What changed in this filing

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Item 1. Financial Statements

2024-05-09 compared with 2023-11-09 · 108 added, 195 removed, 413 unchanged (42% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30,

(in thousands, except par value)

17 unchanged sentences

Lease liabilities, long term

Deferred tax liabilities

Total long-term liabilities

3 unchanged sentences

Preferred stock, $ 0.01 par value:

1,000 shares authorized, 200 shares of Series A Convertible Preferred Stock issued and outstanding at both September 30, 2023 and December 31, 2022 ($ 5.0 million liquidation preference)

1,000 shares authorized, 200 shares of Series A Convertible Preferred Stock issued and outstanding at both March 31, 2024 and December 31, 2023 ( $ 5.0 million liquidation preference)

Common stock, $ 0.001 par value:

30,000 shares authorized, 6,574 shares issued and outstanding at September 30, 2023;

6,610 shares issued and outstanding at December 31, 2022

30,000 shares authorized, 9,860 shares issued and outstanding at both March 31, 2024 and December 31, 2023

Additional paid-in-capital

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income

Accumulated deficit

4 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended September 30,

Nine Months Ended September 30,

Three months ended March 31,

(in thousands, except per share data)

4 unchanged sentences

Total operating expenses

Income (loss) from operations

Loss from operations

Other income (expense):

Other income (expense), net

Income before income taxes

Loss before income taxes

Income tax expense

Net income (loss)

Net income (loss) applicable to common stockholders

Net loss applicable to common stockholders

Earnings (loss) per common share – basic and diluted

3 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three Months Ended September 30,

Nine Months Ended September 30,

Three months ended March 31,

(in thousands)

Net income (loss)

Other comprehensive income (loss), net of tax:

Foreign currency translation adjustments

Comprehensive income (loss)

Comprehensive loss

See accompanying notes to these unaudited condensed consolidated financial statements.

4 unchanged sentences

Stockholders’

Three Months Ended September 30, 2023

Income (Loss)

(in thousands)

Balance at June 30, 2023

Net income (loss)

Preferred stock dividends

Foreign currency translation adjustment

Stock-based compensation expense

Repurchases of common stock

Balance at September 30, 2023

Preferred Stock

Comprehensive

Stockholders’

Nine Months Ended September 30, 2023

Three months ended March 31, 2024

Income (Loss)

1 unchanged sentence

Balance at December 31, 2023

Net income (loss)

Preferred stock dividends

Foreign currency translation adjustment

Stock-based compensation expense

Repurchases of common stock

Balance at September 30, 2023

Preferred Stock

Comprehensive

Stockholders’

Three Months Ended September 30, 2022

Income (Loss)

(in thousands)

Balance at June 30, 2022

Preferred stock dividends

Foreign currency translation adjustment

Stock-based compensation expense

Balance at September 30, 2022

Balance at March 31, 2024

Preferred Stock

1 unchanged sentence

Stockholders’

Nine Months Ended September 30, 2022

Three months ended March 31, 2023

Income (Loss)

3 unchanged sentences

Foreign currency translation adjustment

Stock-based compensation expense

Balance at September 30, 2022

Balance at March 31, 2023

See accompanying notes to these unaudited condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30,

Three months ended March 31,

(in thousands)

Cash flows from operating activities:

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Depreciation and amortization

Unrealized and realized (gains) on marketable securities

Stock-based compensation expense

Adjustment to reconcile operating lease expense to cash paid

Deferred income taxes

Changes in operating assets and liabilities:

7 unchanged sentences

Acquisition of Calman Technology Limited, net of cash acquired

Purchases of marketable securities

Proceeds from sales of marketable securities

Purchases of property, plant and equipment

2 unchanged sentences

Payment of dividends on preferred stock

Repurchases of common stock

Net cash (used in) financing activities

Effect of exchange rate changes on cash and cash equivalents

Net (decrease) in cash and cash equivalents

Effect of exchange rate changes on cash

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of period

1 unchanged sentence

Supplemental disclosure of cash flow information:

Income taxes paid

Income taxes paid, net

Interest paid

Supplemental disclosure of non-cash investing and financing activities:

Lease liabilities arising from obtaining right-of-use assets

See accompanying notes to these unaudited condensed consolidated financial statements.

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Interlink Electronics, Inc.

(“we,” “us,” “our,” “Interlink” or the “Company”) operates in two principal sensor technology divisions:

force/touch sensors, and gas sensors.

Our Force-Sensing Resistor (FSR®) and related technologies, including membrane keypads, graphic overlays and printed electronics, are used extensively in human-machine interface (“HMI”) devices, while our gas 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.

(“we,” “us,” “our,” “Interlink” or the “Company”) is a global sensor and printed electronics company operating in two principal sensor technology divisions:

force/touch sensors, and gas and environmental sensors.

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

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

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

Our membrane keypads, graphic overlays and other printed circuits are also deployed in HMI markets and integrated into products such as medical devices and defense systems.

Our electrochemical gas-sensing technology products and solutions are deployed in industry, community, health and home settings, with uses in fields such as carbon monoxide and ozone detection and air quality monitoring.

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

Our membrane keypads, graphic overlays, printed electronics and industrial label products are applicable for use in a wide range of fields, from industrial automation, process control and monitoring to medical and diagnostic devices and defense systems.

Our electrochemical gas-sensing technology instruments, products and solutions are deployed in industry, community, health and home settings, with uses in fields such as carbon monoxide and ozone detection and air quality monitoring.

We serve our world-wide customer base from our corporate headquarters in Irvine, California;

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our printed-electronics manufacturing facilities in Shenzhen, China, and Irvine, Scotland;

our advanced and proprietary production and product development facility in Newark, California;

our advanced and proprietary production and product development facility in Silicon Valley, California;

our engineering, research and development center in Singapore;

our technical sales office in Japan;

and our distribution and logistics center in Hong Kong.

We also maintain a technical and sales office in Japan.

Our principal executive office is located at 15707 Rockfield Boulevard, Suite 105, Irvine, California 92618 and our telephone number is (805) 484-8855.

Our website address is www.interlinkelectronics.com.

March 2024 Common Stock Dividend

On March 1, 2024, the Board of Directors declared a 50 % common stock dividend with a record date of March 11, 2024, that was paid on March 22, 2024.

Settlement of fractional share interests was made by issuing one full share of common stock in lieu of a fractional share.

The stock dividend increased the number of issued and outstanding shares of common stock from 6,573,570 to 9,860,368 .

Except as otherwise noted, all references to common stock, common stock issuable upon conversion of preferred stock, and corresponding per share information throughout this Quarterly Report on Form 10-Q have been retroactively adjusted to reflect the stock dividend, which is accounted for as a stock split effected in the form of a stock dividend.

Our fiscal year is the calendar year reporting cycle beginning January 1 and ending December 31.

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The benefits of tax deductions in excess of recognized compensation cost are reported as a financing cash flow.

As of September 30, 2023, there were no stock-based compensation awards outstanding.

As of March 31, 2024, there were no stock-based compensation awards outstanding.

Other Income (Expense)

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

Other income (expense) consists of interest income, foreign currency exchange gains and losses, gains and losses on marketable securities, and other non-operating gains and losses.

We account for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards.

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Our operations and financial results may be adversely affected by outbreaks of viruses, widespread illness, infectious diseases, contagions and unforeseen epidemics (such as the COVID-19 coronavirus) in countries in which our products are manufactured and sold.

We experienced delays in the receipt of certain goods and the supply of our products from international and domestic shipping origins as a result of the COVID-19 pandemic and more general global supply chain constraints in fiscal 2021, and to a lesser extent in fiscal 2022 and so far in fiscal 2023.

Depending on the continued extent and duration of these and similar constraints and disruptions, our supply chain, results of operations (including sales) or future business may be materially and adversely impacted.

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Subsequent Events

We have evaluated subsequent events through November 9, 2023, being the date these condensed consolidated financial statements were issued.

We have evaluated subsequent events through May 9, 2024, being the date these condensed consolidated financial statements were issued.

Note 2 – Details of Certain Financial Statement Components

Inventories, stated at the lower of cost or net realizable value, consisted of the following:

September 30,

(in thousands)

4 unchanged sentences

Property, plant and equipment, net, consisted of the following:

September 30,

Property, plant and equipment, net

4 unchanged sentences

Total property, plant and equipment, net

Depreciation expense totaled $ 42,000 and $ 48,000 for the three months ended September 30, 2023 and 2022, respectively.

Depreciation expense totaled $ 125,000 and $ 150,000 for the nine months ended September 30, 2023 and 2022, respectively.

Depreciation expense totaled $ 40,000 and $ 37,000 for the three months ended March 31, 2024 and 2023, respectively.

Intangible assets, net, consisted of the following:

September 30,

Intangible assets, net

8 unchanged sentences

Total intangible assets, net

Amortization expense totaled $ 36,000 and $ 14,000 for the three months ended September 30, 2023 and 2022, respectively.

Amortization expense totaled $ 142,000 and $ 42,000 for the nine months ended September 30, 2023 and 2022, respectively.

Amortization expense totaled $ 189,000 and $ 12,000 for the three months ended March 31, 2024 and 2023, respectively.

Future amortization expense on existing intangible assets is as follows:

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2024 (remainder of year)

The changes in the carrying amount of goodwill for the periods ended March 31, 2024 and 2023 are as follows:

(in thousands)

Balance as of January 1, 2024

Adjustment to goodwill, foreign currency exchange rate changes

Balance as of March 31, 2024

(in thousands)

Balance as of January 1, 2023

Goodwill acquired in acquisition of Calman (before December 2023 adjustment to allocation)

Adjustment to goodwill, foreign currency exchange rate changes

Balance as of March 31, 2023

Accrued liabilities consisted of the following:

September 30,

Accrued liabilities

(in thousands)

Accrued compensation and benefits

Accrued wages and benefits

Accrued vacation

1 unchanged sentence

Total accrued liabilities

Note 3 – Acquisitions

Acquisition of Assets of SPEC Sensors and KWJ Engineering

On December 16, 2022, we acquired substantially all of the assets of SPEC Sensors, LLC (“SPEC”), and KWJ Engineering, Inc.

(“KWJ”) (collectively, “SPEC/KWJ”), two designers and manufacturers of gas, air and environmental quality sensors that were under common ownership, pursuant to an Asset Purchase Agreement, dated as of December 16, 2022 (the “Asset Purchase Agreement”), by and among the Company, SPEC/KWJ, and the respective equity holders of SPEC and KWJ.

The Asset Purchase Agreement contains customary representations, warranties and covenants, including non-competition covenants.

Under the terms of the Asset Purchase Agreement, the purchase price for both companies’ assets was $ 2,000,000 plus the amount by which the combined companies’ net working capital at closing was more than $ 1,350,000 .

At closing, the purchase price was preliminarily calculated as $ 2,269,000 , of which $ 1,519,000 was paid to SPEC/KWJ, and $ 750,000 was paid into escrow against purchase price adjustments and potential claims for breaches of representations and warranties by SPEC/KWJ or the equity holders.

Subsequent to the closing, the parties reached an agreement pursuant to which (i) the purchase price was reduced to $ 2,102,313 resulting from the determination that the closing date net working capital was $ 166,687 lower than was preliminarily calculated, with such funds having been distributed back to the Company from the escrow account in May 2023, and (ii) the remaining funds in the escrow account were released to SPEC/KWJ in May 2023 without prejudice to the Company’s rights in respect of breaches of representations, warranties or covenants.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date, giving effect to the post-closing purchase price adjustment (in thousands).

Accounts receivable

Prepaid expenses and other current assets

Property and equipment

Accounts payable and accrued liabilities

Net identifiable tangible assets acquired

Developed technology

Customer relationships

Tradenames and trademarks

In-process research and development

Non-compete agreements

Order backlog

Net assets acquired

The fair value of accounts receivable is equal to the $ 306,000 gross contractual amount, as we expect the entire balance to be collectible.

The goodwill recognized is attributable primarily to expected synergies and the assembled workforces of SPEC/KWJ.

The goodwill is expected to be deductible for income tax purposes.

Acquisition of Calman Technology Limited

Note 3 – Acquisition of Calman Technology Limited

On March 17, 2023, we acquired all of the outstanding shares in Calman Technology Limited (“Calman”), a Scotland-based designer and manufacturer of membrane keypads, graphic overlays and printed electronics, pursuant to a Share Purchase Agreement (the “Share Purchase Agreement”) by and among the Company’s wholly owned United Kingdom subsidiary, Interlink Electronics Limited, and the shareholders of Calman.

The Share Purchase Agreement contains customary representations, warranties and covenants, including non-competition covenants on the part of the sellers, who continue to be employed by Calman.

The purchase price was subject to adjustment based on the extent, if any, to which Calman’s net working capital at closing was more or less than GB£ 600,000 (approximately $ 714,000 ), which resulted in additional purchase consideration of approximately GB£ 1,292,000 (approximately $ 1,538,000 ).

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands).

We are in the process of identifying and measuring the fair value of certain property and equipment assets, intangible assets, and working capital balances, and accordingly the following measurements of these assets and goodwill are provisional and subject to change.

Under the terms of the Share Purchase Agreement, the purchase price was GB£ 4,127,000 (approximately $ 4,912,000 ), of which GB£ 3,627,000 (approximately $ 4,317,000 ) was paid at closing and the remaining GB£ 500,000 (approximately $ 595,000 ) was held back against potential claims for breaches of representations and warranties (subject to certain deductibles and caps) and was paid to the sellers in December 2023.The purchase price was subject to adjustment based on the extent, if any, to which Calman’s net working capital at closing was more or less than GB£ 600,000 (approximately $ 714,000 ), which resulted in additional purchase consideration of approximately GB£ 1,292,000 (approximately $ 1,538,000 ).

The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date, giving effect to the post-closing purchase price adjustment and the revised allocation based on the results of the valuation report (in thousands).

Accounts receivable

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Net identifiable tangible assets acquired

Developed technology

Tradenames and trademarks

Customer relationships

Non-compete agreements

Deferred tax liabilities

Net assets acquired

The fair value of accounts receivable is equal to the $ 656,000 gross contractual amount, as we expect the entire balance to be collectible.

The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of Calman.

The goodwill is not expected to be deductible for income tax purposes.

The following represents the pro forma consolidated statement of operations as if both SPEC/KWJ and Calman had been included in our consolidated results for the periods ended September 30, 2023 and 2022 (unaudited):

Three Months Ended September 30,

Nine Months Ended September 30,

The following represents the pro forma consolidated statement of operations as if Calman had been included in our consolidated results for the full quarters ended March 31, 2024 and 2023:

Three Months Ended March 31,

(in thousands)

Net income (loss)

Note 4 – Marketable Securities

Our marketable securities consist of equity securities classified as available-for-sale (“AFS”).

AFS securities are carried at fair value on the condensed consolidated balance sheets.

Realized and unrealized gains and losses are reported in earnings within “other income (expense), net”.

The specific identification method is used to determine realized gains and losses on AFS securities.

During the three months ended September 30, 2023 and 2022, we purchased $ 0 and $ 0 of marketable securities, respectively, and we sold $ 0 and $ 15,000 of marketable equity securities, respectively.

During the nine months ended September 30, 2023 and 2022, we purchased $ 0 and $ 6.0 million of marketable securities, respectively, and we sold $ 0 and $ 15,000 of marketable equity securities, respectively.

During the three months ended September 30, 2023 and 2022, gross realized and unrealized gains were $ 0 and $ 2,000 , respectively, and gross realized and unrealized losses were $ 0 and $ 0 , respectively.

During the nine months ended September 30, 2023 and 2022, gross realized and unrealized gains were $ 0 and $ 2,000 , respectively, and gross realized and unrealized losses were $ 0 and $ 0 , respectively.

As of September 30, 2023, we had no marketable equity securities.

Note 4 – Earnings Per Share

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Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period, plus the dilutive effect of any dilutive securities.

On March 1, 2024, the Board of Directors declared a 50 % common stock dividend with a record date of March 11, 2024, that was paid on March 22, 2024.

The effect of this stock dividend (which is accounted for as a stock split effected in the form of a stock dividend) has been applied retroactively to weighted average common shares outstanding, earnings per share, and the conversion rate and conversion price applicable for our Series A Convertible Preferred Stock, as if the 50 % common stock dividend had occurred at the beginning of the earliest period presented.

The following table sets forth the computation of basic and diluted earnings per share:

Three Months Ended

Nine Months Ended

September 30,

(in thousands, except per share data)

Net income (loss)

Preferred stock dividends

Net income (loss) applicable to common stockholders

Net loss applicable to common stockholders

Weighted average common shares outstanding – basic

3 unchanged sentences

Earnings (loss) per common share, diluted

Shares subject to anti-dilutive Series A Convertible Preferred Stock excluded from calculation

200,000 shares of Series A Convertible Preferred Stock convertible into 400,000 shares of common stock were outstanding but were not included in the computation of diluted earnings (loss) per share for the periods presented because the $ 12.50 conversion price per share was greater than the average market price of the common stock for the applicable period.

Note 6 – Stockholders’ Equity

Stock Repurchase Transaction

In May 2023, the Company’s board of directors approved the Company’s repurchase of 5,500 shares of common stock that were previously issued and sold in a private transaction to an individual in December 2022.

The Company repurchased the shares for $ 50,050 ($ 9.10 per share), which is the same price at which the Company issued and sold the shares in December 2022.

Stock Repurchase Program

In May 2023, the Company’s board of directors approved a Stock Repurchase Program to repurchase up to 100,000 shares of the Company’s common stock.

During the three and nine months ended September 30, 2023, the Company repurchased 18,217 and 32,120 shares, respectively, for aggregate purchase prices of approximately $ 173,000 and $ 300,000 , respectively.

Anti-dilutive shares issuable upon conversion of Series A Convertible Preferred Stock excluded from calculation

200,000 shares of Series A Convertible Preferred Stock convertible into 600,000 shares of common stock were outstanding but were not included in the computation of diluted earnings (loss) per share because their effect would be anti-dilutive due to the net losses and due to the $ 8.33 conversion price being higher than the average market price of the common stock.

Note 5 – Significant Customers, Concentrations of Credit Risk, and Geographic Information

We manage and operate our business through one operating segment.

Net revenues from customers equal to or greater than 10% of total net revenues are as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

Three months ended March 31,

* Less than 10% of total net revenues

Net revenues by geographic area are as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

Three months ended March 31,

(in thousands)

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The geographic location of distributors and third-party manufacturing service providers may be different from the geographic location of the purchasers and/or ultimate end users.

We provide credit only to creditworthy customers who are subject to our credit verification procedures.

We provide credit only to creditworthy third parties who are subject to our credit verification procedures.

Accounts receivable balances are monitored on an ongoing basis, and accounts deemed to have credit risk are fully reserved.

At September 30, 2023, two customers accounted for 26 % and 17 % of total accounts receivable.

At March 31, 2024, two customers accounted for 24 % and 19 % of total accounts receivable.

At December 31, 2023, two customers accounted for 35 % and 16 % of total accounts receivable.

Our allowance for doubtful accounts was $ 0 at both September 30, 2023 and December 31, 2022.

Our allowance for doubtful accounts was $ 0 at both March 31, 2024 and December 31, 2023.

Our long-lived assets were geographically located as follows:

September 30,

(in thousands)

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Bronson, our Chairman of the Board, President and Chief Executive Officer, is also the President, Chief Executive Officer and a director of Qualstar.

Hoffman, our Chief Financial Officer, was also previously the Chief Financial Officer of Qualstar.

Hoffman, our Chief Financial Officer, is also the Acting Chief Financial Officer of Qualstar.

Bronson, together with BKF Capital Group, Inc.

(OTCMKTS:BKFG) which he controls, have a controlling interest in both Interlink and Qualstar.

We have a facilities agreement with Qualstar to allow Qualstar to use of a portion of our Irvine, California office facility, and also our former Los Angeles, California office facility, for which we have agreed to split substantially all rent and lease-related costs on an apportioned basis according to the approximate relative usage levels by each entity.

(OTCMKTS:BKFG) which he controls, has a controlling interest in both Interlink and Qualstar.

We have a facilities agreement with Qualstar to allow Qualstar to use a portion of our Irvine, California office facility, for which we have agreed to split substantially all rent and lease-related costs on an apportioned basis according to the approximate relative usage levels by each entity.

Qualstar also has a facilities agreement with us to allow us to use of a portion of its Camarillo, California office and warehouse facility, for which we have agreed to split substantially all rent and lease-related costs on an apportioned basis according to the approximate relative usage levels by each entity.

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Transactions with Qualstar and its subsidiaries are as follows:

Three Months Ended September 30,

(in thousands)

Balance at July 1,

Billed (or accrued) to Qualstar by Interlink

Paid by Qualstar to Interlink

Billed (or accrued) to Interlink by Qualstar

Paid by Interlink to Qualstar

Balance at September 30,

Nine Months Ended September 30,

Three months ended March 31,

(in thousands)

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Paid by Interlink to Qualstar

Balance at September 30,

Balance at March 31,

BKF Capital Group (OTCMKTS:BKFG)

6 unchanged sentences

In addition, we have consulting agreements with BKF Capital for certain of our respective employees and/or independent contractors that provide certain operational and general and administrative services to the other entity.

We entered into a M&A advisory consulting services agreement with Bronson Financial LLC (“BF”), a wholly owned subsidiary of BKF Capital, in which BF provides M&A advisory consulting services to us.

We entered into a M&A advisory consulting services agreement with Bronson Financial LLC (“BF”), a wholly owned subsidiary of BKF Capital, pursuant to which BF provides M&A advisory consulting services to us.

Interlink and BKF Capital also agree to reimburse, or be reimbursed by, one another for expenses paid by one company on behalf of the other.

Transactions with BKF Capital and its subsidiaries are as follows:

Three Months Ended September 30,

(in thousands)

Balance at July 1,

Billed (or accrued) to BKF Capital by Interlink

Paid by BKF Capital to Interlink

Billed (or accrued) to Interlink by BKF Capital

Paid by Interlink to BKF Capital

Balance at September 30,

Nine Months Ended September 30,

Three months ended March 31,

(in thousands)

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Paid by Interlink to BKF Capital

Balance at September 30,

Balance at March 31,

Note 7 – Income Taxes

Our income tax expense is impacted by the mix of our domestic and foreign pre-tax earnings and losses.

Our effective income tax rates are generally higher than the blended statutory tax rates of the jurisdictions in which we operate due to having incurred income tax expense on taxable income in certain jurisdictions, while not being able to benefit from losses in other jurisdictions for which our net operating loss carryovers (“NOLs”) are subject to valuation allowance.

Income tax expense as a percentage of income/loss before income taxes was 89.3 % for the three months ended September 30, 2023 versus 64.7 % for the comparable quarter in the prior year.

Income tax expense as a percentage of income before income taxes was 78.0 % for the nine months ended September 30, 2023 versus 31.8 % for the first nine months of the prior year.

Income tax expense as a percentage of pre-tax loss was 3.1 % for the three months ended March 31, 2024 versus 75.2 % for the comparable period in the prior year.

Our income tax expense is primarily impacted by the mix of domestic and foreign pre-tax earnings, permanent differences between book income/loss and taxable income/loss, and our ability to utilize prior net operating loss carryovers (“NOLs”).

Accordingly, our effective tax rate can vary from the U.S.

statutory tax rate of 21 % from quarter to quarter.

The effective tax rates for each of the three-month periods ended March 31, 2024 and 2023 were impacted by the amount of our foreign pre-tax income and the tax expense thereon while not realizing a benefit on our domestic pre-tax loss due to the valuation allowance on our domestic NOLs.

We experienced an ownership change under IRC Section 382 in 2010.

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Certain state jurisdictions within which we operate contain similar provisions and limitations.

As of September 30, 2023, all of the remaining federal and state NOLs are subject to annual limitations due to the 2010 ownership change.

As of March 31, 2024, all of the remaining federal and state NOLs are subject to annual limitations due to the 2010 ownership change.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets.

We analyzed our need to record a valuation allowance against our otherwise recognizable net deferred tax assets in the federal, state and foreign jurisdictions, and we determined that a valuation allowance on federal and state deferred tax assets was necessary at both September 30, 2023 and December 31, 2022, while no valuation allowance on foreign deferred tax assets was necessary at both September 30, 2023 and December 31, 2022.

We analyzed our need to record a valuation allowance against our otherwise recognizable net deferred tax assets in the federal, state and foreign jurisdictions, and we determined that a valuation allowance on federal and state deferred tax assets was necessary at both March 31, 2024 and December 31, 2023, while no valuation allowance on foreign deferred tax assets was necessary at both March 31, 2024 and December 31, 2023.

The amount of deferred tax assets considered realizable could be adjusted in future periods if estimates of future taxable income during the carryforward period are reduced or increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for future profitability.

1 unchanged sentence

We have elected to account for GILTI as a period cost if and when occurred, rather than recognizing deferred taxes for basis differences expected to reverse.

Of our $5.2 million cash balance at September 30, 2023, $ 1.6 million was held by our foreign subsidiaries.

If these 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 $ 4.4 million of cash at March 31, 2024, $ 2.7 million was held by our foreign subsidiaries.

If these funds are needed for our operations in the U.S.

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.

or foreign taxes to repatriate these funds.

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.

Note 8 – Commitments and Contingencies

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We lease facilities under non-cancellable operating leases.

The leases expire at various dates through fiscal 2025 and frequently include renewal provisions for varying periods of time, provisions which require us to pay taxes, insurance and maintenance costs, and provisions for minimum rent increases.

Our current leases expire at various dates through fiscal 2025 and frequently include renewal provisions for varying periods of time, provisions which require us to pay taxes, insurance and maintenance costs, and provisions for minimum rent increases.

Minimum leases payments, including scheduled rent increases are recognized as rent expenses on a straight-line basis over the term of the lease.

The rate implicit in each lease is not readily determinable, and we therefore use our incremental borrowing rate to determine the present value of the lease payments.

The weighted average incremental borrowing rate used to determine the initial value of right-of-use (“ROU”) assets and lease liabilities capitalized during the nine months ended September 30, 2023 was 5.5 %, and during the nine months ended September 30, 2022 was 7.0 %.

No new right-of-use (“ROU”) assets were capitalized during the three months ended March 31, 2024 or 2023.

ROU assets for operating leases are periodically reduced by impairment losses.

We use the long-lived assets impairment guidance in ASC Subtopic 360-10, Property, Plant and Equipment – Overall , to determine whether a ROU asset is impaired, and if so, the amount of the impairment loss to recognize.

As of September 30, 2023, we have not recognized any impairment losses for our ROU assets.

As of March 31, 2024, we have not recognized any impairment losses for our ROU assets.

We monitor for events or changes in circumstances that require a reassessment of our leases.

2 unchanged sentences

In June 2023, we entered into a lease agreement to lease 1,560 square feet of office space in Irvine, California for approximately $ 4,000 per month for a term commencing June 2023 and ending May 2024.

In March 2024 we extended the term of this lease through May 2025 for the same approximately $ 4,000 per - month rental fee.

Our Irvine, California office is used for executive offices, sales, finance and administration.

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In February 2023, we renewed this lease for the period March 1, 2023 through February 28, 2024 for approximately $ 18,000 per month.

We lease a 9,800 square-foot manufacturing facility and administrative offices in Irvine, Scotland for approximately $ 5,000 per month (with a 50 % discount through October 2023).

In March 2024, we entered into a new lease for a 5,183 square - foot facility in Fremont, California for a five - year and three - month period commencing May 1, 2024 (subject to completion of tenant improvements) for $ 10,625 per month, escalating 3.5 % annually, plus a share of common area operating expenses.

We lease an approximately 9,800 square-foot manufacturing facility and administrative offices in Irvine, Scotland for approximately $ 5,000 per month.

This lease term ends February 2028, with an option for us to terminate the lease in February 2025.

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This lease term ends November 2024.

As of September 30, 2023, we had current and long-term lease liabilities of $ 141,000 and $ 54,000 , respectively, and right-of-use assets of $ 181,000 .

As of March 31, 2024, we had current and long-term lease liabilities of $ 112,000 and $ 2,000 , respectively, and right-of-use assets of $ 99,000 .

As of December 31, 2023, we had current and long-term lease liabilities of $ 126,000 and $ 33,000 , respectively, and right of use assets of $ 143,000 .

Future imputed interest as of September 30, 2023 totaled $ 10,000 .

The weighted average remaining lease term of our leases as of September 30, 2023 is 0.9 years.

Future imputed interest as of March 31, 2024 totaled $ 4,000 .

The weighted average remaining lease term of our leases as of March 31, 2024 is 0.5 years.

Future minimum lease payments under non-cancellable operating leases that have remaining non-cancellable lease terms in excess of one year are as follows:

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Present value of lease liabilities

During the three months ended September 30, 2023, we incurred approximately $ 129,000 in operating lease costs, of which $ 54,000 is included in cost of revenue and $ 75,000 is included in operating expenses in our condensed consolidated statements of operations.

During the three months ended September 30, 2022, we incurred approximately $ 67,000 in operating lease costs, of which $ 33,000 is included in cost of revenue and $ 34,000 is included in operating expenses in our condensed consolidated statements of operations.

During the nine months ended September 30, 2023, we incurred approximately $ 379,000 in operating lease costs, of which $ 149,000 is included in cost of revenue and $ 230,000 is included in operating expenses in our condensed consolidated statements of operations.

During the nine months ended September 30, 2022, we incurred approximately $ 189,000 in operating lease costs, of which $ 94,000 is included in cost of revenue and $ 95,000 is included in operating expenses in our condensed consolidated statements of operations.

We are not party to any legal proceedings as of September 30, 2023.

During the three months ended March 31, 2024, we incurred approximately $ 124,000 in operating lease costs.

Operating lease costs of $ 67,000 are included in cost of revenue, and $ 57,000 are included in operating expenses in our condensed consolidated statements of operations for the three months ended March 31, 2024.

During the three months ended March 31, 2023, we incurred approximately $ 119,000 in operating lease costs.

Operating lease costs of $ 41,000 are included in cost of revenue, and $ 78,000 are included in operating expenses in our condensed consolidated statements of operations for the three months ended March 31, 2023.

We are not party to any legal proceedings as of March 31, 2024.

We are occasionally involved in legal proceedings in the ordinary course of business, including actions against us which assert or may assert claims or seek to impose fines and penalties in substantial amounts.

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We generally warrant our products against defects for one year from date of shipment, with certain exceptions in which the warranty period can extend to more than one year based on contractual agreements.

Our warranty reserves are established at the

time of sale and are updated throughout the warranty period based upon numerous factors including historical warranty return rates and claim costs over various warranty periods.

Our warranty reserves are established at the time of sale and updated throughout the warranty period based upon numerous factors including historical warranty return rates and expenses over various warranty periods.

Historically, our warranty returns have not been material.

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Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit or proceeding has been threatened or filed, we are unable to determine the maximum amount of losses that we could incur relating to such indemnities.

We have also entered into an employment agreement with Steven N.

We have entered into an employment agreement with Steven N.

Bronson, our Chairman of the Board, President and Chief Executive Officer.

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The amount of any potential liabilities related to such obligations cannot be accurately determined until a formal claim is filed.

Historically, any such amounts that become payable have not had a material negative effect our business, financial condition or results of operations.

Historically, any such amounts that become payable have not had a material negative effect on our business, financial condition or results of operations.

We maintain general and product liability insurance which may provide a source of recovery to us in the event of an indemnification claim.

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-Q

Item 1. Financial Statements