Interlink Electronics, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The unaudited filing covers a designer, manufacturer and seller of force-sensing technologies and human-machine-interface products, serving consumer electronics, automotive, industrial and medical markets.
Financial performance
Amounts are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $3,246 | $2,646 | $9,105 | $7,744 |
| Gross profit / margin | $1,950 / 60.1% | $1,511 / 57.1% | $5,464 / 60.0% | $4,106 / 53.0% |
| Operating income / margin | $937 / 28.9% | $476 / 18.0% | $2,469 / 27.1% | $1,178 / 15.2% |
| Net income / margin | $614 / 18.9% | $458 / 17.3% | $1,969 / 21.6% | $1,213 / 15.7% |
| Diluted EPS | $0.08 | $0.06 | $0.27 | $0.17 |
| Operating cash flow | — | $2,021 | $1,317 |
- Q3 revenue rose 22.7%; nine-month revenue rose 17.6%. Q3 growth came chiefly from automotive, industrial and consumer custom products; nine-month growth was led by automotive, industrial and standard products. Management attributed some market declines to order timing.
- Nine-month cost of revenue was nearly unchanged despite higher sales, improving gross margin by 7.0 percentage points. Operating expenses increased modestly overall: nine-month R&D fell 21.8% to $498, while SG&A rose 9.0% to $2,497.
- Cash and cash equivalents were $6.162 million at September 30, versus $4.435 million at December 31, 2015. Working capital was $8.2 million; the company reported no indebtedness. Nine-month investing cash outflow was $269, including $239 of property and equipment purchases and $30 of intangible costs. No financing cash flow was reported.
- Total assets were $9.766 million and stockholders’ equity was $8.697 million at September 30. Current liabilities totaled $1.069 million. The filing reports $855,000 of future minimum operating lease payments.
Changes, outlook and risks
- Revenue growth and improved fixed-cost utilization lifted margins. Nine-month sales increased in automotive (+27.7%), industrial (+72.7%) and standard products (+36.0%); medical and consumer sales declined 23.4% and 18.9%, respectively.
- Income tax expense was $535,000 for the first nine months, compared with a $3,000 benefit in 2015. The company maintained a full valuation allowance against net deferred tax assets, while saying improved earnings could support releasing part of it within 12 months. Domestic net operating loss and credit carryforwards may be limited or expire.
- No numerical earnings or revenue guidance was provided. Management said it was pleased with quarterly performance and expected product demand to increase as markets recovered. It plans to expand the Singapore R&D operation, including approximately 20% annual team growth, and anticipates higher R&D and sales-and-marketing costs. A new five-year Singapore lease began in 2016.
- The company said existing cash should cover requirements for at least 12 months, but acquisitions could require more cash than available and might prompt equity, equity-linked or debt financing. Acquisitions were under evaluation; their effects were excluded from the outlook.
- Customer and receivables concentration is material: four customers each represented at least 10% of nine-month revenue, and four customers accounted for 31%, 26%, 10% and 10% of receivables at quarter-end. Other risks include unpredictable customer order timing, foreign-currency and supplier-cost exposure, product and intellectual-property claims, and dependence on technology development and customer demand. No material litigation or material risk-factor changes were reported.
- Related-party transactions include office services provided to BKF Capital Group and facility/expense reimbursements with Qualstar; both entities are associated with the company’s CEO and Chairman. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue gains and margin improvement persist, particularly given customer concentration and order-timing variability.
- Whether planned Singapore R&D and sales-and-marketing investment increases expenses as anticipated, and whether those investments generate growth.
- The timing and potential income-statement effect of any deferred-tax valuation-allowance release, including limits on tax-loss carryforwards.
- Cash needs and financing implications of any acquisition, and the terms and related-party nature of the disclosed arrangements.
- Execution of the company’s demand outlook and exposure to foreign exchange, supplier costs, product quality and intellectual-property indemnities.