NOTE 9‑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 ROU assets and lease liabilities during the three months ended September 30, 2020 was 6.75%.

ROU assets for operating leases are periodically reduce by impairment 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 September 30, 2020, we have not recognized any impairment losses for our ROU assets.

We monitor for events or changes in circumstances that require a reassessment of one of our leases. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in profit or loss.

In June 2020, the Company entered into a sublease agreement to lease 4,351 square feet of space located in Irvine, California for $5,439 per month with 3 percent annual increases starting July 1, 2021. The ROU asset and lease liability for this sublease agreement as of September 30, 2020 are $148 thousand and $164 thousand, respectively. The lease term begins July 1, 2020 and ends May 31, 2023. The space is used for executive offices, sales, finance and administration. The Company intends to sublease portions of the space to Qualstar Corporation and BKF Capital Group, Inc. Also, in May 2020, the Company renewed its Shenzhen, China manufacturing facility lease for the period June 1, 2020 through May 31, 2022. The ROU asset and lease liability for this lease agreement as of September 30, 2020 are $133 thousand and $135 thousand, respectively.

Right-of-Use Assets

We have various operating leases for office space that expire through 2023. Below is a summary of our right-of-use assets and lease liabilities as of September 30, 2020 (in thousands).


Right-of-use assets	$	367

Lease liability obligations	$	395
Lease liability obligations, less current portion		(230)
Total lease liability obligations, long term	$	165

Weighted-average remaining lease term		1.66 years

Weighted-average discount rate		6.75	%

During the three and nine months ended September 30, 2020, we recognized approximately $77 thousand and $187 thousand, respectively, in operating lease costs. Operating lease costs of $29 thousand and $73 thousand are included in cost of revenue, and $48 thousand and $114 thousand are included in operating expenses in our consolidated statements of operations for the three and nine months ended September 30, 2020. During the three and nine months ended September 30, 2020, cash paid for operating leases was approximately $56 thousand and $186 thousand respectively.

During the three and nine months ended September 30, 2019, we recognized approximately $78 thousand and $233 thousand, respectively, in operating lease costs. Operating lease costs of $26 thousand and $80 thousand are included in cost of revenue, and $52 thousand and $153 thousand are included in operating expenses in our consolidated statements of operations for the three and nine months ended September 30, 2019. During the three and nine months ended September 30, 2019, cash paid for operating leases was approximately $96 thousand and $247 thousand respectively.

Approximate future minimum lease payments for our lease liabilities over the remaining lease periods as of September 30, 2020, are as follows (in thousands):


Remainder of 2020	$	67
2021		221
2022		105
2023		29
Total minimum payments		422
Less: amount representing interest		(27)
Total	$	395

Litigation

We are not party to any legal proceedings at September 30, 2020. We are occasionally involved in legal proceedings in the ordinary course of business, including actions against us which assert or may assert claims or seek to impose fines and penalties in substantial amounts. Related legal defense costs are expensed as incurred.

Warranties

We establish reserves for future product warranty costs that are expected to be incurred pursuant to specific warranty provisions with our customers. We generally warrant our products against defects for one year from date of shipment, with certain exceptions in which the warranty period can extend to more than one year based on contractual agreements. Our warranty reserves are established at the time of sale and updated throughout the warranty period based upon numerous factors including historical warranty return rates and expenses over various warranty periods. Historically, our warranty returns have not been material.

Intellectual Property Indemnities

We indemnify certain customers and our contract manufacturers against liability arising from third-party claims of intellectual property rights infringement related to our products. These indemnities appear in development and supply agreements with our customers as well as manufacturing service agreements with our contract manufacturers, are not limited in amount or duration and generally survive the expiration of the contract. Given that the amount of any potential liabilities related to such indemnities cannot be determined until an infringement claim has been made, we are unable to determine the maximum amount of losses that we could incur related to such indemnifications.

Director and Officer Indemnities and Contractual Guarantees

We have entered into indemnification agreements with our directors and executive officers, which require us to indemnify such individuals to the fullest extent permitted by Nevada law. Our indemnification obligations under such agreements are not limited in amount or duration. Certain costs incurred in connection with such indemnifications may be recovered under certain circumstances under various insurance policies. Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed, we are unable to determine the maximum amount of losses that we could incur relating to such indemnities.

We have also entered into an employment agreement with Steven N. Bronson, our Chairman of the Board, President and Chief Executive Officer. This agreement contains certain severance and change in control obligations. Under the agreement, if Mr. Bronson’s employment is terminated due to his death or disability (as such terms are defined in the agreement), Mr. Bronson or his beneficiaries will be entitled to receive: (i) his base compensation to the end of the monthly pay period immediately following the date of termination; (ii) accrued bonus payments; and (iii) all unvested equity and/or options issued by the Company shall immediately fully vest. If Mr. Bronson’s employment is terminated by him for good reason (as such term is defined in the agreement), or by us without cause, then Mr. Bronson will be entitled to receive: (i) his base compensation to the date of termination; (ii) a severance payment equal to twelve months of his base compensation; (iii) any earned bonus compensation; (iv) employee benefits for twelve months following the date of termination; (v) any vested company match 401k or other retirement contribution; and (vi) all unvested equity and/or options issued by the Company shall immediately fully vest.

In the event of a change in control of the Company (as such term is defined in the agreement), Mr. Bronson is entitled to receive: (i) a change in control payment in an amount equal to twelve months of his base compensation, payable as of the date the change in control occurs; and (ii) all unvested equity and/or options issued by the Company shall immediately fully vest.

Guarantees and Indemnities

In the normal course of business, we are occasionally required to undertake indemnification for which we may be required to make future payments under specific circumstances. We review our exposure under such obligations no less than annually, or more frequently as required. The amount of any potential liabilities related to such obligations cannot be accurately determined until a formal claim is filed. Historically, any such amounts that become payable have not had a material negative effect our business, financial condition or results of operations. We maintain general and product liability insurance which may provide a source of recovery to us in the event of an indemnification claim.

Subsequent Events

Our Registration Statement on Form 10, which we filed with the Securities and Exchange Commission on August 4, 2020, as subsequently amended, to register our shares of common stock under the Securities Exchange Act of 1934, as amended, became effective on October 3, 2020.

We have appointed Ryan J. Hoffman as our Chief Financial Officer and Secretary, with such appointments to take effect immediately following the filing of our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020.