Interlink Electronics, Inc. — Q1 2018 Form 10-Q
Business and period. The unaudited report covers the three months ended March 31, 2018, compared with Q1 2017. Interlink designs, manufactures and sells force-sensing and human-machine-interface products for consumer electronics, automotive, industrial and medical markets. It operates as one reportable segment.
Financial results and liquidity
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $2.573 | $2.884; down 10.8% |
| Gross profit / margin | $1.411 / 54.8% | $1.736 / 60.2% |
| Operating income / margin | $0.219 / 8.5% | $0.531 / 18.3% |
| Net income / diluted EPS | $0.118 / $0.02 | $0.364 / $0.05 |
| Operating cash flow | $0.485 | $0.388 |
- Gross margin contracted 5.4 percentage points. R&D expense rose to $0.224 million from $0.178 million; SG&A declined to $0.968 million from $1.027 million.
- Other expense was $0.046 million, versus other income of $0.019 million in Q1 2017. Income tax expense was $0.055 million; the effective tax rate was 31.8%, compared with 33.8%.
- Cash and cash equivalents were $7.965 million at March 31, up from $7.772 million at year-end; cash, cash equivalents and restricted cash totaled $7.970 million. Working capital was $10.0 million. The company reported no indebtedness.
- Investing cash outflow was $0.377 million, including $0.195 million for property and equipment, $0.020 million for intangibles and $0.162 million for a share repurchase. Cash increased $0.193 million during the quarter. The filing attributes higher investment spending principally to Singapore R&D-center expansion.
- Total assets were $11.920 million and total liabilities were $0.722 million. Current liabilities were $0.722 million.
Material changes and management commentary
- Automotive revenue fell to $0.147 million from $0.700 million, a 79% decline, after a major customer changed its product design and no longer required Interlink’s solution. Total revenue also reflected growth in medical and standard products; medical revenue rose 19.3% to $0.415 million and standard-product revenue rose 24.1% to $0.918 million.
- Management expected revenue to be relatively flat in the first half of 2018 and lower in the second half until automotive revenue could be replaced. It noted that new medical product lines were beginning to generate revenue, while mature product lines may offset some growth.
- Management planned to expand Singapore R&D over the next three years and continue evaluating acquisitions in 2018. It stated existing cash was expected to fund operations for at least the next 12 months; acquisitions could require additional capital. No quantified earnings or revenue guidance was provided.
- The company repurchased and retired 34,010 shares at $4.75 per share for approximately $0.162 million, under a board-authorized program of up to $1 million expiring in December 2018.
Risks, contingencies and unusual items
- Customer and receivables concentration are notable: four customers each represented at least 10% of Q1 revenue, and four customers accounted for 32%, 13%, 13% and 10% of accounts receivable at quarter-end.
- Management cited risks including customer losses, product quality and reliability, international operations and currency fluctuations, supply or manufacturing disruptions, competition, intellectual-property matters, and ability to retain staff or obtain capital. The filing reported no material change to the risk factors in the 2017 Form 10-K.
- There were no legal proceedings at March 31, 2018. The company disclosed uncapped intellectual-property indemnities and director/officer indemnification obligations, whose potential maximum losses could not be determined. Operating lease commitments totaled $0.559 million through 2021.
- Related-party arrangements involve the CEO’s affiliated BKF Capital Group and Qualstar Corporation. The filing reported a $0.002 million balance due to BKF at quarter-end and $0.022 million due from Qualstar.
- The company adopted the new revenue recognition standard effective January 1, 2018 and reported no material effect on its financial statements or revenue-recognition timing. It stated disclosure controls were effective and there was no material change in internal control over financial reporting.
Investor facts to verify
- Whether Interlink can replace the lost automotive platform revenue and how the stated second-half revenue outlook develops.
- Whether new medical and standard-product sales can offset mature product-line declines, given order timing and customer concentration.
- Whether R&D-center expansion and other spending affect margins, operating cash generation or the stated cash sufficiency.
- Any acquisition plans, financing needs, or use of the $1 million share-repurchase authorization.
- The impact of customer concentration, related-party arrangements and outstanding indemnification obligations.