Interlink Electronics, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; financial statements are unaudited. Interlink designs, manufactures and sells force-sensing and human-machine-interface products for consumer, automotive, industrial and medical markets.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1.851 | $2.223 | $5.882 | $5.855 |
| Gross profit / margin | $0.872 / 47.1% | $1.292 / 58.1% | $3.065 / 52.1% | $3.293 / 56.2% |
| Operating income (loss) | $(0.190) | $0.259 | $(0.323) | $0.332 |
| Net income | $0.006 | $0.223 | $0.260 | $0.243 |
| Net income (loss) applicable to common stockholders | $(0.094) | $0.223 | $(0.040) | $0.243 |
| Basic and diluted EPS | $(0.01) | $0.03 | $(0.01) | $0.04 |
- Revenue and mix: Q3 revenue fell 16.7% year over year, while nine-month revenue was up 0.5%. Q3 medical sales grew 11.7%, but industrial sales fell 12.9%, consumer sales fell 42.2%, and standard-product sales fell 19.9%. For the nine months, industrial and medical revenue increased, while consumer revenue declined 79.2%.
- Profitability: Q3 gross margin declined 11.0 percentage points. Management attributed lower margins to higher materials and component costs and unfavorable product and customer mix. Nine-month margin also fell, with freight and tariff costs and production efficiencies cited as additional factors. Q3 operating expenses rose to $1.062 million, including higher R&D spending; nine-month R&D expense increased 64.6% to $0.912 million.
- Non-operating items: Other income was $0.207 million in Q3 and $0.704 million for nine months, primarily reflecting marketable-security gains and foreign-currency gains. The nine-month security gain was $0.562 million. These gains materially supported reported net income while operating results were losses. Preferred dividends of $0.100 million for Q3 and $0.300 million year to date reduced income applicable to common stockholders.
- Cash flow: Nine-month operating cash flow was $(0.385) million versus $0.639 million provided in 2021. Investing cash outflow was $6.021 million, mainly purchases of marketable securities; financing cash outflow was $0.300 million for preferred dividends. Cash, cash equivalents and restricted cash declined by $6.893 million to $3.889 million.
- Liquidity and debt: At September 30, cash and cash equivalents were $3.889 million and marketable securities were $6.574 million. Working capital was $12.0 million; the company reported no indebtedness. Current assets were $12.931 million and current liabilities were $0.949 million. Lease liabilities totaled $0.204 million, including $0.144 million current.
Material changes and management commentary
- Q3 revenue weakness reflected reduced industrial customer purchasing, a consumer customer design change, and lower standard-product sales; medical growth was tied to increased installations at a major customer’s hospital and medical-center locations.
- Nine-month medical revenue increased as COVID-related restrictions subsided and shipments to the largest medical customer grew. The company also reported automotive sales in 2022 for the first time since 2018 as it pursued a program with an automaker.
- Management said existing cash and cash equivalents should be sufficient for current operations, but noted that changed circumstances could require additional capital or expense reductions. Financing, if needed, could dilute shareholders or impose debt payments and restrictive covenants.
- The company has 200,000 shares of 8.0% Series A convertible preferred stock outstanding, with a $5.0 million liquidation preference. The board had been declaring monthly cash dividends and management expected that practice to continue, subject to legal limits.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance was provided. Management cautioned that customer order timing is unpredictable and can vary with customers’ project schedules.
- Key disclosed risks include customer and product concentration, supply shortages, manufacturing disruption, international operations and currency fluctuations, product quality, competition and technology changes, and the ability to raise capital. Three customers represented 65% of accounts receivable at quarter-end; individual customers also accounted for significant shares of revenue.
- Interlink held $6.574 million of marketable equity securities at fair value, with $0.560 million of unrealized gains at September 30. Reported earnings and liquidity therefore include exposure to changes in the value of those securities.
- The company disclosed related-party facilities, consulting and reimbursement arrangements with Qualstar and BKF Capital; the CEO and CFO hold leadership roles at those entities, and the CEO together with BKF Capital controls interests in Interlink. No legal proceedings were pending at September 30. The company reported no material changes to its previously disclosed risk factors.
- Income-tax expense was affected by the geographic mix of earnings and a valuation allowance on domestic deferred tax assets. The company said the effective tax rate may remain above the U.S. statutory rate.
Important facts for investors to verify
- Whether operating performance and gross margins improve without relying on marketable-security and foreign-currency gains.
- The composition, valuation sensitivity and liquidity of the marketable-equity portfolio, and the effect of any future investment gains or losses.
- Customer concentration, order timing and the sustainability of medical and automotive demand, alongside the consumer-market decline.
- Cash burn, working-capital needs and the capacity to fund operations while paying preferred dividends; review the preferred stock’s dividend and conversion terms.
- The terms, governance and ongoing amounts of related-party transactions with Qualstar and BKF Capital.