What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-03-29 compared with 2021-03-17 · 426 added, 808 removed, 266 unchanged (82% of the section changed)

2 unchanged sentences

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (Macias Gini & O’Connell LLP, Irvine, CA, Firm ID 324 )

Report of Independent Registered Public Accounting Firm (RBSM LLP, Larkspur, CA, Firm ID 587 )

Consolidated Balance Sheets as of December 31, 2021 and 2020

1 unchanged sentence

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2021 and 2020

Consolidated Statements of Stockholders’

Equity for the Years Ended December 31, 2020 and 2019

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2021 and 2020

Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Interlink Electronics, Inc.

Opinion on the Financial Statements

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

(the Company) as of December 31, 2021, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the 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.

Basis for Opinion

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

Our responsibility is to express an opinion on the entity’s 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 entity’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 provide a reasonable basis for our opinion.

Critical Audit Matters

Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgements.

We determined that there are no critical audit matters.

/s/ Macias Gini & O’Connell LLP

We have served as the Company’s auditor since 2021.

March 29, 2022

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 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.

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

& Subsidiaries (the Company) as of December 31, 2020, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year 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 position of the Company as of December 31, 2020, 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.

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

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.

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.

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 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.

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 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

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.

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

As described in Notes 1 and 6 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 served as the Company’s auditor since 2017, which ended in 2021.

March 16, 2021

12 unchanged sentences

Deferred tax assets

LIABILITIES AND STOCKHOLDERS’

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

4 unchanged sentences

Accrued income taxes

Deferred revenue

Total current liabilities

1 unchanged sentence

Lease liabilities, long term

Deferred tax liabilities

Total long-term liabilities

Total liabilities

Commitments and contingencies (Notes 10 and 11)

Stockholders’

Commitments and contingencies (Note 11)

Stockholders’ equity

Preferred stock, $ 0.01 par value:

1,000 shares authorized, no shares issued or outstanding

1,000 shares authorized, 200 and 0 shares of Series A Convertible Preferred Stock issued and outstanding at December 31, 2021 ($ 5.0 million liquidation preference) and 2020, respectively

Common stock, $ 0.001 par value:

1 unchanged sentence

Additional paid-in-capital

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income

Accumulated deficit

Total stockholders’

Total liabilities and stockholders’

The accompanying notes are an integral part

of these consolidated financial statements.

Total stockholders’ equity

Total liabilities and stockholders’ equity

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

INTERLINK ELECTRONICS, INC.

13 unchanged sentences

Net income (loss)

Earnings (loss) per share, basic

Earnings (loss) per share, diluted

Weighted average common shares outstanding –

Net income (loss) applicable to common stockholders

Earnings (loss) per common share, basic

Earnings (loss) per common share, diluted

Weighted average common shares outstanding - basic

Weighted average common shares outstanding - diluted

INTERLINK ELECTRONICS, INC.

CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Year ended December 31,

1 unchanged sentence

Net income (loss)

Other comprehensive income (loss), net of tax:

Other comprehensive income, net of tax:

Foreign currency translation adjustments

Comprehensive income (loss)

The accompanying notes are an integral part

of these consolidated financial statements.

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

INTERLINK ELECTRONICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Preferred Stock

Comprehensive

Stockholders’

January 1, 2019

Stockholders'

Income (Loss)

currency translation adjustment

compensation expense

Balance at December 31, 2019

income (loss)

currency translation adjustment

compensation expense

at December 31, 2020

The accompanying notes are an integral part

of these consolidated financial statements.

Foreign currency translation adjustment

Stock-based compensation expense

Balance at December 31, 2020

Issuance of preferred stock

Preferred stock dividends

Foreign currency translation adjustment

Stock-based compensation expense

Balance at December 31, 2021

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

INTERLINK ELECTRONICS, INC.

7 unchanged sentences

Stock-based compensation expense

Amortization of right-of-use assets

Loss on disposal of property, plant and equipment

Gain on forgiveness of PPP loan

Operating leases, other

Deferred income taxes

Changes in operating assets and liabilities:

4 unchanged sentences

Accrued income taxes

Deferred taxes

Lease liabilities

Deferred revenue

5 unchanged sentences

Cash flows from financing activities:

Proceeds from issuance of preferred stock, net of $ 432 of issuance costs

Payment of dividends on preferred stock

Proceeds from PPP loan

Share repurchase

Net cash provided by financing activities

Effect of exchange rate changes on cash

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

Net increase in cash, cash equivalents, and restricted cash

Cash, cash equivalents and restricted cash, beginning of period

9 unchanged sentences

Lease liabilities arising from obtaining right-of-use assets

The accompanying notes are an integral part

of these consolidated financial statements.

INTERLINK ELECTRONICS,

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

INTERLINK ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 –

and its Significant Accounting Policies

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.

(“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 Global Product Development and Materials Science Center and our distribution and logistics center in Camarillo, California, our printed-electronics manufacturing facility in Shenzhen, China, our engineering, research and development center in Singapore, and our distribution and logistics center in Hong Kong.

We also maintain a technical and sales office in Japan, and we expect to launch an engineering, research and development center in the United Kingdom in 2022.

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”).

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.

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, Singapore, and the United Kingdom.

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.

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

The functional currency for our Hong Kong, Singapore and United Kingdom subsidiaries is the United States dollar.

However, our Hong Kong, Singapore, and United Kingdom subsidiaries also transact business in their local currency.

Assets and liabilities are translated into United States dollars at the exchange rate in effect on the balance sheet date.

Revenues and expenses are translated at the average exchange rate prevailing during the respective periods.

Foreign currency transaction and remeasurement gains and losses are included in results of operations within other income (expense), net, for which losses of $ 40 thousand and $ 104 thousand were recorded in the years ended December 31, 2021 and 2020, 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.

INTERLINK ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –

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 credit losses, inventory valuation reserves, warranty reserves, stock-based compensation, purchased intangible asset valuations and useful lives, asset retirement obligations, and deferred income tax asset valuation allowances.

These estimates and assumptions are based on current facts, historical experience and various other factors that we believe to be reasonable under the

circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources.

The actual results we experience may differ materially and adversely from our original estimates.

To the extent there are material differences between the estimates and the actual results, our future results of operations will be affected.

Revenue Recognition

The Company recognizes revenue in accordance with

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

when 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;

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;

(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.

(iv) allocate the transaction price to the performance obligations;

and (v) recognize revenue when (or as) we satisfy a performance obligation.

The five-step model is applied to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services transferred to the customer.

At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct.

We then recognize revenue in the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the terms specified in the arrangement with the customer.

Revenue recognition is deferred until the earnings process is complete.

We (i) input orders based upon receipt of a customer purchase order, (ii) confirm pricing through the customer purchase order record, (iii) validate creditworthiness through past payment history, credit agency reports and other financial data, and (iv) recognize revenue upon shipment of goods or when risk of loss and title transfer to the buyer.

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

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

enable us to reasonably estimate the obligation.

A portion of our product sales is made through distributors

under agreements allowing for right of return.

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

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

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

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 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.

Warranty claims charges are recorded within cost of revenue as claims are incurred and honored.

At each reporting period, we adjust our reserve for warranty claims (as either a charge or benefit to cost of revenue) based on our actual warranty claims experience as a percentage of net revenue during the preceding 24 months, as an estimation of the total future warranty claims expected to be incurred and honored for goods sold through the end of the reporting period.

We 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.

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

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.

ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –

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

Stock-based Compensation

All stock-based payments to employees, including grants

of employee stock options and employee stock purchase rights, are recognized in the financial statements based on their respective

grant date (measurement date) fair values.

We calculate the compensation cost of full-value awards such as restricted stock-based

on the market value of the underlying stock at the date of the grant.

We estimate the expected life of a stock award as the period

of time that the award is expected to be outstanding.

We are required to estimate the fair value of stock-based payment awards

on the date of grant using an option-pricing model.

The value of the portion of the award that is ultimately expected to vest

is recognized as expense ratably over the requisite service periods.

We estimate the fair value of each option award as of the

date of grant using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options

that have no vesting restrictions and that are freely transferable.

The Black-Scholes option pricing model considers, among

other factors, the expected life of the award and the expected volatility of our stock price.

Although the Black-Scholes option

pricing model meets the accounting guidance requirements, the fair values generated by the Black-Scholes option pricing model may

not be indicative of the actual fair values of our awards, as it does not consider other factors important to those stock-based

payment awards, such as continued employment, periodic vesting requirements, and limited transferability.

We have elected to recognize compensation expense for all stock-based

awards on a straight-line basis over the requisite service period for the entire award.

The amount of compensation expense recognized

through the end of each reporting period is equal to the portion of the grant-date value of the awards that have vested, or for

partially vested awards, the value of the portion of the award that is ultimately expected to vest for which the requisite services

have been provided.

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.

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 (Expense), Net

Other income (expense), 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.

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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 (Loss)

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

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.

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.

Basic earnings per share is computed by dividing net income (loss) applicable to common stockholders (i.e., net income (loss) adjusted for preferred stock dividends declared or accumulated) by the weighted average number of common shares outstanding during the period.

Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of diluted common shares, which is inclusive of common stock equivalents from unexercised stock options, unvested restricted stock units, and shares issuable upon conversion of convertible preferred stock.

Unexercised stock options, unvested restricted stock units, and convertible preferred stock are considered to be common stock equivalents if, using the treasury stock method, they are determined to be dilutive.

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

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

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;

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;

shortages of the supplies we use to manufacture our products;

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;

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.

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, Hong Kong 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.

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.

In the U.S., we had approximately $ 8.2 million and $ 3.9 million in excess of the Federal Deposit Insurance Corporation limit of $ 250 thousand per depositor, per insured bank at December 31, 2021 and 2020, respectively.

Approximately $ 1.9 million and $ 1.2 million held in banks in China at December 31,

2021 and 2020, respectively, was not insured.

Approximately $ 296 thousand and $ 149 thousand held in banks in Singapore at December 31, 2021 and 2020, respectively, was not insured.

Approximately $ 202 thousand and $ 386 thousand held in banks in Hong Kong at December 31, 2021 and 2020, respectively, was not insured.

Accounts Receivable and Allowance for Credit Losses

Accounts receivable are recorded at the invoice amount and presented net of the allowance for credit losses.

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

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 to pay.

We include any accounts receivable balances that are determined to be uncollectible in the overall allowance for credit losses 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).

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

Costs include the costs of purchased materials and outsourced assembly.

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.

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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

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 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;

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.

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.

ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –

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.

As of December 31, 2021, we have not recognized any impairment losses for our intangible assets.

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

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.

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, “

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.

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

Subsequent Events

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:

The Company has evaluated subsequent events through March 29, 2022, being the date these consolidated financial statements were issued.

Subsequent to December 31, 2021, the Company used cash to purchase approximately $ 1.9 million of marketable securities.

Note 2 – Details of Certain Financial Statement Components

The following tables provide details of selected balance sheet items:

(in thousands)

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Total inventories

ELECTRONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –

Property, plant and equipment, net

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Total property, plant and equipment, net

Depreciation expense totaled $233 thousand and $225 thousand

in 2020 and 2019, respectively.

Depreciation expense totaled $ 216 thousand and $ 233 thousand in 2021 and 2020, respectively.

Intangible assets, net

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Total intangibles, net

Amortization expense totaled $60 thousand and $41 thousand in

2020 and 2019, respectively.

Amortization expense totaled $ 65 thousand and $ 60 thousand in 2021 and 2020, respectively.

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

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Accrued liabilities

(in thousands, except par value)

(in thousands)

Accrued warranty

Accrued wages and benefits

Accrued taxes, other than income taxes

Accrued vacation

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Total accrued 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

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 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:

(in thousands)

Restricted stock units, January 1, 2019

Restricted stock units, December 31, 2019

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.

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:

(in thousands)

Options outstanding, January 1, 2019

Cancelled or expired

Options outstanding, December 31, 2019

Cancelled or expired

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.

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.

Note 3 - Series A Convertible Preferred Stock

In October and November 2021, the Company sold to investors in a private placement exempt from registration under the Securities Act of 1933, as amended, an aggregate of 200,000 shares of its 8.0 % Series A Convertible Preferred Stock, par value $ 0.01 per share, at an offering price of $ 25.00 per share, for gross proceeds of $ 5.0 million.

After payment of placement agent cash fees and expenses of the offering, the Company received net proceeds of approximately $ 4.6 million.

Holders of the Series A Convertible Preferred Stock generally have no voting rights.

Dividends on the Series A Convertible Preferred Stock accrue daily and are payable monthly in arrears on the 15th day of the calendar month, at the rate of 8.0 % per annum of its liquidation preference, which is the equivalent to $ 2.00 per annum per share.

Each share of Series A Convertible Preferred Stock is convertible into shares of the Company’s common stock at a conversion price of $ 12.50 per common share, or 2.0 shares of common stock, at any time at the option of the holder, subject to certain customary adjustments.

Holders of Series A Convertible Preferred Stock do not participate in common stock dividends, but such common stock dividends if and when declared would reduce the conversion price at which shares of Series A Convertible Preferred Stock would convert into common stock.

The Company may elect to automatically convert some or all of the Series A Convertible Preferred Stock into shares of common stock at any time on or after April 22, 2022 if the closing price of the common stock equals or exceeds $ 15.00 ( 120 % of the initial conversion price) for at least 20 out of 30 consecutive trading days ending within five trading days prior to the notice of automatic conversion.

The Series A Convertible Preferred Stock will not be redeemable before April 22, 2022 except as described below upon the occurrence of a Fundamental Change (as defined in the Certificate of Designations).

The Company may redeem, at the Company’s option, the Series A Convertible Preferred Stock, in whole or in part, at a cash redemption price of $ 27.50 plus accrued and unpaid dividends beginning April 22, 2022 through October 21, 2023, at a cash redemption price of $ 28.125 plus accrued and unpaid dividends beginning October 22, 2023 through October 21, 2024, and, at a cash redemption price of $ 28.75 plus accrued and unpaid dividends beginning October 22, 2024.

If the Company exercises the foregoing redemption right, holders of the Series A Convertible Preferred Stock will have the right to convert such shares into shares of common stock at the conversion price until the redemption date specified in the redemption notice delivered by the Company.

However, at any time within sixty ( 60 ) days after the occurrence of a Fundamental Change, the Company may redeem, at the Company’s option, the Series A Convertible Preferred Stock, in whole or in part, at a cash redemption price of $ 27.50 plus accrued and unpaid dividends if the redemption date occurs from October 22, 2022 through October 21, 2023, at a cash redemption price of $ 28.125 plus accrued and unpaid dividends if the redemption date occurs from October 22, 2023 through October 21, 2024, and at a cash redemption price of $ 28.75 plus accrued and unpaid dividends, if the redemption date occurs on and after October 22, 2024.

If the Company exercises the foregoing redemption right, holders of the Series A Convertible Preferred Stock will have the right to convert such shares into shares of common stock at the conversion price after the Fundamental Change but prior to the redemption date specified in the redemption notice delivered by the Company.

The Company entered into a registration rights agreement with the investors, pursuant to which the Company agreed to register for resale by the investors the shares of common stock issuable upon conversion of the Series A Convertible Preferred Stock.

The registration statement was filed on December 10, 2021, and was declared effective on December 21, 2021.

Note 4 - Stock-Based Compensation

Under the terms of our 2016 Omnibus Incentive Plan, directors, officers and key employees could be granted restricted stock units and stock awards, as well as non-qualified or incentive stock options, at the discretion of the Compensation Committee of the Board of Directors.

All stock-based payments to directors and employees, including grants of stock options and 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 units and stock awards based on the market value of the underlying stock at the date of the grant.

The fair value of stock 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:

We recognize compensation expense for all stock-based awards on a straight-line basis over the requisite service period for the entire award.

The benefits of tax deductions in excess of recognized compensation cost are reported as a financing cash flow.

As of December 31, 2021, there were no stock-based compensation awards outstanding.

The stock-based compensation expense recorded in the year ended December 31, 2021 was for shares of common stock issued to members of the Board of Directors as partial compensation for their service as a director.

The stock-based compensation expense recorded in the year ended December 31, 2020 was from a legacy restricted stock award that became fully vested in that year.

Note 5 - Earnings Per Share

Basic earnings per share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the period.

Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options, restricted stock units, and common shares issuable upon conversion of convertible preferred stock using the treasury stock method.

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

(in thousands, except per share data)

Net income (loss)

Weighted average outstanding shares of common stock

Dilutive potential common shares from stock options and restricted stock units

Common stock and common stock equivalents

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 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:

Preferred stock dividends

Net income (loss) applicable to common stockholders

Weighted average common shares outstanding – basic

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

Weighted average common shares outstanding – diluted

Earnings (loss) per common share, basic

Earnings (loss) per common share, diluted

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

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

Note 6- 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, 2021 and 2020 were as follows:

(in thousands)

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:

Income tax provision (benefit) consists of the following for the years ended December 31, 2021 and 2020:

(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 income (loss) before income taxes 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,

3 unchanged sentences

Foreign taxes

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 differences 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)

6 unchanged sentences

Net deferred tax assets

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:

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 2021

through 2040.

The federal and state NOLs expire at various dates between 2022 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.

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.

As of December 31, 2021, $ 32.3 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, 2021, the gross NOLs without regard to this permanent write-off is $ 31.5 million for federal and $ 13.2 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 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.

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 we determined that a valuation allowance on federal and state deferred tax assets was necessary at December 31, 2021, while no valuation allowance on foreign deferred tax assets was necessary at December 31, 2021.

One objective negative piece of evidence we evaluated was our cumulative domestic loss incurred over the three-year period ended December 31, 2021.

Such objective negative evidence limits our ability to consider other subjective evidence, such as our projections for future profitability.

On the basis of this evaluation, as of December 31, 2021, a valuation allowance of $ 629 thousand was recorded against our domestic deferred tax assets.

The amount of deferred tax assets considered realizable could be adjusted in future periods if estimates of future taxable income during the carryforward period are reduced or increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for future profitability.

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.

Of the $ 10.8 million of cash balances on hand at December 31, 2021, $ 2.4 million was held by our foreign subsidiaries.

If these funds are needed for our operations in the U.S., we have several methods to repatriate the funds without significant tax effects, including repayment of intercompany loans or distributions of previously taxed income.

Other distributions may require us to incur U.S.

or foreign taxes to repatriate these funds.

However, our intent is to permanently reinvest these funds outside the U.S.

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

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 2017 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.

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

Generally, state and foreign income tax returns after 2016 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.

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

As of December 31, 2021 and 2020, 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, 2021 and 2020, there were no penalties or interest recorded in income tax expense.

Note 7 - 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

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.

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, 2021, three customers accounted for 39 %, 18 %, and 12 % of total accounts receivable.

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:

Our allowance for doubtful accounts was $ 0 at both December 31, 2021 and 2020.

Our long-lived assets were geographically located as follows:

(in thousands)

1 unchanged sentence

Total long-lived assets

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

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 $ 3 thousand in 2021 and 2020, respectively.

Note 9 – Paycheck Protection Program Loan

In April 2020, the Company received a loan 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”).

The loan was evidenced by a promissory note, dated April 21, 2020, issued by us to the lender, which was to mature on April 20, 2022, and bore interest at a rate of 1.00 % per annum, payable monthly following an initial deferral period as specified under the PPP.

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.

The full amount of the loan principal and interest was forgiven in February 2021.

Forgiveness of the PPP loan resulted in contra-expense of $ 186 thousand being recorded in selling, general and administrative expense during the year ended December 31, 2021.

Note 10 - 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.

Qualstar Corporation (OTCMKTS:QBAK) (“Qualstar”) is a related party.

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

(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

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

Transactions with Qualstar and its subsidiaries are as follows:

Year ended December 31,

5 unchanged sentences

Balance at January 1,

Billed to Qualstar by Interlink

Billed (or accrued) to Qualstar by Interlink

Paid by Qualstar to Interlink

Billed to Interlink by Qualstar

Billed (or accrued) to Interlink by Qualstar

Paid by Interlink to Qualstar

3 unchanged sentences

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 –

(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.

Bronson, together with BKF Capital, has a controlling interest in Interlink.

We previously had a facilities agreement with BKF Capital under which BKF Capital was allowed to use a portion of our Irvine, California office facility, for which we had agreed to split substantially all rent and lease-related costs on an apportioned basis according to the approximate relative usage levels by each entity.

In addition, we have consulting agreements with BKF Capital for certain of our respective employees and/or independent contractors that provide certain operational and general and administrative services to the other entity.

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

Transactions with BKF Capital and its subsidiaries are as follows:

Year ended December 31,

(in thousands)

Balance at January 1,

Billed (or accrued) to BKF Capital by Interlink

Paid by BKF Capital to Interlink

Billed (or accrued) to Interlink by BKF Capital

Paid by Interlink to BKF Capital

Balance at December 31,

Note 11 – Commitments and Contingencies

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.

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 leases expire at various dates through fiscal 2023 and frequently include renewal provisions for varying periods of time, provisions which require us to pay taxes, insurance and maintenance costs, and provisions for minimum rent increases.

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

The rate implicit in each lease is not readily determinable, and we therefore use our incremental borrowing rate to determine the present value of the lease payments.

The weighted average incremental borrowing rate used to determine the initial value of ROU assets and lease liabilities capitalized during the years ended December 31, 2021 and 2020 was 5.50 % and 6.75 %, respectively.

ROU 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, 2021, we have not recognized any impairment losses for our ROU assets.

We monitor for events or changes in circumstances that require a reassessment 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 approximately $ 6 thousand per month with 3 percent annual increases, plus common area maintenance costs.

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.

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 thousand per month through May 31, 2021 and increasing to approximately $ 8 thousand per month through May 31, 2022.

The Company leases a 275 square-foot engineering and administrative office in Singapore for approximately $ 1 thousand per month.

This lease term ends May 2022.

The Company leases a 3,000 square-foot distribution facility in Hong Kong for approximately $ 2 thousand per month.

This lease term ends April 2023.

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

Japan for approximately $900 per month.

The Company leases a 500 square-foot sales office in Tokyo, Japan for approximately $ 1 thousand 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.

As of December 31, 2021, the Company had current and long-term lease liabilities of $ 138 thousand and $ 37 thousand, respectively, and ROU assets of $ 163 thousand.

As of December 31, 2020, the Company had current and long-term lease liabilities of $ 219 thousand and $ 140 thousand, respectively, and ROU assets of $ 334 thousand.

Future imputed interest as of December 31, 2021 totaled $ 7 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:

The weighted average remaining lease term of the Company’s leases as of December 31, 2021 is 0.6 years.

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,

3 unchanged sentences

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

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.

During the year ended December 31, 2021, we recognized approximately $ 294 thousand in operating lease costs, including approximately $ 122 thousand in cost of revenue and approximately $ 172 thousand in operating expenses.

During the year ended December 31, 2020, we recognized approximately $ 263 thousand in operating lease costs, including approximately $ 98 thousand in cost of revenue and approximately $ 165 thousand in operating expenses.

We are not party to any material legal proceedings at December 31, 2021.

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.

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

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.

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

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;

accrued bonus payments;

(ii) accrued bonus payments;

and (iii) all unvested equity and/or options issued by the Company shall immediately fully vest.

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

without cause, then Mr.

Bronson’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;

severance payment equal to twelve months of his base compensation;

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

(iii) any earned bonus compensation;

(iv) employee

benefits for twelve months following the date of termination;

(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 401(k) match or other retirement contribution;

and (vi) all unvested equity and/or options issued by the Company shall immediately fully vest.

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.

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.

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

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