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10-Q 1 link-20180630x10q.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 June 30, 2018

☐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 August 9, 2018, the issuer had 6,482,784 shares of common stock issued and outstanding.

Table of Contents

INTERLINK ELECTRONICS, INC.

TABLE OF CONTENTS

		Page No.

PART I -- FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Income and Comprehensive Income	4

	Condensed Consolidated Statements of Cash Flows	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29

Item 4.	Controls and Procedures	29

PART II -- OTHER INFORMATION

Item 1A.	Risk Factors	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 6.	Exhibits	31

Signatures		32

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PART I: FINANCIAL INFORMATION

Item 1.Financial Statements

INTERLINK ELECTRONICS, INC.

Condensed Consolidated Balance Sheets

(unaudited)


	June 30,		December 31,
	2018		2017
	(in thousands, except par value)
ASSETS
Current assets
Cash and cash equivalents	$	5,944	$	7,772
Restricted cash		5		5
Accounts receivable, net		1,214		1,374
Inventories		797		1,195
Prepaid expenses and other current assets		232		338
Total current assets		8,192		10,684
Property, plant and equipment, net		654		525
Intangibles, net		88		69
Deferred income taxes		409		493
Other assets		59		59
Total assets	$	9,402	$	11,830

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	189	$	255
Accrued liabilities		323		345
Accrued income taxes		32		103
Total current liabilities		544		703

Total liabilities		544		703

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, 6,479 and 7,328 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively		7		7
Additional paid-in-capital		57,808		60,527
Accumulated other comprehensive income		14		41
Accumulated deficit		(48,971)		(49,448)
Total stockholders' equity		8,858		11,127
Total liabilities and stockholders' equity	$	9,402	$	11,830

See accompanying notes to these condensed consolidated financial statements.

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INTERLINK ELECTRONICS, INC.

Condensed Consolidated Statements of Income and Comprehensive Income

(unaudited)


	Three months ended June 30,				Six months ended June 30,
	2018		2017		2018		2017
	(in thousands, except per share data)				(in thousands, except per share data)

Revenue, net	$	2,683	$	3,264	$	5,256	$	6,148
Cost of revenue		1,135		1,203		2,297		2,351
Gross profit		1,548		2,061		2,959		3,797
Operating expenses:
Engineering, research and development		237		157		461		335
Selling, general and administrative		881		1,065		1,849		2,092
Total operating expenses		1,118		1,222		2,310		2,427
Income from operations		430		839		649		1,370
Other income (expense):
Other income (expense), net		62		(2)		16		17
Income before income tax expense		492		837		665		1,387
Income tax expense		133		288		188		474
Net income		359		549		477		913
Other comprehensive income, net of tax:
Foreign currency translation adjustments		(112)		25		(27)		36
Comprehensive income	$	247	$	574	$	450	$	949

Earnings per share, basic and diluted	$	0.05	$	0.07	$	0.06	$	0.12

Weighted average common shares outstanding - basic		7,317		7,333		7,322		7,331
Weighted average common shares outstanding - diluted		7,407		7,420		7,410		7,416

See accompanying notes to these condensed consolidated financial statements.

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INTERLINK ELECTRONICS, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited)


	Six months ended June 30,
	2018		2017
	(in thousands)
Cash flows from operating activities:
Net income	$	477	$	913
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization		85		86
Stock based compensation		39		50
Changes in operating assets and liabilities:
Accounts receivable		160		(232)
Inventories		398		(93)
Prepaid expenses and other current assets		106		163
Other assets		-		(1)
Accounts payable		(66)		11
Accrued liabilities		(22)		(31)
Accrued income taxes		(71)		97
Deferred income taxes		84		53
Deferred revenue		—		(67)
Net cash provided by operating activities		1,190		949
Cash flows from investing activities:
Property, plant and equipment		(202)		(41)
Share repurchase		(2,764)		—
Intangibles		(31)		(19)
Net cash used in investing activities		(2,997)		(60)
Cash flows from financing activities:
Proceeds from exercise of stock options		6		34
Net cash provided by financing activities		6		34

Effect of exchange rate changes on cash and cash equivalents		(27)		36
Net increase (decrease) in cash and cash equivalents		(1,828)		959
Cash, cash equivalents and restricted cash, beginning of period		7,777		6,014
Cash, cash equivalents and restricted cash, end of period	$	5,949	$	6,973

Supplemental disclosure of cash flow information:
Income taxes paid	$	210	$	293

See accompanying notes to these condensed consolidated financial statements.

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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, 2017 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, 2017, included in our Annual Report on Form 10-K, filed with the SEC on March 15, 2018.

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 six months ended June 30, 2018 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.

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.

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INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

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 May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 permitted companies to adopt the standard as early as the original effective date. Early adoption prior to the original effective date was 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

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INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

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. Effective January 1, 2018, the Company adopted ASU No. 2014-12 and it did not have a material effect on our consolidated financial statements or the timing of when we recoignize revenue.

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 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 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. Effective January 1, 2018, the Company adopted ASU No. 2016-01 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

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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.

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. Effective January 1, 2018, the Company adopted ASU No. 2016-15 and it had no impact on our consolidated statement of cash flows.

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. Effective January 1, 2018, the Company adopted ASU No. 2016-16 and it had no impact on our consolidated financial statements.

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. Effective January 1, 2018, the Company adopted ASU No. 2016-18 and it had no 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 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. Effective January 1, 2018, the Company adopted ASU No. 2017-09 and it had no impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements (Not Yet Adopted)

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

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INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

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 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 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 March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”. This standard amends Accounting Standards Codification 740, Income Taxes (ASC 740) to provide guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the Tax Reform Act) pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. As described in the footnotes to the Annual Report on Form 10-K, the Company’s accounting for the tax effects of enactment of the Tax Reform Act is being assessed; however, in certain cases, as described below, we made a reasonable estimate of the effects on our existing deferred tax balances and valuation allowance at December 31, 2017. In all aspects, the Company will continue to make and refine calculations as additional analysis is completed. The Company expects to complete the accounting assessment during the one-year measurement period provided by SAB 118.

In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”, to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and supersedes the guidance in Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. Under ASU 2018-07, equity-classified nonemployee share-based payment awards are measured at the grant date fair value on the grant date. The probability of satisfying performance conditions must be considered for equity-classified nonemployee share-based payment awards with such conditions. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, 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 July 2018, the FASB issued ASU 2018-10, “Leases (Topic 842),Codification Improvements” and ASU 2018-11, “Leases (Topic 842), Targeted Improvements”, to provide additional guidance for the adoption of Topic 842. ASU 2018-10 clarifies certain provisions and correct unintended applications of the guidance such as the application of implicit rate,

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INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

lessee reassessment of lease classification, and certain transition adjustments that should be recognized to earnings rather than to stockholders' equity. ASU 2018-11 provides an alternative transition method and practical expedient for separating contract components for the adoption of Topic 842. As discussed above, In February 2016 the FASB issued ASU 2016-02. ASU 2018-11, ASU 2018-10, and ASU 2016-02 (collectively, "the new lease standards") are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect the new lease standards will have on our consolidated financial statements.

In July 2018, the FASB issued ASU 2018-09, “Codification Improvements”. The amendments in ASU 2018-09 affect a wide variety of Topics in the FASB Codification and apply to all reporting entities within the scope of the affected accounting guidance. The Company is evaluating ASU 2018-09 in its entirety to determine if any of the amendments apply to the Company. The amendments in ASU 2018-09 have various effective dates. The Company does not expect the adoption of the new standard to have a material impact on our 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 net realizable value, consist of the following:


	June 30,		December 31,
	2018		2017
Inventories	(in thousands)
Raw materials	$	468	$	743
Work-in-process		223		290
Finished goods		106		162
Total inventories	$	797	$	1,195

NOTE 3-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.

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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, 2017	165	$	3.47	1.35	$	861
Awarded	5	$	8.81
Issued	(40)	$	1.00
Forfeited	(5)	$	11.30
Restricted stock units, June 30, 2018	125	$	4.06	1.32	$	406

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 $3.25 and $5.22 as of June 30, 2018 and December 31, 2017, respectively. A total of forty thousand restricted stock units vested in the six months ended June 30, 2018.

Stock based compensation incurred for the three and six months ended June 30, 2018 was $9 thousand and $39 thousand, respectively, as compared to $21 thousand and $50 thousand for the comparable periods ended June 30, 2017.

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, 2017	7	$	4.12	4.46	$	15
Granted	—
Exercised	(4)	$	1.56
Cancelled or expired	—
Options outstanding, June 30, 2018	3	$	7.40	9.34	$	—
Options exercisable, June 30, 2018	3	$	7.40	9.34	$	—

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 $3.25 and $5.22 as of June 30, 2018 and December 31, 2017, 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 expected life of a stock award is the period of time that the award is expected to be outstanding.

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INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

The following table provides additional information in regards to options outstanding as of June 30, 2018:


		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)
$	7.40	3	9.34	$	7.40	3	$	7.40
		3	9.34			3		7.40

NOTE 4-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				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
	(in thousands, except per share data)				(in thousands, except per share data)

Net income	$	359	$	549	$	477	$	913

Comprehensive income	$	247	$	574	$	450	$	949

Weighted average outstanding shares of common stock		7,317		7,333		7,322		7,331
Dilutive potential common shares from stock options and restricted stock units		90		87		88		85
Common stock and common stock equivalents		7,407		7,420		7,410		7,416

Earnings per share, basic and diluted	$	0.05	$	0.07	$	0.06	$	0.12

Comprehensive income per share: basic and diluted	$	0.03	$	0.08	$	0.06	$	0.13

Shares subject to anti-dilutive stock options and restricted stock-based awards excluded from calculation		38		82		40		84

NOTE 5-EQUITY TRANSACTIONS

In December 2017, our Board of Directors authorized a new program for the repurchase of up to $1 million of our outstanding common shares. This program authorization will expire in December 2018.

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INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

Pursuant to this program, on January 17, 2018, we repurchased 34,010 common shares at a purchase price of $4.75 per share from an unrelated shareholder in a private transaction. The repurchased shares were immediately retired and restored to the status of authorized and unissued shares.

Separate from and in addition to the $1 million repurchase program, on June 22, 2018, we repurchased 867,681 shares of our common stock at a purchase price of $3.00 per share from an existing stockholder in a private transaction approved by the Board of Directors. The repurchased shares were immediately retired and restored to the status of authorized and unissued shares.

At June 30, 2018, the Company had 6,478,797 shares of common stock issued and outstanding.

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

We manage and operate our business through one operating segment.

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


	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Customer A		18	%		15	%		18	%		15	%
Customer B		13	%		11	%		15	%		11	%
Customer C		*	%		25	%		*	%		21	%

*Less than 10% of total net revenues

Net revenues by geographic area are as follows:


	Three months ended June 30,				Six months ended June 30,
	2018		2017		2018		2017
	(in thousands)				(in thousands)
United States	$	1,159	$	1,763	$	2,421	$	2,989
Asia and Middle East		1,247		1,167		2,361		2,324
Europe and other		277		334		474		835
Revenue, net	$	2,683	$	3,264	$	5,256	$	6,148

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 June 30, 2018, three customers accounted for 40%, 20% and 10% of total accounts receivable, respectively. At December 31, 2017, three customers accounted for 35%, 10% and 10% of total accounts receivable, respectively. Our allowance for doubtful accounts was $0 and $32 thousand at June 30, 2018 and December 31, 2017, respectively.

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INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

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


	June 30,		December 31,
	2018		2017
	(in thousands)
United States	$	115	$	103
Asia		627		491
Total long-lived assets	$	742	$	594

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 in Westlake Village, CA, 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.

On March 1, 2018, BFK leased executive office space in Charleston, SC. Interlink intends to use a portion of this office space for a fee of $2,465 per month. BKF still intends to utilize a portion of the Interlink offices in California for a fee of $250 per month. Effective March 1, 2018 we modified the existing agreement and entered into a cost-sharing agreement with Interlink that calls for a monthly net settlement of all shared costs between the use of the California and the South Carolina offices, including rent, administrative expenses and similar costs.

For the three and six months ended June 30, 2018 BKF paid $750 and $3,000, respectively to the Company, as compared to $750 and $2,250 thousand for the comparable periods ended June 30, 2017. The Company incurred costs to BKF of $2,465 and $7,395 for the three and six months ended June 30, 2018, respectively. There were no similar payments made by the Company to BKF in 2017. 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 June 30, 2018 and December 31, 2017, there were no unpaid amounts owed by BKF to us. At June 30, 2018 the company’s outstanding balance due BKF was $0.

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.

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INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

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 June 30,
	2018				2017
	Due from Qualstar		Due to Qualstar		Due from Qualstar		Due to Qualstar
	(in thousands)
Balance at March 31,	$	22	$	1	$	—	$	1

Billed to Qualstar by Interlink		81		—		1		—
Paid by Qualstar to Interlink		(93)		—		(1)		—

Billed to Interlink by Qualstar		—		4		—		3
Paid by Interlink to Qualstar		—		(4)		—		(3)
Balance at June 30,	$	10	$	1	$	—	$	1


	Six months ended June 30,
	2018				2017
	Due from Qualstar		Due to Qualstar		Due from Qualstar		Due to Qualstar
	(in thousands)
Balance at January 1,	$	17	$	—	$	2	$	1

Billed to Qualstar by Interlink		145		—		7		—
Paid by Qualstar to Interlink		(152)		—		(9)		—

Billed to Interlink by Qualstar		—		8		—		5
Paid by Interlink to Qualstar		—		(7)		—		(5)
Balance at June 30,	$	10	$	1	$	—	$	1

NOTE 8-INCOME TAXES

Income tax expense as a percentage of income before income taxes was 27.0% and 28.3% for the three and six months ended June 30, 2018 versus 34.4% and 34.2% 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”).

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 June 30, 2018 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

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INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

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:


	2018		2019		2020		2021		Thereafter		Total
		(in thousands)
Operating Leases	$	167	$	293	$	162	$	68	$	0	$	690

Litigation

We are not party to any legal proceedings at June 30, 2018. 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 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

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INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

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.

NOTE 10-SUBSEQUENT EVENTS

In July, 2018, subseqent to quarter end, the Company received purchase orders of $880,000 from an existing prestigious medical customer. This order is for deliveries from October 2018 to June 2019.

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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.

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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 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 growing rapidly. 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 sensors with novel functions and form factors, which is why we have invested heavily in R&D to develop disruptive technology platforms

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and a robust patent portfolio. We expect to accelerate such investments over the next 12 – 36 months as we continue to build out our R&D engineering center in Singapore.

The industrial markets we serve (automotive, medical, rugged computing, industrial tools and equipment, among others) face challenges driven by product innovation, changes in talent requirements, and disruptions in energy markets. Such challenges present an opportunity for us to emerge as a solution provider for these markets. These opportunities include: new technologies such as industrial Internet-of-Things (“IoT”), robotics and advanced manufacturing, and the skills and solutions needed to manage embedded technology and data analytics. If capitalized and managed correctly, these innovations can support step changes in productivity by allowing companies to more actively monitor and optimize plant, asset, and supply chain performance.

The consumer market faces an unprecedented confluence of changes such as declining brand loyalty, rapidly evolving technologies, changing demographics and consumer preferences, and economic uncertainty. The opportunities for us are to provide solutions to help consumer products companies keep up with the frantic pace of innovation to maintain performance of existing categories while also building the breakthrough new businesses of the future. The advent of smarter products (e.g., products with embedded sensor technologies) provides an opportunity for us to deliver unique solutions to build and nurture breakthrough innovation.

Overall, our customers tend to be market leaders, and have been stable enough to manage their businesses through any challenging market cycle. In spite of decreased sales resulting from the loss a significant customer platform, we are very pleased with our performance in the three and six months ended June 30, 2018. We are confident that our leadership position in providing HMI solutions remains strong.

We remain committed to our strategy to create shareholder value through earnings growth and balanced capital allocation, including disciplined investments for organic growth and innovation and strategic bolt-on acquisitions. In connection with our growth strategy, we will continue to evaluate potential acquisitions in 2018; however, the effect of such acquisitions cannot be predicted and therefore is not reflected in this outlook.

Critical Accounting Policies and Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the condensed consolidated financial statements and accompanying notes to the condensed consolidated financial statements. Actual results could differ significantly from those estimates. We base our estimates on historical experience and on various other assumptions that we believe are reasonable in the circumstances. We regularly discuss with our audit committee the basis of our estimates. These estimates could change under different assumptions or conditions.

We believe that our critical accounting policies and estimates, as described in our annual Report on Form 10-K for the year ended December 31, 2017, are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments. There have been no significant changes to these polices during the six months ended June 30, 2018.

Impact of Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements and the impact of these pronouncements see “Note 1 - The Company and its Significant Accounting Policies – Recently Adopted Accounting Pronouncements” and “Recently Issued Accounting Pronouncements (Not Yet Adopted)” in the accompanying notes to the unaudited condensed consolidated financial statements.

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Results of Operations

The following table sets forth certain unaudited condensed consolidated statements of income data for the periods indicated. The percentages in the table are based on net revenues.


	Three months ended June 30,								Six months ended June 30,
	2018				2017				2018				2017
	$		%		$		%		$		%		$		%
	(in thousands, except percentages)								(in thousands, except percentages)
Revenue, net	$	2,683	100.0	%	$	3,264	100.0	%	$	5,256	100.0	%	$	6,148	100.0	%
Cost of revenue		1,135	42.3	%		1,203	36.9	%		2,297	43.7	%		2,351	38.2	%
Gross profit		1,548	57.7	%		2,061	63.1	%		2,959	56.3	%		3,797	61.8	%
Operating expenses:
Engineering, research and development		237	8.8	%		157	4.8	%		461	8.8	%		335	5.4	%
Selling, general and administrative		881	32.8	%		1,065	32.6	%		1,849	35.1	%		2,092	34.1	%
Total operating expenses		1,118	41.6	%		1,222	37.4	%		2,310	43.9	%		2,427	39.5	%
Income from operations		430	16.1	%		839	25.7	%		649	12.4	%		1,370	22.3	%
Other income (expense):
Other income (expense), net		62	2.3	%		(2)	(0.1)	%		16	0.3	%		17	0.3	%
Income before income tax expense		492	18.4	%		837	25.6	%		665	12.7	%		1,387	22.6	%
Income tax expense		133	5.0	%		288	8.8	%		188	3.6	%		474	7.7	%
Net income	$	359	13.4	%	$	549	16.8	%	$	477	9.1	%	$	913	14.9	%
Other comprehensive income, net of tax:
Foreign currency translation adjustments		(112)	(4.2)	%		25	0.8	%		(27)	(0.5)	%		36	0.5	%
Comprehensive income	$	247	9.2	%	$	574	17.6	%	$	450	8.6	%	$	949	15.4	%

Results of Operations for the three months ended June 30, 2018, as compared to the three months ended June 30, 2017

Revenue, net by Market is as follows:


	Three months ended June 30,
	2018				2017
	Amount		% of Net Revenue		Amount		% of Net Revenue		Change		% Change
	(in thousands, except percentages)
Automotive	$	119	4.4	%	$	1,016	31.1	%	$	(897)	(88.3)	%
Industrial		615	22.9	%		475	14.5	%		140	29.6	%
Medical		359	13.4	%		350	10.7	%		9	2.7	%
Consumer		486	18.1	%		486	14.9	%		(0)	(0.0)	%
Standard		1,104	41.2	%		937	28.8	%		167	17.8	%
Revenue, net	$	2,683	100.0	%	$	3,264	100.0	%	$	(581)	(17.8)	%

We sell our custom products into the following markets: automotive, industrial, medical and consumer. We sell our standard products in many different markets which are often unknown to us at the time of sale. Each market has different product design cycles. Products with longer design cycles often have much longer product life-cycles. Automotive, industrial, and medical products generally have longer design and life-cycles than consumer products. We currently have products with life-cycles that have exceeded twenty years and are ongoing.

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The decrease in net revenues was driven by a major customer in the automotive market making a design change to their product that eliminated the need for our solution. This decrease was partially offset by increased sales of our custom products in the industrial and medical markets. We also had an increase in sales of our standard products. Other than the automotive market, growth in our custom product sales was driven by increased sales to our current customers for use in ongoing product lines. In all of our custom product markets, some of our larger customers purchase in bulk quantities and absorption of these products can straddle several financial reporting periods. The timing of orders from our customers is not always predictable and can be concentrated in varying periods during the year to coincide with their project and building plans.

Some of our more recent custom product success for new product lines in the medical market has been in the pipeline as part of a long design cycle and revenues are just starting to be realized in 2018. In July 2018, subsequent to quarter end, the Company received purchase orders of $880,000 from an existing prestigious medical customer. This order is for deliveries from October 2018 to June 2019. However, as these revenues materialize, revenues from current product lines that reach the end of their life cycle will likely offset some of this expected growth in 2018. Overall. we expect revenues to be lower in the second half of 2018 until we are able to fully replace the automotive revenue.


	Three months ended June 30,
	2018				2017
	Amount		% of Net Revenue		Amount		% of Net Revenue		Change		% Change
	(in thousands, except percentages)
Cost of revenue	$	1,135	42.3	%	$	1,203	36.9	%	$	(68)	(5.7)	%

Our cost of revenue is impacted by various factors including product mix, volume, material costs, manufacturing efficiencies, facilities costs, compensation costs and any provisions for excess and obsolete inventories. Cost of revenues decreased compared with the prior year consistent with the decrease in revenues, particularly in the automotive market. Cost of revenues increased as a percentage of revenues for the same reason, including less revenue to cover fixed costs and production overhead costs.


	Three months ended June 30,
	2018				2017
	Amount		% of Net Revenue		Amount		% of Net Revenue		Change		% Change
	(in thousands, except percentages)
Engineering, research and development	$	237	8.8	%	$	157	4.8	%	$	80	51.0	%

Engineering and R&D expenses consist primarily of compensation expenses for employees engaged in research, design and development activities. Our R&D team focuses both on internal design development, as well as design development aimed at addressing customer design challenges, in order to develop our HMI solutions.

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Singapore over the next three years, including expanding our R&D team, expanding the size of the facility, and investing in additional tools and equipment.


	Three months ended June 30,
	2018				2017
	Amount		% of Net Revenue		Amount		% of Net Revenue		Change		% Change
	(in thousands, except percentages)
Selling, general and administrative	$	881	32.8	%	$	1,065	32.6	%	$	(184)	(17.3)	%

Selling, general and administrative expenses (“SG&A”) consist primarily of compensation expenses, legal and other professional fees, facilities expenses and communication expenses. SG&A expenses decreased as compared with the same period in the prior year driven by internal efficiencies gained during a period of lower revenue, and reduced reliance of third party consultants and professional service providers.


	Three months ended June 30,
	2018				2017
	Amount		% of Pre-tax Income		Amount		% of Pre-tax Income		Change		% Change
	(in thousands, except percentages)
Income tax expense (benefit)	$	133	27.0	%	$	288	34.4	%	$	(155)	(53.8)	%

Tax expense reflects statutory tax rates in the jurisdictions that we operate adjusted for normal book/tax differences. Tax expense for the three months ended June 30, 2018 was lower primarily as a result of the enactment of the 2017 Tax Cut and Jobs Act (TCJA), which was signed into law on December 22, 2017. The TCJA significantly reforms the Internal Revenue Code of 1986 (as amended) and includes, among other things, changes to U.S. Federal tax rates, significant additional limitations on the deductibility of interest, immediate expensing of certain capital expenditures, migration from a “worldwide” system of taxation to a territorial system and the modification or repeal of many business deductions and credits.

Our effective tax rate is directly affected by the relative proportions of revenue and income before taxes in the jurisdictions in which we operate. Based on the expected mix of domestic and foreign earnings, we anticipate our effective tax rate to remain lower than prior periods primarily due to a significant portion of our earnings originating in lower rate foreign jurisdictions, and the reduction of the U.S. federal tax rates under the TCJA. Discrete tax events may cause our effective rate to fluctuate on a quarterly basis. Certain events, including, for example, acquisitions and other business changes, which are difficult to predict, may also cause our effective tax rate to fluctuate. We are subject to changing tax laws, regulations, and interpretations in multiple jurisdictions. Continued corporate tax reform continues to be a priority in the U.S. and other jurisdictions. Additional changes to the tax system in the U.S. could have significant effects, positive and negative, on our effective tax rate, and on our deferred tax assets and liabilities.

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Results of Operations for the six months ended June 30, 2018, as compared to the six months ended June 30, 2017

Revenue, net by Market is as follows:


	Six months ended June 30,
	2018				2017
	Amount		% of Net Revenue		Amount		% of Net Revenue		Change		% Change
	(in thousands, except percentages)
Automotive	$	266	5.1	%	$	1,716	27.9	%	$	(1,450)	(84.5)	%
Industrial		1,260	24.0	%		1,122	18.2	%		138	12.3	%
Medical		774	14.7	%		698	11.4	%		76	10.9	%
Consumer		934	17.8	%		935	15.2	%		(1)	(0.1)	%
Standard		2,022	38.5	%		1,677	27.3	%		345	20.6	%
Revenue, net	$	5,256	100.0	%	$	6,148	100.0	%	$	(892)	(14.5)	%

Some of our more recent custom product success for new product lines in the medical market has been in the pipeline as part of a long design cycle and revenues are just starting to be realized in 2018. In July 2018, subsequent to quarter end, the Company received purchase orders of $880,000 from an existing prestigious medical customer. This order is for deliveries from October 2018 to June 2019. However, as these revenues materialize, revenues from current product lines that reach the end of their life cycle will likely offset some of this expected growth in 2018. Overall, we expect revenues to be lower in the second half of 2018 until we are able to fully replace the automotive revenue.


	Six months ended June 30,
	2018				2017
	Amount		% of Net Revenue		Amount		% of Net Revenue		Change		% Change
	(in thousands, except percentages)
Cost of revenue	$	2,297	43.7	%	$	2,351	38.2	%	$	(54)	(2.3)	%

Our cost of revenue is impacted by various factors including product mix, volume, material costs, manufacturing efficiencies, facilities costs, compensation costs and any provisions for excess and obsolete inventories. Cost of revenues decreased compared with the prior year consistent with the decrease in revenues, particularly in the automotive market, although additional costs associated with the abrupt loss of the major customer were recognized in the first quarter of 2018. Cost of revenues increased as a percentage of revenues for the same reason, including less revenue to cover fixed costs and production overhead costs.

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	Six months ended June 30,
	2018				2017
	Amount		% of Net Revenue		Amount		% of Net Revenue		Change		% Change
	(in thousands, except percentages)
Engineering, research and development	$	461	8.8	%	$	335	5.4	%	$	126	37.6	%

Our engineering and R&D costs increased as compared with the same period in the prior year primarily due to continued investments in our Singapore R&D center and an increase in our engineering and R&D staffing worldwide in order to enhance our technology and product offerings. We will continue to substantially grow the global R&D center in Singapore over the next three years, including expanding our R&D team, expanding the size of the facility, and investing in additional tools and equipment.


	Six months ended June 30,
	2018				2017
	Amount		% of Net Revenue		Amount		% of Net Revenue		Change		% Change
	(in thousands, except percentages)
Selling, general and administrative	$	1,849	35.1	%	$	2,092	34.1	%	$	(243)	(11.6)	%

Selling, general and administrative expenses consist primarily of compensation expenses, legal and other professional fees, facilities expenses and communication expenses. SG&A expenses decreased slightly as compared with the same period in the prior year driven by internal efficiencies gained during a period of lower revenue, and reduced reliance of third party consultants and professional service providers.


	Six months ended June 30,
	2018				2017
	Amount		% of Pre-tax Income		Amount		% of Pre-tax Income		Change		% Change
	(in thousands, except percentages)
Income tax expense	$	188	28.3	%	$	474	34.2	%	$	(286)	N/A	%

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be a priority in the U.S. and other jurisdictions. Additional changes to the tax system in the U.S. could have significant effects, positive and negative, on our effective tax rate, and on our deferred tax assets and liabilities.

Liquidity and Capital Resources

Cash requirements for working capital and capital expenditures have been funded from cash balances on hand and cash generated from operations. As of June 30, 2018, we had cash and cash equivalents of $6.0 million, working capital of $7.6 million and no indebtedness. Cash and cash equivalents consist of cash and money market funds. We did not have any short-term or long-term investments as of June 30, 2018. Of the $6.0 million of cash balances on hand, $2.3 million was held by foreign subsidiaries. If these funds are needed for our operations in the U.S., we have several methods to repatriate without significant tax effects, including repayment of intercompany loans or distributions of previously taxed income. Other distributions may require us to incur U.S. or foreign taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate cash to fund our U.S. operations.

We believe that our existing cash and cash equivalents balance will be sufficient to maintain our operations considering our current financial condition, obligations, and other expected cash flows for at least the next twelve months following the date these condensed consolidated financial statements were available for issuance. We are proactively pursuing acquisition opportunities. It is possible our cash requirements for one or more acquisition opportunities could exceed our cash balance at the time of closing. If we require additional cash, we may attempt to raise additional capital through equity, equity-linked or debt financing arrangements. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of indebtedness, we will be subject to fixed payment obligations and could also be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to raise additional needed funds, we may also take measures to reduce expenses to offset any shortfall.

We have a Form S-3 universal shelf registration statement on file with the SEC. The universal shelf registration statement on Form S-3 permits us to sell, in one or more public offerings, shares of our common stock, shares of preferred stock or debt securities, or any combination of such securities and warrants to purchase securities, for proceeds in an aggregate amount of up to $35.0 million, subject to limitations on the amount of securities we may sell in any twelve-month period. As of June 30, 2018, we have not issued any securities pursuant to the Form S-3. The Form S-3 will expire in November 2020.

There can be no assurances that we will be able to raise additional needed capital on acceptable terms or at all, and the failure to do so could adversely affect our ability to achieve our business objectives. In addition, if our future operating performance is below our expectations, our liquidity and ability to operate our business could be adversely affected.

Cash Flow Analysis

Our cash flows from operating, investing and financing activities are summarized as follows:


	Six months ended June 30,
	2018		2017
	(in thousands)
Net cash provided by operating activities	$	1,190	$	949
Net cash used in investing activities	$	(2,997)	$	(60)
Net cash provided by financing activities	$	6	$	34

Net Cash Provided by Operating Activities

For the six months ended June 30, 2018, the $1,190 thousand in net cash provided by operating activities was primarily attributable to net income of $477 thousand, adjusted for non-cash charges of $124 thousand. The net increase in cash due to changes in operating assets and liabilities of $589 thousand was primarily due to payments and shipments during the period.

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For the six months ended June 30, 2017, the $949 thousand in net cash provided by operating activities was primarily attributable to net income of $913 thousand, adjusted for non-cash charges of $136 thousand. The net decrease in cash due to changes in operating assets and liabilities of $100 thousand was primarily due to the timing of shipments and payments during the period.

Net Cash Used in Investing Activities

Net cash used in investing activities was $2,997 thousand for the six months ended June 30, 2018, compared to $60 thousand for the six months ended June 30, 2017. The increase is primarily related to share repurchases of $2,764 thousand plus additional expenditures for leasehold improvements and equipment for the expansion of our global R&D center in Singapore.

Stock Repurchases

In December 2017, our Board of Directors authorized a new program for the repurchase of up to $1 million of our outstanding common shares. This program authorization will expire in December 2018. Pursuant to this program, on January 17, 2018, we repurchased 34,010 common shares at a purchase price of $4.75 per share from an unrelated shareholder in a private transaction. The repurchased shares were immediately retired and restored to the status of authorized and unissued shares.

Separate from and in addition to the $1 million repurchase program, on June 22, 2018, we repurchased 867,681 shares of our common stock at a purchase price of $3.00 per share from an existing stockholder in a private transaction approved by our Board of Directors. The repurchased shares were immediately retired and restored to the status of authorized and unissued shares.

At June 30, 2018, we had 6,478,797 shares of common stock issued and outstanding.

Off-Balance Sheet Arrangements

At June 30, 2018 and December 31, 2017, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Contractual Obligations and Commercial Commitments

Indemnification Agreements

In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify customers, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by us or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated financial position and results of operations.

Operating Leases

We lease various office and manufacturing facilities, including our corporate headquarters in Westlake Village, California, under operating lease agreements that expire through 2021. The terms of the lease agreements provide for rental payments on a graduated basis. We recognize rent expense on a straight-line basis over the lease periods.

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As of June 30, 2018, our principal commitments consisted of obligations under the operating leases for our office and manufacturing facilities. The following table summarizes our future minimum payments under these arrangements:


	2018		2019		2020		2021		Thereafter		Total
		(in thousands)
Operating Leases	$	167	$	293	$	162	$	68	$	0	$	690

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The phrase “disclosure controls and procedures” refers to controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, or the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission, or SEC. Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our chief executive officer, or CEO, and chief financial officer, or CFO, as appropriate to allow timely decision regarding required disclosure.

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of June 30, 2018, the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO had concluded that as of June 30, 2018, our disclosure controls and procedures were designed at a reasonable assurance level and were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

There was no change in our internal control over financial reporting during the period ended June 30, 2018 that materially affected, or is reasonable likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1A.Risk Factors

This Quarterly Report on Form 10-Q contains forward-looking statements, which are subject to a variety of risks and uncertainties. Other actual results could differ materially from those anticipated in those forward-looking statements as a result of various factors, including those set forth in the risk factors relating to our business and common stock contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017. There have been no material changes to such risk factors during the three months ended June 30, 2018.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

In December 2017, our Board of Directors authorized a new program for the repurchase of up to $1 million of our outstanding common shares. This program authorization will expire in December 2018. On January 17, 2018, we repurchased 34,010 shares of our common stock at a price of $4.75 per share from an unrelated shareholder in a private transaction, for an aggregate purchase price of $161,548.

Separate from and in addition to the $1 million repurchase program, on June 22, 2018, we repurchased 867,681 shares of our common stock at a purchase price of $3.00 per share from an existing stockholder in a private transaction approved by our Board of Directors, for an aggregate purchase price of $2,603,043.

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Item 6.Exhibits

Exhibit

Incorporated by Reference

Filed

Number

Exhibit Description

Form

File Number

Exhibit

Filing Date

Herewith

3.1

Articles of Incorporation of the Registrant

000-21858

3.1

February 17, 2016

3.2

Bylaws of the Registrant

000-21858

3.2

February 17, 2016

10.1

Securities Purchase Agreement, dated June 22, 2018, between the Registrant and Leonard Hagan

8-K

001-37659

10.1

June 22, 2018

31.1

Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

*The information in this exhibit is furnished and deemed not filed with the Securities and Exchange Commission for purposes of section 18 of the Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of Interlink Electronics, Inc. under the Securities Act of 1933, as amended, or the Exchange Act of 1934, as amended, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 9, 2018	Interlink Electronics, Inc.
	(Registrant)

	By:	/s/ David S. Burnett
		David S. Burnett
		Chief Financial Officer
		(Principal Financial and Accounting Officer)