LINK

Business Context and Reporting Period

Company: Interlink Electronics, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2000
Business Overview: Interlink Electronics manufactures Force Sensing Resistor (FSR) technology and related products. Approximately 45-50% of consolidated revenues are derived from its Japanese subsidiary. Key markets include business communications (61% of H1 2000 revenue), broadband home entertainment, and e-transactions.

Key Financial Metrics

Cash Flow (Six Months Ended June 30, 2000):

• Operating Activities: $(48) thousand (Net cash used)
• Investing Activities: $(541) thousand (Net cash used)
• Financing Activities: $1,515 thousand (Net cash provided)
• Net Increase in Cash: $666 thousand

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 19% year-over-year for the quarter and 18% for the six-month period. Growth was driven by a 31% increase in sales to OEMs in the business communication market.
• Margin Expansion: Gross margin improved from 37.6% to 40.8% (six-month comparison) due to higher sales of high-margin products and new licensing revenue from International Electronics & Engineering (IEE).
• Expense Increases: Product development and research expenses rose 45% year-over-year (six-month) due to development of VERSAPOINT, REMOTELINK, and INTUITOUCH technologies. SG&A expenses increased 12% but decreased as a percentage of revenue.
• Net Income Decline: Despite revenue and operating income growth, net income decreased 15% year-over-year for the six-month period. This was primarily caused by a one-time non-operating charge of $769,000 related to a cancelled follow-on public stock offering.
• Liquidity: Working capital increased from $17.6 million to $19.7 million. Cash balances rose from $7.49 million to $8.16 million.

Guidance, Outlook, and Risks

Management Commentary:

• Management believes current cash balances, lines of credit ($4.1 million available), and operating cash flow will fund operations for at least the next 12 months.
• Operations were essentially break-even from a cash flow perspective for the six-month period.
• Recent events include the cancellation of a 2.5 million share stock offering in June 2000 and an enhanced license agreement with IEE for auto safety systems.

Risks and Contingencies:

• Market Dependence: Significant reliance on the business communication market and Japanese subsidiary (45-50% of revenue).
• Foreign Exchange: Exposure to fluctuations in foreign currency values, though hedged via forward contracts.
• Supply Chain: Reliance on third parties for manufacturing and potential interruptions in component supply.
• Adoption Risk: Uncertainty regarding market adoption of new technologies in home entertainment and e-transactions.

Investor Verification Checklist

• Cancelled Offering Impact: Verify the full extent of the $769,000 charge and confirm no further liabilities remain from the cancelled stock offering.
• Revenue Concentration: Assess the risk associated with 61% of revenue coming from the business communication market and ~50% from the Japanese subsidiary.
• Cash Flow Sustainability: Review the negative operating cash flow for the six-month period and the reliance on financing activities (borrowings and stock option exercises) to fund operations.
• Debt Obligations: Confirm the terms and repayment schedule for the increased long-term debt ($2.45 million) and capital lease obligations.
• Product Mix Shift: Validate the growth trajectory of the new broadband home entertainment and e-transaction markets to ensure they can offset potential declines in legacy markets.