What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-25 compared with 2023-03-29 · 66 added, 68 removed, 156 unchanged (46% of the section changed)

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Interlink Electronics, Inc.

operates in two principal divisions:

force-sensing technology and gas-sensing technology.

is a global sensor and printed electronics company operating in two principal sensor technology divisions:

force/touch sensors, and gas and environmental sensors.

Our force/touch sensors, including our Force-Sensing Resistor (“FSR ® ”) technology and related technologies, and our membrane keypads, graphic overlays and printed electronics, are used extensively in Human-Machine Interface (“HMI”) devices, while our gas and environmental sensors and instruments are used in environmental and air quality monitoring across a broad range of applications.

We design, develop, manufacture and sell a range of technologies that incorporate our proprietary materials technology, firmware and software into a portfolio of standard products and custom solutions.

On March 1, 2024, the Board of Directors declared a 50% common stock dividend that was paid on March 22, 2024.

For all years presented, all share and per share data have been retroactively adjusted for the effect of the 50% common stock dividend, which is accounted for as a stock split effected in the form of a stock dividend.

Our principal products are:

Force/Touch Sensors .

We design, develop, manufacture and sell a range of force-sensing technologies that incorporate our proprietary materials technology, firmware and software into a portfolio of standard products and custom solutions.

These include sensor components, subassemblies, modules and products that support effective, efficient cursor control and novel three-dimensional user inputs.

Our Human Machine Interface (“HMI”) technology platforms are deployed in a wide range of markets including consumer electronics, automotive, industrial, and medical.

Our HMI technology platforms are deployed in a wide range of markets, including consumer electronics, automotive, industrial and medical.

The application of our HMI technology platforms includes vehicle entry, vehicle multi-media control interface, rugged touch controls, presence detection, collision detection, speed and torque controls, pressure mapping, biological monitoring and others.

Interlink has been a leader in the printed electronics industry for over 35 years with the commercialization of our patented FSR® technology that has enabled rugged and reliable HMI solutions.

Our solutions have focused on handheld user input, menu navigation, cursor control, and other intuitive interface technologies for the world’s top electronics manufacturers.

Through our acquisition in December 2022 of the business assets of SPEC Sensors, LLC and KWJ Engineering, Inc., early pioneers in miniaturized, low-cost gas-sensing technologies, we also offer electrochemical gas-sensing technology products and solutions for industry, community, health and home, with uses in fields such as carbon monoxide and ozone detection and air quality monitoring.

We sell our products and solutions globally to a diverse array of customers that include the Fortune 500 as well as start-ups, design houses, original design manufacturers, OEMs and universities.

Our technology has been deployed in the consumer electronics, industrial automation, automotive, medical, and environmental monitoring markets.

Our global presence in the United States, China, Hong Kong, Singapore and Japan, allows us to provide local sales and engineering support services to our existing and future customers.

Our products are manufactured by our wholly-owned subsidiary in a state-of-the-art facility in Shenzhen, China, and in our production facility in Newark, California.

Additionally, through our acquisition of Calman Technology Limited in March 2023, we offer customized membrane keypads, graphic overlays, printed electronics and industrial label products for use in a wide range of fields, from industrial instrumentation, process control and monitoring to medical and diagnostic devices and defense systems.

With over 25 years as a leading HMI provider, Calman Technology has developed to also become a specialized provider of printed electronics for the medical sector in the UK and Europe.

Gas and Environmental Sensors .

We entered the gas and environmental sensing market in 2022 through our acquisition of the business assets of SPEC Sensors, LLC (“SPEC”) and KWJ Engineering, Inc.

(“KWJ”), early pioneers in miniaturized, low-cost gas and environmental sensing technologies.

Following our acquisition of these operations, we now offer electrochemical gas-sensing technology products and solutions for industry, community, health and home, with uses in fields such as safety, personal wellness and air quality monitoring.

We sell our products and solutions globally to a diverse array of customers that include Fortune Global 500 companies with the world’s most recognizable brands, as well as start-ups, design houses, original design and equipment manufacturers, and universities.

Our technology has been deployed in the consumer electronics, automotive, industrial automation, medical, defense and environmental monitoring markets.

Our global presence in the United States, China, United Kingdom, Hong Kong, Singapore and Japan allows us to broadly provide sales and engineering support services to our existing and future worldwide customers.

We manufacture our products in a state-of-the-art facility in Shenzhen, China, and in our advanced and proprietary facilities in Newark, California and Irvine, Scotland.

We control 100% of the manufacturing and shipping process, which enables us to respond quickly to customer product demand and design requirements.

We have invested significantly in the expansion of our technology platforms through our own internal development to ensure we provide the market with leading-edge solutions that are seamless to deploy and perform flawlessly.

We spent several years building a research and development (R&D) organization in Singapore to develop new product offerings that will meet the market’s growing demand for touch technology and smart surfaces.

We have now shifted a majority of R&D and product development efforts to Camarillo, California, where we established a Global Product Development and Materials Science Center, and our advanced and proprietary facility in Silicon Valley.

We believe this increased presence in the U.S.

will allow us to grow our business and be more closely aligned with current and future large-tier customers.

We also expect to launch an engineering, research and development center in the United Kingdom.

We have invested significantly in the expansion of our technology platforms through our own internal development to ensure we continue to provide the market with leading-edge solutions that are seamless to deploy and perform flawlessly.

Having previously built an R&D organization in Singapore to develop new product offerings that will meet the market’s growing demand for touch technology and smart surfaces, we relocated a majority of our R&D and product development efforts to Camarillo, California, where we have established a Global Product Development and Materials Science Center.

Combined with the advanced and proprietary facilities in Silicon Valley and Scotland that were acquired in connection with the acquisitions of SPEC and KWJ and Calman, we believe this will allow us to grow our business and be more closely aligned with current and future top-tier customers.

We also plan to explore potential strategic relationships with companies and technology institutes that will support our growth initiatives.

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(in thousands, except percentages)

We sell our custom products into the industrial, medical, consumer, automotive and environmental monitoring markets.

We sell our standard products through various distribution networks.

The ultimate customer for standard products may come from different markets which are often unknown to us at the time of sale.

We sell our custom products into the industrial, medical, and consumer markets.

We sell our standard products to customers in many markets through various distribution networks.

The ultimate customer for our standard products may come from different markets which are often unknown to us at the time of sale.

Each market has different product design cycles.

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Industrial, medical, and environmental monitoring products generally have longer design and life cycles than consumer products.

We currently have products with life-cycles that have exceeded twenty years and are ongoing.

Revenues were up in 2022 compared to 2021 in the medical market, down in the consumer market, and generally flat in the industrial and automotive markets, and for our standard products.

The increase in revenue from our medical market customers is due to an increase in orders from and shipments to our largest medical customer, whose purchasing volume has increased based on increases in installations at their hospital and medical center customer locations.

The decrease in revenue from our consumer market customers is primarily due to a design change by one of our largest consumer products customers, offset by shipments of our custom sensors to a

new customer in this market.

In all markets, the timing of orders from our customers is not always predictable and can be concentrated in varying periods during the year to coincide with their project and building plans.

We currently have products with life cycles that have exceeded 20 years and are ongoing.

Revenues were up in 2023 compared to 2022 to customers in all of the custom markets we sell to and also to customers of our standard products.

The increase in revenue from customers in all markets is due primarily to the inclusion of sales by the SPEC and KWJ businesses and by Calman, acquired in December 2022 and March 2023, respectively, and also to increased shipments of our existing force-sensing products and solutions resulting from increased customer demand.

In all markets, the timing of orders from our customers is not always predictable and can be concentrated in varying periods to coincide with their project and building plans.

Year ended December 31,

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Our gross profit and gross margin percentage are impacted by various factors including product mix, customer mix, sales volume, and fluctuations in our cost of revenues, which are comprised of material costs, direct and indirect production labor costs, warehousing and logistics costs, facilities costs, and other costs related to production activities.

Gross profit and gross margin percentage for 2022 were down compared to 2021 due primarily to higher materials and components costs on certain orders, higher freight and tariff costs on certain transactions, unfavorable changes in product and customer mix, and changes in production efficiencies in our manufacturing operations.

Gross profit for 2023 was up compared to 2022 due to higher revenue (resulting primarily from our acquisitions of SPEC and KWJ and Calman), while gross margin percentage was down due to changes in product and customer mix (primarily acquisition-related) and increased materials and components costs on certain orders.

Year ended December 31,

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Our R&D team focuses both on internal design development in order to develop our force-sensing and gas-sensing technologies and solutions, as well as design development aimed at addressing our customers’ unique design challenges.

Engineering and R&D costs for 2022 were up compared to 2021 due to increased engineering employee headcount and increased costs on prototyping and development activities, and also due to inclusion in 2021 of receipt of a $129 thousand research incentive grant from the Singapore government that reduced expenses in the prior year.

Engineering and R&D costs for 2023 were up compared to the prior year due primarily to increased engineering employee headcount following our acquisitions of SPEC and KWJ in December 2022, the inclusion in the current year period of approximately $136,000 of non-cash amortization expense on intangible assets acquired in the purchases of SPEC and KWJ, and increased prototyping and product-development activities this year as compared to the prior year.

Year ended December 31,

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Selling, general and administrative expenses consist primarily of compensation expenses, legal and other professional fees, facilities expenses and communication expenses.

Selling, general and administrative costs for 2022 were up slightly compared to 2021.

The prior year period included a $186 thousand benefit from forgiveness of the PPP loan.

When comparing selling, general and administrative costs for the periods exclusive of that benefit, costs for 2022 were lower than in the prior year due to lower sales and marketing employee headcount, and lower legal and other professional fees.

Selling, general and administrative expenses for the current year were up compared to last year due to increased employee headcount following our acquisitions of SPEC and KWJ in December 2022 and Calman in March 2023, the inclusion in the current year period of approximately $486,000 of non-cash amortization expense on intangible assets acquired in the Calman purchase, and increased acquisition-related legal and other professional fees.

Year ended December 31,

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Other income (expense), net consists of non-operating income and expenses, such as gains and losses on marketable securities, foreign currency transaction gains and losses, interest income and expense, and other non-operating income and expenses.

Other income (expense), net for 2022 was comprised of $2.449 million of gains on marketable securities, $121 thousand of foreign currency

transaction gains, and $41 thousand of interest income, while other income (expense), net for 2021 was comprised of $40 thousand of foreign currency transaction losses, and $10 thousand of other non-operating expenses.

Other income (expense), net for 2023 was comprised of $155,000 of interest income, $3,000 of foreign currency transaction gains, and $6,000 of other non-operating income, while other income (expense), net for 2022 was comprised of $2,449,000 of gains on marketable securities, $121,000 of foreign currency transaction gains, and $41,000 of interest income.

Year ended December 31,

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Income tax expense

Tax expense (benefit) reflects statutory tax rates in the jurisdictions in which we operate adjusted for permanent book/tax differences.

For 2022, the Company’s tax provision reflects tax expense on its foreign earnings, and tax expense on its domestic earnings net of utilization of a portion of the previously recorded valuation allocance.

For 2021, the Company recorded an income tax provision comprised substantially of valuation allowance against domestic deferred tax assets due to recent history of U.S.

taxable losses.

Our effective tax rate is directly affected by the relative proportions of revenue and income before taxes in the jurisdictions in which we operate.

Based on the expected mix of domestic and foreign earnings, we anticipate our effective tax rate to remain similar to the newly stated U.S.

statutory rate of 21% primarily due to a significant portion of our earnings originating in the higher rate China jurisdiction (25%), offset by lower rate jurisdictions in Singapore (17%) and Hong Kong (16.5%).

Income tax expense reflects statutory tax rates in the jurisdictions in which we operate adjusted for permanent book/tax differences.

For both 2023 and 2022, the Company’s income tax expense reflects tax expense on its foreign earnings, and on its domestic earnings net of utilization of a portion of the previously recorded valuation allowance on domestic deferred tax assets.

Our effective tax rate is directly affected by the relative proportions of revenue and income before taxes in the jurisdictions in which we operate and the applicable tax rates in such jurisdictions.

Based on the expected mix of domestic and foreign earnings, we anticipate our effective tax rate to remain higher than the U.S.

statutory rate of 21% primarily due to a significant portion of our earnings originating in higher rate jurisdictions of China (25%) and the United Kingdom (25%), offset in part by earnings in lower-rate jurisdictions of Hong Kong (16.5%) and Singapore (17%).

State income taxes also have an impact in the U.S.

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Additional changes to the tax system in the U.S.

could have significant effects, positive and negative, on our effective tax rate, and on our deferred tax assets and liabilities.

could have significant effects (which we cannot predict to be net positive or net negative) on our effective tax rate and on our deferred tax assets and liabilities.

Liquidity and Capital Resources

Cash requirements for working capital, capital expenditures, and acquisition activities have been funded from cash balances on hand, cash generated from operations and marketable securities, and sales of equity securities.

Cash requirements for working capital, capital expenditures, and acquisition activities have been funded from our cash balances, cash generated from operations and sales of marketable securities, and issuances of equity securities.

As of December 31, 2023, we had cash and cash equivalents of $4.3 million, working capital of $8.0 million and no indebtedness.

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We did not have any short-term or long-term investments as of December 31, 2023.

Of the $10.1 million of cash balances on hand, $0.9 million was held by foreign subsidiaries;

if those funds are needed for our operations in the U.S., we have several methods to repatriate the funds without significant tax effects, including repayment of intercompany loans or distributions of previously taxed income.

Of our $4.3 million of cash, $2.3 million was held by foreign subsidiaries.

If these funds are needed for U.S.

operations or for acquisitions, we have several methods to repatriate the funds without significant tax effects, including repayment of intercompany loans or distributions of previously taxed income.

Other distributions may require us to incur U.S.

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However, our intent is to permanently reinvest these funds outside the U.S.

and our current plans do not demonstrate a need to repatriate cash to fund our U.S.

In 2021, we sold 200,000 shares of our 8.0% Series A Convertible Preferred Stock at a price of $25.00 per share for gross proceeds to us of $5.0 million before placement agent fees and transaction expenses.

Each share of Series A Preferred Stock is convertible into two shares of our common stock.

The designations, rights and preferences of our Series A Convertible Preferred Stock provide that we will pay, when, as and if declared by our board of directors, monthly cumulative cash dividends at an annual rate of 8.0%, which is equivalent to $0.16667 per month and $2.00 per annum per share, based on the $25.00 liquidation preference.

Dividends on the Series A Convertible Preferred Stock will accrue daily and be cumulative from, and including, the first day of the calendar month in which the shares are issued and will be payable monthly in arrears on the 15th day of each calendar month.

Our board of directors commenced paying dividends on our Series A Convertible Preferred Stock in November 2021, and we expect that our board of directors will continue to declare and pay monthly cash dividends on our Series A Convertible Preferred Stock, subject to the limitations to do so under Nevada law.

and our current plans do not demonstrate a need to repatriate cash.

We have outstanding 200,000 shares of our 8.0% Series A Convertible Preferred Stock (the “Preferred Stock”) that have an aggregate liquidation preference of $5.0 million.

We pay, when, as and if declared by our board of directors, monthly cumulative cash dividends on the Preferred Stock at an annual rate of 8.0%;

this is equivalent to $0.16667 per month and $2.00 per annum per share, based on a per share liquidation preference of $25.00.

Dividends on the Preferred Stock are payable monthly in arrears on the 15th day of each calendar month.

Our board of directors has declared, and we have paid, cash dividends on the Preferred Stock each month since the Preferred Stock was issued in October 2021, and we expect that the board will continue to declare, and we will continue to pay, such cash dividends each month while the Preferred Stock is outstanding, subject to applicable limitations under Nevada law.

We believe that our existing cash and cash equivalents balance will be sufficient to maintain our current operations considering our current financial condition, obligations, and other expected cash flows.

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If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted.

If we raise additional financing by the incurrence of indebtedness, we could be subject to fixed payment obligations and could also be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other

operating restrictions that could adversely impact our ability to conduct our business.

If we are unable to raise additional needed funds, we may also take measures to reduce expenses to offset any shortfall.

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(in thousands)

Net cash provided by (used in) operating activities

Net cash (used in) operating activities

Net cash provided by (used in) investing activities

Net cash provided by (used in) financing activities

Net Cash Provided By (Used In) Operating Activities

For the year ended December 31, 2022, the $915 thousand in net cash used in operating activities was attributable to net income of $1.672 million, adjusted for non-cash charges of $256 thousand, realized gain on marketable securities of $2.449 million, and cash used in changes in operating assets and liabilities of $394 thousand.

For the year ended December 31, 2021, the $231 thousand in net cash provided by operating activities was attributable to net loss of $734 thousand, adjusted for non-cash charges of $819 thousand, non-cash gain on forgiveness of PPP loan of $186 thousand, and cash from changes in operating assets and liabilities of $332 thousand.

Accounts receivable increased from $1.080 million at December 31, 2021 to $1.178 million at December 31, 2022 due to timing of shipments and cash collections during the fourth quarter of 2022 compared to the fourth quarter of 2021.

Net cash (used in) financing activities

Net Cash (Used In) Operating Activities

For the year ended December 31, 2023, the $116,000 in net cash used in operating activities was attributable to net loss of $383,000, adjusted for non-cash charges of $806,000 and cash used in changes in operating assets and liabilities of $539,000.

For the year ended December 31, 2022, the $915,000 in net cash used in operating activities was attributable to net income of $1,672,000, adjusted for non-cash charges of $256,000, realized gains on marketable securities of $2,449,000, and cash used in changes in operating assets and liabilities of $394,000.

Accounts receivable increased from $1,178,000 at December 31, 2022 to $2,167,000 at December 31, 2023 due to the addition of accounts receivable from our acquisition of Calman during the year, and also timing of shipments and cash collections during the fourth quarter of 2023 compared to the fourth quarter of 2022.

Many of our customers pay promptly and accounts receivable is generally related to the most recent shipments.

Inventories increased from $814 thousand at December 31, 2021 to $2.112 million at December 31, 2022 due primarily to the inventory acquired in the acquisition of SPEC and KWJ in December 2022;

inventory balances fluctuate depending on the timing of materials purchases and product shipments.

Prepaid expenses and other current assets decreased from $391 thousand at December 31, 2021 to $321 thousand at December 31, 2022.

Inventories increased from $2,112,000 at December 31, 2022 to $2,476,000 at December 31, 2023 due primarily to the addition of Calman’s inventory to our consolidated balances, as well as fluctuations caused by the variability in the timing of materials purchases and product shipments.

Prepaid expenses and other current assets increased from $321,000 at December 31, 2022 to $381,000 at December 31, 2023.

The balance of our prepaid expenses and other assets fluctuates with the timing of payments of insurance premiums, advances, and estimated income taxes.

Accounts payable and accrued liabilities decreased slightly from $845 thousand at December 31, 2021 to $841 thousand at December 31, 2022;

payables and accrued expenses fluctuate based on the timing of payment for purchases of materials, compensation accruals, and other outside services.

Accounts payable, accrued liabilities, and accrued income taxes increased from $958,000 at December 31, 2022 to $1,249,000 at December 31, 2023;

payables, accrued expenses, and accrued income taxes fluctuate based on the timing of payment for purchases of materials, compensation accruals, outside services, and income taxes, and increased in part from the addition of Calman’s liabilities to our consolidated balances.

Net Cash Provided By (Used In) Investing Activities

Net cash provided by investing activities of $735 thousand for the year ended December 31, 2022 consisted of net proceeds from purchase and sales of marketable securities of $2.449 million, net cash used in the December 2022 acquisition of SPEC and KWJ of $1.672 million, and $42 thousand of cash used for purchases of property and equipment.

Net cash used in investing activities of $159 thousand for the year ended December 31, 2021 consisted primarily of capital expenditures related to completion of the Global Product Development and Materials Science Center in our Camarillo footprint.

Net Cash Provided By (Used In) Financing Activities

Net cash used in financing activities of $350 thousand for the year ended December 31, 2022 consisted of payment of $400 thousand of dividends on our Series A Convertible Preferred Stock, offset by $50 thousand of proceeds from issuance of common stock.

Net cash provided by financing activities of $4.5 million for the year ended December 31, 2021 was from our Series A Convertible Preferred Stock offering in which we raised gross offering proceeds of $5.0 million before reductions for selling commissions and costs.

Net cash used in investing activities of $4,885,000 for the year ended December 31, 2023 consisted of $4,873,000 used to acquire the equity interests of Calman (which was net of $1,577,000 of cash acquired), $111,000 received from the purchase price escrow for the acquisition of SPEC and KWJ upon finalization of the purchase price (which was in excess of the $56,000 previously anticipated to have been recovered), and $123,000 of cash used for purchases of property and equipment.

Net cash provided by investing activities of $735,000 for the year ended December 31, 2022 consisted of net proceeds from purchase and sales of marketable securities of $2,449,000, net cash used in the December 2022 acquisition of SPEC and KWJ of $1,672,000 (which was net of $541,000 of cash acquired in the acquisition and $56,000 anticipated to have been recovered from the purchase price adjustment escrow), and $42,000 of cash used for purchases of property and equipment.

Net Cash (Used In) Financing Activities

Net cash used in financing activities of $750,000 for the year ended December 31, 2023 consisted of payment of $400,000 of dividends on our Preferred Stock, and $350,000 used for repurchases of 56,430 shares of common stock.

Net cash used in financing activities of $350,000 for the year ended December 31, 2022 consisted of payment of $400,000 of dividends on our Preferred Stock, offset by $50,000 of proceeds from issuance of common stock.

Transactions with Related Parties

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Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed.

Goodwill is determined to have an indefinite useful life and is not amortized, but tested for impairment at least annually or more frequently in events and circumstances exist that indicate that a goodwill impairment test should be performed.

Goodwill is determined to have an indefinite useful life and is not amortized but is tested for impairment at least annually or more frequently in events and circumstances exist that indicate that a goodwill impairment test should be performed.

Intangible assets and property, plant and equipment are carried at cost less accumulated depreciation and amortization and are tested for impairment whenever events or changes in circumstances indicate their carrying value may not be recoverable.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis