Interlink Electronics, Inc. — Q1 2023 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2023, compared with the same period in 2022. Interlink develops and sells force/touch sensors, gas sensors, and related products for industrial, medical, consumer, automotive, and other markets. Results include the December 2022 SPEC/KWJ acquisition and, from March 17, 2023, Calman Technology.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $3.278 million | $1.991 million |
| Gross profit / margin | $1.587 million / 48.4% | $1.241 million / 62.3% |
| Operating income (loss) | ($173,000) | $18,000 |
| Net income (loss) | ($191,000) | $142,000 |
| Net loss applicable to common / diluted EPS | ($291,000) / ($0.04) | $42,000 / $0.01 |
| Cash used in operating activities | $620,000 | $367,000 |
Revenue increased 64.6% year over year. Gross profit rose 27.9%, but gross margin declined 13.9 percentage points, which management attributed primarily to changes in product and customer mix. R&D expense increased 100.4% to $527,000, and SG&A increased 28.4% to $1.233 million, largely reflecting the acquired businesses, added personnel and facilities, and Calman-related professional fees. Other income fell to $64,000 from $155,000; the prior-year amount included $156,000 of marketable-securities gains.
At March 31, cash and cash equivalents were $6.690 million, working capital was $8.2 million, and the company reported no indebtedness. Current assets were $12.434 million and current liabilities $4.273 million. Cash declined $3.401 million during the quarter, including $2.740 million of acquisition-related investing outflow and $620,000 of operating cash use. Accounts receivable rose to $2.263 million and inventories to $2.976 million. Total liabilities were $4.356 million, including $227,000 of lease liabilities. The company paid $100,000 in preferred dividends.
Material changes and acquisitions
- Revenue growth was strongest in medical (+71.9%), industrial (+66.7%), and standard products (+113.3%); consumer revenue fell 15.9%. The largest medical customer’s increased orders contributed to growth.
- Two acquisitions expanded the portfolio into gas and air-quality sensors (SPEC/KWJ) and membrane keypads, graphic overlays, and printed electronics (Calman). Calman’s reported purchase price was approximately $4.912 million, with an expected additional working-capital adjustment of approximately $1.544 million; its purchase accounting remained provisional. Calman contributed $4.052 million of goodwill. SPEC/KWJ’s adjusted purchase price was approximately $2.102 million.
- Pro forma results assuming both acquired businesses were included for the full comparable quarters show revenue of $4.039 million and net income of $296,000 for Q1 2023, versus revenue of $4.193 million and net income of $818,000 for Q1 2022.
- Goodwill increased to $4.856 million from $650,000 at year-end 2022. Accounts payable increased to $2.969 million, in part due to Calman consideration remaining payable and the inclusion of acquired liabilities.
Outlook, risks, and unusual items
No quantitative revenue or earnings guidance was provided. Management stated existing cash is expected to be sufficient for current operations, while noting that changed circumstances could require additional capital or expense reductions. Management anticipated an effective tax rate near the 21% U.S. statutory rate based on the expected mix of earnings, but noted quarterly fluctuations are possible. Q1’s 75.2% effective tax rate reflected foreign tax expense without a tax benefit for the domestic loss because of a valuation allowance on domestic deferred tax assets.
Key risks include unpredictable customer order timing, dependence on major customers, product and customer mix effects on margins, international operations and currency exposure, supply-chain constraints, and the execution and integration of acquisitions. One customer represented 32% of revenue; two customers represented 45% and 17% of accounts receivable at quarter-end. The company reported no legal proceedings as of March 31, 2023. Acquisition fair values were provisional, and certain customer and director/officer indemnities have no stated maximum exposure. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether acquired businesses sustain revenue growth and achieve the synergies assumed in goodwill valuations, and whether final purchase-price adjustments or purchase accounting materially change reported balances.
- Whether gross margins recover from 48.4%, given the stated sensitivity to product and customer mix.
- Whether operating cash use, receivables, and inventory levels improve as acquisition integration proceeds.
- The durability of demand from the largest medical customer and the company’s exposure to major customers, including the elevated receivables concentration.
- The ongoing cash cost and terms of the 8% Series A preferred stock, including its $5.0 million liquidation preference and monthly cumulative dividends.