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Item 7. Management’s Discussion and Analysis

2025-03-27 compared with 2024-03-25 · 39 added, 42 removed, 180 unchanged (31% of the section changed)

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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.

is a leading provider of sensors and printed electronics used extensively in HMI devices and IoT solutions.

Our broad product and technology portfolio encompasses force, piezo-electric, rugged HMI, wearable sensors for textiles and fabrics, gas sensors, instruments, and systems.

Our blue-chip customers trust our products and solutions which span various markets, including industrial, medical, automotive, consumer, wearables, and IoT.

Our technical and engineering expertise in materials science, manufacturing, embedded electronics, firmware, and software enables us to create and deliver high-quality, cost-effective custom solutions tailored to our customers’ unique requirements.

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

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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 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.

Through our 2023 acquisition of Calman, 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.

Additionally, through our 2024 acquisition of Conductive Transfers, which deepened our innovative patentened processes for integration of printed electronic technologies, we offer functional e-textiles and wearable technology, including heated clothing and personal protection equipment, and other products in development for medical and automotive environments and other wearable form-factors.

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.

We entered the gas and environmental sensing market in 2022 through our acquisition of the business assets of SPEC and 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.

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

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

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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.

Combined with the advanced and proprietary facilities in Silicon Valley, Scotland, and England that were acquired in connection with the acquisitions of SPEC/KWJ, Calman, and Conductive Transfers, 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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The following table sets forth certain consolidated statements of operations data for the periods indicated.

The percentages in the tables are based on net revenues.

The percentages in the tables are based on revenue.

Year Ended December 31,

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Loss from operations

Other income (expense):

Other income (expense), net

Income (loss) before income taxes

Loss before income taxes

Income tax expense

Net income (loss)

Comparison of the Years Ended December 31, 2024 and 2023

Revenue, net by the markets we serve is as follows:

Revenue by the markets we serve is as follows:

Year Ended December 31,

(in thousands, except percentages)

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

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.

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Products with longer design cycles often have much longer product life cycles.

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

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.

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.

Revenues were down in 2024 compared to 2023 to customers in all of the custom markets we sell to, and were up to customers of our standard products.

The decrease in revenue from customers in all custom markets was due to decreased shipments of our force-sensing and gas-sensing products and solutions resulting from lower customer demand in 2024 compared to 2023.

In all markets, the timing of orders from our customers is not always predictable and can be less in some periods and higher in others depending on their projects 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 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.

Gross profit for 2024 was down compared to 2023 due to lower revenue on lower customer demand, while gross margin percentage was down due primarily to the impact the largely fixed portion of our manufacturing- and production-related cost of revenue has on our gross margin percentage, in addition to changes in product and customer mix.

Year Ended December 31,

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Engineering and R&D expenses consist primarily of compensation expenses for employees engaged in research, design and product development activities, and 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 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 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.

Our R&D team focuses both on internal design development of our force-sensing and gas-sensing technologies and other printed electronics solutions, as well as custom design development aimed at addressing our customers’ unique design challenges.

Engineering and R&D costs for 2024 were down compared to the prior year due primarily to decreased engineering employee headcount, offset in part by 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 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.

Selling, general and administrative expenses for the current year were up compared to last year due primarily to the inclusion of Calman for the full year of 2024 (versus only the March to December period of 2023).

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 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.

Other income (expense), net for 2024 was comprised of $54,000 of interest income and $39,000 of foreign currency transaction gains, while 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.

Year Ended December 31,

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Income tax expense

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.

Income tax expense reflects statutory tax rates in the jurisdictions in which we operate on the taxable income (loss) we generate in each jurisdiction.

For both 2024 and 2023, the Company’s income tax expense reflects tax expense on its foreign earnings with no tax benefit on its domestic losses due to the valuation allowance recorded on domestic net operating losses and other deferred tax assets.

Our effective tax rate is directly affected by the relative proportions of our taxable income 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%).

statutory rate of 21% primarily due to a 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%), while our domestic losses are expected to provide no tax benefit due to the valuation allowance recorded on domestic net operating losses and other deferred tax assets.

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

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Net cash (used in) operating activities

Net cash provided by (used in) investing activities

Net cash (used in) investing activities

Net cash (used in) financing activities

Net Cash (Used In) Operating Activities

For the year ended December 31, 2024, the $367,000 in net cash used in operating activities was attributable to net loss of $1,984,000, adjusted for non-cash charges of $809,000 and cash provided by changes in operating assets and liabilities of $808,000.

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.

Accounts receivable decreased from $2,167,000 at December 31, 2023 to $1,612,000 at December 31, 2024 due to the timing of shipments and cash collections during the fourth quarter of 2024 compared to the fourth quarter of 2023.

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

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, 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 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.

Inventories decreased from $2,476,000 at December 31, 2023 to $2,009,000 at December 31, 2024 due primarily to variability in the timing of materials purchases and customer demand on product shipments.

Prepaid expenses and other current assets decreased slightly from $381,000 at December 31, 2023 to $328,000 at December 31, 2024.

The balance of these current assets fluctuates with the timing of payments of insurance premiums, advances, and estimated income taxes.

Accounts payable, accrued liabilities, and accrued income taxes decreased from $1,249,000 at December 31, 2023 to $1,038,000 at December 31, 2024.

The balance of these current liabilities fluctuates based on the timing of payment for purchases of materials, compensation accruals, outside services, and income taxes.

Net Cash (Used In) Investing Activities

Net cash used in investing activities of $491,000 for the year ended December 31, 2024 consisted of $314,000 used to acquire the assets of Conductive Transfers in December 2024, and $177,000 used for purchases of property and equipment.

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, and $123,000 used for purchases of property and equipment.

Net Cash (Used In) Financing Activities

Net cash used in financing activities for the year ended December 31, 2024 consisted of payment of $400,000 of dividends on our Preferred Stock.

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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Revenue Recognition

In accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), we recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services.

In accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), we recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services.

The guidance defines a five-step process to achieve this core principle and, in doing so, judgment and estimates may be required within the revenue recognition process including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

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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