Interlink Electronics, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with the three months ended March 31, 2015 unless noted. Interlink designs, manufactures and sells force-sensing technologies and related products for consumer electronics, automotive, industrial and medical markets.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $2.805 million | $2.257 million | +24.3% |
| Gross profit / margin | $1.671 million / 59.6% | $1.141 million / 50.6% | Margin +9.0 percentage points |
| Operating income / margin | $618,000 / 22.0% | $251,000 / 11.2% | |
| Net income | $606,000 | $274,000 | |
| Diluted EPS | $0.08 | $0.04 | |
| Cash from operations | $185,000 | $280,000 |
Cost of revenue was $1.134 million, up 1.6% despite revenue growth; management attributed the improved gross margin primarily to manufacturing efficiencies and better fixed-cost utilization. Operating expenses rose 18.3% to $1.053 million: R&D declined 12.4% to $141,000, while SG&A increased 25.1% to $912,000. The SG&A increase reflected added compensation, professional fees related to regaining active SEC filing status and NASDAQ relisting, and higher insurance costs.
Revenue mix and material changes
- Automotive revenue grew 42.9% to $806,000; industrial grew 109.7% to $495,000; standard products grew 57.0% to $961,000.
- Medical revenue fell 41.1% to $301,000 and consumer revenue fell 27.5% to $242,000. Management attributed declines largely to customer order timing.
- Revenue increased across the United States, Asia, and Europe and other regions. Four customers each accounted for at least 10% of Q1 revenue; the largest represented 19%.
Liquidity, cash flow and obligations
At March 31, 2016, cash and cash equivalents were $4.615 million, including $371,000 held by foreign subsidiaries. Working capital was $7.1 million, with no indebtedness; current assets were $7.815 million against current liabilities of $718,000. Cash increased $180,000 during the quarter. Operating cash flow of $185,000 was below net income, principally reflecting higher receivables and inventory and lower payables and accrued liabilities. Investing cash outflow was $9,000; there were no financing cash flows. Management expected existing cash to meet requirements for at least 12 months, while noting that additional financing might be sought if needed and could dilute shareholders or impose debt obligations.
Operating lease commitments totaled $886,000, with leases expiring through 2020. The company reported no litigation it expected to have a material adverse effect. Certain intellectual-property and other indemnities are not capped, and potential maximum exposure could not be determined.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance was provided. Management said it expected R&D costs to rise as staffing returned to production needs and the company expanded product development. It planned to grow its Singapore R&D team by approximately 20% annually over five years and began preparations for a new 4,500-square-foot facility intended for occupancy in July 2016 under a five-year lease.
- Management cautioned that customer order timing is unpredictable and quarterly results may not indicate full-year results. Risks include rapid industry change, product reliability and quality, customer loss, international and currency exposure, supply or manufacturing disruptions, competition, intellectual-property matters, staffing, and access to capital.
- Federal and state net operating loss utilization is limited under IRC Section 382; the filing reports an approximately $71,000 annual limitation. The company reported a 25% stock dividend issued April 1, 2016, after quarter-end.
- Management stated disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether automotive, industrial and standard-product growth continues, and whether medical and consumer declines reflect timing or sustained demand weakness.
- Customer concentration and the effect of order timing on revenue, receivables and cash conversion.
- Execution, costs and expected benefits of the planned Singapore R&D expansion and facility lease.
- Cash-flow conversion and the company’s ability to fund operations without additional capital, given its spending plans and lease commitments.
- The post-quarter stock dividend’s effect on share counts and per-share comparisons; the filing reports 7,326,261 shares outstanding as of May 9, 2016.