Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements. These forward-looking statements speak only as of the date of this Form 10-Q and are subject to uncertainties, assumptions and business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth below in Part II, Item 1A, “Risk Factors,” and in our other reports filed with the Securities and Exchange Commission. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances described in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Form 10-Q to conform these statements to actual results or to changes in our expectations, except as required by law.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.
Overview
Interlink Electronics, Inc. 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 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. Additionally, through the Calman acquisition in March 2023, which brought us over 25 years of HMI design and manufacturing expertise as a leading provider of specialized printed electronics, 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.
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 includes 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
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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 Silicon Valley, 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 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 to meet the market’s growing demand for touch technology and smart surfaces, in 2020 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/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.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statements presentation, financial condition, results of operations, and cash flows will be affected.
A description of our critical accounting policies that represent the more significant judgments and estimates used in the preparation of our financial statements was provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 25, 2024. There have been no changes to our critical accounting policies and estimates described in the Form 10-K that have had a material impact on our condensed consolidated financial statements and related notes.
Recently Issued and Adopted Accounting Pronouncements
We reviewed all recently issued accounting pronouncements and concluded they are all not applicable or not expected to be material to our financial statements.
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Results of Operations
The following table sets forth certain unaudited condensed consolidated statements of operations data for the periods indicated. The percentages in the table are based on net revenues.
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
$
%
$
%
$
%
$
%
(in thousands, except percentages)
Revenue, net
$
2,671
100.0
%
$
3,075
100.0
%
$
8,693
100.0
%
$
10,402
100.0
%
Cost of revenue
1,566
58.6
%
1,616
52.6
%
5,030
57.9
%
5,295
50.9
%
Gross profit
1,105
41.4
%
1,459
47.4
%
3,663
42.1
%
5,107
49.1
%
Operating expenses:
Engineering, research and development
486
18.2
%
588
19.1
%
1,572
18.1
%
1,765
17.0
%
Selling, general and administrative
1,095
41.0
%
963
31.3
%
3,631
41.8
%
3,201
30.8
%
Total operating expenses
1,581
59.2
%
1,551
50.4
%
5,203
59.9
%
4,966
47.7
%
Income (loss) from operations
(476)
(17.8)
%
(92)
(3.0)
%
(1,540)
(17.7)
%
141
1.4
%
Other income (expense), net
(19)
(0.7)
%
26
0.8
%
29
0.3
%
154
1.5
%
Income (loss) before income taxes
(495)
(18.5)
%
(66)
(2.1)
%
(1,511)
(17.4)
%
295
2.8
%
Income tax expense
28
1.0
%
59
1.9
%
60
0.7
%
230
2.2
%
Net income (loss)
$
(523)
(19.6)
%
$
(125)
(4.1)
%
$
(1,571)
(18.1)
%
$
65
0.6
%
Comparison of Three Months Ended September 30, 2024 and 2023
Revenue, net, by the markets we serve is as follows:
Three Months Ended September 30,
2024
2023
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Medical
$
572
21.4
%
$
831
27.0
%
$
(259)
(31.2)
%
Industrial
833
31.2
%
988
32.1
%
(155)
(15.7)
%
Consumer
80
3.0
%
56
1.8
%
24
42.9
%
Standard
1,186
44.4
%
1,200
39.0
%
(14)
(1.2)
%
Revenue, net
$
2,671
100.0
%
$
3,075
100.0
%
$
(404)
(13.1)
%
We sell our custom products into the medical, industrial, and consumer markets. We sell our standard products to customers in many markets through various distribution networks. The ultimate customer for our products may come from different markets that are often unknown to us at the time of sale. Each market has different product design cycles. Products with longer design cycles often have much longer product life cycles. Medical, industrial, and environmental monitoring products generally have longer design and life cycles than consumer products. We currently have products with life cycles that have exceeded 20 years and are ongoing.
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Revenues were down in the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 for sales to customers in the medical and industrial markets into which we sell our custom products, and also for our standard products, while revenues for sales of our custom products to customers in the consumer market were up marginally. Fluctuations in our revenue result from variations in the trends and timing of shipments of our products which are impacted by fluctuations in customer demand. In the third quarter of 2024, we experienced lower demand from certain of our larger force-sensor customers in the medical and industrial markets compared to the third quarter of 2023, and we also experienced delays in fulfilment of orders from one of our larger customers of our membrane printed electronics products made in our Calman subsidiary. In all markets, the timing of orders from our customers is not always predictable and can be concentrated in varying periods to coincide with our customers’ project and building plans.
Three Months Ended September 30,
2024
2023
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Gross profit
$
1,105
41.4
%
$
1,459
47.4
%
$
(354)
(24.3)
%
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 were down during the three months ended September 30, 2024 compared to the three months ended September 30, 2023 due primarily to lower revenues and also in part to changes in product and customer mix.
Three Months Ended September 30,
2024
2023
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Engineering, research and development
$
486
18.2
%
$
588
19.1
%
$
(102)
(17.3)
%
Engineering and R&D expenses consist primarily of compensation expenses for employees engaged in research, design and development activities, plus the cost of those employees’ indirect supplies and allocation of facilities expenses. Our R&D team focuses both on internal design development in order to develop our products and solutions, and on custom design development aimed at addressing our customers’ unique design challenges. Engineering and R&D costs for the three months ended September 30, 2024 were down compared to the three months ended September 30, 2023 due to decreased engineering employee and consultant compensation costs.
Three Months Ended September 30,
2024
2023
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Selling, general and administrative
$
1,095
41.0
%
$
963
31.3
%
$
132
13.7
%
Selling, general and administrative expenses consist primarily of compensation expenses for sales and administrative employees, legal and other professional fees, facilities expenses, communication expenses, and intangible asset amortization expense. Selling, general and administrative costs for the three months ended September 30, 2024 were up compared to the three months ended September 30, 2023 attributable to increased intangible asset amortization expense due to the Calman acquisition, partly offset by lower sales and administrative compensation expense on lower headcount and lower professional services expenses.
Three Months Ended September 30,
2024
2023
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Other income (expense), net
$
(19)
(0.7)
%
$
26
0.8
%
$
(45)
(173.1)
%
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Other income (expense) 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) for the three months ended September 30, 2024 was comprised of $14,000 of interest income, offset by $33,000 of foreign currency transaction losses, while other income (expense) for the three months ended September 30, 2023 was comprised of $31,000 of interest income, offset by $5,000 of foreign currency transaction losses.
Income tax expense as a percentage of pre-tax income/loss was 5.7% for the three months ended September 30, 2024 versus 89.4% for the comparable period in the prior year. Our income tax expense is impacted by the mix of domestic and foreign pre-tax earnings and losses, permanent differences between book income/loss and taxable income/loss, and our ability to utilize net operating loss carryovers (“NOLs”). Accordingly, our effective tax rate typically will vary from the U.S. statutory tax rate of 21% from quarter to quarter. The effective tax rates for both of the three-month periods ended September 30, 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.
Discrete tax events may cause our effective rate to fluctuate on a quarterly basis. Certain events, including, for example, acquisitions and other business changes, which are difficult to predict, may also cause our effective tax rate to fluctuate. We are subject to changing tax laws, regulations, and interpretations in multiple jurisdictions. Corporate tax reform continues to be a priority in the U.S. and other jurisdictions. 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.
Comparison of Nine Months Ended September 30, 2024 and 2023
Revenue, net, by the markets we serve is as follows:
Nine Months Ended September 30,
2024
2023
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Medical
$
3,035
34.9
%
$
3,871
37.2
%
$
(836)
(21.6)
%
Industrial
2,019
23.2
%
3,173
30.5
%
(1,154)
(36.4)
%
Consumer
217
2.5
%
350
3.4
%
(133)
(38.0)
%
Standard
3,422
39.4
%
3,008
28.9
%
414
13.8
%
Revenue, net
$
8,693
100.0
%
$
10,402
100.0
%
$
(1,709)
(16.4)
%
Revenues were down in the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 for sales to customers in the medical, industrial, and consumer markets into which we sell our custom products, while revenues for sales of our standard products were up in the 2024 period compared to the prior year. Fluctuations in our revenue result from variations in the trends and timing of shipments of our products which are impacted by fluctuations in customer demand. During the first nine months of 2024, we experienced lower demand from certain of our larger force-sensor customers in the medical, industrial, and consumer markets compared to the first nine months of 2023, and we also experienced delays in fulfilment of orders from one of our larger customers of our membrane printed electronics products made in our Calman subsidiary. In all markets, the timing of orders from our customers is not always predictable and can be concentrated in varying periods to coincide with our customers’ project and building plans.
Nine Months Ended September 30,
2024
2023
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Gross profit
$
3,633
42.1
%
$
5,107
49.1
%
$
(1,474)
(28.9)
%
Gross profit and gross margin percentage were down during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 due primarily to lower revenues and also in part to changes in product and customer mix.
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Nine Months Ended September 30,
2024
2023
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Engineering, research and development
$
1,572
18.1
%
$
1,765
17.0
%
$
(193)
(10.9)
%
Engineering and R&D costs for the nine months ended September 30, 2024 were down compared to the nine months ended September 30, 2023 due to decreased engineering employee and consultant compensation costs.
Nine Months Ended September 30,
2024
2023
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Selling, general and administrative
$
3,631
41.8
%
$
3,201
30.8
%
$
430
13.4
%
Selling, general and administrative costs for the nine months ended September 30, 2024 were up compared to the nine months ended September 30, 2023 attributable to increased intangible asset amortization expense due to the Calman acquisition, partly offset by lower sales and administrative compensation expense on lower headcount and lower professional services expenses.
Nine Months Ended September 30,
2024
2023
% of
% of
Amount
Revenue
Amount
Revenue
$ Change
% Change
(in thousands, except percentages)
Other income (expense), net
$
29
0.3
%
$
154
1.5
%
$
(125)
(81.2)
%
Other income (expense) for the nine months ended September 30, 2024 was comprised of $46,000 of interest income, offset by $17,000 of foreign currency transaction losses, while other income (expense) for the nine months ended September 30, 2023 was comprised of $129,000 of interest income, and $25,000 of foreign currency transaction gains.
Income tax expense as a percentage of pre-tax income/loss was 4.0% for the nine months ended September 30, 2024 versus 78.0% for the comparable period in the prior year. Our income tax expense is impacted by the mix of domestic and foreign pre-tax earnings and losses, permanent differences between book income/loss and taxable income/loss, and our ability to utilize net operating loss carryovers (“NOLs”). The effective tax rates for both of the nine-month periods ended September 30, 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.
Liquidity and Capital Resources
Cash requirements for working capital and capital expenditures have historically been funded from cash balances on hand, cash generated from operations, and sales of equity securities. As of September 30, 2024, we had cash and cash equivalents of $3.8 million, working capital of $6.5 million and no indebtedness. Cash and cash equivalents consist of cash and money market funds. Of our $3.8 million of cash, $2.5 million was held by foreign subsidiaries. If these funds are needed for our operations in the U.S. or for acquisitions, we have several methods to repatriate 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.
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.
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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. If our circumstances change, however, we may require additional cash. If we require additional cash, we may attempt to raise additional capital through equity, equity-linked or debt financing arrangements. 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.
Cash Flow Analysis
Our cash flows from operating, investing and financing activities are summarized as follows:
Nine Months Ended
September 30,
2024
2023
(in thousands)
Net cash provided by (used in) operating activities
$
(144)
$
155
Net cash (used in) investing activities
(107)
(4,322)
Net cash (used in) financing activities
(300)
(650)
Net Cash Provided By (Used In) Operating Activities
For the nine months ended September 30, 2024, the $144,000 of cash used in operating activities was attributable to net loss of $1,571,000, adjusted for non-cash charges of $638,000 and cash provided by changes in operating assets and liabilities of $789,000. For the nine months ended September 30, 2023, the $155,000 of cash provided by operating activities was attributable to net income of $65,000, adjusted for non-cash charges of $292,000 and offset by cash used in changes in operating assets and liabilities of $202,000.
Accounts receivable decreased from $2.2 million at December 31, 2023 to $1.2 million at September 30, 2024 due to lower shipments during the third quarter of 2024 compared to the fourth quarter of 2023. Many of our customers pay promptly and the accounts receivable balance is generally related to the most recent shipments. Inventories were unchanged from December 31, 2023 to September 30, 2024 at $2.5 million. Inventory balances fluctuate depending on the timing of materials purchases and product shipments. Prepaid expenses and other current assets decreased from $381,000 at December 31, 2023 to $243,000 at September 30, 2024 due primarily to the timing of making prepayments versus when the benefits of those prepayments are consumed. Accounts payable, accrued liabilities, and accrued income taxes decreased from $1.2 million at December 31, 2023 to $903,000 at September 30, 2024; the balances of these working capital liabilities fluctuate due to the timing of purchases and payments on inventories and other accruals of employee compensation and outside services.
Net Cash (Used In) Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2024 consisted of $107,000 of purchases of property, plant, and equipment. Net cash used in investing activities of $4.3 million for the nine months ended September 30, 2023 consisted of $4.3 million used to acquire the equity interests of Calman (which is net of $1.6 million of cash acquired), and $44,000 of purchases of property, plant, and equipment.
Net Cash (Used In) Financing Activities
Net cash used in financing activities of $300,000 for the nine months ended September 30, 2024 consisted of payment of dividends on our Preferred Stock. Net cash used in financing activities of $650,000 for the nine months ended September 30, 2023 consisted of $350,000 used for repurchases of 56,430 shares of common stock and $300,000 used for payments of dividends on our Preferred Stock.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.