Interlink Electronics, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Interlink designs, manufactures, and sells force-sensing technologies and related sensor components, modules, and custom solutions for consumer electronics, automotive, industrial, and medical applications. Financial statements are unaudited; amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $3.054 million | $2.841 million | $5.859 million | $5.098 million |
| Gross profit / margin | $1.843 million / 60.3% | $1.454 million / 51.2% | $3.514 million / 60.0% | $2.595 million / 50.9% |
| Operating income / margin | $914,000 / 29.9% | $451,000 / 15.9% | $1.532 million / 26.1% | $702,000 / 13.8% |
| Net income | $749,000 | $481,000 | $1.355 million | $755,000 |
| Basic and diluted EPS | $0.10 | $0.06 | $0.18 | $0.10 |
- For the six months, operating cash flow was $1.156 million, versus $543,000 in 2015; capital expenditures were $166,000, versus $41,000. Cash increased by $969,000 to $5.404 million. No financing cash flows were reported.
- At June 30, cash was $5.404 million, current assets $8.632 million, current liabilities $961,000, and working capital approximately $7.7 million. The company reported no indebtedness. Total assets were $9.014 million and stockholders’ equity was $8.040 million.
- Accounts receivable was $1.735 million and inventory $1.285 million. The company reported no past-due receivables and no allowance for doubtful accounts at quarter-end.
Changes versus comparable periods
- Q2 revenue rose 7.5%; six-month revenue rose 14.9%. Management attributed growth to automotive and industrial custom products and higher standard-product orders. Medical and consumer custom-product sales declined, primarily due to order timing.
- For the first six months, automotive revenue increased 23.3% and standard-product revenue 69.4%; medical revenue declined 31.7% and consumer revenue declined 19.0%.
- Gross margin improved to 60.3% in Q2 and 60.0% for the first six months, from 51.2% and 50.9%, respectively. Management cited improved efficiencies and fixed-cost utilization as revenue increased.
- Six-month R&D expense fell 24.6%, which management attributed primarily to temporarily reduced staffing. SG&A increased 13.0%, primarily reflecting professional fees related to regaining active SEC filing status and NASDAQ relisting, and higher insurance costs.
- Income tax expense was $206,000 for the first six months, compared with an $11,000 tax benefit in 2015. The company cited domestic and foreign taxes and limits on use of net operating loss carryforwards.
Outlook, risks, and unusual items
- Management said existing cash should fund business requirements for at least the next 12 months. It cautioned that weaker-than-expected operating performance could harm liquidity and that additional financing, if needed, might not be available on acceptable terms.
- Management expects R&D costs to exceed prior-year levels as staffing normalizes and plans to expand the Singapore R&D operation over five years, including approximately 20% annual R&D-team growth. A five-year Singapore facility lease began with the move in July 2016. No specific revenue or earnings guidance was provided.
- Customer order timing is unpredictable. Five customers each represented at least 10% of Q2 revenue; four customers accounted for 69% of accounts receivable at June 30, 2016. This concentration creates customer and collection exposure.
- Future minimum operating lease payments totaled $914,000, including $128,000 for the remainder of 2016. The company reported no legal proceedings it believed would materially adversely affect it. Intellectual-property and other indemnities have no stated maximum exposure, which the company said could not be determined.
- Other disclosed risks include rapid industry change, product quality or reliability issues, customer loss, foreign currency movements, supply or manufacturing disruption, intellectual-property claims, and ability to retain employees or raise capital. The company reported no material changes to its annual-report risk factors.
- An April 2016 stock dividend issued one-quarter share for each share held. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Confirm the durability of gross-margin gains and revenue growth, particularly given order-timing variability and the declines in medical and consumer sales.
- Track customer concentration, receivable collections, and inventory growth relative to sales.
- Assess the cost and execution implications of planned Singapore R&D expansion and the new facility lease.
- Review the company’s Section 382-limited tax loss carryforwards and resulting cash-tax exposure.
- The cover page marks “No” for having filed all required Exchange Act reports during the preceding 12 months, while management says it regained active SEC filing status and NASDAQ relisting. Verify the company’s filing and listing status and the context of that checkbox.
- Reconcile the cover-page August 11, 2016 outstanding share count of 7,328,055 with the balance-sheet amount of 7.326 million shares, considering the April stock dividend and the stated dates.