Business Context and Reporting Period
Company: Interlink Electronics, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2008
Business Overview: Interlink develops and sells intuitive interface devices and components, primarily in two segments: eTransactions (electronic signature capture) and Specialty Components (Force Sensing Resistors and sensors). In August 2007, the company sold its OEM Remotes and Branded Products segments, which are now reported as discontinued operations.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2008 |
Three Months Ended June 30, 2007 |
Six Months Ended June 30, 2008 |
Six Months Ended June 30, 2007 |
|---|---|---|---|---|
| Revenues | $6,713 | $3,825 | $12,482 | $8,005 |
| Gross Profit | $3,097 | $1,315 | $5,036 | $3,118 |
| Gross Margin % | 46% | 34% | 40% | 39% |
| Operating Loss | $(972) | $(1,746) | $(3,679) | $(3,130) |
| Net Loss (Continuing Ops) | $(522) | $(1,760) | $(2,631) | $(3,202) |
| Net Loss (Total) | $(522) | $(2,179) | $(2,631) | $(4,698) |
| Cash & Equivalents | $7,851 | $12,659 (Dec 31, 2007) | $7,851 | $1,983 (Jun 30, 2007) |
| Working Capital | $15.7M | $18.7M (Dec 31, 2007) | $15.7M | N/A |
| Convertible Notes (Net) | $3,706 | $3,413 (Dec 31, 2007) | $3,706 | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Revenues from continuing operations increased 76% for the quarter and 56% for the six-month period compared to the prior year. This was driven by a 60% increase in eTransactions and a 96% increase in Specialty Components revenue for the quarter.
- Margin Expansion: Gross margin improved significantly to 46% for the quarter (from 34% in 2007) and 40% for the six months (from 39% in 2007). Specialty Components margins improved from 13% to 40% for the quarter due to operational efficiencies.
- Operating Expenses: Total operating expenses increased by $1.0 million for the quarter and $2.5 million for the six months. Increases were primarily due to higher payroll costs (including severance and realignment) and product development, partially offset by a decrease in non-cash stock-based compensation.
- Cash Flow: Net cash used in operating activities for continuing operations was $6.6 million for the six months ended June 30, 2008, compared to $2.7 million in the prior year period. This increase was largely due to payments associated with the 2007 asset sale reflected in accrued expenses.
- Discontinued Operations: The prior year periods included losses from discontinued operations (OEM Remotes and Branded Products), whereas the current period has no such activity.
Guidance, Outlook, and Risks
- Outlook: Management projects continued revenue growth in both eTransactions and Specialty Components for the full fiscal year 2008. They anticipate that as revenue grows, operating expenses as a percentage of revenue will decrease.
- Liquidity: The company maintains a $5 million line of credit with Silicon Valley Bank, secured by accounts receivable. As of June 30, 2008, no amounts were drawn against this line. Cash reserves decreased from $12.7 million to $7.9 million over the six-month period.
- Management Changes: The former CEO retired on January 4, 2008. John A. Buckett, II serves as Interim CEO while a search for a permanent replacement is underway.
- Legal Contingencies: The company is defending a class action lawsuit and a shareholder derivative action regarding historical financial restatements. While the SEC has indicated no enforcement action is currently intended, the outcome of the litigation remains uncertain and could result in material adverse effects.
- Derivative Liability: A significant portion of the net loss reduction in the current period is attributable to a $1.38 million gain from the change in fair value of warrant liabilities associated with convertible notes issued in 2007.
Investor Verification Checklist
- Revenue Quality: Verify the sustainability of the 96% revenue growth in Specialty Components, which is dependent on a small number of large OEM contracts.
- Cash Burn Rate: Assess the runway provided by the $7.9 million cash balance given the $6.6 million cash burn from operations in the first half of the year.
- Legal Exposure: Monitor the status of the securities class action and derivative lawsuits, specifically regarding potential settlement costs not covered by insurance.
- Debt Obligations: Review the terms of the $5 million convertible notes (maturing 2010) and the potential for dilution if converted, or cash outflow if not.
- Executive Transition: Confirm the timeline and selection of a permanent CEO to ensure strategic continuity.