INTERLINK ELECTRONICS INC — Interim / Quarterly Report 1997

Nov 6, 1997

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 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, 1997 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 October 23, 1997: 5,026,840

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4 INTERLINK ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. Basis of Presentation of Interim Financial Data The financial information herein for the three month and nine month periods ended September 30, 1996 and 1997, 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, 1996. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year. 2. Bank Line of Credit In May 1997 the Company's bank renewed the existing credit line and increased the maximum amount of the line to $2 million. In June 1997 the Company borrowed $1 million against the line. 3. Private Placement In September 1997, The Company completed a private placement of 324,349 shares of common stock. The Company received gross proceeds of $2.25 million (before offering expenses of approximately $100,000). These securities were not required to be registered with the Securities and Exchange Commission. 5 INTERLINK ELECTRONICS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS For the three and nine month periods ended September 30, 1997, revenues were $4,759 and $13,727, respectively, and increased 39% and 46%, respectively, as compared to the same periods of 1996. Revenues for the Computer Pointing Devices product line were $4.0 million for the three months ended September 30, 1997, up 34% from the same period of 1996, and $12.1 million for the nine months ended September 30, 1997, up 50% from the same nine month period of 1996. The growth in this product line resulted from the Company's further penetration into the computer integrated pointing device and retail markets. The Company's patented Versapad touchpad facilitated the growth in the computer integration market. Further, sales of a wireless keyboard launched in the second quarter and the introduction of a retail version of the Company's patented Versapad touchpad enhanced the Company's sales and presence in the retail market. Revenues for the Custom Applications products line increased 71% for the three month period ended September 30, 1997, as compared to the same period of 1996, and increased 18% percent for the nine month period ended September 30, 1997, as compared to the same period of 1996. The increase in revenue for the Custom Applications product line was due to a particularly large customer order. The company expects the revenue for the custom applications product line to remain flat or possibly decline. For the quarter ended September 30, 1997, the Custom Applications product line accounted for 16% of total revenues, up from 13% in the same period of 1996. Gross profits declined to 42% of revenues for the three months ended September 30, 1997 as compared to 46% of revenues for the three months ended September 30, 1996, and declined to 43% of revenues for the nine months ended September 30, 1997 from 49% for the nine month months ended September 30, 1996. The decline in gross profit percentage reflects a greater mix of high volume OEM and retail business, which garner a relatively lower profit margin. The Company expects gross profit percentages to continue to decline as the company's OEM and retail business continues to expand. Product development and research expenses were 8% of revenues for the three months ended September 30, 1997, as compared with 10% of revenue for the same period of 1996. For the nine month period ended September 30, 1997, research expenditures decreased to 8% of revenues as compared to 9% of revenues for the same period of 1996. 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 research and development costs to remain at or near the current level. For the three months and nine months ended September 30, 1997, selling, general and administrative ("S,G, & A") costs were to 27% and 28% of revenues, respectively, as compared to 33% and 36% for the same periods of 1996. The decrease resulted from the leveraging of fixed S,G & A costs over a higher sales base and the greater mix of OEM sales which carry a relatively lower S,G & A requirement. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1997 working capital totaled $13.1 million as compared to $9.0 million at December 31, 1996. This increase is primarily a result of the Company's positive operating results in the first nine months of 1997, proceeds of a private placement the Company's stock (see Item 6-B), proceeds from the exercise of stock options, and proceeds from a capital lease. 6 For the nine months ended September 30, 1997, operations used $3.3 million in cash due primarily to an increase in inventory and receivables as required by the revenue growth and the build-up of inventory related to new products launched in the second and third quarters of 1997. Because the Company is aggressively seeking customers in the computer retail industry and in Japan, both known for extended payment policies, operations may continue to be a net user of cash despite positive operating results. For the nine months ended September 30, 1997, investing activities comprised the purchase of production equipment and the furtherance of intellectual property. For the nine months ended September 30, 1997, financing activities resulted in aggregate proceeds of approximately $4.5 million from a private placement (see Item 6-B), the exercise of employee stock options, borrowing on the Company's credit line, and proceeds from leasing transactions (net of principal repayments). 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, product development, operating expense improvements, and future business activities should be considered in light of these factors. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None. (b) Reports on Form 8-K Current report on Form 8-K of Interlink Electronics, Inc., dated September 22, 1997, as filed with the Commission on October 1, 1997. 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 October 31st, 1997. INTERLINK ELECTRONICS, INC. (Registrant) PAUL D. MEYER - ---------------------------------- Paul D. Meyer Chief Financial Officer 7