Business Context and Reporting Period
Company: Interlink Electronics, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: Interlink develops and sells intuitive interface devices and components, primarily through 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 Sep 30, 2008 |
Nine Months Ended Sep 30, 2008 |
Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Revenues, Net | $7,219 | $19,701 | $12,665 |
| Gross Profit | $3,137 | $8,173 | $4,168 |
| Gross Margin % | 43% | 41% | 33% |
| Operating Loss | $(27) | $(3,707) | $(6,314) |
| Net Income (Loss) | $121 | $(2,509) | $(3,060) |
| Cash and Equivalents | $9,092 | Balance Sheet (Sep 30, 2008) | |
| Working Capital | $15,774 | Calculated (Current Assets $19,909 - Current Liab $4,135) | |
| Convertible Notes (Net) | $3,839 | Balance Sheet (Sep 30, 2008) |
Cash Flow (Nine Months Ended Sep 30, 2008):
- Net cash used in operating activities: $(5,350) thousand
- Net cash used in investing activities: $(703) thousand
- Net cash provided by financing activities: $2,569 thousand
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 55% in Q3 2008 and 56% for the nine-month period compared to 2007, driven by growth in both eTransactions (+62% Q3) and Specialty Components (+49% Q3).
- Margin Expansion: Gross margin improved significantly to 43% in Q3 2008 from 22% in Q3 2007. Specialty Components margins rebounded to 39% from 2% in the prior year quarter.
- Operating Efficiency: Operating loss narrowed to $(27) thousand in Q3 2008 from $(3,184) thousand in Q3 2007. Operating expenses decreased $1.07 million in Q3 due to reduced SG&A costs, offset by higher R&D spending.
- Non-Operating Items: Net other income improved to $344 thousand in Q3 2008 from a loss of $(689) thousand in Q3 2007, primarily due to favorable changes in the fair value of warrant derivatives.
- Discontinued Operations: The 2007 comparative periods include a $6.21 million gain on the sale of assets and losses from discontinued operations, which are not present in the 2008 continuing operations results.
Outlook, Risks, and Unusual Items
- Restructuring Plan: On October 22, 2008, the company announced a plan to transfer significant US manufacturing operations to Shenzhen, China. This will eliminate approximately 40 manufacturing positions between January and June 2009. Expected costs range from $350,000 to $570,000 for severance/retention and $100,000 to $150,000 for equipment/transition costs.
- Liquidity: The company maintains a $5 million line of credit with Silicon Valley Bank (undrawn as of Sep 30, 2008). Cash reserves decreased from $12.7 million to $9.1 million during the nine-month period.
- Legal Proceedings: The company is defending a class action and a shareholder derivative action regarding prior financial restatements. Parties have reached an agreement in principle on settlement terms, but definitive agreements are still being negotiated.
- Convertible Notes: The company has $5 million in 8% convertible notes maturing in July 2010. There are ongoing discussions regarding liquidated damages with investors due to a delay in the effectiveness of the registration statement for the underlying shares.
- Stock-Based Compensation: Significant non-cash charges were recorded, including $339,000 related to the acceleration of options for the former CEO who retired in January 2008.
Investor Verification Checklist
- Restructuring Execution: Verify the timeline and actual costs associated with the planned move of manufacturing to China and the elimination of 40 US jobs.
- Settlement Finalization: Monitor the status of the definitive settlement agreements for the securities class action and derivative lawsuits to assess potential cash outflows.
- Convertible Note Status: Track the resolution of the liquidated damages dispute with note holders and the status of the registration statement effectiveness.
- Revenue Sustainability: Assess whether the 55% revenue growth is sustainable given the company's reliance on a few major customers (two customers represented >10% of revenue in the first nine months of 2008).
- Cash Burn Rate: Evaluate the company's ability to fund operations given the negative operating cash flow of $5.35 million for the nine-month period and the upcoming restructuring costs.