What changed in this filing

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Item 1. Financial Statements

2020-11-13 compared with 2018-11-09 · 1018 added, 630 removed, 251 unchanged (87% of the section changed)

Financial Statements

INTERLINK ELECTRONICS, INC.

ELECTRONICS, INC.

Condensed Consolidated Balance Sheets

8 unchanged sentences

Property, plant and equipment, net

Intangibles, net

Deferred income taxes

Intangible assets, net

Right-of-use assets

Deferred tax assets

LIABILITIES AND STOCKHOLDERS' EQUITY

2 unchanged sentences

Accrued liabilities

Lease liabilities, current

PPP loan payable

Accrued income taxes

Deferred revenue

Total current liabilities

Long term liabilities

Lease liabilities, long term

Deferred tax liabilities

Total long-term liabilities

Total liabilities

Commitments and contingencies (see note 9)

Commitments and contingencies (note 9)

Stockholders' equity

4 unchanged sentences

Additional paid-in-capital

Accumulated other comprehensive income

Accumulated other comprehensive loss

Accumulated deficit

1 unchanged sentence

Total liabilities and stockholders' equity

See accompanying notes to these condensed consolidated financial statements.

INTERLINK ELECTRONICS, INC.

Condensed Consolidated Statements of Income and Comprehensive Income

See accompanying notes to these unaudited

condensed consolidated financial statements.

ELECTRONICS, INC.

Condensed Consolidated

Statements of Income (Loss) and Comprehensive Income (Loss)

( unaudited )

8 unchanged sentences

Total operating expenses

Income from operations

Income (loss) from operations

Other income (expense):

Other income (expense), net

Income before income tax expense

Income tax expense

Income (loss) before income taxes

Income tax expense (benefit)

Net income (loss)

Other comprehensive income, net of tax:

Foreign currency translation adjustments

Comprehensive income

Earnings per share, basic and diluted

Comprehensive income (loss)

Earnings (loss) per share, basic and diluted

Weighted average common shares outstanding - basic

Weighted average common shares outstanding - diluted

See accompanying notes to these condensed consolidated financial statements.

INTERLINK ELECTRONICS, INC.

Condensed Consolidated Statements of Cash Flows

See accompanying notes to these unaudited

condensed consolidated financial statements.

ELECTRONICS, INC.

Condensed Consolidated Statements of

( unaudited )

2 unchanged sentences

Cash flows from operating activities:

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

Net income (loss)

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

Depreciation and amortization

Stock based compensation

Amortization of right-of-use assets

Changes in operating assets and liabilities:

4 unchanged sentences

Accrued income taxes

Deferred income taxes

Deferred taxes

Lease liabilities

Deferred revenue

3 unchanged sentences

Share repurchase

Intangible assets

Net cash used in investing activities

Cash flows from financing activities:

Proceeds from exercise of stock options

Proceeds from PPP loan

Net cash provided by financing activities

Effect of exchange rate changes on cash and cash equivalents

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

Net increase (decrease) in cash and cash equivalents

1 unchanged sentence

Cash, cash equivalents and restricted cash, end of period

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

Cash and cash equivalents, end of period

Restricted cash, end of period

Cash, cash equivalents and restricted cash, end of period

Supplemental disclosure of cash flow information:

Income taxes paid

See accompanying notes to these condensed consolidated financial statements.

INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements

Interest paid

Supplemental non-cash investing and financing activities:

Lease liabilities arising from obtaining right-of-use assets

See accompanying notes to these unaudited

condensed consolidated financial statements.

ELECTRONICS, INC.

Notes to Condensed

Consolidated Financial Statements

NOTE 1-THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

1 unchanged sentence

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.

(“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 Irvine, California (Orange County area) and from our facility in Camarillo, California (Ventura County).

to establish a Global Product Development and Materials Science Center in our existing Camarillo footprint, which we expect to

be operational by early 2021.

This facility will have a state-of-the-art printed electronics development laboratory as well as

materials science lab.

Our engineering team will be based in this center where we will work with our US and global customers on

developing, engineering, prototyping and implementing our advanced HMI solutions.

We also maintain a small embedded software and

Internet-of-Things (“IoT”) application development center in Singapore.

We manufacture all our products in our printed

electronics manufacturing facility in Shenzhen, China, which has been in operation since 2006.

In addition, we maintain a global

distribution and logistics center in Hong Kong, a technical sales office in Japan, and several manufacturer representatives and

distributors in strategic locations in our key markets, all of which allows us to support our global customer base.

products 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.

We were incorporated in California on February 27, 1985.

On July 10, 1996, we re-incorporated into a Delaware corporation and, on July 20, 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.

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

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.

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.

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 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

These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial

statements and footnotes included in our Amendment No.

2 to Registration Statement on Form 10, which was filed the Securities

and Exchange Commission, or SEC, on September 29, 2020.

ELECTRONICS, INC.

Notes to Condensed Consolidated Financial

Statements - continued

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.

INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

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 of our Chinese subsidiary is the Chinese

Yuan Renminbi.

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.

However, our Hong

Kong and Singapore subsidiaries also transact business in their local currency.

Therefore, 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.

Foreign currency transaction and translation gains and losses are

included in results of operations.

Segment Reporting

We operate in one reportable segment:

the manufacture and sale of force sensing technology solutions.

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.

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

The Company recognizes revenue in accordance with Accounting

Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606), when a 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

To determine revenue recognition for arrangements that the Company

determines are within the scope of ASC 606, we perform the following five steps:

(i) identify the contract(s) with a

(ii) identify the performance obligations in the contract;

(iii) determine the transaction price;

(iv) allocate

the transaction price to the performance obligations in the contract;

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.

ELECTRONICS, INC.

Notes to Condensed Consolidated Financial

Statements - continued

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.

We recognize revenue for non-recurring engineering or non-recurring

tooling fees when there is persuasive evidence of an arrangement, performance obligations are identified, fees are fixed or determinable,

delivery has occurred, and collectability is reasonably assured.

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.

A warranty reserve is recorded against revenues when products are shipped.

At each reporting period,

we adjust our reserve for warranty claims based on our actual warranty claims experience as a percentage of net revenue for the

preceding 12 months and also consider the effect of known operations issues that may have an impact that differs from historical

Historically, our warranty returns have not been material.

Shipping and Handling Fees and Costs

Amounts billed to customers for shipping and handling fees are

presented in product 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

Marketing Costs

All of the costs related to marketing and advertising our products

are expensed as incurred or at the time the marketing 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.

ELECTRONICS, INC.

Notes to Condensed Consolidated Financial

Statements - continued

Other Income, Net

Other income, net, consists of interest income, foreign exchange

gains and losses and other non-operating gains and losses.

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 not included in our U.S.

federal income tax return until earnings are repatriated.

are generally eligible to receive tax credits on repatriated earnings on our U.S.

federal income tax return for foreign taxes paid

by our subsidiaries.

Comprehensive Income

Comprehensive income includes all components of comprehensive

income, including net income and any changes in equity during the period from transactions and other events and circumstances generated

by non-owner sources.

Earnings per Share

Basic net income per share is computed by dividing net income

by the weighted average number of common shares outstanding during the period.

Diluted net income per share is computed by dividing

net income by the weighted average number of diluted common shares, which is inclusive of common stock equivalents from unexercised

stock options and restricted stock units.

Unexercised stock options and restricted stock units 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.

Effective January 1, 2019, the Company accounts for its

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 (“ROU”) asset and lease liability,

calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental

borrowing rate.

Lease liabilities are increased by interest and reduced by payments each period, and the ROU asset is amortized

over the lease term.

For finance leases, interest on the lease liability and the amortization of the ROU asset results in front-loaded

expense over the lease term.

Variable lease expenses are recorded when incurred.

ELECTRONICS, INC.

Notes to Condensed Consolidated Financial

Statements - continued

In calculating the ROU asset and lease liability, the Company

has elected to combine lease and non-lease components.

The Company excludes short-term leases having initial term of 12 months

or less from the new guidance as an accounting policy election, and recognizes rent expense on a straight-line basis over the lease

In June 2020, the Company entered into a sublease agreement

to lease 4,351 square feet of space located in Irvine, California for $5,439 per month with 3 percent annual increases starting

July 1, 2021.

The ROU asset and lease liability for this sublease agreement as of September 30, 2020 are $148 thousand

and $164 thousand, respectively.

The lease term begins July 1, 2020 and ends May 31, 2023.

The space is used for executive

offices, sales, finance and administration.

The Company intends to sublease portions of the space to Qualstar Corporation and BKF

Capital Group, Inc.

Also, in May 2020, the Company renewed its Shenzhen, China manufacturing facility lease for the period

June 1, 2020 through May 31, 2022.

The ROU asset and lease liability for this lease agreement as of September 30,

2020 are $133 thousand and $135 thousand, respectively.

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;

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;

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;

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

INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

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.

INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

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)

and our ability to raise

additional capital.

Public health threats could have an adverse effect on our

operations and financial results.

Public health threats could adversely affect our ongoing or

planned business operations.

In particular, the outbreak in December 2019 of a novel coronavirus (COVID-19) in China has resulted

in quarantines, restrictions on travel and other business and economic disruptions.

We cannot presently predict the scope and severity

of any potential business shutdowns or disruptions, 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):

Observable inputs such as quoted prices

for identical assets or liabilities in active markets;

Other inputs observable directly or indirectly,

such as quoted prices for similar assets or liabilities or market-corroborate inputs;

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.

ELECTRONICS, INC.

Notes to Condensed Consolidated Financial

Statements - continued

Recently Issued Accounting Pronouncements

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.

Leases (Topic 842) ”, which replaces the existing guidance in ASC Topic 840, “Leases”.

The new standard

establishes a 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 adopted ASU 2016-02 as

of January 1, 2019, which resulted in reclassifications to our balance sheet but an overall immaterial impact to our consolidated

income or loss

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

INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

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.

INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

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.

2016-13, “

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

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, 2020, 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, “

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.

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 will apply this standard to future transactions within

the scope of the ASU.

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:

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

consist of the following:

September 30,

5 unchanged sentences

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.

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.

ELECTRONICS, INC.

Notes to Condensed Consolidated Financial

Statements - continued

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.

INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

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

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:

Weighted Average

Restricted Stock

Weighted-Average Grant

Weighted Average

Aggregate Intrinsic

5 unchanged sentences

Restricted stock units, September 30, 2020

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.

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 $5.55 and $4.75

as of September 30, 2020 and December 31, 2019, respectively.

A total of thirty-seven thousand five hundred restricted

stock units vested in the nine months ended September 30, 2020.

Stock based compensation incurred for the three and nine months

ended September 30, 2020 was $0 thousand and $26 thousand, respectively, as compared to $20 thousand and $45 thousand for

the comparable periods ended September 30, 2019.

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.

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:

The following table summarizes the activity for

the remaining options outstanding under the Plan:

Weighted Average

9 unchanged sentences

Options exercisable, September 30, 2020

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

INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

interest rate is based on the United States Treasury constant maturity rate for the expected life of the stock option.

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 $5.55

and $4.75 as of September 30, 2020 and December 31, 2019, respectively, which would have been received by the option

holders had those option holders exercised their in-the-money options as of those dates.

ELECTRONICS, INC.

Notes to Condensed Consolidated Financial

Statements - continued

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:

Options Outstanding

Options Exercisable

Weighted Average

Average Exercise

Exercise Price

Remaining Contractual Life

Exercise Price

(in thousands)

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:

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

4 unchanged sentences

(in thousands, except per share data)

Comprehensive income

Net income (loss)

Weighted average outstanding shares of common stock

1 unchanged sentence

Common stock and common stock equivalents

Earnings per share, basic and diluted

Comprehensive income per share:

basic and diluted

Earnings (loss) per share, basic and diluted

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

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.

INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

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.

On August 21, 2019, we repurchased 2,788 shares of our

common stock at a purchase price of $1.95 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 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

At September 30, 2020 we had 6,600,550 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:

ELECTRONICS, INC.

Notes to Condensed Consolidated Financial

Statements - continued

Net revenues from customers equal to or greater than 10% of

total net revenues are as follows:

Three months ended September 30,

9 unchanged sentences

Europe and other

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.

INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

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

Revenues by geographic area are based on the country of shipment

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.

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, 2020, two

customers accounted for 40% and 11% of total accounts receivable, respectively.

At December 31, 2019, four customers accounted

for 29%, 20%, 11% and 11% of total accounts receivable, respectively.

Our allowance for doubtful accounts was $0 thousand

at September 30, 2020 and December 31, 2019, respectively.

Our long-lived assets (property, plant and equipment plus intangibles,

net) were geographically located as follows:

September 30,

3 unchanged sentences

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.

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.

Bronson, our Chairman

INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

of the Board, President and Chief Executive Officer, is also the President and Chief Executive Officer of Qualstar.

BKF Capital Group (OTCM:BKFG)

Bronson, our Chairman of the Board, President and

Chief Executive Officer, simultaneously serves as an officer of Qualstar Corporation (OTCMKTS:

QBAK) and BKF Capital Group, Inc.

Bronson serves as President and Chief Executive Officer of Qualstar Corporation (“Qualstar”)

and as the Chairman of the Board and Chief Executive Officer for BKF Capital Group, Inc.

(“BKF Capital”).

entered into the following cost sharing arrangements with Qualstar and BKF Capital.

CA Facility :

We entered into a sublease agreement for our corporate headquarters in Irvine, CA in June 2020.

have an oral agreement with Qualstar and BKF Capital to allow each use of a portion of the premises, and have agreed to split all

rent and lease-related costs as follows:

47.5% for Interlink, 47.5% for Qualstar, and 5% for BKF Capital.

For the three and nine

months ended September 30, 2020, BKF Capital paid the Company $612.

ELECTRONICS, INC.

Notes to Condensed Consolidated Financial

Statements - continued

We entered into an agreement, dated March 1, 2017 with

Pursuant to the agreement, BKF Capital occupies and uses one furnished office, telephone and other services, located

at our corporate offices, for a fee of $1,000 per month.

The agreement was amended effective February 1, 2017, reducing the

fee to $250 per month.

In addition, we will occasionally pay administrative expenses on behalf of BKF Capital, and BKF Capital

will reimburse the Company.

On March 1, 2018, BFK Capital leased executive office space in Charleston, SC.

Interlink used

a portion of this office space for a proportionate fee.

BKF Capital still utilized a portion of the Interlink offices in California

for the $250 per month fee.

Effective March 1, 2018, we modified the existing agreement and entered into a cost-sharing agreement

with BKF Capital 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.

In February 2019, BKF Capital chose not to renew the lease

for executive office space in Charleston, SC.

BKF Capital still paid for office space located at Interlink’s corporate offices

in Westlake Village, CA, for a fee of $250 per month until June 2019, when Interlink moved its corporate headquarters to Camarillo,

CA in a facility shared with Qualstar.

Beginning in June 2019 and going forward, BKF Capital pays Qualstar directly for the

$250 per month fee.

For the three and nine months ended September 30, 2020,

BKF Capital paid $3,805 and $3,805, respectively to the Company as compared to $0 and $1,500 for the comparable periods ended September 30,

At September 30, 2020 and December 31, 2019, there were no amounts owed between the companies.

Qualstar Corporation (OTCM:QBAK)

The Company agreed to reimburse, or be reimbursed by, Qualstar

for our occupation and use of a portion of their Camarillo, CA manufacturing location and other expenses paid by one company on

behalf of the other.

In addition, the Company and Qualstar have entered into shared services agreements for marketing, executive

and finance support services.

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:

5 unchanged sentences

(in thousands)

Balance at September 30,

Balance at June 30,

Billed to Qualstar by Interlink

15 unchanged sentences

Balance at September 30,

ELECTRONICS, INC.

Notes to Condensed Consolidated Financial

Statements - continued

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

INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

future earnings, that sufficient evidence existed to reach a conclusion that the valuation allowance was no longer warranted.

Income tax benefit as a percentage of income before income taxes

was 154.2% for the three months ended September 30, 2020 versus tax expense of 51.3% for the comparable period in the prior

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, 2020 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:

(in thousands)

Operating Leases

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.

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.

Lease Agreements

We lease facilities under non-cancellable operating leases.

The leases expire at various dates through fiscal 2023 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 leases payments,

including scheduled rent increases are recognized as rent expenses on a straight-line basis over the term of the lease.

The rate implicit in each lease is not readily determinable,

and we therefore use our incremental borrowing rate to determine the present value of the lease payments.

The weighted average

incremental borrowing rate used to determine the initial value of ROU assets and lease liabilities during the three months ended

September 30, 2020 was 6.75%.

ROU assets for operating leases are periodically reduce by impairment

We use the long-lived assets impairment guidance in ASC Subtopic 360-10, Property, Plant and Equipment –

to determine whether a ROU asset is impaired, and if so, the amount of the impairment loss to recognize.

As of September 30,

2020, we have not recognized any impairment losses for our ROU assets.

We monitor for events or changes in circumstances that require

a reassessment of one of our leases.

When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment

is made to the carrying amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset

to an amount less than zero.

In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded

in profit or loss.

In June 2020, the Company entered into a sublease agreement

to lease 4,351 square feet of space located in Irvine, California for $5,439 per month with 3 percent annual increases starting

July 1, 2021.

The ROU asset and lease liability for this sublease agreement as of September 30, 2020 are $148 thousand

and $164 thousand, respectively.

The lease term begins July 1, 2020 and ends May 31, 2023.

The space is used for executive

offices, sales, finance and administration.

The Company intends to sublease portions of the space to Qualstar Corporation and BKF

Capital Group, Inc.

Also, in May 2020, the Company renewed its Shenzhen, China manufacturing facility lease for the period

June 1, 2020 through May 31, 2022.

The ROU asset and lease liability for this lease agreement as of September 30,

2020 are $133 thousand and $135 thousand, respectively.

ELECTRONICS, INC.

Notes to Condensed Consolidated Financial

Statements - continued

Right-of-Use Assets

We have various operating leases for office space that expire

through 2023.

Below is a summary of our right-of-use assets and lease liabilities as of September 30, 2020 (in thousands).

Right-of-use assets

Lease liability obligations

Lease liability obligations, less current portion

Total lease liability obligations, long term

Weighted-average remaining lease term

Weighted-average discount rate

During the three and nine months ended September 30, 2020,

we recognized approximately $77 thousand and $187 thousand, respectively, in operating lease costs.

Operating lease costs of $29

thousand and $73 thousand are included in cost of revenue, and $48 thousand and $114 thousand are included in operating expenses

in our consolidated statements of operations for the three and nine months ended September 30, 2020.

During the three and

nine months ended September 30, 2020, cash paid for operating leases was approximately $56 thousand and $186 thousand respectively.

During the three and nine months ended September 30, 2019,

we recognized approximately $78 thousand and $233 thousand, respectively, in operating lease costs.

Operating lease costs of $26

thousand and $80 thousand are included in cost of revenue, and $52 thousand and $153 thousand are included in operating expenses

in our consolidated statements of operations for the three and nine months ended September 30, 2019.

During the three and

nine months ended September 30, 2019, cash paid for operating leases was approximately $96 thousand and $247 thousand respectively.

Approximate future minimum lease payments for our lease liabilities

over the remaining lease periods as of September 30, 2020, are as follows (in thousands):

Remainder of 2020

Total minimum payments

amount representing interest

We are not party to any legal proceedings

at September 30, 2020.

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.

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 historical warranty return rates and expenses over various warranty periods.

Historically,

our warranty returns have not been material.

ELECTRONICS, INC.

Notes to Condensed Consolidated Financial

Statements - continued

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.

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

INTERLINK ELECTRONICS, INC.

Notes to Condensed Consolidated Financial Statements - continued

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.

liabilities related to such indemnities cannot be determined until an infringement claim has been made, we are unable to determine

the maximum amount of losses that we could incur related to such indemnifications.

Director and Officer Indemnities and Contractual Guarantees

We have entered into indemnification agreements with our directors

and executive officers, which require us to indemnify such individuals to the fullest extent permitted by Nevada law.

Our indemnification

obligations under such agreements are not limited in amount or duration.

Certain costs incurred in connection with such indemnifications

may be recovered under certain circumstances under various insurance policies.

Given that the amount of any potential liabilities

related to such indemnities cannot be determined until a lawsuit has been filed, we are unable to determine the maximum amount

of losses that we could incur relating to such indemnities.

We have also entered into an employment agreement with Steven

Bronson, our Chairman of the Board, President and Chief Executive Officer.

This agreement contains certain severance and change in control obligations.

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’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;

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.

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:

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.

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;

(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;

(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.

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.

(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.

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’

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;

the imposition of restrictions, tariffs, duties, or regulations by the United States and foreign governments on the importation of our products or our customers’

products that incorporate our components;

future acquisitions of or investments in complementary companies or technologies;

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,”

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.

Subsequent Events

Our Registration Statement on Form 10, which we filed with

the Securities and Exchange Commission on August 4, 2020, as subsequently amended, to register our shares of common stock

under the Securities Exchange Act of 1934, as amended, became effective on October 3, 2020.

We have appointed Ryan J.

Hoffman as our Chief Financial Officer

and Secretary, with such appointments to take effect immediately following the filing of our Quarterly Report on Form 10-Q

for the quarterly period ended September 30, 2020.

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 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.

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

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.

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.

Interlink Electronics Inc.

(“we”, “us”, “our”, “Interlink”

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.

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

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.

The tariffs announced by the Office of the United States Trade Representative (USTR) under the Section 301 Action went into effect in July 2018 with additional products added to the list in August 2018.

All items identified, as classified, under the Harmonized Tariff Schedule of the United States (HTSUS) with a country of origin of China are subject to a 25% duty upon importation into the United States.

Interlink continues to work toward minimizing the impact of the tariffs to our customers, yet adhere to the law.

Initially our inventory position served to delay the immediate impact of the tariff in some instances.

The tariff only impacts products with specific HTSUS codes, with a listed country of origin of China, and consumed within the United States.

There is no impact on pricing for products shipped outside the United States.

We will continue to monitor the situation and exhaust all avenues to mitigate any impact or uncertainty to our customers.

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 declining revenues, we are very optimistic with our performance in the three and nine months ended September 30, 2018, as significant progress has been made in repositioning the business to focus on R&D and new product development.

This includes revamping our global sales organization to reflect broadened technology offerings and geographies.

It will take time to turn the corner, and we will remain patient and capitalize on opportunities as they arise rather than sacrificing margins in order to pull revenue forward.

We are confident that our leadership position in providing HMI solutions remains strong, and the lull in revenues is temporary.

However, due to extended sales cycles, we antiicipate the results in the third quarter of 2018 are indicative of the next tweleve months.

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.

(“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 invented FSR®

technology and pioneered commercialization

of printed electronics manufacturing, paving the way for industry-wide adoption of force sensing technology.

Our extensive knowledge

and experience with this technology, along with the firmware we incorporate in our HMI solutions, differentiates us from other

providers of HMI solutions.

We, along with our customers, incorporate our FSR and force sensing sensors and modules into end user

Our sensors and modules are used in electronics devices and systems where user input must be converted into useful output

Our force sensing technology solution platforms enabled industry-first implementations in gaming, smartphone, rugged notebook,

automotive cockpit and automotive entry applications.

Consumer and end-user demand for enhanced user experience is driving the

need for innovative multi-modal HMI technologies and applications.

Force sensing input provides a critical novel modality that

drives a paradigm shift in HMI.

Market requirements for innovative solutions that enable smaller,

thinner devices, lower power consumption, highly refined designs, better navigation and more intuitive usability in all environments,

are also driving increased demand for our products.

Industry is moving towards the use of multi-modal HMI in the home, industrial,

medical and automotive spaces.

Interlink delivers cutting edge, high performance HMI solutions for customers who wish to replace

outdated switches and knobs in these environments.

Significant market opportunities are rapidly emerging for us

to improve upon the functionality of standard capacitive sensors which are widely available and competitively priced.

activation, where users unintentionally activate a control, is a common problem with capacitive technology.

In contrast, force

sensing solutions require a deliberate application of force to operate.

We have had recent success in using our force sensing solutions

in combination with capacitive technologies to minimize the latter’s performance issues, enabling force sensing solutions

to complement competitive technologies and provide hybrid solutions and open up new opportunities for growth.

We continue to simultaneously

expand our standard product portfolio and develop new technology platforms to grow existing markets and capture emerging markets.

This portfolio expansion will incorporate other complimentary sensing technologies.

This broader portfolio of technologies will

allow us to use our expertise in integrating multiple sensing technologies for applications in the rapidly growing Internet-of-Things

(“IoT”).

Interlink serves our world-wide customer base from our corporate

headquarters in Irvine, California (Orange County area) and from our facility in Camarillo, California (Ventura County).

to establish a Global Product Development and Materials Science Center in our existing Camarillo footprint, which we expect to

be operational by early 2021.

This facility will have a state-of-the-art printed electronics development laboratory as well as

materials science lab.

Our engineering team will be based in this center where we will work with our US and global customers on

developing, engineering, prototyping and implementing our advanced HMI solutions.

We also maintain a small embedded software and

IoT application development center in Singapore.

We manufacture all our products in our printed electronics manufacturing facility

in Shenzhen, China, which has been in operation since 2006.

In addition, we maintain a global distribution and logistics center

in Hong Kong, a technical sales office in Japan, and several manufacturer representatives and distributors in strategic locations

in our key markets, all of which allows us to support our global customer base.

We sell our products 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.

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 nine months ended September 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.

We prepare our consolidated financial statements in accordance

with generally accepted accounting principles in the United States (“GAAP”).

The preparation of consolidated financial

statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs

and expenses, and related disclosures.

We evaluate our estimates and assumptions on an ongoing basis.

We base our estimates on

historical experience and on various other assumptions that we believe to be reasonable under the circumstances.

Actual results

could differ significantly from the estimates made by our management.

To the extent that there are differences between our estimates

and actual results, our future financial statements presentation, financial condition, results of operations, and cash flows will

A description of our critical accounting policies that represent

the more significant judgments and estimates used in the preparation of our financial statements was provided in the Management’s

Discussion and Analysis of Financial Condition and Results of Operations section in our Amendment No.

2 to Registration Statement

on Form 10 filed with the Securities and Exchange Commission on September 29, 2020.

There have been no changes to our

critical accounting policies and estimates described in the Form 10 that have had a material impact on our condensed consolidated

financial statements and related notes.

Recently Issued and Adopted Accounting Pronouncements

Recent accounting pronouncements are detailed in Note 1 to our

condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Results of Operations

The following table sets forth certain unaudited condensed consolidated statements of income data for the periods indicated.

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.

8 unchanged sentences

Total operating expenses

Income from operations

Income (loss) from operations

Other income (expense):

Other income (expense), net

Income before income tax expense

Income tax expense

Income (loss) before income taxes

Income tax expense (benefit)

Net income (loss)

Other comprehensive income, net of tax:

Foreign currency translation adjustments

Comprehensive income

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

Comprehensive income (loss)

Comparison of Three Months Ended September 30, 2020

Revenue, net by Market is as follows:

1 unchanged sentence

(in thousands, except percentages)

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.

We sell our custom products into the industrial, medical and

consumer markets.

We previously sold custom products in the automotive market and continue to peruse opportunities in that sector.

We sell our standard products through various distribution networks.

The ultimate customer for standards products may come from

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.

The decrease in automotive market revenues was driven by a major customer making a design change to their product that eliminated the need for our solution.

Revenues for this customer have eroded from mid-2017 to mid-2018.

In addition, a product for another large automotive customer had expectedly reached its end of life cycle.

As a result, automotive revenues in the quarter ended September 30, 2018 were negligible.

We also saw decreases in the medical and consumer markets, partially offset by increased sales of our custom products in the industrial market.

We also had a decrease in sales of our standard products.

Diminution in our custom product sales was driven by decreased sales to our current customers for use in their ongoing product lines.

In all of our 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.

Many of our products are currently subject to import tariffs inposed on goods manufactured in China, increasing the cost to our customers by up to 25%.

We believe many of our existing customers have reduced orders until the uncertainty passes, hoping to avoid tariffs.

In the worst case, some of them may be seeking alterntive domestic suppliers.

Some of our more recent custom product success for new product lines in the medical market is making its way into the pipeline as part of a long design cycle and revenues are just starting to be realized in late 2018.

In July 2018, 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.

we expect revenues to be lower in the fourth quarter of 2018 and into early 2019 until we are able to fully replace the automotive revenue.

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.

Overall revenues for the three months ended September 30,

2020 decreased 28.2% as compared to the prior year period due to lower demand from our medical customer as COVID-19 affected their

planned manufacturing cycle, and decreased volume of purchases by our industrial customers.

These decreases were partially offset

by increased demand from our consumer customer.

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.

Many of our products are currently subject

to import tariffs imposed on goods manufactured in China, increasing the cost to our customers.

Some of our more recent custom product success for new product

lines in the medical market is making its way into the pipeline as part of a long design cycle and revenues are being realized.

Overall, we expect revenues to stabilize for the remainder of the year.

Three months ended September 30,

1 unchanged sentence

Cost of revenue

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.

Cost of revenues increased as a percentage of revenues for the same reason, including less revenue to cover fixed costs and production overhead costs.

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 for the three months ended September 30, 2020 as compared with the prior

year period as revenues decreased, and as a result of product mix, as well as improved efficiencies at our China facility.

margin improved to 52.4% for the three months ended September 30, 2020, as compared to 50.1% for the three months ended September 30,

Cost of revenue and gross margin were adversely affected by the costs of import tariffs imposed on goods manufactured

Three months ended September 30,

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Engineering, research and development

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.

Our engineering and R&D costs were flat as compared with the same period in the prior year primarily due to a leveling out of our continued investment in our Singapore R&D center.

However, we will continue to substantially grow the global R&D center in Singapore over the next several years, including expanding our R&D team, expanding the size of the facility, and investing in additional tools and equipment.

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.

Our engineering and R&D costs were lower during the three

months ended September 30, 2020 as compared with the same period in the prior year due primarily to reduced costs and headcount

at our Singapore R&D center as part of the transfer of the lab to Camarillo, CA.

Three months ended September 30,

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Selling, general and administrative

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.

We are responding to the contraction in revenues by revamping our global sales organization to reflect broadened technology offerings and geographies.

As a result, SG&A expenses are expected to increase in the fourth quarter.

Selling, general and administrative expenses consist primarily

of compensation expenses, legal and other professional fees, facilities expenses and communication expenses.

The major factor in

the increase in selling, general and administrative expense during the three months ended September 30, 2020 is due to the

costs associated with the submission of a Registration Statement on Form 10 during the period.

Sales and marketing costs also

increased for the three months ended September 30, 2020 as compared to the comparable period of 2019 as a result of the Company

building its sales and marketing team.

We expect to incur additional selling, general and administrative expenses as we expand

our geographic footprint and now that we are once again a public reporting company.

Although there may be a lag, we expect increases

in global revenue to more than offset these new costs.

Three months ended September 30,

Pre-tax Income

(in thousands, except percentages)

Income tax expense (benefit)

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 September 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.

Tax expense reflects statutory tax rates in the jurisdictions

in which we operate adjusted for book/tax differences.

Tax benefit for 2020 reflects the relative proportions of international

net income and domestic loss.

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 similar to the US statutory rate of 21% primarily due to a

significant portion of our earnings originating in the higher rate China jurisdiction (25%), offset by lower rate jurisdictions

in Singapore (17%) and Hong Kong (16.5%).

State taxes also have an impact in the United States.

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.

Results of Operations for the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017

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.

Comparison of Nine Months Ended September 30, 2020

Revenue, net by Market is as follows:

1 unchanged sentence

(in thousands, except percentages)

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.

The decrease in net revenues was primarily driven by a major customer in the automotive market making a design change to their product that eliminated the need for our solution.

Revenues for this customer have eroded from mid-2017 to mid-2018.

In addition, a product for another large automotive customer had expectedly reached its end of life cycle.

We also saw decreases in the medical and consumer markets, partially offset by increased sales of our custom products in the industrial market.

We also had an increase in sales of our standard products.

Other than the automotive market, decreased revenues in our custom product markets was driven by lower sales to our current customers for use in their ongoing product lines.

In all of our 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.

Masny of our products are currently subject to import tariffs inposed on goods manufactured in China, increasing the cost to our customers by up to 25%.

We believe many of our existing customers have reduced orders until the uncertainty passes, hoping to avoid tariffs.

In the worst case, some of them may be seeking alterntive domestic suppliers.

In July 2018, 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 fourth quarter of 2018 and into early 2019 until we are able to fully replace the automotive revenue.

Overall revenues for the nine months ended September 30,

2020 decreased 12.0% as compared to the prior year period due to lower demand from our medical customer as COVID-19 affected their

planned manufacturing cycle, and decreased volume of purchases by our industrial customers.

These decreases were partially offset

by the timing of a standard product order from a longtime customer and increased demand from our consumer products customer.

the normal cycle, 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.

Many of our products are currently subject to import

tariffs imposed on goods manufactured in China, increasing the cost to our customers.

Nine months ended September 30,

1 unchanged sentence

Cost of revenue

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.

of revenues decreased for the nine months ended September 30, 2020 as compared with the prior year period as revenues

decreased, and as a result of product mix, as well as improved efficiencies at our China facility.

Gross profit improved to 56.0%

for the nine months ended September 30, 2020, as compared to 50.5% for the nine months ended September 30, 2019.

of revenue and gross margin were adversely affected by the costs of import tariffs imposed on goods manufactured in China.

Nine months ended September 30,

1 unchanged sentence

Engineering, research and development

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.

Our engineering and R&D costs increased as compared with the same period in the prior year primarily due to 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 several years, including expanding our R&D team, expanding the size of the facility, and investing in additional tools and equipment.

Our engineering and R&D costs were higher during the nine

months ended September 30, 2020 as compared with the same period in the prior year primarily due to research incentive grant

from the Singapore government paid last year in the quarter ended June 30, 2019.

Nine months ended September 30,

1 unchanged sentence

Selling, general and administrative

Selling, general and administrative expenses consist primarily of compensation expenses, legal and other professional fees, facilities expenses and communication expenses.

We are responmding to the contraction in revenues by revamping our global sales organization to reflect broadened technology offerings and geographies.

As a result, SG&A expenses are expected to increase in the fourth quarter.

A major factor in the increase in selling, general and administrative

expense during the nine months ended September 30, 2020 is due to the costs associated with the submission of a Registration

Statement on Form 10 during the period.

Sales and marketing costs also increased for the nine months ended September 30,

2020 as compared to the comparable period of 2019 as a result of the Company building its sales and marketing team.

Nine months ended September 30,

Pre-tax Income

(in thousands, except percentages)

Income tax expense

Tax expense reflects statutory tax rates in the jurisdictions that we operate adjusted for normal book/tax differences.

Tax expense for the nine months ended September 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.

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.

Income tax expense (benefit)

Tax benefit reflects statutory tax rates in the jurisdictions

that we operate adjusted for book/tax differences.

The tax benefit for the nine months ended September 30, 2020 was a result

of the mix of domestic and foreign earnings.

Tax expense for 2019 was higher primarily as a result of withholding tax on dividends

paid by a subsidiary to our U.S.-based parent company.

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 September 30, 2018, we had cash and cash equivalents of $6.4 million, working capital of $7.8 million and no indebtedness.

Cash requirements for working capital and capital expenditures

have been funded from cash balances on hand and cash generated from operations.

As of September 30, 2020, we had cash and

cash equivalents of $6.1 million, working capital of $7.3 million and no indebtedness except for a loan of $185 thousand we received

from Silicon Valley Bank pursuant to the Paycheck Protection Program, which can be forgiven based upon the terms of that program.

Cash and cash equivalents consist of cash and money market funds.

We did not have any short-term or long-term investments as of September 30, 2018.

We did not have any short-term or long-term investments as of

September 30, 2020.

Of the $6.1 million of cash balances on hand, $1.7 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.

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.

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.

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 September 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.

and our current

plans do not demonstrate a need to repatriate cash to fund our U.S.

The Company received a loan from Silicon Valley Bank in the

aggregate principal amount of $185 thousand pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus

Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted March 27, 2020.

The loan is evidenced

by a promissory note, dated April 21, 2020, issued by us to the lender, which note matures on April 20, 2022, and bears

interest at a rate of 1.00% per annum, payable monthly commencing on November 21, 2020, following an initial deferral period

as specified under the PPP.

We may prepay the note at any time prior to maturity with no prepayment penalties.

Proceeds from the

loan will be used to fund designated expenses, including certain payroll costs, group health care benefits and other permitted

expenses, in accordance with the PPP.

Under the terms of the PPP, up to the entire amount of principal and accrued interest may

be forgiven to the extent loan proceeds are used for qualifying expenses as described in the CARES Act and applicable implementing

guidance issued by the U.S.

Small Business Administration under the PPP.

We intend to use all or a substantial portion of the loan

for designated qualifying expenses and to apply for forgiveness of all or a substantial portion of the loan in accordance with

the terms of the PPP.

No assurance can be given that we will obtain forgiveness of the loan in whole or in part.

With respect to

any portion of the loan that is not forgiven, the loan will be subject to customary provisions for a loan of this type, including

customary events of default relating to, among other things, payment defaults and breaches of the note’s provisions.

We believe that our existing cash and cash equivalents balance

will be sufficient to maintain our current operations considering our current financial condition, obligations, the proceeds of

the PPP loan and other expected cash flows.

If our circumstances change, however, we may require additional cash.

If we require

additional cash, we may attempt to raise additional capital through equity, equity-linked or debt financing arrangements.

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 could 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.

Cash Flow Analysis

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

Nine months ended September 30,

Our cash flows from operating, investing and financing activities

are summarized as follows:

Nine Months Ended

September 30,

(in thousands)

3 unchanged sentences

Net Cash Provided by Operating Activities

For the nine months ended September 30, 2018, the $1,775 thousand in net cash provided by operating activities was primarily attributable to net income of $576 thousand, adjusted for non-cash charges of $184 thousand.

The net increase in cash due to changes in operating assets and liabilities of $1,015 thousand was primarily due to payments and shipments during the period.

For the nine months ended September 30, 2017, the $1,853 thousand in net cash provided by operating activities was primarily attributable to net income of $1,265 thousand, adjusted for non-cash charges of $232 thousand.

The net decrease in cash due to changes in operating assets and liabilities of $356 thousand was primarily due to the timing of shipments and payments during the period.

For the nine months ended September 30, 2020, the $42 thousand

in net cash provided by operating activities was primarily attributable to net income of $60 thousand plus adjustments for non-cash

charges of $396 thousand, resulting in a net increase in cash of $456 thousand.

This increase, however, was offset by changes in

operating assets and liabilities that resulted in a net use of cash of $414 thousand, primarily related to increases in accounts

receivable, inventories and prepaid expenses and other current assets, and decreases in lease liabilities and deferred income taxes,

partially offset by increases in accounts payable, accrued liabilities and accrued income taxes.

For the nine months ended September 30, 2019, the $74 thousand

in net cash provided by operating activities was primarily attributable to net loss of $94 thousand, adjusted for non-cash charges

of $363 thousand, resulting in a net increase in cash of $269 thousand.

This increase, however, was offset by changes in operating

assets and liabilities that resulted in a net use of cash of $195 thousand, primarily related to increases in accounts receivable

and inventories and decreases in accounts payable and lease liabilities, partially offset by decreases in prepaid expenses and

other current assets and increases in accrued liabilities, accrued income taxes and deferred income taxes.

Accounts receivable increased from $730 thousand at December 31,

2019 to $924 thousand at September 30, 2020 due to timing of shipments and collections during the third quarter of 2020 as

compared to the end of 2019.

Many of our customers pay immediately and accounts receivable is generally related to the most recent

Inventories increased from $927 thousand at December 31, 2019 to $963 thousand at September 30, 2020.

balances will fluctuate at the end of any accounting period depending on the timing of materials purchases and product shipments.

Prepaid expenses and other current assets increased from $330 thousand at September 30, 2019 to $497 thousand at September 30,

Current liabilities increase from $687 thousand at December 31, 2019 to $1.1 million at September 30, 2020 primarily

due to the PPP loan, accrued income taxes and increases in lease liabilities.

Net Cash Used in Investing Activities

Net cash used in investing activities was $3,006 thousand for the nine months ended September 30, 2018, compared to $173 thousand for the nine months ended September 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.

At September 30, 2018, we had 6,482,784 shares of common stock issued and outstanding.

Net cash used in investing activities of $66 thousand and $189

thousand for the nine months ended September 30, 2020 and 2019, respectively, primarily related to costs in securing patents

on new products and processes developed thereunder and, in the 2019 period, capital expenditures for the continued investment in

our R&D center in Singapore.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the nine months

ended September 30, 2020 related to proceeds from the PPP loan.

There were no financing activities during the nine months

ended September 30, 2019.

Off-Balance Sheet Arrangements

At September 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.

As of September 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:

(in thousands)

Operating Leases

We do not have any off-balance sheet arrangements.

Quantitative and Qualitative Disclosures About Market Risk

1 unchanged sentence

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What changed 10-Q

Item 1. Financial Statements