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Item 8. Financial Statements and Supplementary Data

2021-03-17 compared with 2018-03-15 · 848 added, 532 removed, 226 unchanged (86% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INTERLINK ELECTRONICS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firm s

Consolidated Financial Statements:

Consolidated Balance Sheets

Consolidated Statements of Comprehensive Income

Consolidated Statements of Stockholders’

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2020 and 2019

Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020 and 2019

Consolidated Statements of Stockholders’

Equity for the Years Ended December 31, 2020 and 2019

Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

To the Board of Directors and Stockholders of

2 unchanged sentences

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Interlink Electronics, Inc.

and Subsidiaries (the Company) as of December 31, 2017, and the related consolidated statements of comprehensive income, stockholders’

equity, and cash flows for the year ended December 31, 2017, and the related notes (collectively referred to as the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the consolidated results of its operations and its cash flows for the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated balance sheets

of Interlink Electronics, Inc.

& Subsidiaries (the Company) as of December 31, 2020 and 2019, and the related consolidated

statements of operations, comprehensive income (loss), stockholders’

equity, and cash flows for the years then ended, and

the related notes (collectively referred to as the consolidated financial statements).

In our opinion, the consolidated financial

statements present fairly, in all material respects, the financial positions of the Company as of December 31, 2020 and 2019,

and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles

generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

We have served as the Company’s auditor since 2017.

March 15, 2018

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the Board of Directors and Shareholders of

Interlink Electronics, Inc.

& Subsidiaries

We have audited the accompanying consolidated balance sheet of Interlink Electronics, Inc.

& Subsidiaries (the “Company”) as of December 31, 2016, and the related consolidated statements of comprehensive income, stockholders’

equity and cash flows for the year then ended.

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

These consolidated financial statements are the responsibility

of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements

based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)

(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and

the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged

to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding

of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s

internal control over financial reporting.

Accordingly, we express no such opinion.

An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Interlink Electronics, Inc.

& Subsidiaries as of December 31, 2016, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/Marcum LLP

Los Angeles, CA

Our audits included performing procedures to assess the risks

of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial

Our audits also included evaluating the accounting principles used and significant estimates made by management, as

well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis

for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising

from the current period audit of the consolidated financial statements that was communicated or required to be communicated to

the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements

and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does

not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the

critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which

Realizability of deferred tax assets

As described in Notes 1 and 5 to the consolidated financial

statements, the Company recognizes deferred income taxes for the effects of temporary differences between the tax basis of an asset

or liability and their reported amounts in the accompanying consolidated balance sheet.

These temporary differences result in taxable

or deductible amounts in future years.

Valuation allowances are established, when necessary, to reduce deferred tax assets to the

amount that is more likely than not to be realized.

As of December 31, 2020 the Company concluded it is more likely

than not the Company will generate sufficient taxable income primarily within the applicable net operating loss periods to fully

realize $527 thousand of its net deferred tax assets.

We identified the realizability of deferred tax assets as a critical audit

matter due to the Company’s tax structure and the significant judgments and estimates made by management to determine that

sufficient taxable income will be generated to realize a portion of deferred tax assets prior to expiration.

This required a high

degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate management’s estimates

of taxable income in relation to the duration of statutory carryforward periods for the use of these deferred tax assets.

The primary procedures we performed to address this critical

audit matter included:

Recalculating the mathematical accuracy of management’s accounting for the previously described taxes, which included

supporting calculations, schedules, and reconciliations.

Reading and evaluating management’s documentation of the accounting for income taxes, including relevant significant

accounting policies, and information obtained by management from third party tax specialists which details management’s basis

for the accounting and impact to the consolidated financial statements.

Utilized with internal tax specialists in evaluating management’s calculation of its provision for income taxes and that

the significant judgments used were applied consistently with the tax code.

We have served as the Company’s auditor since 2017.

March 16, 2021

INTERLINK ELECTRONICS, INC.

CONSOLIDATED BALANCE SHEET S

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

6 unchanged sentences

Property, plant and equipment, net

Intangibles, net

Deferred income taxes

LIABILITIES AND STOCKHOLDERS' EQUITY

Intangible assets, net

Right-of-use assets

Deferred tax assets

LIABILITIES AND STOCKHOLDERS’

Current liabilities

1 unchanged sentence

Accrued liabilities

Lease liabilities, current

PPP loan payable

Accrued income taxes

Deferred revenue, current

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)

Stockholders' equity

Commitments and contingencies (Notes 10 and 11)

Stockholders’

Preferred stock, $0.01 par value:

1 unchanged sentence

Common stock, $0.001 par value:

30,000 shares authorized, 7,336 and 7,328 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively

30,000 shares authorized, 6,601 and 6,563 shares issued and outstanding at December 31, 2020 and 2019, respectively

Additional paid-in-capital

Accumulated other comprehensive (loss) income

Accumulated other comprehensive income (loss)

Accumulated deficit

Total stockholders' equity

Total liabilities and stockholders' equity

The accompanying notes are an integral part of these consolidated financial statements.

Total stockholders’

Total liabilities and stockholders’

The accompanying notes are an integral part

of these consolidated financial statements.

INTERLINK ELECTRONICS, INC.

Consolidated Statements of Comprehensive Income

CONSOLIDATED STATEMENTS OF OPERATIONS

Year ended December 31,

(in thousands, except per share data)

Cost of revenue

3 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 (loss) before income taxes

Income tax expense (benefit)

Other comprehensive income, net of tax:

Net income (loss)

Earnings (loss) per share, basic

Earnings (loss) per share, diluted

Weighted average common shares outstanding –

INTERLINK ELECTRONICS, INC.

CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME (LOSS)

Year ended December 31,

(in thousands)

Net income (loss)

Other comprehensive income (loss), net of tax:

Foreign currency translation adjustments

Comprehensive income

Earnings per share, basic and diluted

Weighted average common shares outstanding - basic

Weighted average common shares outstanding - diluted

The accompanying notes are an integral part of these consolidated financial statements.

Comprehensive income (loss)

The accompanying notes are an integral part

of these consolidated financial statements.

INTERLINK ELECTRONICS, INC.

Consolidated Statements of Stockholders’

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

Comprehensive

Stockholders'

(in thousands)

(Loss) Income

Balance at January 1, 2016

Foreign currency translation adjustment

Compensation expense related to equity awards, net of cancellations

Balance at December 31, 2016

Foreign currency translation adjustment

Compensation expense related to equity awards, net of cancellations

Stockholders’

January 1, 2019

income (loss)

currency translation adjustment

compensation expense

Balance at December 31,

The accompanying notes are an integral part of these consolidated financial statements.

income (loss)

currency translation adjustment

compensation expense

at December 31, 2020

The accompanying notes are an integral part

of these consolidated financial statements.

INTERLINK ELECTRONICS, INC.

Consolidated Statements of Cash Flow s

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended December 31,

1 unchanged sentence

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

Stock-based compensation expense

Amortization of right-of-use assets

Changes in operating assets and liabilities:

Accounts receivable

Prepaid expenses and other current assets

Prepaid expenses and other assets

Accounts payable

1 unchanged sentence

Accrued income taxes

Deferred income taxes

Deferred taxes

Lease liabilities

Deferred revenue

2 unchanged sentences

Property, plant and equipment

Intangible assets

Net cash used in investing activities

Cash flows from financing activities:

Proceeds from exercise of stock options

Proceeds from PPP loan

Share repurchase

Net cash provided by financing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase in cash and cash equivalents

Effect of exchange rate changes on cash

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

Cash, cash equivalents and restricted cash, beginning of period

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

The accompanying notes are an integral part of these consolidated financial statements.

INTERLINK ELECTRONICS, INC.

Interest paid

Supplemental non-cash investing and financing activities:

Lease liabilities arising from obtaining right-of-use assets

The accompanying notes are an integral part

of these consolidated financial statements.

INTERLINK ELECTRONICS,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1-THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

Note 1 –

and its Significant Accounting Policies

Description of Business

Interlink Electronics, Inc.

(“we,”

“us,”

“our,”

“Interlink”

or the “Company”) designs, develops, manufactures and sells a range of force-sensing technologies that incorporate our proprietary materials technology, firmware and software into a portfolio of standard sensor based products and custom sensor system solutions.

These include sensor components, subassemblies, modules and products that support effective, efficient cursor control and novel three-dimensional user inputs.

Our Human Machine Interface (“HMI”) technology platforms are deployed in a wide range of markets including consumer electronics, automotive, industrial, and medical.

Interlink serves our world-wide customer base from our corporate headquarters in Westlake Village, California (greater Los Angeles area), our global research and development (“R&D”) and engineering center in Singapore, our printed-electronics manufacturing facility in Shenzhen, China and our global distribution and logistics center in Hong Kong.

We also maintain engineering, assembly and prototyping capabilities in Simi Valley, California along with technical and sales offices in Japan and at multiple locations in the United States.

Our principal executive office is located at 31248 Oak Crest Drive, Suite 110, Westlake Village, California 91361 and our telephone number is (805) 484-8855.

(“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, our distribution and logistics center in Camarillo, California, our engineering, research and

development center in Singapore, our printed-electronics manufacturing facility in Shenzhen, China and our distribution and logistics

center in Hong Kong.

We also maintain engineering, assembly and prototyping capabilities in Camarillo, California along with technical

and sales offices in Japan and at multiple locations in the United States.

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.

Our fiscal year is the calendar year reporting cycle beginning

January 1 and ending December 31.

Basis of Presentation

The accompanying 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”).

Our reporting currency is the United States dollar.

Our consolidated financial statements include the accounts of Interlink Electronics and our subsidiaries in China, Hong Kong and Singapore.

All intercompany accounts and transactions were eliminated in consolidation.

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

Reclassification

Certain prior period amounts have been reclassified for consistency with the current period presentation.

These reclassifications had no effect on the reported results of operations.

Certain components in the Consolidated Statements of Cash Flows for the year ended December 31, 2016 have been separately identified or reclassified.

This change in classification does not affect previously reported cash flows from operating activities in the Consolidated Statements of Cash Flows.

The accompanying consolidated financial statements have been

prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

reporting currency is the United States dollar.

Our consolidated financial statements include the accounts of

Interlink Electronics, Inc.

and our subsidiaries in China, Hong Kong and Singapore.

All intercompany accounts and transactions

were eliminated in consolidation.

Foreign Currency Translation

The functional currency of our Chinese subsidiary is the Chinese Yuan Renminbi.

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, 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.

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 within other income (expense), net, for which losses of $104 thousand and $14 thousand

were recorded in the years ended December 31, 2020 and 2019, respectively.

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.

INTERLINK ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –

Revenue Recognition

We recognize product revenues when the following fundamental criteria are met:

(i) persuasive evidence of an arrangement exists;

(ii) delivery has occurred;

(iii) the price to the customer is fixed or determinable;

and (iv) collection of the sales price is reasonably assured.

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.

The Company recognizes revenue in accordance with

Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”),

when its customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect

to receive in exchange for those goods or services.

To determine revenue recognition for arrangements that are within the

scope of ASC 606, we perform the following five steps;

(i) identify the contracts(s) with a customer;

(ii) identify the

performance obligations in the contract;

(iii) determine the transaction price;

(iv) allocate the transaction price to the

performance obligations.

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

contrct and determine those that are performance obligations and assess whether each promised good or service is distinct.

then recognize revenue in the amount of the transaction price that is allocated to the respective performance obligation when

(or as) the performance obligation is satisfied.

Delivery occurs when goods are shipped and title and risk of loss transfer

to the customer, in accordance with the terms specified in the arrangement with the customer.

Revenue recognition is deferred

until the earnings process is complete.

We (i) input orders based upon receipt of a customer purchase

order, (ii) confirm pricing through the customer purchase order record, (iii) validate creditworthiness through past payment history,

credit agency reports and other financial data, and (iv) recognize revenue upon shipment of goods or when risk of loss and title

transfer to the buyer.

All customers have warranty rights, and some customers also have explicit or implicit rights of return.

We establish reserves for potential customer returns or warranty repairs based on historical experience and other factors that enable us to reasonably estimate the obligation.

A portion of our product sales is made through distributors under agreements allowing for right of return.

Our past history with these sell-through right of return provisions allow us to reasonably estimate the amount of inventory that could be returned pursuant to these agreements, and revenue is recognized accordingly.

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.

We establish reserves for potential customer returns or warranty repairs based on historical experience and other factors that

enable us to reasonably estimate the obligation.

A portion of our product sales is made through distributors

under agreements allowing for right of return.

Our past history with these sell-through right of return provisions allow us to

reasonably estimate the amount of inventory that could be returned pursuant to these agreements, and revenue is recognized accordingly.

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 trends.

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.

Amounts billed to customers for shipping and handling fees are

presented in revenue.

Costs incurred for shipping and handling are included in cost of revenue.

Engineering, Research and Development Costs

Engineering, research and development (“R&D”) costs are expensed when incurred.

R&D expenses consist primarily of compensation expenses for employees engaged in research, design and development activities.

R&D expenses also include depreciation and amortization, and overhead, including facilities expenses.

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.

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

Advertising and Marketing Costs

All of the costs related to advertising and marketing our products

are expensed as incurred or at the time the marketing takes place.

ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –

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.

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.

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.

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

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.

We 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.

See Note 6 - Income Taxes for further information and discussion of our income tax provision and balances including discussion of the impacts of the Tax Cuts and Jobs Act (TCJA) enacted in December 2017.

Earnings of our foreign subsidiaries are included in our U.S.

federal income tax return as they are earned.

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.

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.

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.

ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –

Effective January 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 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.

liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease

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

expense over the lease term.

Variable lease expenses are recorded when incurred.

In calculating the right of use and lease liability, 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

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.

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.

Cash, Cash Equivalents and Restricted Cash

We invest excess cash in highly liquid interest-bearing instruments, including commercial paper or money market accounts.

Investments with original maturity dates less than 90 days are classified as cash equivalents.

Cash that is reserved for a specific purpose and therefore not available for immediate or general business use is classified as restricted cash.

All of our cash, cash equivalents and restricted cash are held at major financial institutions in the United States, China and Singapore.

We invest excess cash in highly liquid interest-bearing instruments,

including commercial paper or money market accounts.

Investments with original maturity dates less than 90 days are classified

as cash equivalents.

Cash that is reserved for a specific purpose and therefore not available for immediate or general business

use is classified as restricted cash.

All of our cash, cash equivalents and restricted cash are held at major financial institutions

in the United States, China and Singapore.

Our balances in each country were insured at the maximum limit determined by each country.

In the U.S., we had approximately $4.9 million and $4.8 million in excess of the Federal Deposit Insurance Corporation limit of $250 thousand per depositor, per insured bank at December 31, 2017 and 2016, respectively.

Approximately $1.7 million and $639 thousand held in banks in China at December 31, 2017 and 2016, respectively were not insured.

Approximately $676 thousand and $43 thousand held in banks in Singapore at December 31, 2017 and 2016, respectively were not insured.

In the U.S., we had approximately $3.9 million and $5.0 million in excess of the Federal Deposit Insurance Corporation limit of

$250 thousand per depositor, per insured bank at December 31, 2020 and 2019, respectively.

Approximately $1.2 million and

$1.0 million held in banks in China at December 31, 2020 and 2019, respectively, were not insured.

Approximately $149 thousand

and $232 thousand held in banks in Singapore at December 31, 2020 and 2019, respectively, were not insured.

Approximately

$386 thousand and $351 thousand held in banks in Hong Kong at December 31, 2020 and 2019, respectively, were not insured.

ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoice amount and presented net of the allowance for doubtful accounts.

Accounts receivable are recorded at the invoice amount and presented

net of the allowance for doubtful accounts.

Our receivables do not bear interest.

We evaluate the collectability of accounts receivable at each balance sheet date using a combination of factors, such as specific customer historical experience and credit quality, overall historical data, age of the accounts receivable balances, and economic conditions that may affect a customer’s ability to pay.

We include any accounts receivable balances that are determined to be uncollectible in the overall allowance for doubtful accounts using the specific identification method.

After all attempts to collect a receivable have failed, the receivable is written off against the allowance.

Inventories are stated at the lower of cost or net realizable value (NRV) and consist of materials, labor and overhead.

Inventory costs are determined using standard costs which approximate actual costs under the first-in, first-out method.

Costs include the costs of purchased finished products, sorted wafers, and outsourced assembly, testing and internal overhead.

NRV is the amount by which the estimated selling price of the product exceeds the sum of any additional costs expected to be incurred on the sale of such product in the ordinary course of business.

We evaluate the collectability of accounts receivable

at each balance sheet date using a combination of factors, such as specific customer historical experience and credit quality,

overall historical data, age of the accounts receivable balances, and economic conditions that may affect a customer’s ability

We include any accounts receivable balances that are determined to be uncollectible in the overall allowance for doubtful

accounts using the specific identification method.

After all attempts to collect a receivable have failed, the receivable is written

off against the allowance.

Inventories are stated at the lower of cost or net realizable

value (NRV) and consist of materials, labor and overhead.

Inventory costs are determined using standard costs which approximate

actual costs under the first-in, first-out method.

Costs include the costs of purchased finished products, sorted wafers, and outsourced

assembly, testing and internal overhead.

NRV is the amount by which the estimated selling price of the product exceeds the sum

of any additional costs expected to be incurred on the sale of such product in the ordinary course of business.

We evaluate inventories for excess quantities and obsolescence.

2 unchanged sentences

new product introductions;

and changes in strategic business direction.

and changes in strategic

business direction.

Estimates by their very nature include elements that are uncertain.

In order to state the inventory at the lower of cost or NRV, we maintain reserves against individual stocking units.

Inventory reserves, once established, are not reversed until the related inventories have been sold or scrapped.

If future demand or market conditions are less favorable than our projections, a write-down of inventory may be required, and would be reflected in cost of product revenues sold in the period the revision is made.

In order to state the inventory at the

lower of cost or NRV, we maintain reserves against individual stocking units Inventory reserves, once established, are not reversed

until the related inventories have been sold or scrapped.

If future demand or market conditions are less favorable than our projections,

a write-down of inventory may be required, and would be reflected in cost of product revenues sold in the period the revision is

Property, Plant and Equipment, Net

Property, plant and equipment are carried at cost less accumulated depreciation and amortization.

Depreciation and amortization expense are calculated using the straight-line method over the assets’

Property, plant and equipment are carried at cost less accumulated

depreciation and amortization.

Depreciation and amortization expense are calculated using the straight-line method over the assets’

remaining estimated useful lives, ranging from two to five years for machinery and equipment, including product tooling;

and the shorter of the lease terms or estimated useful lives for leasehold improvements.

When property, plant and equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts.

Gains and losses from retirements and asset disposals are recorded in selling, general and administrative (“SG&A”) expenses.

Repairs and maintenance on our property, plant and equipment are expensed in the period incurred.

We perform periodic reviews to evaluate the recoverability of property, plant and equipment and to determine whether facts and circumstances exist that would indicate that the carrying amounts of property, plant and equipment exceed their

If facts and circumstances indicate that the carrying amount of property, plant and equipment might not be fully recoverable, projected undiscounted net cash flows associated with the related asset or group of assets over their estimated remaining useful lives are compared against their respective carrying amounts.

In the event that the projected undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are written down to their estimated fair values.

All long-lived assets to be disposed of are reported at the lower of carrying amount or fair market value, less expected selling costs.

shorter of the lease terms or estimated useful lives for leasehold improvements.

When property, plant and equipment is retired

or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts.

Gains and losses from retirements

and asset disposals are recorded in selling, general and administrative expenses.

Repairs and maintenance on our property, plant

and equipment are expensed in the period incurred.

We perform periodic reviews to evaluate the recoverability of

property, plant and equipment and to determine whether facts and circumstances exist that would indicate that the carrying amounts

of property, plant and equipment exceed their fair values.

If facts and circumstances indicate that the carrying amount of property,

plant and equipment might not be fully recoverable, projected undiscounted net cash flows associated with the related asset or

group of assets over their estimated remaining useful lives are compared against their respective carrying amounts.

that the projected undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are written

down to their estimated fair values.

All long-lived assets to be disposed of are reported at the lower of carrying amount or fair

market value, less expected selling costs.

Intangible Assets, Net

Our intangible assets consist primarily of patents and trademarks and are carried at cost less accumulated amortization.

We evaluate our finite-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an intangible asset or asset group may not be recoverable.

The carrying value of an intangible asset or asset group is not recoverable if the amounts of undiscounted future cash flows the assets are expected to generate (including any net proceeds expected from the disposal of the asset) are less than its carrying value.

When we identify that an impairment has occurred, we reduce the carrying value of the asset to its comparable market value (if available and appropriate) or to its estimated fair value based on a discounted cash flow approach.

Currently, we do not have goodwill or indefinite-lived intangible assets.

Our intangible assets consist primarily of patents and trademarks

and are carried at cost less accumulated amortization.

We evaluate our finite-lived assets for impairment whenever events or changes

in circumstances indicate the carrying value of an intangible asset or asset group may not be recoverable.

The carrying value of

an intangible asset or asset group is not recoverable if the amounts of undiscounted future cash flows the assets are expected

to generate (including any net proceeds expected from the disposal of the asset) are less than its carrying value.

When we identify

that an impairment has occurred, we reduce the carrying value of the asset to its comparable market value (if available and appropriate)

or to its estimated fair value based on a discounted cash flow approach.

Currently, we do not have goodwill or indefinite-lived

intangible assets.

ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –

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.

Recently Adopted Accounting Pronouncements

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.

Effective January 1, 2017, the Company adopted ASU No.

2015-02 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.

Effective January 1, 2017, the Company adopted ASU No.

2015-02 and it had no impact on our consolidated financial statements.

In August 2016, the FASB issued ASU No.

2016-15, “

Statement of Cash Flows (Topic 230):

Classification of Certain Cash Receipts and Cash Payment, ”

which clarifies how cash receipts and cash payments in certain transactions are presented and classified in the statement of cash flows.

The effective date of this update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted.

The update requires retrospective application to all periods presented but may be applied prospectively if retrospective application is impracticable.

The Company early adopted ASU No.

2016-15 effective January 1, 2017 and applied it retroactively.

There was 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.

The Company early adopted ASU No.

2016-15 in the fourth quarter of 2017 and applied it retroactively, with minimal impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements (Not Yet Adopted)

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 would permit companies to adopt the standard as early as the original effective date.

Early adoption prior to the original effective date is not permitted.

The core principle of this Topic is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services.

This Topic defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

The Company will adopt ASU 2014-09 effective January 1, 2018 and it is not expected to result in material differences in the amount or timing of recognized revenue.

In January 2016, the FASB issued ASU No.

2016-01, “

Financial Instruments—Overall (Subtopic 825-10):

Recognition and Measurement of Financial Assets and Financial Liabilities ”, that amends existing guidance around classification and measurement of certain financial assets and liabilities.

Changes to the current GAAP model primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure

requirements for financial instruments.

Under the new guidance, all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings.

For equity investments without readily determinable fair values, the cost method is also eliminated.

However, most entities will be able to elect to record equity investments without readily determinable fair values at cost, less impairment, and plus or minus subsequent adjustments for observable price changes.

The standard also requires that financial assets and liabilities be disclosed separately in the notes to the financial statements based on measurement principle and form of financial asset.

The amendments in this guidance are effective for financial statements issued for interim and annual periods beginning after December 15, 2017.

This standard is not expected to have a significant impact on our consolidated financial statements or disclosures.

In February 2016, the FASB issued ASU No.

2016-02, “

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

The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.

Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and requires retrospective application.

The Company is currently evaluating the impact of ASU 2016-02 to its consolidated financial statements.

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.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No.

2016-13, “

Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments ”, that significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income, including trade receivables.

The standard requires an entity to estimate its lifetime “expected credit loss”

for such assets at inception, and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset.

The standard is effective for annual periods beginning after December 15, 2019, and interim periods therein.

Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein.

This standard is not expected to have a significant impact on our consolidated financial statements or disclosures.

In 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.

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 impact on our consolidated financial statements to be material.

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.

We do not expect this new guidance to have a material impact on its condensed consolidated financial statements.

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

NOTE 2-DETAILS OF CERTAIN FINANCIAL STATEMENT COMPONENTS

The following tables provide details of selected balance sheet items:

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, 2019, and interim periods therein.

This adoption of this standard did not have a significant impact on

our consolidated financial statements or 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.

Subsequent Events

The Company has evaluated subsequent events through March 16,

2021, being the date these consolidated financial statements were issued.

In January 2021, the Company formed a wholly owned subsidiary

entity, IE Sensors, Inc.

This entity has not yet commenced operations.

In February 2021, the Company was notified that its loan

under the Payroll Protection Program of the Coronavirus Aid, Relief, and Economic Security Act was forgiven, for which the economic

effect will be recorded in the Company’s consolidated statement of operations for the quarter ending March 31, 2021.

Note 2 –

Certain Financial Statement Components

The following tables provide

details of selected balance sheet items:

(in thousands)

3 unchanged sentences

Total inventories

ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –

Property, plant and equipment, net

4 unchanged sentences

Total property, plant and equipment, net

Depreciation expense totaled $128 thousand and $57 thousand in 2017 and 2016, respectively.

There were no significant disposals of property, plant and equipment in 2017 and 2016.

Intangibles, net

Depreciation expense totaled $233 thousand and $225 thousand

in 2020 and 2019, respectively.

Intangible assets, net

(in thousands)

2 unchanged sentences

Total intangibles, net

Amortization expense totaled $17 thousand and $9 thousand in 2017 and 2016, respectively.

Amortization expense totaled $60 thousand and $41 thousand in

2020 and 2019, respectively.

Future amortization on existing intangibles over the next five years is as follows:

9 unchanged sentences

Total accrued liabilities

NOTE 3-FAIR VALUE MEASUREMENTS

The following table summarizes the Company’s cash and marketable securities using the hierarchy described in Note 1 under the heading “Fair Value Measurements”:

December 31, 2017

(in thousands)

Restricted cash

December 31, 2016

(in thousands)

Restricted cash

NOTE 4-STOCK BASED COMPENSATION

Under the terms of our 2016 Omnibus Incentive Plan (the “2016 Plan”), officers and key employees could be granted restricted stock units, as well as non-qualified or incentive stock options, at the discretion of the compensation committee of the board of directors.

The 2016 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.

As of December 31, 2017 and 2016, none of our stock-based awards are classified as liabilities.

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 2016 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.

The Company recorded stock-based compensation expense of

$26 thousand and $75 thousand for the years ended December 31, 2020 and 2019, respectively.

As of December 31, 2020 and

2019, none of our stock-based awards are classified as liabilities.

We did not capitalize any stock-based compensation cost

At December 31, 2017, there was $278 thousand of unrecognized stock-based compensation expense related to non-vested restricted stock units, and the weighted average period over which the unearned stock-based compensation for the restricted stock units is expected to be recognized is approximately 1.3 years.

All of our outstanding stock options are fully vested with no remaining unrecognized stock-based compensation expense.

On a quarterly basis, we assess our estimate of forfeitures based on historical forfeiture activity and expected future employee attrition.

We recognize the effect of adjustments made to forfeiture rates, if any, in the period we change the forfeiture estimate.

Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards and our stock price increases.

Share amounts and weighted-average grant date fair values reflect the 25% stock dividend paid on April 1, 2016.

during the years ended December 31, 2020 or 2019.

At December 31, 2020, there was no unrecognized stock-based

compensation expense related to non-vested stock-based awards restricted stock units.

On a quarterly basis, we assess our

estimate of forfeitures based on historical forfeiture activity and expected future employee attrition.

We recognize the

effect of adjustments made to forfeiture rates, if any, in the period we change the forfeiture estimate.

Future stock-based

compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity

ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –

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.

Our restricted stock unit grants generally vest over five years

in installments of 50% on the fourth anniversary of the grant date and 50% on the fifth anniversary of the grant date.

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

Aggregate Intrinsic

Date Fair Value

Contractual Life

(in thousands)

3 unchanged sentences

Restricted stock units, December 31, 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 $5.22 and $7.02 as of December 31, 2017 and 2016, respectively.

In 2017 and 2016 no restricted stock units vested.

The aggregate intrinsic values as of December 31,

2020, 2019 and 2018 in the preceding table for the restricted stock units outstanding represent the total pretax intrinsic value,

based on our closing stock prices of $9.00, $4.75 and $2.10 as of December 31, 2020, 2019 and 2018, respectively.

and 77,500 restricted stock units vested in 2020 and 2019, respectively.

Stock Options

The exercise price of our stock options is the closing price on the date the options are granted.

The exercise price of our stock options is the closing price

on the date the options are granted.

Options generally expire 10 years from the date of grant.

The following table summarizes the activity for the remaining options outstanding under the Plan:

Weighted Average

Aggregate Intrinsic

Exercise Price

Contractual Life

The following table summarizes the

activity for the remaining options outstanding under the Plan:

(in thousands)

6 unchanged sentences

Options exercisable, December 31, 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 $5.22 and $7.02 as of December 31, 2017 and 2016, respectively, which would have been received by the option holders had those option holders exercised their in-the-money options as of those dates.

The fair value of stock-based option awards is estimated at the date of grant using the Black-Scholes option pricing model;

however, the value calculated using an option pricing model may not be indicative of the fair value observed in a willing buyer/willing seller market transaction, or actually realized by the employee upon exercise.

Expected volatility used to estimate the fair value of options granted is based on the historical volatility of our common stock.

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

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 as of December 31, 2020, 2019 and 2018 in the preceding table for the options outstanding represent the total

pretax intrinsic value, based on our closing stock prices of $9.00, $4.75 and $2.10 as of December 31, 2020, 2019 and

2018, 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 CONSOLIDATED FINANCIAL STATEMENTS –

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 December 31, 2017:

Options Outstanding

Options Exercisable

Weighted Average

Average Exercise

Exercise Price

Remaining Contractual Life

Exercise Price

(in thousands)

NOTE 5-EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period.

Diluted earnings per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding

stock options and restricted stock-based awards using the treasury stock method.

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

Comprehensive income

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:

(in thousands, except per share data)

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

Earnings (loss) per share, diluted

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

NOTE 6-INCOME TAXES

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (TCJA).

The TCJA makes broad and complex changes to the U.S.

tax code, including, but not limited to, (1) reducing the top U.S.

federal corporate tax rate from 35% to 21%, effective January 1, 2018;

(2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries (the "Transition Tax");

(3) generally eliminating U.S.

federal income taxes on dividends from foreign subsidiaries;

(4) requiring a current inclusion in U.S.

federal taxable income of certain earnings of controlled foreign corporations;

(5) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized;

(6) creating the base erosion anti-abuse tax (BEAT), a new minimum tax;

(7) creating a new limitation on deductible interest expense;

and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

Under GAAP, we use the asset and liability method of accounting for income taxes.

Under this method, 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 bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Due to the reduction in our federal corporate tax rate from 34% to 21%, we revalued our net deferred tax assets and deferred tax liabilities and recorded a discrete tax expense of $169 thousand in 2017.

The Transition Tax is a tax on previously untaxed accumulated and current earnings and profits of certain of our foreign subsidiaries.

We were able to make a reasonable estimate of the Transition Tax and determined that it was insignificant.

The Tax Act includes a new provision, referred to as Global Intangible Low-Taxed Income (“GILTI”), which provides for a 10.5% tax on certain income of controlled foreign corporations.

We have elected to account for GILTI as a period cost if and when occurred, rather than recognizing deferred taxes for basis differences expected to reverse.

As a result of this policy election, there is no impact to our 2017 deferred tax calculation.

The remeasurement of the deferred tax assets and liabilities is included in our 2017 tax expense.

However, the remeasured amounts incorporate assumptions made based upon the Company’s current interpretation of the TCJA.

Our estimates of the impact of the Tax Act may change due to a number of additional considerations including, but not limited to, the issuance of additional regulations or guidance and our ongoing analysis of the new law.

Any subsequent adjustment to these amounts will be recorded to tax expense in 2018 when the analysis is complete.

The components of earnings before income tax provision (benefit) for the years ended December 31, 2017 and 2016 were as follows:

Note 5 –

Under GAAP, we use the asset and liability method of accounting

for income taxes.

Under this method, 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 bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which

those temporary differences are expected to be recovered or settled.

The components of earnings before income taxes for the years

ended December 31, 2020 and 2019 were as follows:

(in thousands)

Income (loss) before income tax provision (benefit):

Income tax provision (benefit) consists of the following for the years ended December 31, 2017 and 2016:

Income (loss) before income taxes:

ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –

Income tax provision (benefit) consists of the following for

the years ended December 31, 2020 and 2019:

(in thousands)

3 unchanged sentences

Total income tax provision (benefit)

A reconciliation of the income tax provision (benefit) by applying the statutory United States federal income tax rate to net income before income tax provision (benefit) is as follows:

A reconciliation of the income tax provision (benefit) by applying

the statutory United States federal income tax rate to income (loss) before income taxes is as follows:

Year Ended December 31,

(in thousands, except percentages)

2 unchanged sentences

Foreign taxes

Change in statutory tax rate

Foreign withholding and dividend tax

Change in valuation allowance

Income tax provision (benefit)

Deferred tax assets and liabilities are recognized for future tax consequences between the carrying amounts of assets and liabilities and their respective tax basis using enacted tax rates in effect for the fiscal year in which the difference are expected to reverse.

Significant deferred tax assets and liabilities, consist of the following:

Deferred tax assets and liabilities are recognized for future

tax consequences between the carrying amounts of assets and liabilities and their respective tax basis using enacted tax rates

in effect for the fiscal year in which the differences are expected to reverse.

Significant deferred tax assets and liabilities,

consist of the following:

(in thousands)

Deferred tax assets, net

Deferred taxes, net

Net operating loss carryforward

Fixed assets and intangible property

Stock compensation

Property, plant and equipment, and intangible assets

Stock-based compensation expense

Total deferred tax assets

1 unchanged sentence

Net deferred tax assets

Deferred taxes are recorded for the following Net Operating Losses (“NOLs”) that can be used in future tax years:

ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –

Deferred taxes are recorded for the following net operating

losses (“NOLs”) that can be used in future tax years:

(in millions)

Net operating losses

The federal and state NOLs expire at various dates between 2017 through 2030.

The federal and state NOLs expire at various dates between 2021

through 2040.

Foreign NOLs are related to the jurisdictions of Singapore and Hong Kong and may be carried forward indefinitely.

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.

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 amount as of December 31, 2017 are subject to annual limitations due to the February 2010 ownership change, at approximately $71,000 per year.

Because these limitations preclude the use of a large portion of these NOLs, the Company permanently wrote-off the related deferred tax assets during the year ended December 31, 2015.

Because the Company maintained a full valuation allowance against these deferred tax assets, this write-off had no impact on tax expense.

At December 31, 2017, the gross NOLs without regard to this permanent write-off is $48.5 million

for federal and $17.5 million for state.

As of December 31, 2020, $33.5 million of the federal NOLs and $14.0 million of the state NOLs are subject to annual limitations

due to the February 2010 ownership change, at approximately $71 thousand per year.

Because these limitations preclude the use of

a large portion of these NOLs, the Company permanently wrote-off the related deferred tax assets during the year ended December 31,

Because the Company maintained a full valuation allowance against these deferred tax assets, this write-off had no impact

on tax expense.

At December 31, 2020, the gross NOLs without regard to this permanent write-off is $33.5 million for federal

and $15.2 million for state.

A roll-forward of the NOLs for which deferred tax assets are now recorded is as follows:

6 unchanged sentences

Balance at December 31,

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 total valuation allowance of $989 thousand as of December 31, 2015.

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 against our NOL was no longer warranted.

As of December 31, 2017, withholding and U.S.

taxes had not been provided on approximately $700 thousand of unremitted earnings of non-U.S.

subsidiaries because the Company has currently reinvested these earnings permanently in such operations.

Such earnings would be taxable upon the sale or liquidation of these subsidiaries or upon remittance of dividends.

Although such earnings are intended to be reinvested indefinitely, any tax liability for undistributed earnings, including withholding taxes, would be partially negated by the availability of corresponding foreign tax credits.

As of December 31, 2015, there were no unremitted earnings of non-U.S.

subsidiaries due to historical losses in those entities.

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 record a valuation allowance against our otherwise recognizable net deferred tax assets in the federal, state and foreign

jurisdictions and determined that no valuation allowance was necessary at December 31, 2020 or 2019.

The Internal Revenue Code includes a provision, referred to

as Global Intangible Low-Taxed Income (“GILTI”), which provides for a 10.5% tax on certain income of controlled foreign

corporations.

We have elected to account for GILTI as a period cost if and when occurred, rather than recognizing deferred taxes

for basis differences expected to reverse.

The Company is subject to taxation in the U.S.

and various states and foreign jurisdictions.

and various states

and foreign jurisdictions.

federal income tax returns after 2016 remain open to examination.

We and our subsidiaries are also subject to income tax in multiple state and foreign jurisdictions.

Generally, state and foreign income tax returns after 2012 remain open to examination.

We and our subsidiaries are also

subject to income tax in multiple state and foreign jurisdictions.

Generally, state and foreign income tax returns after 2015 remain

open to examination.

No income tax returns are currently under examination.

As of December 31, 2017 and 2016, the Company does not have any unrecognized tax benefits, and continues to monitor its current and prior tax positions for any changes.

The Company recognizes penalties and interest related to unrecognized tax benefits as income tax expense.

For the years ended December 31, 2017 and 2016, there were no penalties or interest recorded in income tax expense.

NOTE 7-SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK AND GEOGRAPHIC INFORMATION

As of December 31, 2020 and 2019, the Company

does not have any unrecognized tax benefits, and continues to monitor its current and prior tax positions for any changes.

Company recognizes penalties and interest related to unrecognized tax benefits as income tax expense.

For the years ended December 31,

2020 and 2019, there were no penalties or interest recorded in income tax expense.

ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –

Note 6 –

Significant Customers, Concentrations of Credit

Risk and Geographic Information

We manage and operate our business through one operating segment.

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

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

total net revenues are as follows:

Year ended December 31,

5 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 December 31, 2017, three customers accounted for 35%, 10% and 10% of total accounts receivable.

At December 31, 2016, two customers account for approximately 44% and 15% of total accounts receivable.

Our allowance for doubtful accounts was $32 and $0 thousand as of December 31, 2017 and 2016, respectively.

As of December 31, 2017, our long-lived assets 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.

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 December 31, 2020, two customers accounted for 47% and 22% of total accounts receivable.

At December 31, 2019, four customers accounted for 29%, 20%, 11% and 11% of total accounts receivable.

Our allowance for doubtful

accounts was $0 at both December 31, 2020 and 2019.

As of December 31, 2020, our long-lived assets were geographically

located as follows:

(in thousands)

1 unchanged sentence

Total long-lived assets

NOTE 8-RETIREMENT SAVINGS PLAN

We have a qualified retirement plan under the provisions of Section 401(k) of the Internal Revenue Code covering all U.S.

Participants in this plan may contribute between 1% and 60% of their eligible pay on a pretax basis, up to the annual Internal Revenue Service dollar limits.

The Company will make matching contributions in an amount equal to 50% of the participant’s deferral contributions, not to exceed $500.

All contributions, including the Company match, are vested immediately.

Our matching contributions to the plan were $5 thousand and $5 thousand in 2017 and 2016, respectively.

NOTE 9-RELATED PARTY TRANSACTIONS

BKF Capital Group (OTC:BKFG)

We entered into an agreement, dated March 1, 2016 with BKF Capital Group, Inc.

(“BKF”).

Pursuant to the agreement, BKF occupies and uses one furnished office, telephone and other services, located at our corporate offices, for a fee of $1,000 per month.

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, and BKF will reimburse the Company.

For the years ended December 31, 2017 and 2016, BKF paid $4 thousand and $12 thousand, respectively to the Company.

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 December 31, 2017 and 2016, BKF owed us $0 thousand and $1 thousand, respectively.

Qualstar Corporation (NASDAQ:QBAK)

The Company agreed to reimburse, or be reimbursed by, Qualstar Corporation (“Qualstar”) for our occupation and use of a portion of their Simi Valley manufacturing location and other expenses paid by one company on behalf of the other.

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

Transactions with Qualstar are as follows:

Note 7 –

Retirement Savings Plan

We have a qualified retirement plan under the provisions of

Section 401(k) of the Internal Revenue Code covering all U.S.

Participants in this plan may contribute between

1% and 60% of their eligible pay on a pretax basis, up to the annual Internal Revenue Service dollar limits.

The Company will make

matching contributions in an amount equal to 50% of the participant’s deferral contributions, not to exceed $500.

All contributions,

including the Company match, are vested immediately.

Our matching contributions to the plan were $3 thousand in each of 2020

Note 8 –

Paycheck Protection Program Loan

The Company received a loan from Silicon Valley Bank in

the aggregate principal amount of $186 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.

loan is evidenced by a promissory note, dated April 21, 2020, issued by us to the lender, which matures on

April 20, 2022, and bears interest at a rate of 1.00% per annum, payable monthly 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 were 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.

The full amount of the loan principal

and interest was forgiven in February 2021.

ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –

Note 9 –

Related Party Transactions

Qualstar Corporation (OTCMKTS:QBAK)

Qualstar Corporation (OTCMKTS:QBAK) (“Qualstar”)

is a related party.

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

and Chief Executive Officer and Director of Qualstar.

Hoffman, our Chief Financial Officer, is also the Chief Financial

Officer of Qualstar.

Bronson, together with BKF Capital Group, Inc.

(OTCMKTS:BKFG) which he controls, has a controlling interest

in both Interlink and Qualstar.

We have a facilities agreement with Qualstar to allow Qualstar to use of a portion of our Irvine,

California office facility, for which we have agreed to split substantially all rent and lease-related costs on an apportioned

basis according to the approximate relative usage levels by each entity.

Qualstar also has a facilities agreement with us to allow

us to use of a portion of its Camarillo, California office and warehouse facility, for which we have agreed to split substantially

all rent and lease-related costs on an apportioned basis according to the approximate relative usage levels by each entity.

addition, we have various consulting agreements with Qualstar for certain of our respective employees and/or independent contractors

that provide certain operational, sales, marketing, general and administrative services to the other entity.

Interlink and Qualstar

also agree to reimburse, or be reimbursed by, one another for expenses paid by one company on behalf of the other.

with Qualstar are as follows:

Year ended December 31,

10 unchanged sentences

Balance at December 31,

NOTE 10-COMMITMENTS

Operating Leases

BKF Capital Group, Inc.

(OTCMKTS:BKFG)

BKF Capital Group, Inc.

(OTCMKTS:BKFG) (“BKF

Capital”) is a related party.

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

also the Chief Executive Officer and Chairman of BKF Capital.

Hoffman, our Chief Financial Officer, is also the Chief

Financial Officer of BKF Capital.

BKF Capital, together with Mr.

Bronson, has a controlling interest in Interlink.

facilities agreement with BKF Capital to allow BKF Capital to use of a portion of our Irvine, California office facility, for

which we have agreed to split substantially all rent and lease-related costs on an apportioned basis according to the

approximate relative usage levels by each entity.

We previously had a facilities agreement with BKF Capital to allow BKF

Capital to use of a portion of our Simi Valley, California office facility, which ceased in June 2019 when Interlink ceased

using this office facility.

Interlink and BKF Capital also agree to reimburse, or be reimbursed by, one another for expenses

paid by one company on behalf of the other.

For the years ended December 31, 2020 and 2019, BKF Capital paid Interlink

$2 thousand and $2 thousand, respectively pursuant to these arrangements.

For the years ended December 31, 2020 and

2019, Interlink paid BKF Capital $0 and $4 thousand, respectively pursuant to these arrangements.

ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –

Note 10 –

Lease Agreements

We lease 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 leases 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:

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 right-of-use (ROU) assets and lease liabilities during each of

the years ended December 31, 2020 and 2019 was 6.75%.

Right-of-use assets for operating leases are periodically reduced

by impairment losses.

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

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

of December 31, 2020 and 2019, 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.

term began July 1, 2020 and ends May 31, 2023.

The space is used for executive offices, sales, finance and administration.

The Company leases a 14,476 square-foot manufacturing facility

and administrative office in Shenzhen, China.

In May 2020, the Company renewed this lease for the period June 1, 2020 through

May 31, 2022 for approximately $7,300 per month through May 31, 2021 and increasing to approximately $7,800 per month

through May 31, 2022.

The Company leases a 4,544 square-foot engineering and

admininstrative office in Singapore for approximately $9,700 per month.

This lease term ends July 2021.

The Company leases a 3,000 square-foot distribution facility

in Hong Kong for approximately $2,000 per month.

This lease term ends April 2021.

The Company leases a 500 square-foot sales office in Tokyo,

Japan for approximately $900 per month.

This lease term ends November 2022.

As of December 31, 2020, the Company had current and long-term

lease liabilities of $219 thousand and $140 thousand, respectively, and right-of-use assets of $334 thousand.

of December 31, 2019, the Company had current and long-term lease liabilities of $154 thousand and $66 thousand,

respectively, and right of use assets of $203 thousand.

Future imputed interest as of December 31, 2020 totaled $22 thousand.

The weighted average remaining lease term of the Company’s leases as of December 31, 2020 is 1.45 years.

ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –

Future minimum lease payments under non-cancellable operating

leases that have remaining non-cancellable lease terms in excess of one year are as follows:

Years ending December 31,

(in thousands)

Operating Leases

NOTE 11-CONTINGENCIES

Total undiscounted future non-cancelable minimum lease payments

imputed interest

Present value of lease liabilities

Rent expense for the years ended ended December 31, 2020

and 2019 was $263 thousand and $283 thousand, respectively.

Note 11 –

Contingencies

We are not party to any legal proceedings at December 31,

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.

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.

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

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.

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.

We indemnify certain customers and our contract manufacturers

against liability arising from third-party claims of intellectual property rights infringement related to our products.

These indemnities

appear in development and supply agreements with our customers as well as manufacturing service agreements with our contract manufacturers,

are not limited in amount or duration and generally survive the expiration of the contract.

Given that the amount of any potential

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

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

Director and Officer Indemnities and Contractual Guarantees

We have entered into indemnification agreements with our directors and executive officers, which require us to indemnify such individuals to the fullest extent permitted by Nevada law.

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

Certain costs incurred in connection with such indemnifications may be recovered under certain circumstances under various insurance policies.

Given that the amount of any potential 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.

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

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 or his beneficiaries will be entitled to receive:

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

(i) his base compensation to the end of the monthly pay period immediately following the date of termination;

(ii) accrued bonus payments;

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’s employment is terminated by him for good reason (as such term is defined in the agreement), or by us

without cause, then Mr.

Bronson will be entitled to receive:

(i) his base compensation to the date of termination;

(ii) a severance payment equal to twelve months of his base compensation;

severance payment equal to twelve months of his base compensation;

(iii) any earned bonus compensation;

(iv) employee benefits for twelve months following the date of termination;

(v) any vested company match 401k or other retirement contribution;

(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.

ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –

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.

NOTE 12-SUBSEQUENT EVENTS

On January 17, 2018, the Company 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.

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.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data