LINK

Business Context and Reporting Period

Company: Interlink Electronics, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2001
Business Overview: Interlink develops intuitive interface devices (Force Sensing Resistor technology) for home, business, and medical applications. Key markets include Business Communications (67% of Q2 2001 revenue), Specialty Components, Home Entertainment, and E-Transactions. The company relies heavily on OEM relationships, with approximately 43% of 2000 revenue derived from Japanese customers.

Key Financial Metrics

Liquidity & Debt: As of June 30, 2001, the company held $9.7 million in cash. Total current liabilities were $4.96 million. The company has an unused $5 million U.S. line of credit and an unused $1 million equipment lease line. Long-term debt (net of current portion) was $2.099 million.

Material Changes vs. Prior Period

• Revenue Decline: Revenues dropped 21% in Q2 2001 and 13% for the six-month period compared to 2000. This was attributed to a global economic slowdown, particularly in the U.S. and Japan, and the devaluation of the Japanese Yen.
• Margin Compression: Gross margin collapsed from 43.5% to 13.0% in Q2 2001. Management cited a $2 million increase in inventory reserves to anticipate write-offs due to the economic downturn. Excluding this reserve, margins were consistent with the prior year.
• Operating Loss: The company swung from an operating profit of $851,000 in Q2 2000 to a loss of $2.33 million in Q2 2001. This was driven by the revenue decline and the inventory reserve adjustment.
• Expense Increases: Product development expenses rose 5% (Q2) and 17% (6-Mo) due to investments in IntuiTouch and VersaPad technologies. SG&A expenses increased as a percentage of revenue (from 21.7% to 33.4% in Q2) due to fixed costs for new sales teams in E-Transaction and Home Entertainment markets.

Outlook, Risks, and Unusual Items

Management Commentary & Outlook: Management believes current cash balances and credit lines are sufficient to fund operations for at least the next 12 months. However, they noted that an unforeseen downturn could adversely affect this forecast. The company expects growth in Business Communications to depend on overall market growth, given its ~80% market share in that segment.

Unusual Items:

• Inventory Reserve: A $2 million charge was taken in Q2 2001 to increase inventory reserves.
• Stockholder Loans: In May 2001, the company advanced $403,000 to officers and directors to purchase common stock. These loans bear 5% interest and are due November 1, 2002.

Risks and Contingencies:

• Foreign Exchange: Significant exposure to Yen/Dollar fluctuations due to 43% of revenue coming from Japan.
• Market Concentration: Heavy reliance on the Business Communications segment and major OEM customers.
• Competition: Intense competition, including low-cost remote control products.
• Supply Chain: Risks related to contract manufacturing interruptions and component supply shortages.

Investor Verification Checklist

• Inventory Valuation: Verify the rationale and sufficiency of the $2 million inventory reserve taken in Q2 2001.
• Japanese Yen Exposure: Assess the impact of continued Yen devaluation on future revenue and margins given the 43% reliance on Japanese customers.
• Liquidity Runway: Confirm the status of the $5 million line of credit and the company's ability to service debt amidst operating losses.
• Related Party Transactions: Review the terms and repayment status of the $403,000 loans advanced to officers and directors.
• New Market Penetration: Evaluate the progress and cost-effectiveness of the new sales teams for Home Entertainment and E-Transactions segments.