10-Q 1 link-20170930x10q.htm 10-Q link_Current_Folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2017

 

or

 

Transition Report Pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from __________________ to ______________________.

 

Commission file number 001-37659

 

INTERLINK ELECTRONICS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

 

77-0056625

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

31248 Oak Crest Drive, Suite 110
Westlake Village, California 91361

(Address of principal executive offices, zip code)

 

(805) 484-8855

(Registrant’s telephone number, including area code)

 

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  ☒  No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ☒  No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

 

Accelerated filer ☐

Non-accelerated filer   ☐

(Do not check if smaller reporting company)

Smaller reporting company ☒

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐  No  ☒

 

As of  November 8, 2017, the issuer had 7,336,488 shares of common stock issued and outstanding.

 

 

 

 

 


 

2


 

PART I:  FINANCIAL INFORMATION

Item 1.Financial Statements

INTERLINK ELECTRONICS, INC.

 

Condensed Consolidated Balance Sheets

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2017

    

2016

    

 

 

(in thousands, except par value)

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,798

 

$

6,009

 

Restricted cash

 

 

 5

 

 

 5

 

Accounts receivable, net

 

 

1,386

 

 

1,726

 

Inventories

 

 

1,256

 

 

1,268

 

Prepaid expenses and other current assets

 

 

183

 

 

377

 

Total current assets

 

 

10,628

 

 

9,385

 

Property, plant and equipment, net

 

 

320

 

 

310

 

Intangibles, net

 

 

68

 

 

44

 

Deferred income taxes

 

 

527

 

 

675

 

Other assets

 

 

59

 

 

57

 

Total assets

 

$

11,602

 

$

10,471

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

143

 

$

324

 

Accrued liabilities

 

 

320

 

 

334

 

Accrued income taxes

 

 

74

 

 

104

 

Deferred revenue, current

 

 

 —

 

 

111

 

Total current liabilities

 

 

537

 

 

873

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

537

 

 

873

 

 

 

 

 

 

 

 

 

Commitments and contingencies (see note 9)

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

Preferred stock, $0.01 par value: 1,000 shares authorized, no shares issued or outstanding

 

 

 —

 

 

 —

 

Common stock, $0.001 par value: 30,000 shares authorized, 7,336 and 7,326 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively

 

 

 7

 

 

 7

 

Additional paid-in-capital

 

 

60,497

 

 

60,370

 

Accumulated other comprehensive (loss) income

 

 

 4

 

 

(71)

 

Accumulated deficit

 

 

(49,443)

 

 

(50,708)

 

Total stockholders' equity

 

 

11,065

 

 

9,598

 

Total liabilities and stockholders' equity

 

$

11,602

 

$

10,471

 

 

See accompanying notes to these condensed consolidated financial statements.

 

3


 

INTERLINK ELECTRONICS, INC.

 

Condensed Consolidated Statements of Income and Comprehensive Income

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

 

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue, net

 

$

2,649

 

$

3,246

 

$

8,797

 

$

9,105

 

Cost of revenue

 

 

992

 

 

1,296

 

 

3,343

 

 

3,641

 

Gross profit

 

 

1,657

 

 

1,950

 

 

5,454

 

 

5,464

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 Engineering, research and development

 

 

230

 

 

183

 

 

565

 

 

498

 

 Selling, general and administrative

 

 

895

 

 

830

 

 

2,987

 

 

2,497

 

  Total operating expenses

 

 

1,125

 

 

1,013

 

 

3,552

 

 

2,995

 

Income from operations

 

 

532

 

 

937

 

 

1,902

 

 

2,469

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 Other income (expense), net

 

 

(4)

 

 

 6

 

 

13

 

 

35

 

Income before income tax expense

 

 

528

 

 

943

 

 

1,915

 

 

2,504

 

Income tax expense

 

 

176

 

 

329

 

 

650

 

 

535

 

Net income

 

 

352

 

 

614

 

 

1,265

 

 

1,969

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

39

 

 

(4)

 

 

75

 

 

(25)

 

Comprehensive income

 

$

391

 

$

610

 

$

1,340

 

$

1,944

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share, basic and diluted

 

$

0.05

 

$

0.08

 

$

0.17

 

$

0.27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

7,336

 

 

7,327

 

 

7,332

 

 

7,327

 

Weighted average common shares outstanding - diluted

 

 

7,425

 

 

7,410

 

 

7,418

 

 

7,406

 

 

See accompanying notes to these condensed consolidated financial statements.

4


 

INTERLINK ELECTRONICS, INC.

 

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

    

2017

    

2016

 

 

 

(in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

1,265

 

$

1,969

 

Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

139

 

 

63

 

Stock based compensation

 

 

93

 

 

90

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

340

 

 

(170)

 

Inventories

 

 

12

 

 

(227)

 

Prepaid expenses and other current assets

 

 

194

 

 

158

 

Other assets

 

 

(2)

 

 

(32)

 

Accounts payable

 

 

(181)

 

 

(154)

 

Accrued liabilities

 

 

(14)

 

 

18

 

Accrued income taxes

 

 

(30)

 

 

329

 

Deferred income taxes

 

 

148

 

 

 —

 

Deferred revenue

 

 

(111)

 

 

(23)

 

Net cash provided by operating activities

 

 

1,853

 

 

2,021

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Property, plant and equipment

 

 

(138)

 

 

(239)

 

Intangibles

 

 

(35)

 

 

(30)

 

Net cash used in investing activities

 

 

(173)

 

 

(269)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

34

 

 

 —

 

Net cash provided by financing activities

 

 

34

 

 

 —

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

75

 

 

(25)

 

Net increase in cash and cash equivalents

 

 

1,789

 

 

1,727

 

Cash and cash equivalents, beginning of period

 

 

6,009

 

 

4,430

 

Cash and cash equivalents, end of period

 

$

7,798

 

$

6,157

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Income taxes paid

 

$

503

 

$

206

 

 

See accompanying notes to these condensed consolidated financial statements.

 

 

5


 

Table of Contents

INTERLINK ELECTRONICS, INC.

 

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

NOTE 1-THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

 

Interlink Electronics, Inc. (“we,” “us,” “our,” “Interlink” or the “Company”) designs, develops, manufactures and sells a range of force-sensing technologies that incorporate our proprietary materials technology, firmware and software into a portfolio of standard sensor based products and custom sensor system solutions.  These include sensor components, subassemblies, modules and products that support effective, efficient cursor control and novel three-dimensional user inputs.  Our human machine interface (“HMI”) technology platforms are deployed in a wide range of markets including consumer electronics, automotive, industrial, and medical. 

 

Interlink serves our world-wide customer base from our corporate headquarters in Westlake Village, California (greater Los Angeles area), our global research and development (“R&D”) and engineering center in Singapore, our printed-electronics manufacturing facility in Shenzhen, China and our global distribution and logistics center in Hong Kong.  We also maintain engineering, assembly and prototyping capabilities in Simi Valley, California along with technical and sales offices in Japan and at multiple locations in the United States.  Our principal executive office is located at 31248 Oak Crest Drive, Suite 110, Westlake Village, California 91361 and our telephone number is (805) 484-8855.  Our website address is www.interlinkelectronics.com.

 

Fiscal Year

 

Our fiscal year is the calendar year reporting cycle beginning January 1 and ending December 31.

 

Basis of Presentation

 

The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. They do not include all of the information and footnotes required by GAAP for complete financial statements. The December 31, 2016 balance sheet data was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required for annual periods. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2016, included in our Annual Report on Form 10-K, filed with the SEC on March 2, 2017.

 

The condensed consolidated financial statements included herein are unaudited. However, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly our consolidated financial position and our consolidated results of operations and consolidated cash flows. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for future quarters or the full year.

 

Our condensed consolidated financial statements include the accounts of Interlink and our subsidiaries in Shenzhen, China, Hong Kong and Singapore. All intercompany accounts and transactions between our consolidated operations have been eliminated. 

 

Share and per share amounts and weighted-average grant date fair value reflect a 25% stock dividend paid on April 1, 2016.

 

6


 

Table of Contents

INTERLINK ELECTRONICS, INC.

 

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

 

Foreign Currency Translation

 

The functional currency of our Chinese subsidiary is the Chinese Yuan Renminbi.  Translation adjustments are an inherent result of the process of translating our Chinese subsidiary 's financial statements from Renminbi to United States dollars. Assets and liabilities are translated into United States dollars at the exchange rate in effect on the balance sheet date.  Revenues and expenses are translated at the average exchange rate prevailing during the respective periods.  Translation adjustments are not included in determining net income for the period but are accumulated in a separate component of consolidated equity until a recognition event takes place.

 

The functional currency for our Hong Kong and Singapore subsidiaries is the United States dollar.  However, our Hong Kong and Singapore subsidiaries also transact business in their local currency.  Therefore, the effect of exchange rate changes on transactions denominated in currencies other than the functional currency are included in results of operations. 

 

Segment Reporting

 

We operate in one reportable segment: the manufacture and sale of force sensing technology solutions.

 

Use of Estimates

 

The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosures made in the accompanying notes to the consolidated financial statements.  Management regularly evaluates estimates and assumptions related to revenue recognition, allowances for doubtful accounts, warranty reserves, inventory valuation reserves, stock-based compensation, purchased intangible asset valuations and useful lives, asset retirement obligations, and deferred income tax asset valuation allowances.  These estimates and assumptions are based on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources.  The actual results we experience may differ materially and adversely from our original estimates.  To the extent there are material differences between the estimates and the actual results, our future results of operations will be affected. 

 

Risk and Uncertainties

 

Our future results of operations involve a number of risks and uncertainties. Factors that could affect our business or future results and cause actual results to vary materially from historical results include, but are not limited to, the rapid change in our industry; problems with the performance, reliability or quality of our products; loss of customers; impacts of doing business internationally, including foreign currency fluctuations; potential shortages of the supplies we use to manufacture our products; disruptions in our manufacturing facilities; changes in environmental directives impacting our manufacturing process or product lines; the development of new proprietary technology and the enforcement of intellectual property rights by or against us; our ability to attract and retain qualified employees; and our ability to raise additional capital.

 

Recently Adopted Accounting Pronouncements

 

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-12, “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force)”, effective for annual periods and interim periods within those annual periods,

7


 

Table of Contents

INTERLINK ELECTRONICS, INC.

 

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

 

beginning after December 15, 2015. This update is intended to resolve the diverse accounting treatment of share-based payment awards whose performance target may be achieved after the requisite service period. An entity may apply the standards (1) prospectively to all share-based payment awards that are granted or modified on or after the effective date, or (2) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. Earlier application is permitted. Effective January 1, 2016, the Company adopted ASU No. 2014-12 and it did not have a material effect on our consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Sub-Topic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, which provides guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This update is effective for annual periods ending after December 15, 2016 and for annual periods and interim periods thereafter. Early application is permitted. Effective January 1, 2016, the Company adopted ASU No. 2014-15 and it did not have a material effect on our consolidated financial statements.

 

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis”, to change the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities.  The standard is effective for fiscal and interim periods within those fiscal years, beginning after December 15, 2015.  Effective January 1, 2016, the Company adopted ASU No. 2015-02 and it had no impact on our consolidated financial statements.

 

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”, which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet.  The ASU may be applied prospectively or retrospectively.  The Company adopted ASU 2015-17 on January 1, 2016, and applied it retrospectively.

 

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”, which provides new guidance regarding the measurement of inventory.  The new guidance requires most inventory to be measured at the lower of cost or net realizable value. The standard defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The standard applies to companies other than those that measure inventory using last-in, first-out ("LIFO") or the retail inventory method.  The standard will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods. Early application is permitted. Effective January 1, 2017, the Company adopted ASU No. 2015-11 and it had no impact on our consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation- Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, which modifies and simplifies several aspects of accounting for share-based payment transactions.  Changes to the current guidance primarily pertain to the income tax consequences of share-based payment transactions.  Under the standard, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement.  The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur, regardless of whether the benefit reduces taxes payable in the current period.  The full amount of excess tax benefits should be classified along with other income tax cash flows as an operating activity.  When awards are settled, cash paid to the taxing authorities by an employer when directly withholding shares for tax withholding purposes will be classified as a financing activity.  Additionally, with respect to forfeitures of awards, an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur.  The amendments in this standard are effective for annual periods beginning after December

8


 

Table of Contents

INTERLINK ELECTRONICS, INC.

 

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

 

15, 2016, and interim periods within those annual periods, with early adoption permitted.  Effective January 1, 2017, the Company adopted ASU No. 2016-09 and it had no impact on our consolidated financial statements.

 

Recently Issued Accounting Pronouncements (Not Yet Adopted)

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).”  The amendments to this update supersede nearly all existing revenue recognition guidance under GAAP, including the revenue recognition requirements in ASC Topic 605, “Revenue Recognition.”- The standard was originally set to become effective in annual periods beginning after December 15, 2016 and for interim and annual reporting periods thereafter. In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers; Deferral of the Effective Date,” which defers the effective date of ASU 2014-09 for all entities by one year, thereby delaying the effective date of the standard to January 1, 2018, with an option that would permit companies to adopt the standard as early as the original effective date. Early adoption prior to the original effective date is not permitted. The core principle of this Topic is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. This Topic defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The Company is currently assessing the impact of ASU 2014-09 on our consolidated financial statements, but it is not expected to result in material differences in the amount or timing of recognized revenue.

 

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”, that amends existing guidance around classification and measurement of certain financial assets and liabilities.  Changes to the current GAAP model primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments.  Under the new guidance, all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings.  For equity investments without readily determinable fair values, the cost method is also eliminated.  However, most entities will be able to elect to record equity investments without readily determinable fair values at cost, less impairment, and plus or minus subsequent adjustments for observable price changes.  The standard also requires that financial assets and liabilities be disclosed separately in the notes to the financial statements based on measurement principle and form of financial asset.  The amendments in this guidance are effective for financial statements issued for interim and annual periods beginning after December 15, 2017.  This standard is not expected to have a significant impact on our consolidated financial statements or disclosures.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which replaces the existing guidance in ASC Topic 840, “Leases”.  The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.  Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.  The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and requires retrospective application.  The Company is currently evaluating the impact of ASU 2016-02 to our consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, that significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income, including trade receivables.  The standard requires an entity to estimate its lifetime “expected credit loss” for such assets at inception, and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount

9


 

Table of Contents

INTERLINK ELECTRONICS, INC.

 

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

 

expected to be collected on the financial asset.  The standard is effective for annual periods beginning after December 15, 2019, and interim periods therein.  Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein.  This standard is not expected to have a significant impact on our consolidated financial statements or disclosures.

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payment,” which clarifies how cash receipts and cash payments in certain transactions are presented and classified in the statement of cash flows.  The effective date of this update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted.  The update requires retrospective application to all periods presented but may be applied prospectively if retrospective application is impracticable.  The Company has not yet evaluated the impact of the adoption of this accounting standard on our consolidated financial statements.

 

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which reduces the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs. Historically, recognition of the income tax consequence was not recognized until the asset was sold to an outside party.  This amendment should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.  ASU 2016-16 is effective for annual periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods.  Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance.  We are currently evaluating the impact of ASU 2016-16 on our consolidated financial statements and related disclosures.

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. The amendments in this update apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230.  The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.  These amounts should be included within cash and cash equivalents when reconciling the beginning and ending balances for the periods shown on the statement of cash flows.  The ASU requires retrospective application, and is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods.  Early adoption is permitted.  The Company does not expect the adoption of this accounting standard to have a material impact on our consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”, clarifying the definition of a business, reducing the number of transactions that need to be further evaluated and providing a framework to assist entities in evaluating whether both an input and a substantive process are present.  The amendments in the ASU specify that when the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar identifiable assets, the integrated set of assets and activities is not a business.  The guidance also requires that an integrated set of assets and activities must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output to be considered a business, and removes the evaluation of whether a market participant could replace the missing elements.  The ASU is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019, with early adoption permitted.  The Company does not expect  the adoption of this accounting standard to have a material impact on our consolidated financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, Modification Accounting for Share-Based Payment Arrangements, which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required

10


 

Table of Contents

INTERLINK ELECTRONICS, INC.

 

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

 

to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. We do not expect this new guidance to have a material impact on its condensed consolidated financial statements.

 

We reviewed all other recently issued accounting pronouncements and concluded they are not applicable or not expected to be material to our financial statements.

 

NOTE 2-INVENTORIES

 

Inventories, stated at the lower of cost or market, consist of the following:

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2017

    

2016

    

Inventories

 

(in thousands)

 

Raw materials

 

$

860

 

$

738

 

Work-in-process

 

 

250

 

 

357

 

Finished goods

 

 

146

 

 

173

 

Total inventories

 

$

1,256

 

$

1,268

 

 

 

NOTE 3-STOCKHOLDERS’ EQUITY

 

On April 1, 2016, we completed a stock dividend of one quarter (¼) of one share of common stock for every one (1) share of common stock outstanding. All share amounts, exercise prices, and weighted-average grant date fair value for our common stock, stock options and restricted stock reflect the stock dividend.

 

NOTE 4-STOCK BASED COMPENSATION

 

Under the terms of our 2016 Omnibus Incentive Plan (the “2016 Plan”), officers and key employees could be granted restricted stock units, as well as non-qualified or incentive stock options, at the discretion of the Compensation Committee of the Board of Directors. The Plan replaces the 1996 Stock Incentive Plan (the “1996 Plan”) which was terminated in December 2015; however, all grants issued under the 1996 Plan prior to its termination will continue to vest, expire or terminate in accordance with the 1996 Plan document and the terms of each award.   

 

Restricted Stock Units

 

Our outstanding restricted stock unit grants vest over five years in installments of 50% on the fourth anniversary of the grant date and the remaining 50% on the fifth anniversary of the grant date. Unvested restricted shares are forfeited if the recipient’s employment terminates for any reason other than death, disability or special circumstances as determined by the Compensation Committee of the Board of Directors.

 

11


 

Table of Contents

INTERLINK ELECTRONICS, INC.

 

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

 

Activity for our restricted stock units is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Weighted Average

    

 

 

 

 

Restricted Stock

 

Weighted-Average Grant

    

Remaining

    

Aggregate Intrinsic

 

 

    

Units

    

Date Fair Value

    

Contractual Life

    

Value

 

 

 

(in thousands)

 

 

 

 

(years)

 

(in thousands)

 

Restricted stock units, December 31, 2016

 

165

 

$

3.54

 

2.33

 

$

1,158

 

Awarded

 

 5

 

$

8.81

 

 

 

 

 

 

Released

 

 —

 

$

 —

 

 

 

 

 

 

Forfeited

 

(5)

 

$

11.09

 

 

 

 

 

 

Restricted stock units, September 30, 2017

 

165

 

$

3.47

 

1.60

 

$

1,134

 

 

The aggregate intrinsic values in the preceding table for the restricted stock units outstanding represent the total pretax intrinsic value, based on our closing stock price of $6.87 and $7.02 as of September 30, 2017 and December 31, 2016, respectively. No restricted stock units vested in the nine months ended September 30, 2017.

 

Stock based compensation incurred for the three and nine months ended September 30, 2017 was $29 thousand and $79 thousand, respectively as compared to $27 thousand and $70 thousand for the comparable periods ended September 30, 2016.

 

Stock Options

 

The exercise price of our stock options is the closing price on the date the options are granted. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Options generally expire 10 years from the date of grant. The following table summarizes the activity for the remaining options outstanding under the Plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

Weighted Average

 

Remaining

 

Aggregate Intrinsic

 

 

    

Shares

    

Exercise Price

    

Contractual Life

    

Value

 

 

 

(in thousands)

 

 

 

 

(years)

 

(in thousands)

 

Options outstanding, December 31, 2016

 

11

 

$

3.75

 

0.65

 

$

37

 

Granted

 

 —

 

$

 —

 

 

 

 

 

 

Exercised

 

(6)

 

$

4.96

 

 

 

 

 

 

Cancelled or expired

 

(1)

 

$

4.80

 

 

 

 

 

 

Options outstanding, September 30, 2017

 

 4

 

$

1.56

 

0.52

 

$

21

 

Options exercisable, September 30, 2017

 

 4

 

$

1.56

 

0.52

 

$

21

 

 

This intrinsic value represents the excess of the fair market value of our common stock on the date of exercise over the exercise price of such options.  The aggregate intrinsic values in the preceding table for the options outstanding represent the total pretax intrinsic value, based on our closing stock price of $6.87 and $7.02 as of September 30, 2017 and December 31 2016, respectively, which would have been received by the option holders had those option holders exercised their in-the-money options as of those dates. 

 

The fair value of stock-based option awards is estimated at the date of grant using the Black-Scholes option pricing model; however, the value calculated using an option pricing model may not be indicative of the fair value observed in a willing buyer/willing seller market transaction, or actually realized by the employee upon exercise. Expected volatility used to estimate the fair value of options granted is based on the historical volatility of our common stock. The risk-free interest rate is based on the United States Treasury constant maturity rate for the expected life of the stock option. The

12


 

Table of Contents

INTERLINK ELECTRONICS, INC.

 

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

 

expected life of a stock award is the period of time that the award is expected to be outstanding. We have not granted any stock options since 2008.

 

The following table provides additional information in regards to options outstanding as of September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

 

 

 

 

 

 

 

    

Weighted

 

Range of

 

Number

 

Weighted Average

 

Weighted Average

 

Number

    

Average Exercise

 

Exercise Price

    

Outstanding

    

Remaining Contractual Life

    

Exercise Price

    

Exercisable

    

Price

 

 

 

 

 

 

(in thousands)

 

(years)

 

 

 

(in thousands)

 

 

 

 

$

 

 

1.56

 

 4

 

0.52

 

$

1.56

 

 4

 

$

1.56

 

 

 

NOTE 5-EARNINGS PER SHARE

 

Basic earnings per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options and restricted stock-based awards using the treasury stock method.

 

The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

352

 

$

614

 

$

1,265

 

$

1,969

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

391

 

$

610

 

$

1,340

 

$

1,944

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares of common stock

 

 

7,336

 

 

7,327

 

 

7,332

 

 

7,327

 

Dilutive potential common shares from stock options and restricted stock units

 

 

89

 

 

83

 

 

86

 

 

79

 

Common stock and common stock equivalents

 

 

7,425

 

 

7,410

 

 

7,418

 

 

7,406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share, basic and diluted

 

$

0.05

 

$

0.08

 

$

0.17

 

$

0.27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income per share: basic and diluted

 

$

0.05

 

$

0.08

 

$

0.18

 

$

0.26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares subject to anti-dilutive stock options and restricted stock-based awards excluded from calculation

 

 

80

 

 

93

 

 

83

 

 

98

 

 

 

NOTE 6-SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK AND GEOGRAPHIC INFORMATION

 

We manage and operate our business through one operating segment.

 

13


 

Table of Contents

INTERLINK ELECTRONICS, INC.

 

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

 

Net revenues from customers equal, to or greater than, 10% of total net revenues are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

    

2017

    

2016

 

2017

    

2016

 

Customer A

 

 

18

%

 

14

%

 

16

%

 

12

%

Customer B

 

 

*

%

 

23

%

 

16

%

 

21

%

Customer C

 

 

20

%

 

11

%

 

14

%

 

11

%

Customer D

 

 

*

%

 

*

%

 

*

%

 

11

%


*Less than 10% of total net revenues

 

Net revenues by geographic area are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

(in thousands)

 

(in thousands)

 

United States

 

$

1,249

 

$

1,699

 

$

4,238

 

$

5,191

 

Asia and Middle East

 

 

1,156

 

 

1,093

 

 

3,480

 

 

2,410

 

Europe and other

 

 

244

 

 

454

 

 

1,079

 

 

1,504

 

Revenue, net

 

$

2,649

 

$

3,246

 

$

8,797

 

$

9,105

 

 

Revenues by geographic area are based on the country of shipment destination. The geographic location of distributors and third-party manufacturing service providers may be different from the geographic location of the purchasers and/or ultimate end users.

 

We provide credit only to creditworthy third parties who are subject to our credit verification procedures. Accounts receivable balances are monitored on an ongoing basis, and accounts deemed to have credit risk are fully reserved. At September 30, 2017, three customers accounted for 35%, 20% and 11% of total accounts receivable, respectively. At December 31, 2016, two customers accounted for 44% and 15% of total accounts receivable, respectively. Our allowance for doubtful accounts was $0 at both September 30, 2017 and December 31, 2016.

 

Our long-lived assets (property, plant and equipment plus intangibles, net) were geographically located as follows:

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2017

    

2016

 

 

 

(in thousands)

 

United States

 

$

105

 

$

87

 

Asia

 

 

283

 

 

267

 

Total long-lived assets

 

$

388

 

$

354

 

 

 

NOTE 7-RELATED PARTY TRANSACTIONS

 

BKF Capital Group (OTC:BKFG)

 

We entered into an agreement, dated March 1, 2015 with BKF Capital Group, Inc. (“BKF”).  Pursuant to the agreement, BKF occupies and uses one furnished office, telephone and other services, located at our corporate offices, for a fee of $1,000 per month.  As of February 1, 2017 this agreement was modified as BKF relocated and no longer occupied the furnished office.  Accordingly, the fee was reduced to $250 per month.  In addition, we will occasionally pay administrative expenses on behalf of BKF, and BKF will reimburse the Company.  For the three months ended September 30, 2017 and 2016, BKF paid $750 and $3,000, respectively to the Company.  For the nine months ended

14


 

Table of Contents

INTERLINK ELECTRONICS, INC.

 

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

 

September 30, 2017 and 2016, BKF paid $3,000 and $9,000, respectively to the Company.  Steven N. Bronson, our Chairman of the Board, President and Chief Executive Officer, is also the Chairman of the Board, Chief Executive Officer and majority shareholder of BKF.  At September 30, 2017 and December 31, 2016, there were no unpaid amounts owed by BKF to us.

 

Qualstar Corporation (NASDAQ:QBAK)

 

The Company agreed to reimburse, or be reimbursed by, Qualstar Corporation (“Qualstar”) for our occupancy and use of a portion of their Simi Valley manufacturing location and other expenses paid by one company on behalf of the other.  Steven N. Bronson, our Chairman of the Board, President and Chief Executive Officer, is also the President and Chief Executive Officer of Qualstar. Transactions with Qualstar are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

 

 

2017

 

2016

 

 

    

Due from Qualstar

    

Due to Qualstar

    

Due from Qualstar

    

Due to Qualstar

 

 

 

(in thousands)

 

Balance at June 30,

 

$

 —

 

$

 1

 

$

 4

 

$

 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Billed to Qualstar by Interlink

 

 

 1

 

 

 —

 

 

 5

 

 

 —

 

Paid by Qualstar to Interlink

 

 

(1)

 

 

 —

 

 

(9)

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Billed to Interlink by Qualstar

 

 

 —

 

 

 3

 

 

 —

 

 

10

 

Paid by Interlink to Qualstar

 

 

 —

 

 

(3)

 

 

 —

 

 

(10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 

 

$

 —

 

$

 1

 

$

 —

 

$

 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

 

2017

 

2016

 

 

    

Due from Qualstar

    

Due to Qualstar

    

Due from Qualstar

    

Due to Qualstar

 

 

 

(in thousands)

 

Balance at January 1,

 

$

 2

 

$

 1

 

$

 —

 

$

 6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Billed to Qualstar by Interlink

 

 

 8

 

 

 —

 

 

11

 

 

 —

 

Paid by Qualstar to Interlink

 

 

(10)

 

 

 —

 

 

(11)

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Billed to Interlink by Qualstar

 

 

 —

 

 

 8

 

 

 —

 

 

30

 

Paid by Interlink to Qualstar

 

 

 —

 

 

(8)

 

 

 —

 

 

(33)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 

 

$

 —

 

$

 1

 

$

 —

 

$

 3

 

 

 

 

NOTE 8-INCOME TAXES

 

Income tax expense as a percentage of income before income taxes was 33.3% and 33.9%   for the three and nine months ended September 30, 2017 versus 34.9% and 21.4% for the comparable period in the prior year. Our income tax expense is primarily impacted by the mix of domestic and foreign pre-tax earnings, as well as our ability to utilize prior net operating loss carryovers (“NOLs”). 

 

15


 

Table of Contents

INTERLINK ELECTRONICS, INC.

 

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

 

The Company experienced an ownership change under IRC Section 382 in February 2010.  In general, a Section 382 ownership change occurs if there is a cumulative change in our ownership by “5% shareholders” (as defined in the Internal Revenue Code of 1986, as amended) that exceeds 50 percentage points over a rolling three-year period.  An ownership change generally affects the rate at which NOLs and potential other deferred tax assets are permitted to offset future taxable income.  Certain state jurisdictions within which we operate contain similar provisions and limitations.  All of the remaining federal and state NOLs as of September 30, 2017 are subject to annual limitations due to the February 2010 ownership change.   

 

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets.  We analyzed our need to maintain the valuation allowance against our otherwise recognizable deferred tax assets in the federal, state and foreign jurisdictions and had previously recorded a full valuation allowance.   During the fourth quarter of 2016, we determined, given our current earnings and anticipated future earnings, that sufficient evidence existed to reach a conclusion that the valuation allowance was no longer warranted.

 

NOTE 9-COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

We lease certain facilities under non-cancellable operating leases. The leases expire at various dates through fiscal 2021 and frequently include renewal provisions for varying periods of time, provisions which require us to pay taxes, insurance and maintenance costs, and provisions for minimum rent increases. Minimum lease payments, including scheduled rent increases are recognized as rent expenses on a straight-line basis over the term of the lease.

 

Future minimum lease payments under non-cancellable operating leases that have remaining non-cancellable lease terms in excess of one year are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Remaining 2017

    

2018

    

2019

    

2020

    

Thereafter

    

Total

 

 

 

 

(in thousands)

 

Operating Leases

 

$

71

 

$

226

 

$

183

 

$

120

 

$

68

 

$

668

 

 

Litigation

 

We are not party to any legal proceedings at September 30, 2017.  We are occasionally involved in legal proceedings in the ordinary course of business, including actions against us which assert or may assert claims or seek to impose fines and penalties in substantial amounts. Related legal defense costs are expensed as incurred.

 

Warranties

 

We establish reserves for future product warranty costs that are expected to be incurred pursuant to specific warranty provisions with our customers.  We generally warrant our products against defects for one year from date of shipment, with certain exceptions in which the warranty period can extend to more than one year based on contractual agreements.  Our warranty reserves are established at the time of sale and updated throughout the warranty period based upon numerous factors including past warranty return rates and expenses over various warranty periods.  Historically, our warranty returns have not been material.

 

Intellectual Property Indemnities

 

We indemnify certain customers and our contract manufacturers against liability arising from third-party claims of intellectual property rights infringement related to our products.  These indemnities appear in development and supply

16


 

Table of Contents

INTERLINK ELECTRONICS, INC.

 

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

 

agreements with our customers as well as manufacturing service agreements with our contract manufacturers, are not limited in amount or duration and generally survive the expiration of the contract.  Given that the amount of any potential liabilities related to such indemnities cannot be determined until an infringement claim has been made, we are unable to determine the maximum amount of losses that we could incur related to such indemnifications.

 

Director and Officer Indemnities and Contractual Guarantees

 

We have entered into indemnification agreements with our directors and executive officers, which require us to indemnify such individuals to the fullest extent permitted by Nevada law.  Our indemnification obligations under such agreements are not limited in amount or duration.  Certain costs incurred in connection with such indemnifications may be recovered under certain circumstances under various insurance policies.  Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed, we are unable to determine the maximum amount of losses that we could incur relating to such indemnities.

 

We have also entered into an employment agreement with  Steven N. Bronson, our Chairman of the Board, President and Chief Executive Officer.  This agreement contains certain severance and change in control obligations.  Under the agreement, if Mr. Bronson’s employment is terminated due to his death or disability (as such terms are defined in the agreement), Mr. Bronson or his beneficiaries will be entitled to receive: (i) his base compensation to the end of the monthly pay period immediately following the date of termination; (ii) accrued bonus payments; and (iii) all unvested equity and/or options issued by the Company shall immediately fully vest.  If Mr. Bronson’s employment is terminated by him for good reason (as such term is defined in the agreement), or by us without cause, then Mr. Bronson will be entitled to receive: (i) his base compensation to the date of termination; (ii) a severance payment equal to twelve months of his base compensation; (iii) any earned bonus compensation; (iv) employee benefits for twelve months following the date of termination; (v) any vested company match 401k or other retirement contribution; and (vi) all unvested equity and/or options issued by the Company shall immediately fully vest.

 

In the event of a change in control of the Company (as such term is defined in the agreement), Mr. Bronson is entitled to receive: (i) a change in control payment in an amount equal to twelve months of his base compensation, payable as of the date the change in control occurs; and (ii) all unvested equity and/or options issued by the Company shall immediately fully vest.

 

Guarantees and Indemnities 

 

In the normal course of business, we are occasionally required to undertake indemnification for which we may be required to make future payments under specific circumstances.  We review our exposure under such obligations no less than annually, or more frequently as required.  The amount of any potential liabilities related to such obligations cannot be accurately determined until a formal claim is filed.  Historically, any such amounts that become payable have not had a material negative effect our business, financial condition or results of operations.  We maintain general and product liability insurance which may provide a source of recovery to us in the event of an indemnification claim.

 

 

 

17


 

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the following:

 

·

our future financial and operating results;

 

·

our business strategy;

 

·

our intentions, expectations and beliefs regarding anticipated growth, market penetration and trends in our business;

 

·

our dependence on growth in our customers’ businesses;

 

·

the effects of market conditions on our stock price and operating results;

 

·

our ability to maintain our competitive technological advantages against competitors in our industry;

 

·

our ability to timely and effectively adapt our existing technology and have our technology solutions gain market acceptance;

 

·

our ability to introduce new products and bring them to market in a timely manner;

 

·

our ability to maintain, protect and enhance our intellectual property;

 

·

the effects of increased competition in our market and our ability to compete effectively;

 

·

costs associated with defending intellectual property infringement and other claims;

 

·

our expectations concerning our relationships with customers and other third parties;

 

·

our expectations concerning relationships between our customers and their manufacturers;

 

·

the attraction and retention of qualified employees and key personnel;

 

·

future acquisitions of or investments in complementary companies or technologies; and

 

·

our ability to comply with evolving legal standards and regulations, particularly concerning requirements for being a public company and United States export regulations.

 

These forward-looking statements speak only as of the date of this Form 10-Q and are subject to uncertainties, assumptions and business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth below in Part II, Item 1A, “Risk Factors,” and in our other reports filed with the Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in our forward-looking statements.

 

18


 

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances described in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Form 10-Q to conform these statements to actual results or to changes in our expectations, except as required by law.

 

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

 

Overview and Outlook

 

Overview

 

Interlink Electronics, Inc. (“we”, “us”, “our”, “Interlink” or the “Company”) designs, develops, manufactures and sells a range of force-sensing technologies that incorporate our proprietary materials technology, firmware and software into a portfolio of standard products and custom solutions.  These include sensor components, subassemblies, modules and products that support effective, efficient cursor control and novel three-dimensional user inputs.  Our Human Machine Interface (“HMI”) technology platforms are deployed in a wide range of markets including consumer electronics, automotive, industrial, and medical. The application of our HMI technology platforms includes vehicle entry, vehicle multi-media control interface, rugged touch controls, presence detection, collision detection, speed and torque controls, biological monitoring and others.

 

Interlink has been a leader in the printed electronics industry for over 30 years with the commercialization of our patented Force Sensing Resistor (“FSR®”) technology that has enabled rugged and reliable HMI solutions.  Our solutions have focused on handheld user input, menu navigation, cursor control, and other intuitive interface technologies for the world’s top electronics manufacturers.

 

We sell our products globally to a diverse array of customers that include the Fortune 500 as well as start-ups, design houses, original design manufacturers, OEMs and universities.  Our technology has been deployed in the consumer electronics, industrial automation, automotive and medical markets.  Our global presence in the United States, China, Hong Kong, Singapore and Japan, allows us to provide local sales and engineering support services to our existing and future customers.   Our products are manufactured by our wholly-owned subsidiary in a state-of-the-art facility in Shenzhen, China.  We also maintain engineering, assembly and prototyping capabilities in Simi Valley, California.  We control 100% of the manufacturing and shipping process which enables us to respond quickly to customer product demand and design requirements. 

 

Over the next three-to-five years, we anticipate investing significantly in the expansion of our technology platforms through our own internal development to ensure we provide the market with leading-edge HMI solutions that are seamless to deploy and preform flawlessly.  We are dramatically growing our R&D organization in Singapore to ensure we have the right team to launch our current designs and develop new product offerings that will meet the market’s growing demand for touch technology.  Our Singapore location allows us to take advantage of the abundance of engineering talent for future new product development.  We are also exploring potential strategic relationships with Singapore-based companies and technology institutes that will support our growth initiatives.

 

Outlook

 

We follow market research conducted by IDTechEx and other independent parties in the printed, flexible electronics industry. Market research indicates that the sensor portion of the printed electronics market is a $6.5 billion industry and continues to grow.  We maintain our focus on developing solutions around scalable sensor and product architectures and emerging applications in order to capitalize on this growth.  We believe there are significant innovation opportunities for

19