Business Context and Reporting Period
Company: Interlink Electronics, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: Interlink Electronics develops and sells electronic components and devices across four segments: Business Communications, Home Entertainment, E-Transactions, and Specialty Components. The company utilizes Force Sensing Resistor (FSR) technology and manufactures branded pointing devices and signature capture products.
Key Financial Metrics
| Metric (in thousands) | Q3 2003 | Q3 2002 | 9 Months 2003 | 9 Months 2002 |
|---|---|---|---|---|
| Revenues | $7,848 | $6,629 | $22,326 | $18,065 |
| Gross Profit | $3,285 | $2,701 | $9,341 | $7,442 |
| Gross Margin % | 41.9% | 40.7% | 41.8% | 41.2% |
| Operating Income | $280 | $30 | $536 | $(692) |
| Net Income | $238 | $40 | $659 | $(692) |
| Diluted EPS | $0.02 | $0.00 | $0.06 | $(0.07) |
| Cash and Equivalents | $6,116 | $7,906 (Dec 31, 2002) | N/A | |
| Working Capital | $19,711 | $16,247 (Dec 31, 2002) | N/A | |
| Total Debt | $1,860 | $2,334 (Dec 31, 2002) | N/A |
Note: Debt figures represent current maturities plus long-term debt net of current portion. Working capital is calculated as Total Current Assets minus Total Current Liabilities.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 18% in Q3 2003 and 24% for the nine-month period compared to 2002. Growth was driven by the Business Communications segment (up 32% YTD) and E-Transactions segment (up 56% YTD).
- Profitability Turnaround: The company returned to profitability, reporting net income of $238,000 for Q3 2003 compared to $40,000 in Q3 2002. For the nine-month period, the company reported net income of $659,000, a significant improvement from a net loss of $692,000 in the same period of 2002.
- Cash Flow: Operating cash flow turned negative, using $3.8 million in the first nine months of 2003 compared to generating $425,000 in 2002. This was primarily due to increased working capital investments (inventory and receivables) to support sales growth in the branded channel.
- Segment Performance:
- Business Communications: Revenue grew due to expanded distribution, though margins compressed slightly (34% YTD vs 37% prior year) due to a higher mix of lower-margin OEM sales.
- Home Entertainment: Revenue increased 127% in Q3 due to Microsoft Xbox program fluctuations.
- Specialty Components: Revenue declined 7% YTD due to a large one-time order in Q3 2002, though margins improved to 65%.
Outlook, Risks, and Unusual Items
- Liquidity: Management believes current cash balances ($6.1 million) and an unused $3 million bank line of credit are sufficient to fund operations for at least the next 12 months. Proceeds from stock option exercises ($2.5 million YTD) bolstered liquidity.
- Unusual Items:
- Legal Settlement: Other income included a $180,000 gain in Q1 2003 from settling a lawsuit with a former Japanese component supplier.
- Inventory Write-downs: The company recorded $330,000 and $531,000 in inventory write-downs in Q1 and Q2 2003, respectively, related to excess and obsolete inventory.
- Risks and Contingencies:
- Foreign Exchange: Approximately 22% of YTD 2003 revenue is denominated in Japanese Yen. The company uses forward contracts to hedge, but prolonged exchange rate fluctuations could materially impact results.
- Customer Concentration: No single customer accounted for more than 10% of sales in the first nine months of 2003.
- Accounting Change: The company dismissed KPMG LLP as its principal accountant on September 12, 2003, and engaged BDO Siedman, LLP.
Investor Verification Checklist
- Working Capital Usage: Verify the sustainability of the $3.8 million operating cash outflow and the company's ability to manage receivables and inventory growth without further dilution or debt.
- Revenue Quality: Assess the mix of OEM vs. Branded sales in the Business Communications segment, as OEM sales carry lower margins and may be more volatile.
- Inventory Levels: Monitor inventory balances ($8.6 million at Sept 30, 2003) against sales trends to ensure write-downs do not recur.
- Accountant Change: Review the Form 8-K filed on September 12, 2003, regarding the dismissal of KPMG to understand the rationale and any potential impact on audit quality or future reporting.
- Stock-Based Compensation: Note that the company applies APB Opinion No. 25 (no expense recognized). Pro forma net loss under SFAS No. 123 would have been $(3.5) million for the nine months ended Sept 30, 2003.