Business Context and Reporting Period
Company: Interlink Electronics, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2007
Interlink Electronics develops and sells intuitive interface devices and components. During the quarter, the Company executed a major strategic shift by selling its OEM Remotes and Branded Products business segments on August 31, 2007, for $11.5 million. Consequently, financial results for these segments are presented as discontinued operations. The Company is now focused on two continuing segments: E-transactions and Specialty Components.
Key Financial Metrics
| Metric (in thousands) | 9 Months Ended Sep 30, 2007 | 9 Months Ended Sep 30, 2006 |
|---|---|---|
| Revenues (Continuing Ops) | $12,665 | $10,148 |
| Gross Profit | $4,168 | $4,550 |
| Gross Margin | 33% | 45% |
| Operating Loss (Continuing Ops) | $(6,314) | $(8,940) |
| Net Income (Loss) | $(3,060) | $(8,109) |
| Cash and Equivalents (End of Period) | $14,885 | $2,221 |
| Working Capital | $20,746 | $15,343 |
| Total Debt (Money Borrowed) | $5,078 | Not Disclosed |
Note: Net Income for the nine months ended Sep 30, 2007, includes a $6.2 million gain on the sale of discontinued operations. Without this gain, the Company reported a net loss from continuing operations of $7.3 million.
Material Changes vs. Prior Period
- Revenue Growth: Revenues from continuing operations increased 25% ($2.5 million) year-over-year, driven primarily by a 52% increase in the Specialty Components segment.
- Margin Compression: Gross profit margin declined from 45% to 33%. This was primarily due to unabsorbed manufacturing costs in the Specialty Components segment, where margins dropped from 39% to 15%.
- Operating Expenses: Total operating expenses decreased by $3.0 million (22%) compared to the prior year. This reduction was driven by lower consulting, audit, and legal fees, as well as reduced stock-based compensation. However, this was partially offset by a $643,000 severance charge related to the CEO's planned resignation.
- Liquidity Improvement: Cash and cash equivalents increased significantly from $1.3 million to $14.9 million, fueled by the $11.5 million asset sale and a $5.0 million private placement of convertible notes.
Guidance, Outlook, and Risks
Management Commentary & Outlook: Management expects revenue growth in the E-transactions and Specialty Components segments in 2008. While operating expenses are projected to remain relatively constant or decline, the Company anticipates continued net losses in the near term as it scales operations to support a reduced revenue base. The Company believes the capital raised from the asset sale and convertible notes will allow it to operate for the foreseeable future.
Risks and Contingencies:
- Going Concern: While recent capital raises have alleviated immediate concerns, the Company has a history of losses and negative cash flow from operations.
- Legal Proceedings: The Company is defending a securities class action lawsuit and a shareholder derivative action. While no costs were incurred in 2007, the outcome remains uncertain and could result in material adverse effects.
- Executive Transition: The current CEO, E. Michael Thoben, III, is retiring in January 2008. The Board has not yet identified a replacement.
- Derivative Liabilities: The Company recorded a $622,000 charge related to the change in fair value of warrants issued in July 2007.
Investor Verification Checklist
- Asset Sale Finalization: Verify the final tax allocation and post-closing adjustments regarding the $11.5 million sale of OEM Remotes and Branded Products.
- CEO Succession: Monitor the progress of the search for a new CEO to ensure business continuity post-January 2008.
- Legal Exposure: Track developments in the securities class action and derivative lawsuits to assess potential financial liability.
- Margin Recovery: Evaluate whether the Specialty Components segment can achieve projected margin improvements as manufacturing scales and unabsorbed costs decrease.
- Convertible Note Terms: Review the terms of the $5 million convertible notes and warrants, specifically regarding dilution risks and the status of the registration statement.