Interlink Electronics(LINK) - 2024 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for the quarter ended March 31, 2024 Item 1. Financial Statements (unaudited) This section provides the unaudited condensed consolidated financial statements and related notes for the quarter ended March 31, 2024 Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and stockholders' equity as of March 31, 2024, and December 31, 2023 | ASSETS (in thousands) | March 31, 2024 | December 31, 2023 | | :---------------------- | :------------- | :---------------- | | Cash and cash equivalents | $4,367 | $4,304 | | Accounts receivable, net | $1,772 | $2,167 | | Inventories | $2,570 | $2,476 | | Total current assets | $9,077 | $9,328 | | Total assets | $14,498 | $15,062 | | LIABILITIES AND STOCKHOLDERS' EQUITY (in thousands) | March 31, 2024 | December 31, 2023 | | :---------------------------------- | :------------- | :---------------- | | Accounts payable | $965 | $464 | | Total current liabilities | $1,835 | $1,375 | | Total liabilities | $2,418 | $2,034 | | Total stockholders' equity | $12,080 | $13,028 | | Total liabilities and stockholders' equity | $14,498 | $15,062 | - Total assets decreased from $15.062 million at December 31, 2023, to $14.498 million at March 31, 2024, while total stockholders' equity also decreased from $13.028 million to $12.080 million over the same period[8] Condensed Consolidated Statements of Operations This section outlines the company's financial performance, including revenues, expenses, and net loss for the three months ended March 31, 2024, and 2023 | (in thousands, except per share data) | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Revenue, net | $3,124 | $3,278 | | Cost of revenue | $1,871 | $1,691 | | Gross profit | $1,253 | $1,587 | | Total operating expenses | $2,004 | $1,760 | | Loss from operations | $(751) | $(173) | | Net loss | $(741) | $(191) | | Net loss applicable to common stockholders | $(841) | $(291) | | Earnings (loss) per common share – basic and diluted | $(0.09) | $(0.03) | - Net revenue decreased by 4.7% from $3.278 million in Q1 2023 to $3.124 million in Q1 2024, resulting in a significantly higher net loss of $0.741 million in Q1 2024 compared to $0.191 million in Q1 2023, and a basic and diluted loss per common share of $(0.09) in Q1 2024, up from $(0.03) in Q1 2023[10] Condensed Consolidated Statements of Comprehensive Income (Loss) This section presents the company's comprehensive income or loss, including net loss and other comprehensive income items, for the three months ended March 31, 2024, and 2023 | (in thousands) | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(741) | $(191) | | Foreign currency translation adjustments | $(107) | $182 | | Comprehensive loss | $(848) | $(9) | - Comprehensive loss significantly increased to $(0.848) million in Q1 2024 from $(0.009) million in Q1 2023, primarily due to a larger net loss and negative foreign currency translation adjustments[13] Condensed Consolidated Statements of Stockholders' Equity This section details changes in stockholders' equity, including net loss, dividends, and foreign currency adjustments, for the three months ended March 31, 2024 | (in thousands) | Balance at Dec 31, 2023 | Net loss | Preferred stock dividends | Foreign currency translation adjustment | Balance at Mar 31, 2024 | | :------------- | :---------------------- | :------- | :------------------------ | :-------------------------------------- | :---------------------- | | Total Stockholders' Equity | $13,028 | $(741) | $(100) | $(107) | $12,080 | - Total stockholders' equity decreased from $13.028 million at December 31, 2023, to $12.080 million at March 31, 2024, primarily due to a net loss of $0.741 million, preferred stock dividends of $0.100 million, and negative foreign currency translation adjustments of $0.107 million[15] Condensed Consolidated Statements of Cash Flows This section summarizes the cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2024, and 2023 | (in thousands) | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash provided by (used in) operating activities | $222 | $(620) | | Net cash (used in) investing activities | $(18) | $(2,750) | | Net cash (used in) financing activities | $(100) | $(100) | | Net increase (decrease) in cash and cash equivalents | $63 | $(3,401) | | Cash and cash equivalents, end of period | $4,367 | $6,690 | - Operating activities provided $0.222 million in cash in Q1 2024, a significant improvement from a cash usage of $0.620 million in Q1 2023, primarily due to changes in operating assets and liabilities offsetting the net loss[18] - Investing activities used substantially less cash in Q1 2024 ($0.018 million) compared to Q1 2023 ($2.75 million), primarily due to the Calman acquisition in the prior year[18] - Financing activities consistently used $0.100 million for preferred stock dividends in both periods[18] 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, Inc.'s business operations and outlines its key accounting policies - Interlink Electronics, Inc. operates in two principal sensor technology divisions: force/touch sensors and gas/environmental sensors, designing, developing, manufacturing, and selling proprietary sensor-based products and custom solutions globally[21] - On March 1, 2024, the Board of Directors declared a 50% common stock dividend, increasing outstanding shares from 6,573,570 to 9,860,368, retroactively adjusted in the financial statements[23] - The company recognizes revenue when customers obtain control of promised goods or services, typically upon shipment, and establishes reserves for potential returns or warranty repairs based on historical experience[29][30] - Engineering, research and development costs are expensed as incurred, primarily consisting of compensation, depreciation, amortization, and overhead[33] - The company operates in one reportable segment: the manufacture and sale of force/touch sensors and gas sensors[45] - The company accounts for leases under ASC 842, recording right-of-use assets and lease liabilities for operating and financing leases, excluding short-term leases[48][49] - Future results are subject to risks including industry changes, product performance, customer loss, international business impacts (e.g., foreign currency, trade policies), supply chain disruptions, and intellectual property enforcement[50][51] Note 2 – Details of Certain Financial Statement Components This note provides a detailed breakdown of specific balance sheet accounts, including inventories, property, plant and equipment, intangible assets, and goodwill Inventories (in thousands) | Category | March 31, 2024 | December 31, 2023 | | :-------------- | :------------- | :---------------- | | Raw materials | $2,049 | $1,986 | | Work-in-process | $225 | $232 | | Finished goods | $296 | $258 | | Total inventories | $2,570 | $2,476 | Property, plant and equipment, net (in thousands) | Category | March 31, 2024 | December 31, 2023 | | :---------------------------- | :------------- | :---------------- | | Furniture, machinery and equipment | $2,014 | $2,009 | | Leasehold improvements | $406 | $412 | | Less: accumulated depreciation | $(2,131) | $(2,108) | | Total property, plant and equipment, net | $289 | $313 | Intangible assets, net (in thousands) | Category | March 31, 2024 | December 31, 2023 | | :---------------------------- | :------------- | :---------------- | | Patents, tradenames, and trademarks | $932 | $935 | | Developed technology | $538 | $543 | | Customer relationships | $1,433 | $1,449 | | Non-compete agreements | $920 | $930 | | Order backlog | $22 | $22 | | In-process research and development | $29 | $29 | | Less: accumulated amortization | $(1,437) | $(1,254) | | Total intangible assets, net | $2,437 | $2,654 | - Amortization expense for intangible assets significantly increased to $0.189 million for Q1 2024, compared to $0.012 million for Q1 2023[57] Goodwill (in thousands) | Period | Amount | | :-------------------------- | :----- | | Balance as of January 1, 2024 | $2,461 | | Adjustment to goodwill, foreign currency exchange rate changes | $(26) | | Balance as of March 31, 2024 | $2,435 | Note 3 – Acquisition of Calman Technology Limited This note details the acquisition of Calman Technology Limited, including the purchase price, assets acquired, and pro forma financial impacts - On March 17, 2023, Interlink acquired Calman Technology Limited for approximately $4.912 million (GB£4,127,000), a Scotland-based designer and manufacturer of membrane keypads, graphic overlays, and printed electronics[58] Fair Values of Assets Acquired and Liabilities Assumed (in thousands) | Category | Amount | | :---------------------------- | :----- | | Cash | $1,577 | | Accounts receivable | $656 | | Inventories | $622 | | Net identifiable tangible assets acquired | $2,398 | | Developed technology | $381 | | Customer relationships | $1,260 | | Goodwill | $2,064 | | Net assets acquired | $6,450 | - The acquisition resulted in $2.064 million in goodwill, primarily attributed to expected synergies and Calman's assembled workforce, which is not expected to be tax-deductible[60] Pro Forma Consolidated Statement of Operations (in thousands) | Category | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------- | :-------------------------------- | :-------------------------------- | | Revenue | $3,124 | $4,039 | | Net income (loss) | $(741) | $296 | Note 4 – Earnings Per Share This note explains the calculation of basic and diluted earnings per share, including the impact of the common stock dividend - The 50% common stock dividend declared on March 1, 2024, has been retroactively applied to weighted average common shares outstanding and earnings per share calculations for all periods presented[63] Earnings Per Share Computation (in thousands, except per share data) | Category | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss applicable to common stockholders | $(841) | $(291) | | Weighted average common shares outstanding – basic | 9,860 | 9,915 | | Earnings (loss) per common share, basic | $(0.09) | $(0.03) | | Earnings (loss) per common share, diluted | $(0.09) | $(0.03) | - 600,000 shares issuable upon conversion of Series A Convertible Preferred Stock were excluded from diluted EPS calculation as their effect would be anti-dilutive due to net losses and a conversion price higher than the average market price[64] Note 5 – Significant Customers, Concentrations of Credit Risk, and Geographic Information This note identifies significant customers, discusses credit risk concentrations, and provides revenue and asset breakdowns by geographic area Net Revenues from Significant Customers | Customer | Three months ended March 31, 2024 (% of total net revenues) | Three months ended March 31, 2023 (% of total net revenues) | | :---------- | :---------------------------------------------------------- | :---------------------------------------------------------- | | Customer A | 16 % | 32 % | | Customer B | 17 % | < 10 % | Net Revenues by Geographic Area (in thousands) | Geographic Area | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :---------------- | :-------------------------------- | :-------------------------------- | | United States | $1,445 | $2,153 | | Asia and Middle East | $729 | $826 | | Europe and other | $950 | $299 | | Revenue, net | $3,124 | $3,278 | - Revenue from Customer A decreased significantly from 32% to 16% of total net revenues, while Customer B became a significant customer in Q1 2024, accounting for 17%[66] - Geographically, U.S. revenues decreased, while European revenues significantly increased from $0.299 million in Q1 2023 to $0.950 million in Q1 2024[67] Long-Lived Assets by Geographic Location (in thousands) | Geographic Area | March 31, 2024 | December 31, 2023 | | :-------------- | :------------- | :---------------- | | United States | $674 | $733 | | Europe | $4,565 | $4,784 | | Asia | $182 | $217 | | Total long-lived assets | $5,421 | $5,734 | Note 6 – Related Party Transactions This note discloses transactions and balances with related parties, including Qualstar Corporation and BKF Capital Group - Interlink has ongoing 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[70][71] Transactions with Qualstar Corporation (in thousands) | Category | Due from Qualstar (Mar 31, 2024) | Due to Qualstar (Mar 31, 2024) | | :---------------------------- | :------------------------------- | :----------------------------- | | Balance at January 1 | $2 | $32 | | Billed (or accrued) to Qualstar by Interlink | $76 | — | | Paid by Qualstar to Interlink | $(65) | — | | Billed (or accrued) to Interlink by Qualstar | — | $37 | | Paid by Interlink to Qualstar | — | $(44) | | Balance at March 31 | $13 | $25 | Transactions with BKF Capital Group (in thousands) | Category | Due from BKF Capital (Mar 31, 2024) | Due to BKF Capital (Mar 31, 2024) | | :---------------------------- | :---------------------------------- | :-------------------------------- | | Balance at January 1 | $2 | — | | Billed (or accrued) to BKF Capital by Interlink | $2 | — | | Paid by BKF Capital to Interlink | $(3) | — | | Billed (or accrued) to Interlink by BKF Capital | — | $56 | | Paid by Interlink to BKF Capital | — | $(56) | | Balance at March 31 | $1 | — | Note 7 – Income Taxes This note details the company's income tax expense, effective tax rate, and factors influencing tax positions, including NOLs and foreign cash holdings - Income tax expense as a percentage of pre-tax loss significantly decreased to 3.1% for Q1 2024, compared to 75.2% for Q1 2023[72] - The effective tax rate is impacted by the mix of domestic and foreign pre-tax earnings and the inability to realize benefits on domestic pre-tax losses due to a valuation allowance on domestic Net Operating Losses (NOLs)[72][74] - An ownership change in 2010 under IRC Section 382 limits the rate at which NOLs and other deferred tax assets can offset future taxable income[73] - The company has elected to account for Global Intangible Low-Taxed Income (GILTI) as a period cost when incurred[75] - Of the $4.4 million cash at March 31, 2024, $2.7 million was held by foreign subsidiaries, with an intent to permanently reinvest these funds outside the U.S.[76] Note 8 – Commitments and Contingencies This note outlines the company's lease obligations, legal proceedings, warranty policies, and indemnification agreements - The company leases various facilities globally, with current leases expiring through fiscal 2025, and has recently entered into a new five-year and three-month lease for a facility in Fremont, California, commencing May 1, 2024[77][83] Lease Liabilities (in thousands) | Category | March 31, 2024 | December 31, 2023 | | :------------------- | :------------- | :---------------- | | Current lease liabilities | $112 | $126 | | Long-term lease liabilities | $2 | $33 | | Right-of-use assets | $99 | $143 | Future Minimum Lease Payments (in thousands) | Years ending December 31, | Amount | | :------------------------ | :----- | | 2024 (remainder of year) | $85 | | 2025 | $33 | | Total undiscounted future non-cancelable minimum lease payments | $118 | | Present value of lease liabilities | $114 | - Operating lease costs for Q1 2024 totaled $0.124 million, with $0.067 million included in cost of revenue and $0.057 million in operating expenses[88] - The company is not party to any legal proceedings as of March 31, 2024, and historically, warranty returns have not been material[90][91] - The company indemnifies customers and contract manufacturers against intellectual property infringement claims and has severance and change-in-control obligations for its CEO, Steven N. Bronson[92][94][95] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section offers management's analysis of the company's financial condition and operational results for the three months ended March 31, 2024 Overview This section provides a general description of Interlink Electronics, Inc.'s business, products, markets, and strategic initiatives - Interlink Electronics, Inc. is a global sensor and printed electronics company with two main divisions: force/touch sensors (including FSR® technology, membrane keypads, graphic overlays) and gas/environmental sensors[100][102][103] - The company declared a 50% common stock dividend on March 1, 2024, retroactively adjusting all share and per share data[101] - Interlink serves a diverse global customer base across consumer electronics, automotive, industrial automation, medical, defense, and environmental monitoring markets, with manufacturing facilities in China, Silicon Valley, and Irvine, Scotland[104][105][106] - The company has invested in expanding its technology platforms through internal development and by establishing a Global Product Development and Materials Science Center in Camarillo, California, aiming for growth and closer alignment with top-tier customers[107] Critical Accounting Policies and Estimates This section discusses the significant accounting policies and estimates that require management's judgment and can materially affect financial reporting - The company's financial statements are prepared in accordance with GAAP, requiring management to make estimates and assumptions that affect reported amounts[108] - 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 25, 2024[109] Recently Issued and Adopted Accounting Pronouncements This section addresses the impact of new accounting pronouncements on the company's financial statements - All recently issued accounting pronouncements have been reviewed and are not applicable or not expected to be material to the financial statements[110] Results of Operations This section analyzes the company's operational performance, including revenue, gross profit, and expenses, for the reported periods Comparison of Three Months Ended March 31, 2024 and 2023 This section provides a detailed comparative analysis of the company's financial results for the three months ended March 31, 2024, versus the same period in 2023 Condensed Consolidated Statements of Operations Data (in thousands, except percentages) | Category | 2024 Amount | 2024 % | 2023 Amount | 2023 % | | :---------------------------- | :---------- | :----- | :---------- | :----- | | Revenue, net | $3,124 | 100.0% | $3,278 | 100.0% | | Cost of revenue | $1,871 | 59.9% | $1,691 | 51.6% | | Gross profit | $1,253 | 40.1% | $1,587 | 48.4% | | Engineering, research and development | $576 | 18.4% | $527 | 16.1% | | Selling, general and administrative | $1,428 | 45.7% | $1,233 | 37.6% | | Total operating expenses | $2,004 | 64.1% | $1,760 | 53.7% | | Loss from operations | $(751) | (24.0)%| $(173) | (5.3)% | | Net loss | $(741) | (23.7)%| $(191) | (5.8)% | Revenue, net, by Market (in thousands, except percentages) | Market | 2024 Amount | 2024 % of Revenue | 2023 Amount | 2023 % of Revenue | $ Change | % Change | | :-------- | :---------- | :---------------- | :---------- | :---------------- | :------- | :------- | | Industrial | $677 | 21.7% | $1,027 | 31.3% | $(350) | (34.1)% | | Medical | $1,185 | 37.9% | $1,351 | 41.2% | $(166) | (12.3)% | | Consumer | $132 | 4.2% | $228 | 7.0% | $(96) | (42.1)% | | Standard | $1,130 | 36.2% | $672 | 20.5% | $458 | 68.2% | | Revenue, net | $3,124 | 100.0% | $3,278 | 100.0% | $(154) | (4.7)% | - Overall net revenue decreased by 4.7% YoY, driven by lower demand from industrial, medical, and consumer markets, partially offset by a 68.2% increase in standard product sales[114][116] - Gross profit decreased by 21.0% and gross margin percentage declined from 48.4% to 40.1% YoY, primarily due to changes in product and customer mix and lower revenues[117] - Engineering, research and development expenses increased by 9.3% YoY due to higher employee and consultation compensation costs and increased intangible asset amortization[118] - Selling, general and administrative expenses increased by 15.8% YoY, mainly due to increased intangible asset amortization from the Calman acquisition and inclusion of Calman's operating costs, despite lower compensation expenses[119] - Other income (expense), net, decreased by 50.0% YoY, primarily due to lower interest income and a shift from foreign currency transaction losses to gains[120][121] - Income tax expense as a percentage of pre-tax loss was 3.1% for Q1 2024, significantly lower than 75.2% in Q1 2023, influenced by the mix of domestic and foreign pre-tax earnings and valuation allowance on domestic NOLs[122] Liquidity and Capital Resources This section assesses the company's ability to meet its short-term and long-term financial obligations, including cash position and financing arrangements - As of March 31, 2024, the company had $4.4 million in cash and cash equivalents, $7.2 million in working capital, and no indebtedness[124] - Approximately $2.7 million of the cash balance is held by foreign subsidiaries, intended for permanent reinvestment outside the U.S.[124] - 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 cumulative cash dividends[125] - Management believes existing cash and cash equivalents are 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[126] Cash Flow Analysis This section analyzes the company's cash flows from operating, investing, and financing activities, highlighting significant changes between periods Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :---------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by (used in) operating activities | $222 | $(620) | | Net cash (used in) investing activities | $(18) | $(2,750) | | Net cash (used in) financing activities | $(100) | $(100) | - Operating activities provided $0.222 million in cash in Q1 2024, a significant improvement from using $0.620 million in Q1 2023, primarily due to changes in operating assets and liabilities offsetting the net loss[128] - Investing activities used $0.018 million in Q1 2024, a substantial decrease from $2.75 million used in Q1 2023, which included the Calman acquisition[130] - Financing activities consistently used $0.100 million in both periods for preferred stock dividend payments[131] Off-Balance Sheet Arrangements This section confirms the absence of any off-balance sheet arrangements that could materially affect the company's financial position - The company does not have any off-balance sheet arrangements[132] 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[133] Item 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures and internal control over financial reporting. Management, including the CEO and CFO, concluded that disclosure controls were effective as of March 31, 2024, and reported no material changes in internal controls over financial reporting during the period Evaluation of Disclosure Controls and Procedures This section describes management's evaluation and conclusion regarding the effectiveness of the company's disclosure controls and procedures - As of March 31, 2024, management, with CEO and CFO participation, concluded that the company's disclosure controls and procedures were designed at a reasonable assurance level and were effective[136] Changes in Internal Controls over Financial Reporting This section reports on any material changes in the company's internal control over financial reporting during the period - There were no changes in internal control over financial reporting during the period ended March 31, 2024, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[137] Limitations on Effectiveness of Controls and Procedures This section acknowledges the inherent limitations of any control system, emphasizing that absolute assurance cannot be provided - Management acknowledges that no control system can prevent or detect all errors and fraud, providing only reasonable, not absolute, assurance due to human diligence, judgment lapses, and changing conditions[139] PART II – OTHER INFORMATION This section includes additional information not covered in the financial statements, such as risk factors, other disclosures, and exhibits Item 1A. Risk Factors This section refers to the risk factors detailed in the company's Annual Report on Form 10-K, stating that no material changes have occurred during the three months ended March 31, 2024 - There have been no material changes to the risk factors previously disclosed in Item 1A of the Annual Report on Form 10-K filed on March 25, 2024[142] Item 5. Other Information This section confirms that there are no insider trading arrangements to report for the period - No insider trading arrangements are reported[143] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including corporate documents, certifications, and XBRL-related files - The report includes various exhibits such as Articles of Incorporation, Certificate of Designations of Series A Preferred Stock, Bylaws, a new Lease agreement, and certifications from the Principal Executive Officer and Principal Financial Officer[145] Signatures This section contains the required signatures for the Quarterly Report on Form 10-Q, duly authorized by the registrant - The report is signed by Ryan J. Hoffman, Chief Financial Officer (Principal Financial and Accounting Officer), on behalf of Interlink Electronics, Inc. on May 9, 2024[148]