INTERLINK ELECTRONICS INC — Interim / Quarterly Report 1996

Nov 14, 1996

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _ to _ Commission File No. 0-21808 INTERLINK ELECTRONICS, INC. (Exact name of registrant as specified in its charter) Delaware 77-0056625 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 546 Flynn Road Camarillo, California 93012 (Address of principal executive offices) (Zip Code) (805) 484-8855 (Registrant's telephone number, including area code) Not applicable. (Former name, former address and former fiscal year if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Shares of Common Stock Outstanding, at November 5, 1996: 4,492,529

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4 INTERLINK ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1996 - ------------------------------------------------------ 1. BASIS OF PRESENTATION OF INTERIM FINANCIAL DATA The financial information herein for the three month and nine month periods ended September 30, 1995 and 1996 is unaudited; however, such information reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of results for the interim periods. The interim statements should be read in conjunction with the financial statements and the notes thereto included in the Interlink Electronics, Inc. Form 10-K for the fiscal year ended December 31, 1995. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year. EXERCISE AND EXPIRATION OF WARRANTS As of December 31, 1995 the Company had the following Common Stock Warrants outstanding: Number of Shares Exercise Price Expiration Date ---------------- -------------- --------------- 1,897,614 $8.25 June 7, 1996 135,000 $8.25 June 7, 1998 135,000 $6.60 June 7, 1998 Of the Warrants expiring in June 1996, 223,723 Warrants were exercised just prior to the expiration date and the remaining 1,673,891 warrants expired. As a result of the exercise, the Company received net proceeds of $1.75 million (after deducting offering costs of approximately $100,000). 3. LINE OF CREDIT In May 1996, the Company's bank renewed the existing credit line and increased the maximum amount of the line to $1.5 million. All other terms remained the same. 4. BANK LOAN In March 1996 two Japanese banks co-agreed to lend approximately $180,000 to the Company's Japan subsidiary. The loan carries an interest rate of 2.8% and is to be repaid over a six year period. 5. EQUIPMENT LEASE LINE In April 1996 the Company's equipment leasing firm increased the maximum amount available under the Company's equipment lease line to $1.8 million. As of September 30, 1996 the Company had used approximately $971,000 of the line. 5 INTERLINK ELECTRONICS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - --------------------------------------------- RESULTS OF OPERATIONS For the three month and the nine month periods ended September 30, 1996, revenues grew 22% and 20%, respectively, as compared to the same periods of 1995. Revenues for the Computer Pointing Devices product line grew 38% and 44% in the same comparisons. The growth in this product line resulted from the Company's further penetration into the rugged portable computer and presentation system markets, as well as, broader distribution of its Branded products in the retail channels. Revenues for the Custom Applications products line decreased 32% for the three month comparison and 39% for the nine month comparison as a result of the Company's strategy to focus on the Computer Pointing Devices product line. For the quarter ended September 30, 1996, the Custom Applications product line accounted for 13% of total revenues, down from 23% in the same period of 1995. The Company expects that the Custom Applications product line will continue to decline as a percentage of total revenues in succeeding periods. As a percent of revenues, gross profit declined to 46% for the third quarter of 1996 and to 49% for the first nine months of 1996 as compared to 51% for the same periods of 1995. The decline in gross profit percentage reflects a greater mix of high volume OEM business, which carries a relatively lower profit margin. The Company expects gross profit percentages to remain slightly above or below the current level depending on the mix of high volume OEM business versus low volume OEM business or non OEM business. Product development and research expenses reached 10% and 9% of revenues for the third quarter of 1996 and the first nine months of 1996, respectively, as compared to 7% and 9% for the respective periods in 1995 as the Company continues to develop products based on its proprietary VersaPoint technology (which was developed in 1992). Given the industries the Company participates in, management expects minimum research and development costs to remain at or near the current level. For the three months and the nine months ended September 30, 1996, selling, general and administrative costs fell to 32% and 36% of revenues, respectively, as compared to 41% and 42% for the same periods of 1995. The decrease resulted from the leveraging of fixed S,G & A costs over a higher sales base. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1996 working capital totaled $8.7 million as compared to $6.4 million at December 31, 1995. This increase is primarily a result of the Company's positive operating results in the first nine months of 1996, $2.1 million in further capitalization received from the exercise of outstanding warrants and utilization of the Company's equipment lease line. For the nine months ended September 30, 1996, operations used $1.4 million in cash due to the increase in accounts receivable and inventory as necessitated by the revenue growth. As the Company is aggressively seeking customers in the computer retail industry and in Japan, both areas known for extended payment policies, operations may, in the near term, continue to be a net user of cash despite profitable results. For the nine months of 1996, investing activities comprised the purchase of production equipment and the furtherance of intellectual property. For the nine months ended September 30, 1996, financing activities resulted in proceeds of approximately $180,000 from a loan from a Japanese bank, additional usage of the Company's equipment lease line and $1.8 million from the exercise of outstanding warrants. 6 FORWARD LOOKING STATEMENTS From time to time the Company may issue forward-looking statements that involve a number of risks and uncertainties. The following are among the factors that could cause actual results to differ materially from the forward-looking statements: business conditions and growth in the electronics industry and general economies, both domestic and international; lower than expected customer orders, delays in receipt of orders or cancellation of orders; competitive factors, including increased competition, new product offerings by competitors and price pressures; the availability of third party parts and supplies at reasonable prices; changes in product mix; significant quarterly performance fluctuations due to the receipt of a significant portion of customer orders and product shipments in the last month of each quarter; and product shipment interruptions due to manufacturing problems. The forward looking statements contained in this document regarding industry trends, revenue and product mix, costs and margin expectations and future business activities should be considered in light of these factors. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 3.1b of Post-Effective Amendment No. 8 to the Company's Registration Statement on Form S-1 filed with the Commission on October 2, 1996 (Registration No. 33-60380). 3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2 of Post-Effective Amendment No. 8 to the Company's Registration Statement on Form S-1 filed with the Commission on October 2, 1996 (Registration No. 33-60380). 27 Financial Data Schedule (b) Reports on Form 8-K No reports were filed during the period for which this report is filed. Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 8, 1996. INTERLINK ELECTRONICS, INC. (Registrant) PAUL D. MEYER - --------------------------- Paul D. Meyer Vice President, Finance 7