the nine months, it was $(0.04) compared to $(0.01) in the prior year[66] - 400,000 shares of common stock convertible from Series A Convertible Preferred Stock were excluded from diluted EPS calculation as they were anti-dilutive due to the conversion price being higher than the average market price[66] Note 6 – Stockholders' Equity This note provides details on changes in stockholders' equity, including common stock repurchases - In May 2023, the Company repurchased 5,500 shares of common stock for $50 thousand ($9.10 per share)[67] - Under a Stock Repurchase Program approved in May 2023, the Company repurchased 18,217 shares for approximately $173 thousand during the three months ended September 30, 2023, and 32,120 shares for approximately $300 thousand during the nine months ended September 30, 2023[68] Note 7 – Significant Customers, Concentrations of Credit Risk, and Geographic Information This note discloses information on major customers, credit risk concentrations, and revenue distribution by geographic area Net Revenues from Significant Customers | Customer | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Customer A | 11 % | 20 % | 22 % | 27 % | | Customer B | 19 % | * % | 11 % | * % | | Customer C | 11 % | 15 % | * % | 18 % | * Less than 10% of total net revenues Net Revenues by Geographic Area (in thousands) | Region | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | United States | $1,257 | $661 | $5,357 | $2,657 | | Asia and Middle East | $816 | $1,069 | $2,770 | $2,849 | | Europe and other | $1,002 | $121 | $2,275 | $376 | - At September 30, 2023, two customers accounted for 26% and 17% of total accounts receivable, with no allowance for doubtful accounts[71] Note 8 – Related Party Transactions This note details transactions with related parties, including Qualstar Corporation and BKF Capital Group - Interlink has facilities and consulting agreements with Qualstar Corporation and BKF Capital Group, both related parties controlled by Steven N. Bronson, Interlink's Chairman, President, and CEO[73][75] Transactions with Qualstar (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Billed (or accrued) to Qualstar by Interlink | $196 | $206 | $630 | $592 | | Billed (or accrued) to Interlink by Qualstar | $31 | $29 | $87 | $74 | Transactions with BKF Capital (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Billed (or accrued) to BKF Capital by Interlink | $8 | $20 | $41 | $81 | | Billed (or accrued) to Interlink by BKF Capital | $56 | $37 | $136 | $97 | Note 9 – Income Taxes This note explains the company's effective income tax rates and factors influencing tax expense - The effective income tax rate for the three months ended September 30, 2023, was 89.3%, up from 64.7% in the prior year. For the nine months, it was 78.0%, up from 31.8%[76] - The higher effective tax rates are due to the mix of domestic and foreign pre-tax earnings/losses and the inability to benefit from domestic losses due to a valuation allowance on net operating loss carryovers (NOLs)[76][78] - As of September 30, 2023, $1,600 thousand of the $5,200 thousand cash balance was held by foreign subsidiaries, which can be repatriated without significant tax effects through intercompany loans or previously taxed income distributions[80] Note 10 – Commitments and Contingencies This note outlines the company's lease obligations, legal proceedings, and other contractual commitments and indemnities - The company leases facilities under non-cancellable operating leases expiring through fiscal 2025, with a weighted average remaining lease term of 0.9 years as of September 30, 2023[81][90] Future Minimum Lease Payments (in thousands) | Years ending December 31, | Amount | | :------------------------ | :----- | | 2023 (remainder of year) | $43 | | 2024 | $129 | | 2025 | $33 | | Total undiscounted future non-cancelable minimum lease payments | $205 | | Less: imputed interest | $(10) | | Present value of lease liabilities | $195 | - Operating lease costs for the three months ended September 30, 2023, were approximately $129 thousand, and for the nine months, approximately $379 thousand, showing an increase from the prior year periods[91][92] - The company is not party to any legal proceedings as of September 30, 2023, but provides indemnities for intellectual property, directors/officers, and other contractual guarantees, with historical amounts not having a material negative effect[93][97][98][101] 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 condition and results, highlighting business segments, investments, and performance comparisons Overview This overview describes Interlink's core sensor technology divisions and strategic investments in R&D and acquisitions - Interlink operates in force/touch sensors (FSR® technology, membrane keypads, graphic overlays) for HMI devices and gas sensors for environmental monitoring[105] - Recent acquisitions of Calman Technology Limited (March 2023) expanded membrane keypads and printed electronics offerings, while SPEC Sensors and KWJ Engineering (December 2022) added electrochemical gas-sensing technology[107][108] - The company has invested in R&D, relocating a majority of efforts to a Global Product Development and Materials Science Center in Camarillo, California, to align with customer needs and growth initiatives[110] Critical Accounting Policies and Estimates This section confirms no material changes to critical accounting policies and estimates during the reported period - The company's critical accounting policies and estimates, as described in the Annual Report on Form 10-K, have not materially changed during the nine months ended September 30, 2023[113] Recently Issued and Adopted Accounting Pronouncements This section states that recently issued accounting pronouncements were reviewed and deemed immaterial to financial statements - All recently issued accounting pronouncements were reviewed and deemed not applicable or not expected to be material to the financial statements[114] Results of Operations This section analyzes the company's financial performance, comparing key metrics for the current and prior periods Comparison of Three Months Ended September 30, 2023 and 2022 This section compares the company's financial results for the three months ended September 30, 2023, versus 2022 Revenue, net by Market (in thousands) | Market | Sep 30, 2023 Amount | Sep 30, 2023 % of Revenue | Sep 30, 2022 Amount | Sep 30, 2022 % of Revenue | $ Change | % Change | | :-------- | :------------------ | :------------------------ | :------------------ | :------------------------ | :------- | :------- | | 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 % | | Total | $3,075 | 100.0 % | $1,851 | 100.0 % | $1,224 | 66.1 % | - Revenue increased by 66.1% YoY, driven by significant growth in Industrial (84.7%), Medical (84.7%), and Standard products (264.7%), largely due to the SPEC/KWJ and Calman acquisitions. Consumer market revenue decreased by 89.6% due to order timing fluctuations[117][118] Key Financials (in thousands, except percentages) | Metric | Sep 30, 2023 Amount | Sep 30, 2023 % of Revenue | Sep 30, 2022 Amount | Sep 30, 2022 % of Revenue | $ Change | % Change | | :----- | :------------------ | :------------------------ | :------------------ | :------------------------ | :------- | :------- | | Gross profit | $1,459 | 47.4 % | $872 | 47.1 % | $587 | 67.3 % | | Engineering, R&D | $588 | 19.1 % | $319 | 17.2 % | $269 | 84.3 % | | Selling, G&A | $963 | 31.3 % | $743 | 40.1 % | $220 | 29.6 % | | Other income (expense), net | $26 | 0.8 % | $207 | 11.2 % | $(181) | (87.4)% | | Income tax expense | $59 | 89.4 % of Pre-tax Income | $11 | 64.7 % of Pre-tax Income | $48 | 24.7 % | - Gross profit increased by 67.3% due to higher revenues, while gross margin percentage slightly declined. R&D and SG&A expenses increased by 84.3% and 29.6% respectively, primarily due to increased headcount and amortization from acquisitions[120][121][122] Comparison of Nine Months Ended September 30, 2023 and 2022 This section compares the company's financial results for the nine months ended September 30, 2023, versus 2022 Revenue, net by Market (in thousands) | Market | Sep 30, 2023 Amount | Sep 30, 2023 % of Revenue | Sep 30, 2022 Amount | Sep 30, 2022 % of Revenue | $ Change | % Change | | :-------- | :------------------ | :------------------------ | :------------------ | :------------------------ | :------- | :------- | | 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 % | | Total | $10,402 | 100.0 % | $5,882 | 100.0 % | $4,520 | 76.8 % | - Total revenue increased by 76.8% YoY, driven by strong growth in Industrial (48.9%), Medical (118.0%), and Standard products (206.3%), largely attributed to increased demand and recent acquisitions. Consumer market revenue declined by 64.8% due to order timing and product design cyclicality[127] Key Financials (in thousands, except percentages) | Metric | Sep 30, 2023 Amount | Sep 30, 2023 % of Revenue | Sep 30, 2022 Amount | Sep 30, 2022 % of Revenue | $ Change | % Change | | :----- | :------------------ | :------------------------ | :------------------ | :------------------------ | :------- | :------- | | Gross profit | $5,107 | 49.1 % | $3,065 | 52.1 % | $2,042 | 66.6 % | | Engineering, R&D | $1,765 | 17.0 % | $912 | 15.5 % | $853 | 93.5 % | | Selling, G&A | $3,201 | 30.8 % | $2,476 | 42.1 % | $725 | 29.3 % | | Other income (expense), net | $154 | 1.5 % | $704 | 12.0 % | $(550) | (78.1)% | | Income tax expense | $230 | 78.0 % of Pre-tax Income | $121 | 31.8 % of Pre-tax Income | $109 | 46.2 % | - Gross profit increased by 66.6% due to higher revenues, but gross margin percentage decreased due to higher material costs and unfavorable product/customer mix. R&D and SG&A expenses rose by 93.5% and 29.3% respectively, mainly due to increased headcount, amortization from acquisitions, and professional fees[129][130][131] Liquidity and Capital Resources This section discusses the company's cash position, working capital, and capital structure, including preferred stock - As of September 30, 2023, the company had $5,200 thousand in cash and cash equivalents, $8,000 thousand in working capital, and no indebtedness[134] - The company has 200,000 shares of 8.0% Series A Convertible Preferred Stock outstanding, with an aggregate liquidation preference of $5,000 thousand, paying monthly cash dividends[135] - Management believes existing cash will be sufficient for current operations but may seek additional capital through equity, equity-linked, or debt financing if circumstances change, which could dilute existing stockholders or impose restrictive covenants[136] Cash Flow Analysis This section analyzes cash flows from operating, investing, and financing activities for the reported periods Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------- | :----------------------------- | :----------------------------- | | Operating Activities | $155 | $(385) | | Investing Activities | $(4,322) | $(6,021) | | Financing Activities | $(650) | $(300) | - Operating activities provided $155 thousand in cash for the nine months ended September 30, 2023, a positive shift from cash used in the prior year, driven by net income and non-cash adjustments, partially offset by changes in operating assets and liabilities[138] - Investing activities used $4,322 thousand, primarily for the acquisition of Calman Technology Limited. Financing activities used $650 thousand, mainly for common stock repurchases and preferred stock dividends[141][142] Off-Balance Sheet Arrangements This section confirms that the company 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 states that there are no quantitative and qualitative disclosures about market risk applicable to the company for the reported period - The company has no applicable quantitative and qualitative disclosures about market risk for the period[144] Item 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures and internal controls over financial reporting, confirming their effectiveness - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2023[146] - There were no material changes in internal control over financial reporting during the period ended September 30, 2023[147] - The company acknowledges that control systems provide only reasonable, not absolute, assurance and are subject to human diligence, judgment lapses, and potential breakdowns[150] PART II -- OTHER INFORMATION This section includes other required information such as risk factors, exhibits, and corporate signatures Item 1A. Risk Factors This section refers to the risk factors outlined in the company's Annual Report on Form 10-K, with no material changes - No material changes to the risk factors previously disclosed in Item 1A of the Annual Report on Form 10-K have occurred during the nine months ended September 30, 2023[153] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications and XBRL documents - The report includes certifications from the Principal Executive Officer and Principal Financial Officer (Exhibits 31.1, 31.2, 32.1) and XBRL instance and taxonomy documents (Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[155] Signatures This section contains the required signatures for the Quarterly Report on Form 10-Q, confirming its submission - The report was signed by Ryan J. Hoffman, Chief Financial Officer (Principal Financial and Accounting Officer) on November 9, 2023[157]