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, 2018

 

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)

 

 

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 every Interactive Data File required to be submitted 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 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.

 

 

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

 

 

 

 

INTERLINK ELECTRONICS, INC.

TABLE OF CONTENTS

 

 

 

 

 

PART I:  FINANCIAL INFORMATION

Item 1.Financial Statements

INTERLINK ELECTRONICS, INC.

 

Condensed Consolidated Balance Sheets

(unaudited)

 

 

See accompanying notes to these condensed consolidated financial statements.

 

INTERLINK ELECTRONICS, INC.

 

Condensed Consolidated Statements of Income and Comprehensive Income

(unaudited)

 

 

See accompanying notes to these condensed consolidated financial statements.

INTERLINK ELECTRONICS, INC.

 

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

See accompanying notes to these condensed consolidated financial statements.

 

 

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.  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 nine months ended September 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. 

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

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 recognize revenue.

 

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 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 within those fiscal years and requires retrospective application.  The Company is currently evaluating the impact of ASU 2016-02 to our consolidated financial statements, but does not expect it to have a significant impact on 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, 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.

 

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement to ASC Topic 820, Fair Value Measurement (‘ASC 820’)”.  ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, and/or adding certain disclosures.  ASU 2018-13 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2019.  An entity is permitted to early adopt by modifying existing disclosures and delay adoption of the additional disclosures until the effective date.  The adoption of this disclosure update is not expected to have a material impact on our consolidated financial statements and disclosures.

 

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:

 

 

 

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.

 

Activity for our restricted stock units is as follows:

 

 

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 $4.02 and $5.22 as of September 30, 2018 and December 31, 2017, respectively. A total of forty thousand restricted stock units vested in the nine months ended September 30, 2018.

 

Stock based compensation incurred for the three and nine months ended September 30, 2018 was $22 thousand and $61 thousand, respectively, as compared to $29 thousand and $79 thousand for the comparable periods ended September 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:

 

 

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 $4.02 and $5.22 as of September 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.

 

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

 

 

 

 

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:

 

 

 

 

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. 

 

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 September 30, 2018, the Company had 6,482,784 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:

 

*Less than 10% of total net revenues

 

Net revenues by geographic area are as follows:

 

 

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, 2018,  two customers accounted for 45% and 25%  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 September 30, 2018 and December 31, 2017, respectively.

 

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

 

 

 

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.  Effective September 1, 2018 the square footage dedicated to Interlink was decreased and the fee was lowered to $1,255 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 entered into a cost-sharing agreement with BKF 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 nine months ended September 30, 2018 BKF paid $750 and $3,000, respectively to the Company, as compared to $750 and $3,000 thousand for the comparable periods ended September 30, 2017. The Company incurred costs to BKF of $6,468 and $16,328 for the three and nine months ended September 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 September 30, 2018 and December 31, 2017, there were no unpaid amounts outstanding between the parties.

 

Qualstar Corporation (NASDAQ:QBAK)

 

The Company utilizes a portion of a Simi Valley, California manufacturing facility leased by Qualstar Corporation (“Qualstar”) for our assembly and prototyping operations.  In addition, Qualstar or Interlink will occasionally pay administrative expenses on behalf of the other party, and seek reimbursement at cost.  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:

 

 

 

 

 

 

 

NOTE 8-INCOME TAXES

 

Income tax expense as a percentage of income before income taxes was 35.3% and 29.6% for the three and nine months ended September 30, 2018 versus 33.3% and 33.9% 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 September 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

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:

 

 

Litigation

 

We are not party to any legal proceedings at September 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