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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, 2022

or

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

For the transition period from __________________ to ______________________.

Commission file number 001-37659

INTERLINK ELECTRONICS, INC.

(Exact name of registrant as specified in its charter)

Nevada

    

77-0056625

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

1 Jenner, Suite 200

Irvine, California 92618

(Address of principal executive offices, zip code)

(805) 484-8855

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common stock, $0.001 par value per share

LINK

The Nasdaq Stock Market LLC

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:

Large accelerated filer

    

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

As of November 10, 2022, the issuer had 6,604,298 shares of common stock issued and outstanding.

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 Operations

4

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity

6

Condensed Consolidated Statements of Cash Flows

7

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

30

 

 

 

Item 4.

Controls and Procedures

30

 

 

 

PART II -- OTHER INFORMATION

 

Item 1A.

Risk Factors

32

 

 

 

Item 6.

Exhibits

32

 

 

 

Signatures

33

2

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

INTERLINK ELECTRONICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

September 30, 

December 31, 

    

2022

    

2021

 

(in thousands, except par value)

ASSETS

Current assets

Cash and cash equivalents

 

$

3,889

 

$

10,777

Restricted cash

5

Marketable securities

6,574

Accounts receivable, net

958

1,080

Inventories

1,057

814

Prepaid expenses and other current assets

453

391

Total current assets

12,931

13,067

Property, plant and equipment, net

196

338

Intangible assets, net

89

131

Right-of-use assets

197

163

Deferred tax assets

8

8

Other assets

39

72

Total assets

 

$

13,460

 

$

13,779

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Accounts payable

 

$

358

 

$

338

Accrued liabilities

334

507

Lease liabilities, current

144

138

Accrued income taxes

113

54

Total current liabilities

949

1,037

Long-term liabilities

Lease liabilities, long-term

60

37

Total long-term liabilities

60

37

Total liabilities

1,009

1,074

Commitments and contingencies (Note 8)

Stockholders’ equity

Preferred stock, $0.01 par value: 1,000 shares authorized, 200 shares of Series A Convertible Preferred Stock issued and outstanding at both September 30, 2022 and December 31, 2021 ($5.0 million liquidation preference)

2

2

Common stock, $0.001 par value: 30,000 shares authorized, 6,604 shares issued and outstanding at September 30, 2022, 6,602 shares issued and outstanding at December 31, 2021

7

7

Additional paid-in-capital

62,567

62,552

Accumulated other comprehensive income (loss)

(133)

96

Accumulated deficit

(49,992)

(49,952)

Total stockholders’ equity

12,451

12,705

Total liabilities and stockholders’ equity

 

$

13,460

 

$

13,779

See accompanying notes to these unaudited condensed consolidated financial statements.

3

INTERLINK ELECTRONICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

Three months ended September 30, 

Nine months ended September 30, 

    

2022

    

2021

    

2022

    

2021

 

(in thousands, except per share data)

Revenue, net

 

$

1,851

 

$

2,223

 

$

5,882

 

$

5,855

Cost of revenue

979

931

2,817

2,562

Gross profit

872

1,292

3,065

3,293

Operating expenses:

Engineering, research and development

319

105

912

554

Selling, general and administrative

743

928

2,476

2,407

Total operating expenses

1,062

1,033

3,388

2,961

Income (loss) from operations

(190)

259

(323)

332

Other income (expense):

Other income (expense), net

207

(6)

704

(25)

Income (loss) before income taxes

17

253

381

307

Income tax expense

11

30

121

64

Net income

$

6

$

223

$

260

$

243

Net income (loss) applicable to common stockholders

 

$

(94)

 

$

223

 

$

(40)

 

$

243

Earnings per common share – basic and diluted

$

(0.01)

$

0.03

$

(0.01)

$

0.04

Weighted average common shares outstanding – basic and diluted

6,603

6,602

6,603

6,601

See accompanying notes to these unaudited condensed consolidated financial statements.

4

INTERLINK ELECTRONICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

Three months ended September 30, 

 

Nine months ended September 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands)

Net income

$

6

$

223

$

260

$

243

Other comprehensive income (loss), net of tax:

 

 

Foreign currency translation adjustments

 

(80)

 

(2)

(229)

21

Comprehensive income (loss)

$

(74)

$

221

$

31

$

264

See accompanying notes to these unaudited condensed consolidated financial statements.

5

INTERLINK ELECTRONICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

    

    

    

    

    

    

    

Accumulated

    

    

    

    

Additional

Other

Total

Preferred Stock

Common Stock

Paid-in-

Comprehensive

Accumulated

Stockholders’

Three months ended September 30, 2022

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity

(in thousands)

 

Balance at June 30, 2022

 

200

$

2

6,602

$

7

$

62,552

$

(53)

$

(49,898)

$

12,610

Net income

 

 

 

 

 

6

 

6

Preferred stock dividends

 

 

 

 

 

(100)

 

(100)

Foreign currency translation adjustment

 

 

 

 

(80)

 

 

(80)

Stock-based compensation expense

 

2

 

 

15

 

 

 

15

Balance at September 30, 2022

 

200

$

2

6,604

$

7

$

62,567

$

(133)

$

(49,992)

$

12,451

    

    

    

    

    

    

    

Accumulated

    

    

    

    

Additional

Other

Total

Preferred Stock

Common Stock

Paid-in-

Comprehensive

Accumulated

Stockholders’

Nine months ended September 30, 2022

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity

(in thousands)

Balance at December 31, 2021

200

$

2

6,602

$

7

$

62,552

$

96

$

(49,952)

$

12,705

Net income

 

 

 

 

260

 

260

Preferred stock dividends

 

 

 

 

(300)

 

(300)

Foreign currency translation adjustment

 

 

 

(229)

 

 

(229)

Stock-based compensation expense

 

2

 

 

15

 

 

 

15

Balance at September 30, 2022

200

$

2

6,604

$

7

$

62,567

$

(133)

$

(49,992)

$

12,451

    

    

    

    

    

    

    

Accumulated

    

    

    

Additional

Other

Total

Preferred Stock

Common Stock

Paid-in-

Comprehensive

Accumulated

Stockholders’

Three months ended September 30, 2021

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity

(in thousands)

 

Balance at June 30, 2021

 

$

6,601

$

7

$

57,971

$

60

$

(49,150)

$

8,888

Net income

 

 

 

 

 

223

 

223

Foreign currency translation adjustment

 

 

 

 

(2)

 

 

(2)

Stock-based compensation expense

 

 

 

15

 

 

 

15

Balance at September 30, 2021

 

$

6,601

$

7

$

57,986

$

58

$

(48,927)

$

9,124

    

    

    

    

    

    

    

Accumulated

    

    

    

    

Additional

Other

Total

Preferred Stock

Common Stock

Paid-in-

Comprehensive

Accumulated

Stockholders’

Nine months ended September 30, 2021

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity

(in thousands)

 

Balance at December 31, 2020

 

$

6,601

$

7

$

57,966

$

37

$

(49,170)

$

8,840

Net income

 

 

 

 

 

243

 

243

Foreign currency translation adjustment

 

 

 

 

21

 

 

21

Stock-based compensation expense

 

 

 

20

 

 

 

20

Balance at September 30, 2021

 

$

6,601

$

7

$

57,986

$

58

$

(48,927)

$

9,124

See accompanying notes to these unaudited condensed consolidated financial statements.

6

INTERLINK ELECTRONICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Nine months ended September 30, 

    

2022

    

2021

(in thousands)

Cash flows from operating activities:

Net income

 

$

260

 

$

243

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation and amortization

192

214

Unrealized and realized (gains) on marketable securities

(562)

Stock-based compensation expense

15

20

(Gain) on forgiveness of PPP loan

(186)

Adjustment to reconcile operating lease expense to cash paid

(6)

(13)

Loss on disposal of property and equipment

14

Deferred taxes

(6)

Changes in operating assets and liabilities:

Accounts receivable

121

7

Inventories

(318)

64

Prepaid expenses and other assets

(36)

62

Accounts payable

33

(12)

Accrued liabilities

(154)

100

Accrued income taxes

70

132

Net cash provided by (used in) operating activities

(385)

639

Cash flows from investing activities:

Purchases of marketable securities

(6,027)

Proceeds from sales of marketable securities

15

Purchases of property, plant and equipment

(9)

(142)

Net cash used in investing activities

(6,021)

(142)

Cash flows from financing activities:

Payment of dividends on preferred stock

(300)

Net cash used in financing activities

(300)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

(187)

25

Net increase (decrease) in cash, cash equivalents and restricted cash

(6,893)

522

Cash, cash equivalents and restricted cash, beginning of period

10,782

6,125

Cash, cash equivalents and restricted cash, end of period

 

$

3,889

 

$

6,647

Reconciliation of cash, cash equivalents and restricted cash, end of period:

Cash and cash equivalents, end of period

$

3,889

$

6,642

Restricted cash, end of period

5

Cash, cash equivalents and restricted cash, end of period

$

3,889

$

6,647

Supplemental disclosure of cash flow information:

Income taxes paid (refunded), net

 

$

167

 

$

(14)

Interest paid

Supplemental disclosure of non-cash investing and financing activities:

Lease liabilities arising from obtaining right-of-use assets

$

178

$

50

See accompanying notes to these unaudited condensed consolidated financial statements.

7

Table of Contents

INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 – The Company and its Significant Accounting Policies

Description of Business

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

Interlink serves our world-wide customer base from our corporate headquarters in Irvine, California, our Global Product Development and Materials Science Center and distribution and logistics center in Camarillo, California, our printed-electronics manufacturing facility in Shenzhen, China, our engineering, research and development center in Singapore, and our distribution and logistics center in Hong Kong. We also maintain a technical and sales office in Japan, and we expect to launch an engineering, research and development center in the United Kingdom.

We were incorporated in California in 1985. In 1996, we re-incorporated into a Delaware corporation and, in 2012, we again changed our domicile from Delaware to Nevada by completing a merger with a newly formed Nevada corporation named Interlink Electronics, Inc. Our principal executive office is located at 1 Jenner, Suite 200, Irvine, California 92618 and our telephone number is (805) 484-8855. Our website address is www.interlinkelectronics.com. Interlink makes available its annual financial statements, quarterly financial statements, and other significant reports and amendments to such reports, free of charge, on its website as soon as reasonably practicable after such reports are prepared.

Fiscal Year

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

Basis of Presentation

The accompanying unaudited interim consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intra-entity transactions and balances have been eliminated in consolidation.

The accompanying unaudited interim consolidated financial statements for the Company and its subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting. Accordingly, certain information and footnote disclosures normally included in annual consolidated financial statements have been condensed or omitted in accordance with Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments and the elimination of intra-entity accounts) considered necessary for a fair presentation of all periods presented. The results of the Company’s operations for any interim periods are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes included in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 29, 2022.

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INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

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.

Revenue Recognition

We recognize revenue in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”), when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that are within the scope of ASC 606, we perform the following five steps; (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; and (v) recognize revenue when (or as) we satisfy a performance obligation. The five-step model is applied to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services transferred to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize revenue in the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the terms specified in the arrangement with the customer. Revenue recognition is deferred until the earnings process is complete.

We (i) input orders based upon receipt of a customer purchase order, (ii) confirm pricing through the customer purchase order record, (iii) validate creditworthiness through past payment history, credit agency reports and other financial data, and (iv) recognize revenue upon shipment of goods or when risk of loss and title transfer to the buyer. All customers have warranty rights, and some customers also have explicit or implicit rights of return. We establish reserves for potential customer returns or warranty repairs based on historical experience and other factors that enable us to reasonably estimate the obligation.

A portion of our product sales is made through distributors under agreements allowing for right of return. Our past history with these sell-through right of return provisions allow us to reasonably estimate the amount of inventory that could be returned pursuant to these agreements, and revenue is recognized accordingly.

Shipping and Handling Fees and Costs

Amounts billed to customers for shipping and handling fees are presented in revenues. Costs incurred for shipping and handling are included in cost of revenues.

Engineering, Research and Development Costs

Engineering, research and development (“R&D”) costs are expensed when incurred. R&D expenses consist primarily of compensation expenses for employees engaged in research, design and development activities. R&D expenses also include depreciation and amortization, and overhead, including facilities expenses.

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Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

Marketing and Advertising Costs

All of the costs related to marketing and advertising our products are expensed as incurred or at the time the marketing or advertising takes place.

Stock-Based Compensation

All stock-based payments to employees, including grants of employee stock options and employee stock purchase rights, are recognized in the financial statements based on their respective grant date (measurement date) fair values. We calculate the compensation cost of full-value awards, such as restricted stock, based on the market value of the underlying stock at the date of the grant. We estimate the expected life of a stock award as the period of time that the award is expected to be outstanding. We are required to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. We estimate the fair value of each option award as of the date of grant using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes option pricing model considers, among other factors, the expected life of the award and the expected volatility of our stock price. Although the Black-Scholes option pricing model meets the accounting guidance requirements, the fair values generated by the Black-Scholes option pricing model may not be indicative of the actual fair values of our awards, as it does not consider other factors important to those stock-based payment awards, such as continued employment, periodic vesting requirements, and limited transferability.

We have elected to recognize compensation expense for all stock-based awards on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized through the end of each reporting period is equal to the portion of the grant-date value of the awards that have vested, or for partially vested awards, the value of the portion of the award that is ultimately expected to vest for which the requisite services have been provided. The benefits of tax deductions in excess of recognized compensation cost are reported as a financing cash flow.

As of September 30, 2022, there were no stock-based compensation awards outstanding.

Other Income (Expense), Net

Other income (expense), net, consists of interest income, foreign currency exchange gains and losses, gains and losses on marketable securities, and other non-operating income and expenses.

Income Taxes

We account for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not determinable beyond a “more likely than not” standard, we establish a valuation allowance. To the extent we establish a valuation allowance or increase or decrease this allowance in a period, we include an expense or benefit within the tax provision in the statement of operations. We also utilize a “more likely than not” recognition threshold and measurement analysis for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognize potential accrued interest and penalties related to unrecognized tax benefits within the consolidated statements of operations as income tax expense.

We operate within multiple tax jurisdictions and are subject to audit in these jurisdictions. Our foreign subsidiaries are subject to foreign income taxes on earnings in their respective jurisdictions. Earnings of our foreign subsidiaries are included in our U.S. federal income tax return as they are earned.

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INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

Foreign Currency Translation

The functional currency of our Chinese subsidiary is the Chinese Yuan Renminbi. The functional currency for our Hong Kong, Singapore and United Kingdom subsidiaries is the United States dollar. However, our Hong Kong, Singapore, and United Kingdom subsidiaries also transact business in their local currency. 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.

Comprehensive Income (Loss)

Comprehensive income (loss) includes all components of comprehensive income (loss), including net income (loss) and any changes in equity during the period from transactions and other events and circumstances generated by non-owner sources.

Segment Reporting

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

Earnings Per Share

Basic earnings per share is computed by dividing net income (loss) applicable to common stockholders (i.e., net income (loss) adjusted for preferred stock dividends declared or accumulated) by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of diluted common shares, which is inclusive of common stock equivalents from unexercised stock options, unvested restricted stock units, and shares issuable upon conversion of convertible preferred stock. Unexercised stock options, unvested restricted stock units, and convertible preferred stock are considered to be common stock equivalents if, using the treasury stock method, they are determined to be dilutive.

Under the two-class method of determining earnings for each class of stock, we consider the dividend rights and participating rights in undistributed earnings for each class of stock.

Leases

We account for our leases under ASC 842. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases, and are recorded on the consolidated balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or our incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For finance leases, interest on the lease liability and the amortization of the right of use asset results in front-loaded expense over the lease term. Variable lease expenses are recorded when incurred.

In calculating the right of use and lease liability, we have elected to combine lease and non-lease components. We exclude short-term leases having an initial term of 12 months or less from the new guidance as an accounting policy election, and recognize rent expense on a straight-line basis over the lease term.

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 and political instability; 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;

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Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

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.

Public health threats could adversely affect our ongoing or planned business operations, including shutdowns, supply chain disruptions, logistical restrictions, impacts on consumer spending patterns, and other such affects. In particular, the outbreak of a novel coronavirus (COVID-19) in China resulted in quarantines, restrictions on travel and other business and economic disruptions. We cannot predict the scope and severity of potential business shutdowns or economic disruptions posed by public health threats, but if we or any of the third parties with whom we engage, including the suppliers, distributers, resellers and other third parties with whom we conduct business, were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially and adversely impacted.

Fair Value Measurements

We determine fair value measurements based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, we follow the following fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) our own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs):

Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets;

Level 2: Other inputs observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborate inputs; and

Level 3: Unobservable inputs for which there is little or no market data and which requires the owner of the assets or liabilities to develop its own assumptions about how market participants would price these assets or liabilities.

Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy.

Recently Issued Accounting Pronouncements

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

Subsequent Events

We have evaluated subsequent events through November 10, 2022, being the date these condensed consolidated financial statements were issued.

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INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

Note 2 – Details of Certain Financial Statement Components

Inventories, stated at the lower of cost or net realizable value, consisted of the following:

September 30, 

December 31, 

    

2022

    

2021

Inventories

 

(in thousands)

Raw materials

 

$

655

 

$

447

Work-in-process

230

209

Finished goods

172

159

Total inventories

 

$

1,057

 

$

814

Property, plant and equipment, net, consisted of the following:

September 30, 

December 31, 

    

2022

    

2021

Property, plant and equipment, net

(in thousands)

Furniture, machinery and equipment

$

1,643

$

1,696

Leasehold improvements

 

409

 

444

 

2,052

 

2,140

Less: accumulated depreciation

 

(1,856)

 

(1,802)

Total property, plant and equipment, net

$

196

$

338

Depreciation expense totaled $48 thousand and $51 thousand for the three months ended September 30, 2022 and 2021, respectively. Depreciation expense totaled $150 thousand and $163 thousand for the nine months ended September 30, 2022 and 2021, respectively.

Intangible assets, net consisted of the following:

September 30, 

December 31, 

    

2022

    

2021

Intangible assets, net

(in thousands)

Patents and trademarks

$

658

$

658

Less: accumulated amortization

 

(569)

 

(527)

Total intangible assets, net

$

89

$

131

Amortization expense totaled $14 thousand and $16 thousand for the three months ended September 30, 2022 and 2021, respectively. Amortization expense totaled $42 thousand and $50 thousand for the nine months ended September 30, 2022 and 2021, respectively. Future amortization expense on existing intangible assets is as follows:

Years ending December 31,

    

(in thousands)

2022 (remainder of year)

$

13

2023

 

42

2024

 

27

2025

 

7

$

89

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INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

Accrued liabilities consisted of the following:

September 30, 

December 31, 

    

2022

    

2021

Accrued liabilities

(in thousands)

Accrued compensation and benefits

$

219

$

402

Accrued vacation

 

94

 

82

Other accrued liabilities

 

21

 

23

Total accrued liabilities

$

334

$

507

Note 3 – Marketable Securities

Our marketable securities consist of equity securities classified as available-for-sale (“AFS”). AFS securities are carried at fair value on the condensed consolidated balance sheets. Realized and unrealized gains and losses are reported in earnings within “other income (expense), net”. The specific identification method is used to determine realized gains and losses on AFS securities. During the three months ended September 30, 2022, we purchased $0 and sold $15 thousand of marketable equity securities. During the nine months ended September 30, 2022, we purchased $6.027 million and sold $15 thousand of marketable equity securities. During the three months ended September 30, 2022, gross realized gains were $2 thousand and gross realized losses were $0. During the nine months ended September 30, 2022, gross realized gains were $2 thousand and gross realized losses were $0. As of September 30, 2022, gross unrealized gains were $560 thousand, and gross unrealized losses were $0. As of September 30, 2022, our position in marketable equity securities had a historical cost of $6.014 million and a fair value of $6.574 million, as determined using Level 1 inputs on the fair value hierarchy.

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Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

Note 4 – Earnings Per Share

Basic earnings per share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options, restricted stock units, and common shares issuable upon conversion of convertible preferred stock using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands, except per share data)

Net income (loss)

 

$

6

 

$

223

 

$

260

 

$

243

Less: Preferred stock dividends

(100)

(300)

Net income (loss) applicable to common stockholders

(94)

223

(40)

243

Weighted average common shares outstanding – basic

6,603

6,602

6,603

6,601

Dilutive potential common shares from stock options, restricted stock units, and convertible preferred stock

Weighted average common shares outstanding – diluted

6,603

6,602

6,603

6,601

Earnings (loss) per common share, basic

 

$

(0.01)

 

$

0.03

 

$

(0.01)

 

$

0.04

Earnings (loss) per common share, diluted

$

(0.01)

$

0.03

$

(0.01)

$

0.04

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

Shares subject to anti-dilutive Series A Convertible Preferred Stock excluded from calculation

400

400

Note 5 – Significant Customers, Concentrations 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 September 30, 

Nine months ended September 30, 

 

    

2022

    

2021

    

2022

    

2021

Customer A

 

20

%  

15

%  

27

%  

11

%

Customer B

 

*

%  

17

%  

*

%

22

%

Customer C

15

%

*

%

18

%

*

%

Customer D

12

%

*

%

*

%

*

%

Customer E

 

10

%  

12

%  

*

%  

12

%

*    Less than 10% of total net revenues

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Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

Net revenues by geographic area are as follows:

Three months ended September 30, 

Nine months ended September 30, 

    

2022

    

2021

    

2022

    

2021

 

(in thousands)

(in thousands)

United States

$

661

$

674

$

2,657

$

1,534

Asia and Middle East

 

1,069

 

1,383

 

2,849

 

3,873

Europe and other

 

121

 

166

 

376

 

448

Revenue, net

$

1,851

$

2,223

$

5,882

$

5,855

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 customers 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, 2022, three customers accounted for 35%, 16%, and 14% of total accounts receivable. At December 31, 2021, three customers accounted for 39%, 18%, and 12% of total accounts receivable. Our allowance for doubtful accounts was $0 at both September 30, 2022 and December 31, 2021.

Our long-lived assets were geographically located as follows:

    

September 30, 

    

December 31, 

 

2022

 

2021

 

(in thousands)

United States

$

314

$

536

Asia

 

215

 

176

Total long-lived assets

$

529

$

712

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INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

Note 6 – Related Party Transactions

Qualstar Corporation (OTCMKTS:QBAK)

Qualstar Corporation (OTCMKTS:QBAK) (“Qualstar”) is a related party. Steven N. Bronson, our Chairman of the Board, President and Chief Executive Officer, is also the President, Chief Executive Officer and a director of Qualstar. Ryan J. Hoffman, our Chief Financial Officer, is also the Chief Financial Officer of Qualstar. Mr. Bronson, together with BKF Capital Group, Inc. (OTCMKTS:BKFG) which he controls, has a controlling interest in both Interlink and Qualstar. We have a facilities agreement with Qualstar to allow Qualstar to use of a portion of our Irvine, California and Los Angeles, California office facilities, for which we have agreed to split substantially all rent and lease-related costs on an apportioned basis according to the approximate relative usage levels by each entity. Qualstar also has a facilities agreement with us to allow us to use of a portion of its Camarillo, California office and warehouse facility, for which we have agreed to split substantially all rent and lease-related costs on an apportioned basis according to the approximate relative usage levels by each entity. In addition, we have various consulting agreements with Qualstar for certain of our respective employees and/or independent contractors that provide certain operational, sales, marketing, general and administrative services to the other entity. Interlink and Qualstar also agree to reimburse, or be reimbursed by, one another for expenses paid by one company on behalf of the other. Transactions with Qualstar and its subsidiaries are as follows:

Three months ended September 30, 

 

2022

2021

    

Due from 

    

Due to

    

Due from 

    

Due to 

Qualstar

Qualstar

Qualstar

Qualstar

 

(in thousands)

Balance at July 1,

$

23

$

7

$

16

$

1

Billed (or accrued) to Qualstar by Interlink

 

206

 

 

217

 

Paid by Qualstar to Interlink

 

(203)

 

 

(217)

 

Billed (or accrued) to Interlink by Qualstar

 

 

29

 

 

22

Paid by Interlink to Qualstar

 

 

(28)

 

 

(23)

Balance at September 30,

$

26

$

8

$

16

$

Nine months ended September 30, 

 

2022

2021

    

Due from 

    

Due to

    

Due from

    

Due to

Qualstar

Qualstar

Qualstar

Qualstar

 

(in thousands)

Balance at January 1,

$

85

$

8

$

52

$

34

Billed (or accrued) to Qualstar by Interlink

 

592

 

 

692

 

Paid by Qualstar to Interlink

 

(651)

 

 

(728)

 

Billed (or accrued) to Interlink by Qualstar

 

 

74

 

 

76

Paid by Interlink to Qualstar

 

 

(74)

 

 

(110)

Balance at September 30,

$

26

$

8

$

16

$

17

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INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

(unaudited)

BKF Capital Group (OTCMKTS:BKFG)

BKF Capital Group, Inc. (OTCMKTS:BKFG) (“BKF Capital”) is a related party. Steven N. Bronson, our Chairman of the Board, President and Chief Executive Officer, is also the Chief Executive Officer and Chairman of BKF Capital. Ryan J. Hoffman, our Chief Financial Officer, is also the Chief Financial Officer of BKF Capital. Mr. Bronson, together with BKF Capital, has a controlling interest in Interlink. We have a facilities agreement with BKF Capital to allow BKF Capital to use a portion of our Irvine, California office facility, for which we have agreed to split substantially all rent and lease-related costs on an apportioned basis according to the approximate relative usage levels by each entity. In addition, we have consulting agreements with BKF Capital for certain of our respective employees and/or independent contractors that provide certain operational and general and administrative services to the other entity. We entered into a M&A advisory consulting services agreement with Bronson Financial LLC (“BF”), a wholly owned subsidiary of BKF Capital, in which BF provides M&A advisory consulting services to us. Interlink and BKF Capital also agree to reimburse, or be reimbursed by, one another for expenses paid by one company on behalf of the other. Transactions with BKF Capital and its subsidiaries are as follows:

Three months ended September 30, 

2022

2021

    

Due from 

    

Due to

    

Due from 

    

Due to 

BKF Capital

BKF Capital

BKF Capital

BKF Capital

(in thousands)

Balance at July 1,

$

6

$

$

6

$

Billed (or accrued) to BKF Capital by Interlink

 

20

 

 

33

 

Paid by BKF Capital to Interlink

 

(14)

 

 

(32)

 

Billed (or accrued) to Interlink by BKF Capital

 

 

37

 

 

30

Paid by Interlink to BKF Capital

 

 

(37)

 

 

(30)

Balance at September 30,

$

12

$

$

7

$

Nine months ended September 30, 

2022

2021

    

Due from 

    

Due to

    

Due from

    

Due to

BKF Capital

BKF Capital

BKF Capital

BKF Capital

(in thousands)

Balance at January 1,

$

12

$

$

$

Billed (or accrued) to BKF Capital by Interlink

 

81

 

 

46

 

Paid by BKF Capital to Interlink

 

(81)