Business Context and Reporting Period
Company: Interlink Electronics, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2000
Business Overview: Interlink is a developer of intuitive interface devices, including Force Sensing Resistor (FSR) technology, for home, business, and medical applications. Key markets include Business Communication (OEM computer peripherals), Specialty Components, Broadband Home Entertainment, and E-Transactions. Approximately 50% of 1999 revenues were derived from Japanese customers.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2000 | 9 Months Ended Sep 30, 2000 |
|---|---|---|
| Revenues | $8,625 | $24,567 |
| Gross Profit | $3,792 | $10,302 |
| Gross Margin | 44.0% | 41.9% |
| Operating Income | $860 | $2,495 |
| Net Income | $797 | $1,577 |
| EPS (Diluted) | $0.07 | $0.14 |
| Cash and Equivalents | $8,615 | $8,615 (Balance Sheet) |
| Working Capital | $21,588 | $21,588 (Balance Sheet) |
| Total Debt (Current + Long Term) | $3,398 | $3,398 (Balance Sheet) |
Note: Working Capital calculated as Total Current Assets ($26,074) minus Total Current Liabilities ($4,486).
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 20% for the quarter and 19% for the nine-month period compared to the same periods in 1999. Growth was driven primarily by a 20% increase in sales to OEMs in the Business Communication market.
- Margin Expansion: Gross margin improved from 36.5% to 44.0% for the quarter and from 37.3% to 41.9% for the nine-month period. This was attributed to higher-margin product sales in new markets and additional licensing revenue.
- Expense Increases: Product development and research expenses rose 34% (quarter) and 41% (nine months). SG&A expenses increased 54% (quarter) and 26% (nine months) due to investments in sales infrastructure for new markets.
- One-Time Charge: A non-operating charge of $769,000 was recorded in the second quarter of 2000 related to a cancelled follow-on public stock offering.
- Cash Flow: Operating cash flow turned negative, using $587,000 for the nine months ended September 30, 2000, compared to providing $2.7 million in the prior year. This was primarily due to a $1.9 million increase in inventory associated with switching to a new Chinese contract manufacturer.
Guidance, Outlook, and Risks
Management Commentary: Management expects revenue growth in the Business Communication market to depend on overall market growth, given Interlink's ~80% market share. The company is actively developing products for Broadband Home Entertainment and E-Transactions. Income taxes are expected to increase as net operating loss carryforwards expire.
Liquidity: The company holds $8.6 million in cash and has $6.1 million in unused bank lines of credit (U.S. and Japan) plus a new $1 million facility for equipment purchases. Management believes current resources will fund operations for at least the next 12 months.
Risks and Contingencies:
- Market Dependence: Heavy reliance on the Business Communication market and specific OEM customers (approx. 50% of revenue from Japan).
- Currency Risk: Exposure to yen/dollar exchange rate fluctuations.
- Manufacturing: Reliance on third-party manufacturers, including a recent transition to a new Chinese supplier.
- Adoption Risk: Uncertainty regarding market adoption of new technologies in home entertainment and e-transactions.
Investor Verification Checklist
- Inventory Build: Verify the necessity and sell-through rate of the $1.9 million inventory increase linked to the new Chinese manufacturer.
- Debt Structure: Review the terms of the $2.2 million in new borrowings from Japanese banks and the $1 million U.S. equipment credit facility.
- Customer Concentration: Assess the risk profile of the top OEM customers, particularly given the 50% revenue exposure to Japan.
- New Market Traction: Monitor revenue contribution from Broadband Home Entertainment and E-Transactions to ensure they offset the high SG&A investments.
- One-Time Charges: Confirm the final impact of the cancelled equity offering on future capital raising plans.