LINK

Business Context and Reporting Period

Company: Interlink Electronics, Inc.
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 1996
Business Overview: Interlink designs and manufactures products incorporating Force Sensing Resistor (FSR) technology, which converts physical pressure into electronic signals. The Company shifted its focus from selling custom sensors to complete sensor systems, primarily targeting computer pointing devices (e.g., SuperMouse, DuraPoint, RemotePoint) and custom applications for industrial and medical sectors. Operations include a manufacturing facility in Camarillo, California, and a Japanese subsidiary (Interlink Electronics K.K.) accounting for approximately 20% of consolidated revenues.

Key Financial Metrics (Year Ended Dec 31, 1996)

Note: All figures in thousands except per share data and percentages.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 26% to $13.5 million, driven primarily by the Computer Pointing Devices segment, which grew to $11.6 million (86% of total revenue). Conversely, the Custom Applications segment declined 33% to $1.9 million.
• Profitability: Operating income improved significantly from $68,000 in 1995 to $606,000 in 1996. Net income rose 243% to $515,000.
• Margin Compression: Gross margin decreased from 51% in 1995 to 48% in 1996. Management attributed this to a higher mix of high-volume OEM sales compared to branded products.
• Expense Management: Selling, General, and Administrative (SG&A) expenses as a percentage of revenue dropped from 42% to 34%, reflecting the amortization of fixed costs over a larger revenue base.
• Cash Flow: Operating activities consumed $1.3 million in cash due to increased accounts receivable and inventory requirements supporting revenue growth. Financing activities provided $2.2 million, largely from the exercise of stock warrants.

Outlook, Risks, and Management Commentary

• Strategic Focus: The Company continues to prioritize the development and marketing of computer pointing devices based on VersaPoint technology. Custom Applications are expected to show minimal or negative growth.
• Liquidity: Management believes existing cash balances and a $1.5 million bank line of credit (unused at year-end) are sufficient to meet forecasted requirements for the next twelve months. A $1.8 million equipment lease line is also available, with $1.3 million drawn.
• Key Risks:
  • Competition: Intense competition from larger entities (e.g., Microsoft, IBM, Logitech) with greater resources and economies of scale.
  • Supply Chain: Reliance on third-party suppliers for microcontrollers and raw materials; potential shortages or price increases could impact operations.
  • Customer Concentration: One customer in the computer industry accounted for 15% of 1996 sales.
  • Patent Expiration: Key patents covering the initial FSR technology expire in 1999, though newer patents extend protection through 2015.
• Unusual Items: The 1994 financials included a one-time gain of $3.4 million from the sale of the European joint venture interest, which is not present in 1995 or 1996 results.

Investor Verification Checklist

• OEM Dependency: Verify the stability of the top customer representing 15% of sales and the sustainability of the shift toward lower-margin OEM sales.
• Inventory Levels: Review the increase in inventory from $2.2 million to $3.6 million to ensure it aligns with demand and does not indicate obsolescence.
• Patent Portfolio: Assess the Company's pipeline of new patents to mitigate the risk of core technology patents expiring in 1999.
• Stock-Based Compensation: Note that pro forma net income (under SFAS No. 123) would have been a loss of $213,000 in 1996, compared to reported net income of $515,000.
• Debt Covenants: Confirm continued compliance with financial covenants on the $1.5 million bank line of credit and equipment leases.