Business Context and Reporting Period
Company: Interlink Electronics, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1998
Business Overview: The company manufactures computer pointing devices and custom applications, with significant operations in the United States and Japan. The reporting period covers the third quarter and the first nine months of fiscal year 1998.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 1998 | Nine Months Ended Sep 30, 1998 |
|---|---|---|
| Revenues | $5,231,000 | $15,739,000 |
| Gross Profit | $1,924,000 | $5,888,000 |
| Gross Margin | 37% | 37% |
| Operating Income | $257,000 | $488,000 |
| Net Income (Loss) | $(136,000) | $49,000 |
| Earnings Per Share (Basic) | $(0.03) | $0.01 |
| Cash and Equivalents | $3,413,000 (as of Sep 30, 1998) | |
| Working Capital | ||
| Total Debt (Current + Long Term) | $1,819,000 (Bank line: $320k; Long-term: $1,486k) |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 10% for the quarter and 15% for the nine-month period compared to 1997. The Computer Pointing Devices line grew 13% (quarter) and 12% (nine months), while Custom Applications grew 31% (nine months).
- Margin Compression: Gross profit margins declined to 37% from 42% (quarter) and 43% (nine months) in the prior year. Management attributes this to a higher mix of high-volume OEM business which carries lower margins.
- Profitability: Despite revenue growth, the company reported a net loss of $136,000 for the quarter compared to a net income of $278,000 in the prior year quarter. This was primarily driven by a one-time charge.
- Cash Flow: Net cash used for operating activities was $1.1 million for the nine months ended September 30, 1998, compared to $3.3 million used in the prior year period. The reduction in cash burn was offset by a significant increase in inventory ($1.9 million outflow).
Guidance, Risks, and Unusual Items
- Unusual Item: A one-time charge of $365,000 was recorded in the third quarter related to the settlement of a customer lawsuit, included in "Other Income (Expense)."
- Liquidity Outlook: Working capital increased to $13.3 million. Management notes that operations may continue to be a net user of cash due to inventory build-up for business expansion in Japan and extended payment policies in the computer retail industry.
- Year 2000 Compliance: The company believes its products and internal systems are largely compliant. Estimated costs to resolve remaining deficiencies are capped at $100,000, with completion expected by mid-1999. Risks remain regarding supplier compliance and public utility availability.
- Foreign Exchange Risk: Results are exposed to fluctuations in the yen/U.S. dollar exchange rate, as the Japan subsidiary reports in yen but purchases products in U.S. dollars.
- Debt Covenants: The company is in compliance with all covenants on its $3 million U.S. bank line of credit, which was unused as of September 30, 1998.
Investor Verification Checklist
- Verify the sustainability of revenue growth given the shift toward lower-margin OEM business.
- Monitor inventory levels and cash conversion cycles, as inventory build-up is currently consuming operating cash.
- Assess the impact of the $365,000 lawsuit settlement on future legal contingencies.
- Review the status of supplier Year 2000 compliance responses expected in Q4 1998.
- Track the utilization of the $3 million U.S. credit line and the $2.5 million Japan credit line.