Item 8. Financial Statements and Supplementary Data
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTERLINK ELECTRONICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
34
Consolidated Balance Sheets as of December 31, 2020 and 2019
35
Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019
36
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020 and 2019
36
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019
37
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019
38
Notes to Consolidated Financial Statements
39
33
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Interlink Electronics, Inc. & Subsidiaries
Opinion on the Financial Statements
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 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
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 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.
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
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. 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
it relates.
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.
/s/RBSM LLP
We have served as the Company’s auditor since 2017.
Larkspur, CA
March 16, 2021
34
INTERLINK ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
December 31,
2020
2019
(in thousands, except par value)
ASSETS
Current assets
Cash and cash equivalents
$
6,120
$
5,812
Restricted cash
5
32
Accounts receivable, net
1,113
730
Inventories
866
927
Prepaid expenses and other current assets
392
330
Total current assets
8,496
7,831
Property, plant and equipment, net
407
633
Intangible assets, net
195
171
Right-of-use assets
334
203
Deferred tax assets
527
435
Other assets
63
59
Total assets
$
10,022
$
9,332
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable
$
235
$
218
Accrued liabilities
343
302
Lease liabilities, current
219
154
PPP loan payable
186
—
Accrued income taxes
59
—
Deferred revenue
—
13
Total current liabilities
1,042
687
Long-term liabilities
Lease liabilities, long term
140
66
Deferred tax liabilities
—
8
Total long-term liabilities
140
74
Total liabilities
1,182
761
Commitments and contingencies (Notes 10 and 11)
—
—
Stockholders’ equity
Preferred stock, $0.01 par value: 1,000 shares authorized, no shares issued or outstanding
—
—
Common stock, $0.001 par value: 30,000 shares authorized, 6,601 and 6,563 shares issued and outstanding at December 31, 2020 and 2019, respectively
7
7
Additional paid-in-capital
57,966
57,940
Accumulated other comprehensive income (loss)
37
(93
)
Accumulated deficit
(49,170
)
(49,283
)
Total stockholders’ equity
8,840
8,571
Total liabilities and stockholders’ equity
$
10,022
$
9,332
The accompanying notes are an integral part
of these consolidated financial statements.
35
INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
2020
2019
(in thousands, except per share data)
Revenue, net
$ 6,888
$ 7,305
Cost of revenue
2,986
3,995
Gross profit
3,902
3,310
Operating expenses:
Engineering, research and development
918
916
Selling, general and administrative
2,874
2,608
Total operating expenses
3,792
3,524
Income (loss) from operations
110
(214 )
Other income (expense):
Other income (expense), net
(92 )
39
Income (loss) before income taxes
18
(175 )
Income tax expense (benefit)
(95 )
282
Net income (loss)
$ 113
$ (457 )
Earnings (loss) per share, basic
$ 0.02
$ (0.07 )
Earnings (loss) per share, diluted
$ 0.02
$ (0.07 )
Weighted average common shares outstanding – basic
6,586
6,543
Weighted average common shares outstanding – diluted
6,599
6,581
INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME (LOSS)
Year ended December 31,
2020
2019
(in thousands)
Net income (loss)
$ 113
$ (457 )
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments
130
(26 )
Comprehensive income (loss)
$ 243
$ (483 )
The accompanying notes are an integral part
of these consolidated financial statements.
36
INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Accumulated
Additional
Other
Total
Common Stock
Paid-in-
Comprehensive
Accumulated
Stockholders’
Shares
Amount
Capital
(Loss)
Income
Deficit
Equity
(in
thousands)
Balance at
January 1, 2019
6,483
$ 7
$ 57,871
$ (67 )
$ (48,826 )
$ 8,985
Net
income (loss)
—
—
—
—
(457 )
(457 )
Foreign
currency translation adjustment
—
—
—
(26 )
—
(26 )
Stock
repurchase
(3 )
—
(6 )
—
—
(6 )
Stock-based
compensation expense
83
—
75
—
—
75
Balance at December 31,
2019
6,563
7
57,940
(93 )
(49,283 )
8,571
Net
income (loss)
—
—
—
—
113
113
Foreign
currency translation adjustment
—
—
—
130
—
130
Stock-based
compensation expense
38
—
26
—
—
26
Balance
at December 31, 2020
6,601
$ 7
$ 57,966
$ 37
$ (49,170 )
$ 8,840
The accompanying notes are an integral part
of these consolidated financial statements.
37
INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
2020
2019
(in thousands)
Cash flows from operating activities:
Net income (loss)
$ 113
$ (457 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
293
251
Stock-based compensation expense
26
75
Amortization of right-of-use assets
213
192
Changes in operating assets and liabilities:
Accounts receivable
(383 )
50
Inventories
99
144
Prepaid expenses and other assets
(62 )
(27 )
Accounts payable
(31 )
(86 )
Accrued liabilities
32
5
Accrued income taxes
47
(26 )
Deferred taxes
(91 )
43
Lease liabilities
(204 )
(175 )
Deferred revenue
(13 )
13
Net cash provided by operating activities
39
2
Cash flows from investing activities:
Property, plant and equipment
(7 )
(141 )
Intangible assets
(83 )
(92 )
Net cash used in investing activities
(90 )
(233 )
Cash flows from financing activities:
Proceeds from PPP loan
186
—
Share repurchase
—
(6 )
Net cash provided by financing activities
186
(6 )
Effect of exchange rate changes on cash
146
(26 )
Net increase (decrease) in cash, cash equivalents, and restricted cash
281
(263 )
Cash, cash equivalents and restricted cash, beginning of period
5,844
6,107
Cash, cash equivalents and restricted cash, end of period
$ 6,125
$ 5,844
Reconciliation of cash, cash equivalents and restricted cash, end of period:
Cash and cash equivalents, end of period
$ 6,120
$ 5,812
Restricted cash, end of period
5
32
Cash, cash equivalents and restricted cash, end of period
$ 6,125
$ 5,844
Supplemental disclosure of cash flow information:
Income taxes paid
$ 137
$ 247
Interest paid
—
—
Supplemental non-cash investing and financing activities:
Lease liabilities arising from obtaining right-of-use assets
$ 334
$ 395
The accompanying notes are an integral part
of these consolidated financial statements.
38
INTERLINK ELECTRONICS,
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – The Company
and its Significant Accounting Policies
Description of Business
Interlink Electronics, Inc. (“we,” “us,”
“our,” “Interlink” or the “Company”) designs, develops, manufactures and sells a range of force-sensing
technologies that incorporate our proprietary materials technology, firmware and software into a portfolio of standard sensor based
products and custom sensor system solutions. These include sensor components, subassemblies, modules and products that support
effective, efficient cursor control and novel three-dimensional user inputs. Our Human Machine Interface (“HMI”) technology
platforms are deployed in a wide range of markets including consumer electronics, automotive, industrial, and medical.
Interlink serves our world-wide customer base from our corporate
headquarters in 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.
Fiscal Year
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”). Our
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 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 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.
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.
39
INTERLINK ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
Revenue Recognition
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. We
then recognize revenue in the amount of the transaction price that is allocated to the respective performance obligation when
(or as) the performance obligation is satisfied. Delivery occurs when goods are shipped and title and risk of loss transfer
to the customer, in accordance with the terms specified in the arrangement with the customer. Revenue recognition is deferred
until the earnings process is complete.
We (i) input orders based upon receipt of a customer purchase
order, (ii) confirm pricing through the customer purchase order record, (iii) validate creditworthiness through past payment history,
credit agency reports and other financial data, and (iv) recognize revenue upon shipment of goods or when risk of loss and title
transfer to the buyer. All customers have warranty rights, and some customers also have explicit or implicit rights of return.
We establish reserves for potential customer returns or warranty repairs based on historical experience and other factors that
enable us to reasonably estimate the obligation.
A portion of our product sales is made through distributors
under agreements allowing for right of return. Our past history with these sell-through right of return provisions allow us to
reasonably estimate the amount of inventory that could be returned pursuant to these agreements, and revenue is recognized accordingly.
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.
Warranty
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. 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 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.
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.
40
INTERLINK
ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
Stock-based Compensation
All stock-based payments to employees, including grants
of employee stock options and employee stock purchase rights, are recognized in the financial statements based on their respective
grant date (measurement date) fair values. We calculate the compensation cost of full-value awards such as restricted stock-based
on the market value of the underlying stock at the date of the grant. We estimate the expected life of a stock award as the period
of time that the award is expected to be outstanding. We are required to estimate the fair value of stock-based payment awards
on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest
is recognized as expense ratably over the requisite service periods. We estimate the fair value of each option award as of the
date of grant using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options
that have no vesting restrictions and that are freely transferable. The Black-Scholes option pricing model considers, among
other factors, the expected life of the award and the expected volatility of our stock price. Although the Black-Scholes option
pricing model meets the accounting guidance requirements, the fair values generated by the Black-Scholes option pricing model may
not be indicative of the actual fair values of our awards, as it does not consider other factors important to those stock-based
payment awards, such as continued employment, periodic vesting requirements, and limited transferability.
We have elected to recognize compensation expense for all stock-based
awards on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized
through the end of each reporting period is equal to the portion of the grant-date value of the awards that have vested, or for
partially vested awards, the value of the portion of the award that is ultimately expected to vest for which the requisite services
have been provided. The benefits of tax deductions in excess of recognized compensation cost are reported as a financing cash flow.
Other Income, Net
Other income, net, consists of interest income, foreign currency
exchange gains and losses and other non-operating gains and losses.
Income Taxes
We account for income taxes under the asset and liability method,
whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and
tax credit carryforwards. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and
to the extent we believe that recovery is not determinable beyond a “more likely than not” standard, we establish a
valuation allowance. To the extent we establish a valuation allowance or increase or decrease this allowance in a period, we include
an expense or benefit within the tax provision in the statement of operations. We also utilize a “more likely than not”
recognition threshold and measurement analysis for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. We recognize potential accrued interest and penalties related to unrecognized tax benefits
within the consolidated statements of operations as income tax expense.
We operate within multiple tax jurisdictions and are subject
to audit in these jurisdictions. Our foreign subsidiaries are subject to foreign income taxes on earnings in their respective jurisdictions.
Earnings of our foreign subsidiaries are included in our U.S. federal income tax return as they are earned.
Comprehensive Income
Comprehensive income includes all components of comprehensive
income, including net income and any changes in equity during the period from transactions and other events and circumstances generated
by non-owner sources.
Earnings Per Share
Basic net income per share is computed by dividing net
income by the weighted average number of common shares outstanding during the period. Diluted net income per share is
computed by dividing net income by the weighted average number of diluted common shares, which is inclusive of common stock
equivalents from unexercised stock options and restricted stock units. Unexercised stock options and restricted stock units
are considered to be common stock equivalents if, using the treasury stock method, they are determined to be dilutive.
Under the two-class method of determining earnings for each
class of stock, we consider the dividend rights and participating rights in undistributed earnings for each class of stock.
41
INTERLINK
ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
Leases
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. Lease
liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease
term. For finance leases, interest on the lease liability and the amortization of the right of use asset results in front-loaded
expense over the lease term. Variable lease expenses are recorded when incurred.
In calculating the right of use and lease liability, 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
term.
Risk and Uncertainties
Our future results of operations involve a number of risks and
uncertainties. Factors that could affect our business or future results and cause actual results to vary materially from historical
results include, but are not limited to, the rapid change in our industry; problems with the performance, reliability or quality
of our products; loss of customers; impacts of doing business internationally, including foreign currency fluctuations; potential
shortages of the supplies we use to manufacture our products; disruptions in our manufacturing facilities; changes in environmental
directives impacting our manufacturing process or product lines; the development of new proprietary technology and the enforcement
of intellectual property rights by or against us; our ability to attract and retain qualified employees; and our ability to raise
additional capital.
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. Our balances in each country were insured at the maximum limit determined by each country.
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.
42
INTERLINK
ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
Accounts Receivable and 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
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.
Our evaluation considers market and economic conditions; technology changes; new product introductions; 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.
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’
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 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. 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.
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.
43
INTERLINK
ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
Fair Value Measurements
We determine fair value measurements based on the assumptions
that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions
in fair value measurements, we follow the following fair value hierarchy that distinguishes between (1) market participant
assumptions developed based on market data obtained from independent sources (observable inputs) and (2) our own assumptions
about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs):
Level 1: Observable inputs such as quoted prices
for identical assets or liabilities in active markets;
Level 2: Other inputs observable directly or
indirectly, such as quoted prices for similar assets or liabilities or market-corroborate inputs; and
Level 3: Unobservable inputs for which there
is little or no market data and which requires the owner of the assets or liabilities to develop its own assumptions about how
market participants would price these assets or liabilities.
Our assessment of the significance of a particular input to
the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within
the fair value hierarchy.
Recently Issued Accounting Pronouncements
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. 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 – Details of
Certain Financial Statement Components
The following tables provide
details of selected balance sheet items:
December 31,
December 31,
2020
2019
Inventories
(in thousands)
Raw materials
$ 520
$ 540
Work-in-process
246
253
Finished goods
100
134
Total inventories
$ 866
$ 927
44
INTERLINK
ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
December 31,
December 31,
2020
2019
Property, plant and equipment, net
(in thousands)
Furniture, machinery and equipment
$ 1,662
$ 1,626
Leasehold improvements
538
527
2,200
2,153
Less: accumulated depreciation
(1,793 )
(1,520 )
Total property, plant and equipment, net
$ 407
$ 633
Depreciation expense totaled $233 thousand and $225 thousand
in 2020 and 2019, respectively.
December 31,
December 31,
2020
2019
Intangible assets, net
(in thousands)
Patents and trademarks
$ 658
$ 573
Less: accumulated amortization
(463 )
(402 )
Total intangibles, net
$ 195
$ 171
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:
Years ending December 31,
(in thousands)
2021
$ 65
2022
54
2023
42
2024
27
2025
7
Thereafter
—
$ 195
December 31,
December 31,
2020
2019
Accrued liabilities
(in thousands, except par value)
Accrued warranty
$ 7
$ 9
Accrued wages and benefits
180
168
Accrued taxes, other than income taxes
—
3
Accrued vacation
110
83
Accrued other
46
39
Total accrued liabilities
$ 343
$ 302
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
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
awards.
45
INTERLINK
ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
Restricted Stock Units
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. Unvested
restricted shares are forfeited if the recipient’s employment terminates for any reason other than death, disability or special
circumstances as determined by the compensation committee of the board of directors.
Activity for our restricted stock units is as follows:
Restricted
Stock
Units
Weighted-
Average
Grant Date
Fair Value
Weighted-
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
(in thousands)
(years)
(in thousands)
Restricted stock units, January 1, 2019
120
$ 3.97
0.70
$ 252
Awarded
—
—
Issued
(78 )
3.05
Forfeited
(5 )
8.81
Restricted stock units, December 31, 2019
37
$ 5.23
0.38
$ 178
Awarded
—
—
Issued
(37 )
5.23
Forfeited
—
—
Restricted stock units, December 31, 2020
—
$ —
—
$ —
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. 37,500
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. Options generally expire 10 years from the date of grant. The following table summarizes the
activity for the remaining options outstanding under the Plan:
Shares
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
(in thousands)
(years)
(in thousands)
Options outstanding, January 1, 2019
3
$ 7.40
8.84
$ —
Granted
—
Exercised
—
Cancelled or expired
—
Options outstanding, December 31, 2019
3
$ 7.40
7.84
$ —
Granted
—
Exercised
—
Cancelled or expired
(3 )
7.40
Options outstanding, December 31, 2020
—
$ —
—
$ —
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 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.
46
INTERLINK
ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
The fair value of stock-based option awards is estimated at
the date of grant using the Black-Scholes option pricing model; however, the value calculated using an option pricing model may
not be indicative of the fair value observed in a willing buyer/willing seller market transaction, or actually realized by the
employee upon exercise. Expected volatility used to estimate the fair value of options granted is based on the historical volatility
of our common stock. The risk-free interest rate is based on the United States Treasury constant maturity rate for the expected
life of the stock option. The expected life of a stock award is the period of time that the award is expected to be outstanding.
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:
Year Ended
December 31,
2020
2019
(in thousands, except per share data)
Net income (loss)
$ 113
$ (457 )
Weighted average outstanding shares of common stock
6,586
6,543
Dilutive potential common shares from stock options and restricted stock units
13
38
Common stock and common stock equivalents
6,599
6,581
Earnings (loss) per share, basic
$ 0.02
$ (0.07 )
Earnings (loss) per share, diluted
$ 0.02
$ (0.07 )
Shares subject to anti-dilutive stock options and restricted stock-based awards excluded from calculation
3
3
Note 5 – Income Taxes
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:
Year Ended
December 31,
2020
2019
(in thousands)
Income (loss) before income taxes:
Domestic
$ (859 )
$ (383 )
Foreign
877
208
$ 18
$ (175 )
47
INTERLINK
ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
Income tax provision (benefit) consists of the following for
the years ended December 31, 2020 and 2019:
Year Ended
December 31,
2020
2019
(in thousands)
Income tax provision (benefit):
Current
Federal
$ (190 )
$ 69
State
1
2
Foreign
194
155
Total current
5
226
Deferred:
Federal
(7 )
2
State
(86 )
(2 )
Foreign
(7 )
56
Total deferred
(100 )
56
Total income tax provision (benefit)
$ (95 )
$ 282
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,
2020
2019
$
%
$
%
(in thousands, except percentages)
Federal income tax provision (benefit) at statutory rate
$ 4
21.0 %
$ (37 )
(21.0 )%
State tax expense net of federal tax benefit
(66 )
(366.7 )
(1 )
(0.6 )
Foreign taxes
24
133.3
(4 )
(2.3 )
Other
(57 )
(316.7 )
75
42.9
Foreign withholding and dividend tax
—
—
255
145.7
Change in valuation allowance
—
—
(6 )
(3.4 )
Income tax provision (benefit)
$ (95 )
(527.8 )%
$ 282
(161.3 )%
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:
December 31,
2020
2019
(in thousands)
Deferred taxes, net
Net operating loss carryforward
$ 324
$ 236
Accruals
22
11
Reserves
11
8
Property, plant and equipment, and intangible assets
28
48
Stock-based compensation expense
132
125
Other
10
7
Total deferred tax assets
527
435
Valuation allowance
—
—
Net deferred tax assets
$ 527
$ 435
48
INTERLINK
ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
Deferred taxes are recorded for the following net operating
losses (“NOLs”) that can be used in future tax years:
December 31,
2020
2019
(in millions)
Net operating losses
Federal
$ 0.9
$ 0.8
State
2.0
1.0
Foreign
0.0
0.0
$ 2.9
$ 1.8
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. Certain state jurisdictions within which we operate contain similar provisions and limitations.
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,
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, 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:
Year Ended
December 31,
2020
2019
(in millions)
Net operating losses
Balance at January 1,
$ 1.8
$ 1.9
NOL generated (utilized)
1.1
(0.1 )
NOL expired unused
—
—
Other, including changes in foreign exchange rates
—
—
Balance at December 31,
$ 2.9
$ 1.8
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. U.S. 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 2015 remain
open to examination. No income tax returns are currently under examination. 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. The
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.
49
INTERLINK
ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
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:
Year ended December 31,
2020
2019
Customer A
17 %
<10 %
Customer B
16 %
37 %
Customer C
12 %
10 %
Customer D
<10 %
10 %
Net revenues by geographic area are as follows:
Year ended December 31,
2020
2019
(in thousands)
United States
$ 2,832
$ 3,726
Asia and Middle East
3,575
2,949
Europe and other
481
630
Revenue, net
$ 6,888
$ 7,305
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, 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:
December 31,
December 31,
2020
2019
(in thousands)
United States
$ 1,194
$ 648
Asia
332
853
Total long-lived assets
$ 1,526
$ 1,501
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. employees. 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
and 2019.
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. The
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.
50
INTERLINK
ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
Note 9 – Related Party Transactions
Qualstar Corporation (OTCMKTS:QBAK)
Qualstar Corporation (OTCMKTS:QBAK) (“Qualstar”)
is a related party. Steven N. Bronson, our Chairman of the Board, President and Chief Executive Officer, is also the President
and Chief Executive Officer and Director of Qualstar. Ryan J. Hoffman, our Chief Financial Officer, is also the Chief Financial
Officer of Qualstar. Mr. Bronson, together with BKF Capital Group, Inc. (OTCMKTS:BKFG) which he controls, has a controlling interest
in both Interlink and Qualstar. We have a facilities agreement with Qualstar to allow Qualstar to use of a portion of our Irvine,
California 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. In
addition, we have various consulting agreements with Qualstar for certain of our respective employees and/or independent contractors
that provide certain operational, sales, marketing, general and administrative services to the other entity. Interlink and Qualstar
also agree to reimburse, or be reimbursed by, one another for expenses paid by one company on behalf of the other. Transactions
with Qualstar are as follows:
Year ended December 31,
2020
2019
Due from Qualstar
Due to Qualstar
Due from Qualstar
Due to Qualstar
(in thousands)
Balance at January 1,
$ 24
$ 12
$ 3
$ 2
Billed to Qualstar by Interlink
645
—
269
—
Paid by Qualstar to Interlink
(617 )
—
(248 )
—
Billed to Interlink by Qualstar
—
123
—
52
Paid by Interlink to Qualstar
—
(101 )
—
(42 )
Balance at December 31,
$ 52
$ 34
$ 24
$ 12
BKF Capital Group, Inc. (OTCMKTS:BKFG)
BKF Capital Group, Inc. (OTCMKTS:BKFG) (“BKF
Capital”) is a related party. Steven N. Bronson, our Chairman of the Board, President and Chief Executive Officer, is
also the Chief Executive Officer and Chairman of BKF Capital. Ryan J. Hoffman, our Chief Financial Officer, is also the Chief
Financial Officer of BKF Capital. BKF Capital, together with Mr. Bronson, has a controlling interest in Interlink. We have a
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.
51
INTERLINK
ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
Note 10 – Commitments
Lease Agreements
We lease facilities under non-cancellable operating leases.
The leases expire at various dates through fiscal 2023 and frequently include renewal provisions for varying periods of time, provisions
which require us to pay taxes, insurance and maintenance costs, and provisions for minimum rent increases. Minimum leases payments,
including scheduled rent increases are recognized as rent expenses on a straight-line basis over the term of the lease.
The rate implicit in each lease is not readily determinable,
and we therefore use our incremental borrowing rate to determine the present value of the lease payments. The weighted average
incremental borrowing rate used to determine the initial value of 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. As
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. The lease
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. As
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.
52
INTERLINK
ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
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)
2021
$ 236
2022
117
2023
29
2024
—
2025
—
Thereafter
—
Total undiscounted future non-cancelable minimum lease payments
382
Less: imputed interest
(22 )
Present value of lease liabilities
$ 359
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,
2020. We are occasionally involved in legal proceedings in the ordinary course of business, including actions against us which
assert or may assert claims or seek to impose fines and penalties in substantial amounts. Related legal defense costs are expensed
as incurred.
Warranties
We establish reserves for future product warranty costs that
are expected to be incurred pursuant to specific warranty provisions with our customers. We generally warrant our products against
defects for one year from date of shipment, with certain exceptions in which the warranty period can extend to more than one year
based on contractual agreements. Our warranty reserves are established at the time of sale and updated throughout the warranty
period based upon numerous factors including 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.
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. Bronson, our Chairman of the Board, President and Chief Executive Officer. This agreement contains certain
severance and change in control obligations. Under the agreement, if Mr. Bronson’s employment is terminated due to his
death or disability (as such terms are defined in the agreement), Mr. Bronson or his beneficiaries will be entitled to
receive: (i) his base compensation to the end of the monthly pay period immediately following the date of termination; (ii)
accrued bonus payments; and (iii) all unvested equity and/or options issued by the Company shall immediately fully vest. If
Mr. Bronson’s employment is terminated by him for good reason (as such term is defined in the agreement), or by us
without cause, then Mr. Bronson will be entitled to receive: (i) his base compensation to the date of termination; (ii) a
severance payment equal to twelve months of his base compensation; (iii) any earned bonus compensation; (iv) employee
benefits for twelve months following the date of termination; (v) any vested company match 401k or other retirement
contribution; and (vi) all unvested equity and/or options issued by the Company shall immediately fully vest.
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INTERLINK
ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
In the event of a change in control of the Company (as such
term is defined in the agreement), Mr. Bronson is entitled to receive: (i) a change in control payment in an amount equal to twelve
months of his base compensation, payable as of the date the change in control occurs; and (ii) all unvested equity and/or options
issued by the Company shall immediately fully vest.
Guarantees and Indemnities
In the normal course of business, we are occasionally required
to undertake indemnification for which we may be required to make future payments under specific circumstances. We review our exposure
under such obligations no less than annually, or more frequently as required. The amount of any potential liabilities related to
such obligations cannot be accurately determined until a formal claim is filed. Historically, any such amounts that become payable
have not had a material negative effect our business, financial condition or results of operations. We maintain general and product
liability insurance which may provide a source of recovery to us in the event of an indemnification claim.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.