Interlink Electronics, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Interlink designs and manufactures force-sensing and human-machine-interface technologies for consumer, industrial, medical and automotive markets.
Financial performance
Amounts below are in thousands of dollars, except percentages and per-share data.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,548 | $2,157 | $4,941 | $5,613 |
| Gross profit / margin | $811 / 52.4% | $1,081 / 50.1% | $2,768 / 56.0% | $2,834 / 50.5% |
| Operating income (loss) | $(79) | $203 | $(110) | $231 |
| Net income (loss) | $65 | $111 | $60 | $(94) |
| Diluted EPS | $0.01 | $0.02 | $0.01 | $(0.01) |
| Operating cash flow | Not stated by quarter | $42 | $74 |
At September 30, cash and cash equivalents were $6.050 million, restricted cash was $5,000, working capital was $7.3 million, and total assets were $10.0 million. Total liabilities were $1.3 million, including a $186,000 PPP loan payable and $395,000 of lease liabilities. The PPP loan bears 1% interest and matures April 2022; forgiveness is not assured. The company reported no other indebtedness. Nine-month investing cash outflow was $66,000, and financing inflow was $186,000 from the PPP loan. Cash, cash equivalents and restricted cash increased by $211,000 over the nine-month period.
Changes versus prior comparable periods
- Q3 revenue declined 28.2%; nine-month revenue declined 12.0%. Management attributed the declines principally to COVID-19-related disruption to a medical customer’s planned manufacturing cycle and lower industrial-customer purchases.
- Q3 gross margin improved 2.3 percentage points, and nine-month gross margin improved 5.5 points. Management cited product mix and improved China-facility efficiencies; China import tariffs continued to weigh on costs and margins.
- Q3 operating results moved from $203,000 income to a $79,000 loss, while nine-month results moved from $231,000 income to a $110,000 loss. SG&A rose, including costs related to the Form 10 registration and expansion of the sales and marketing team. Nine-month R&D expense also increased year over year.
- Net income in Q3 2020 and the first nine months of 2020 reflected income tax benefits of $185,000 and $213,000, respectively, despite pretax losses. Results therefore included a significant tax benefit rather than operating profitability.
Outlook, risks and notable items
- Management expected revenue to stabilize for the remainder of 2020, but provided no quantified guidance. It expected a Camarillo Global Product Development and Materials Science Center to be operational by early 2021.
- Management said existing cash, the PPP proceeds and expected cash flows should support current operations, while noting that changed circumstances could require additional capital or expense reductions. No assurance was given that the PPP loan would be forgiven.
- Risks include COVID-19 and related operating or supply-chain disruptions, dependence on customer order timing, customer concentration, China manufacturing and import tariffs, foreign-currency movements, and the ability to raise capital. Two customers represented 40% and 11% of receivables at quarter-end; one customer generated 39% of nine-month revenue.
- The company disclosed related-party cost-sharing and shared-services arrangements with Qualstar and BKF Capital, entities whose leadership overlaps with Interlink’s CEO. It also disclosed executive severance and change-in-control obligations, and uncapped intellectual-property and officer/director indemnities whose potential losses could not be determined. No litigation was pending at quarter-end.
- The Form 10 registration statement became effective October 3, 2020; Ryan J. Hoffman was appointed CFO and Secretary effective after this 10-Q was filed. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the drivers and durability of the sharp medical-revenue decline, customer order trends, and management’s stabilization expectation.
- Assess earnings quality given the tax benefits, operating losses and limited operating cash generation.
- Check PPP forgiveness status and the company’s cash needs, including lease commitments and planned development-center costs.
- Review customer and receivables concentration, China tariff exposure, and related-party arrangements and their terms.
- The filing’s cover page marks “No” for having filed all required Exchange Act reports during the preceding 12 months; verify the reason and any compliance implications.