SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
|
|
December 31,
|
|
|
2018
|
|
2017
|
Ingram Micro Inc.
|
|
|
41
|
%
|
|
|
37
|
%
|
Bluestar, Inc.
|
|
|
19
|
%
|
|
|
23
|
%
|
ScanSource, Inc.
|
|
|
*
|
|
|
|
10
|
%
|
Ingram Micro Pan Europe GmbH
|
|
|
*
|
|
|
|
10
|
%
|
*Customer accounts for less
than 10% of accounts receivable balances
|
Concentration
of Suppliers
Several
of the Company’s component parts are produced by a sole or limited number of suppliers. Shortages could occur in these essential
materials due to increased demand, or to an interruption of supply. Suppliers may choose to restrict credit terms or require advance
payments causing delays in the procurement of essential materials. If the Company were unable to procure certain of such materials,
it could have a material adverse effect upon its results. At December 31, 2018, 25% of the Company’s accounts payable balances
were concentrated with top two suppliers. For the years ended December 31, 2018 and 2017, top two suppliers accounted for 49%
and 52%, respectively, of the inventory purchases in each of these years.
Revenue
Recognition and Deferred Revenue
On
January 1, 2017, the Company adopted ASC 606 “Revenue from Contracts with Customers” and implemented a new revenue
recognition policy. Instead of deferring 100% of revenue and cost of revenue until products are sold by distributors, the new
policy recognizes revenue on sales to distributors when shipping of product is completed and title transfers to the distributor,
less a reserve for estimated product returns (sales and cost of sales). The reserves are based on estimates of future returns
calculated from actual return history, primarily from stock rotations, plus knowledge of pending returns outside of the norm.
On January 1, 2017, the Company recorded a one-time reduction (debit) to net deferred revenue in the amount of $836,000 less the
deferred tax effects of $333,000 for a net improvement in retained deficit of $503,000. At December 31, 2018, the deferred revenue
and deferred cost on shipments to distributors were approximately $397,000 and $165,000 respectively, compared to approximately
$493,000 and $204,000, respectively, at December 31, 2017.
The
Company defers revenue on advance payments from customers when performance obligations have yet to be completed and/or services
performed.
The
Company earns revenue from services performed in connection with consulting and engineering development arrangements. For those
agreements that include contract milestones or acceptance criteria, revenue is recognized as such milestones are achieved or as
such acceptance occurs.
The
Company also earns revenue from its SocketCare services program which provides for extended warranty and accidental breakage coverage
for selected products. Service purchased at the time of product purchase provides for coverage in three-year and five-year terms.
The Company additionally offers comprehensive coverage and program term extensions. Revenues from the SocketCare services program
are recognized ratably over the life of the extended warranty contract. The amount of unrecognized warranty service revenue is
classified as deferred service revenue and presented on the Company’s balance sheet in its short- and long-term components.
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Warranty
The
Company’s products typically carry a one-year warranty. The Company reserves for estimated product warranty costs at the
time revenue is recognized based upon the Company’s historical warranty experience, and additionally for any known product
warranty issues. If actual costs differ from initial estimates, the Company records the difference in the period they are identified.
Actual claims are charged against the warranty reserve. The following describes activity in the reserves for product warranty
costs for the years ended December 31, 2018 and 2017:
Year
|
|
Balance at
Beginning of Year
|
|
Additional Warranty Reserves
|
|
Amounts
Charged to Reserves
|
|
Balance at
End of
Year
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
$
|
78,871
|
|
|
$
|
56,383
|
|
|
$
|
(56,383
|
)
|
|
$
|
78,871
|
|
|
2017
|
|
|
$
|
78,871
|
|
|
$
|
53,115
|
|
|
$
|
(53,115
|
)
|
|
$
|
78,871
|
|
Research
and Development
Research
and development expenditures are charged to operations as incurred.
The major components
of research and development costs include salaries and employee benefits, stock-based compensation expense,
third party
development costs including consultants and outside services
, and allocations of overhead
and occupancy costs.
Software
Development Costs
Costs
incurred to develop computer software to be sold or otherwise marketed are charged to expense until technological feasibility
of the product has been established. Once technological feasibility has been established, computer software development costs
(consisting primarily of internal labor costs) are capitalized and reported at the lower of amortized cost or estimated realizable
value. Purchased software development cost is recorded at cost. When a product is ready for general release, its capitalized costs
are amortized on a product-by-product basis. The annual amortization is the straight-line method over the remaining estimated
economic life (a period of three to five years) of the product. Amortization of capitalized software development costs is included
in the cost of revenues line on the statements of operations. If the future revenue of a product is less than anticipated,
impairment of the related unamortized development costs could occur, which could impact the Company’s results of operations.
Amortization expense on software development costs included in costs of revenues for 2018 and 2017 was $34,650 and $0, respectively.
The amount of unamortized capitalized software costs as of December 31, 2018 and 2017 was $173,000 and $208,000, respectively.
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Advertising
Costs
Advertising
costs are charged to sales and marketing as incurred. The Company incurred $75,286 and $61,262, in advertising costs during 2018
and 2017, respectively.
Income
Taxes
The
Company uses the asset and liability method to account for income taxes. Deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and
laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance against deferred
tax assets when it is more likely than not that such assets will not be realized. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the enactment date.
The
Company recognizes the tax benefit from uncertain tax positions if it is more likely than not that the tax positions will be sustained
on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the
largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. It is the Company's policy
to include interest and penalties related to tax positions as a component of income tax expense.
Shipping
and handling costs
Shipping
and handling costs are included in the cost of revenues in the statement of operations.
Net
Loss Per Share
The
following table sets forth the reconciliation of basic shares to diluted shares and the computation of basic and diluted net loss
per share:
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
|
Net loss
|
|
$
|
(571,141
|
)
|
|
$
|
(1,430,731
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used in computing
net loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
6,094,709
|
|
|
|
6,292,898
|
|
Net loss per share applicable to common stockholders:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(0.23
|
)
|
Due
to the net loss for 2018 and 2017, options to purchase 2,374,124 and 2,247,026 shares, respectively, of the Company’s Common
Stock were excluded from the calculation of the diluted earnings per share because they are anti-dilutive. Basic and diluted EPS
are the same for 2018 and 2017.
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Stock-Based
Compensation Expense
The
Company has incentive plans that reward employees with stock options. The amount of compensation cost for these stock-based awards
is measured based on the fair value of the awards as of the date that the awards are issued. The fair values of stock options
are generally determined using a binomial lattice valuation model which incorporates assumptions about expected volatility, risk-free
interest rate, dividend yield, and expected life. Compensation cost for stock-based awards is recognized on a straight-line basis
over the vesting period.
Segment
Information
Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief executive officer in deciding how to allocate resources and in assessing performance.
The
Company operates in the mobile barcode scanning and RFID reader/writer market. Mobile scanning typically consists of mobile devices
such as smartphones or tablets, with mobile scanning peripherals for data collection, and third-party vertical applications software.
The Company distributes its products in the United States and foreign countries primarily through distributors and resellers.
The Company markets its products primarily through application developers whose applications are designed to work with Company’s
products.
Revenues
for the geographic areas for the years ended December 31, 2018 and 2017 are as follows:
|
|
Years Ended December 31,
|
Revenues: (in thousands)
|
|
2018
|
|
2017
|
United States
|
|
$
|
12,562
|
|
|
$
|
16,621
|
|
Europe
|
|
|
2,526
|
|
|
|
3,572
|
|
Asia and rest of world
|
|
|
1,366
|
|
|
|
1,093
|
|
|
|
$
|
16,454
|
|
|
$
|
21,286
|
|
Export
revenues are attributable to countries based on the location of the Company’s customers. The Company does not hold long-lived
assets in foreign locations.
Major
Customers
Customers
who accounted for at least 10% of total revenues for the years ended December 31, 2018 and 2017 were as follows:
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Ingram Micro Inc.
|
|
|
32
|
%
|
|
|
37
|
%
|
BlueStar, Inc.
|
|
|
21
|
%
|
|
|
17
|
%
|
ScanSource, Inc.
|
|
|
10
|
%
|
|
|
16
|
%
|
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Recently
Issued Financial Accounting Standards
From
time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company
as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards
that are not yet effective will not have a material impact on the Company’s financial position or results of operations
upon adoption.
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance: ASU 2017-13,
ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, Topic 842). Topic 842 requires lessees to classify leases
as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater
than 12 months regardless of the lease classification. We expect to adopt Topic 842 using the effective date, January 2019, as
the date of our initial application of the standard. Consequently, financial information for the comparative periods will not
be updated. We expect that our finance and operating lease commitments will be subject to the new standard and recognized as finance
and operating lease liabilities and right-of-use assets upon our adoption of Topic 842, which will increase our total assets and
total liabilities that we report relative to such amounts prior to adoption.
In
June 2018, the FASB issued ASU 2018-07 Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based
Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the
guidance consistent with the accounting for employee share-based compensation. It was effective for annual reporting periods,
and interim periods within those years, beginning after December 15, 2018 and did not have a significant impact on the Company’s
financial statements.
In
August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other-Internal-Use Software (“ASU 2018-15”),
which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract
with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance
is effective for interim and annual reporting periods beginning after December 15, 2019 and is not expected to have a significant
impact on the Company’s financial statements.
NOTE
2 — Short Term Related Party Convertible Notes Payable
The
Company’s Subordinated Convertible Notes of $752,625 matured on September 4, 2017. At the option of the note holders, note
payable principal and accrued interest totaling $1,216,109 was converted into 972,884 shares of common stock at a conversion rate
of $1.25 per share. The conversion reduced current liabilities and increased stockholders’ equity by $1,216,109. These 4-year
notes were originally issued on September 4, 2013 to officers and directors of the company and converted into common stock at
maturity pursuant to the terms of the notes. Interest expense on these convertible notes for 2017 was $80,676.
NOTE
3 — Bank Financing Arrangements
Third
Financing Agreement
On
January 31, 2018, the Company entered into an Amended and Restated Business Financing Agreement (the “Third Financing Agreement”)
with Western Alliance Bank (the “Bank), that provides for a $2.5 million revolving line of credit and a $4.0 million term
loan that the Company may use to repurchase shares of common stock. Pursuant to the revolving line of credit, the Company is permitted
to borrow up to the lesser of $2.5 million or 80% of eligible accounts receivables. Amounts outstanding under the line of credit
bear interest at the “U.S. Prime Rate” published by the Wall Street Journal plus 0.75%. Interest is payable monthly
on the line of credit, and the principal is due upon the maturity date of January 31, 2020. Amounts outstanding under the term
loan bear interest at the “U.S. Prime Rate” published by the Wall Street Journal plus 1.75%. Following a three-month
interest only period, the term loan is payable in 45 equal monthly installments of principal and interest (see “Forth Financing
Agreement” and “Fifth Financing Agreement” for subsequent changes affecting the term loan and financial covenants).
The loans are secured by all of the Company’s present and future assets, including intellectual property and general intangibles.
Termination of the revolving line of credit or term loan prior to its termination date may be subject to early termination fees,
subject to certain exceptions. Amounts repaid or prepaid under the term loan may not be reborrowed. At the end of each quarter
through the quarter ending December 31, 2018, the Company is required to prepay outstanding term loan principal in an amount equal
to 25% of excess cash flow, as set forth in the Third Financing Agreement, for the most recent quarter ended. The Company is also
obligated to pay customary fees for a loan facility of this size and type.
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
The
Third Financing Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the
Company’s ability to, among other things, grant liens, make investments, incur indebtedness, merge or consolidate, dispose
of assets, make acquisitions, pay dividends or make distributions, repurchase stock, enter into transactions with affiliates and
enter into restrictive agreements, in each case subject to customary exceptions for a credit facility of this size and type. The
Company is also required to maintain compliance with an asset coverage ratio (unrestricted cash maintained with the Bank plus
Eligible Receivables, divided by the total amount of the Obligations) measured monthly, which requirements increase during the
term of the Financing Agreement, a fixed charge coverage ratio of no less than 1.75 to 1.0, measured quarterly, and a total funded
debt to trailing twelve months EBITDA multiple of not more than 1.75 to 1.0, measured monthly.
The
Third Financing Agreement also contains customary events of default including, among others, payment defaults, breaches of covenants,
bankruptcy and insolvency events, cross defaults with certain material indebtedness, judgment defaults, and breaches of representations
and warranties. Upon an event of default, the Bank may declare all or a portion of the Company’s outstanding obligations
payable to be immediately due and payable and exercise other rights and remedies provided for under the Financing Agreement. During
the existence of an event of default, interest on the obligations could be increased.
On
March 1, 2018, the Company received proceeds of $4.0 million under the provisions of the term loan for a common stock repurchase.
On March 9, 2018, the Company completed a tender offer to purchase and retire 1,250,000 shares of common stock from multiple investors
at a purchase price of $3.90 per share, for an aggregate cost of approximately $4.9 million, excluding fees and expenses relating
to the tender offer.
On
April 12, 2018, the Company advised the Bank that its operating results for the quarter ended March 31, 2018 were not expected
to be in compliance with two financial covenants, the first a Fixed Charge Coverage Ratio and the second a Total Funded Debt to
EBITDA ratio. The Company reported the non-compliance in its Form 10-Q for the quarter ended March 31, 2018. The Bank verbally
agreed to forbear the events of default subject to further modification of the Financing Agreement. The Company subsequently paid
down the term loan from $4.0 million at March 31, 2018 to $1.0 million at June 30, 2018. The paydowns were made from its cash
and revolving lines of credit.
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Fourth
Financing Agreement
On
June 4, 2018, the Company entered into an Amended and Restated Business Financing Agreement (the “Fourth Financing Agreement”)
with the Bank. In the Fourth Financing Agreement, the Bank recognizes the repayment of the outstanding term loan balance to $1.0
million by June 30, 2018. The remaining balance is repayable in 24 equal monthly installments. The Fixed Charge Coverage Ratio
is replaced with a commitment to maintain cash plus available credit at or above the term loan balance. The Total Funded Debt
to EBITDA ratio and the excess cash flow application provisions that were designed to accelerate the pay down of the term loan
balance are removed. The Bank permanently waived the defaults resulting from March 31, 2018 results when paydown of the term loan
balance to $1.0 million by June 30, 2018 was achieved. In the Fourth Financing Agreement, the Company is required to maintain
compliance with the Asset Coverage Ratio measured monthly.
Fifth
Financing Agreement
On
July 30, 2018, the Company entered into an Amended and Restated Business Financing Agreement (the “Fifth Financing Agreement”)
with the Bank. The Company is required to maintain daily cash plus available credit at or above 90% of the outstanding principal
balance of the term loan until the Asset Coverage Ratio is at 1.25 to 1.0. The minimum Asset Coverage Ratio increased to 1.2 to
1.0 on October 1, 2018. From December 31, 2018 onwards, the ratio increased to 1.25 to 1.0.
The
Company was in complete compliance with all the required covenants during Q3 and Q4 2018. On December 31, 2018, the sum of Company’s
unrestricted cash on deposit with the Bank plus availability was $1.24 million, $0.49 million more than 90% of the outstanding
principal balance of the term loan, or $0.75 million, and the Asset Coverage Ratio was 1.48 to 1.0.
In
2018, the total amount borrowed under the term loan was $4.0 million and total repayments was $3.17 million. Total amount borrowed
under the domestic and international lines was $13.55 million and the total repayments was $12.23 million. Amounts outstanding
under the term loan and bank credit facilities at December 31, 2018 are as follows:
|
|
December 31, 2018
|
Term loan
|
|
|
833,333
|
|
Less: current-portion of term loan
|
|
|
(500,000
|
)
|
Long-term portion of term loan
|
|
$
|
333,333
|
|
|
|
December 31, 2018
|
Lines of credit - domestic line
|
|
|
906,549
|
|
Lines of credit - EXIM line
|
|
|
410,229
|
|
Total lines of credit
|
|
$
|
1,316,778
|
|
Total
interest expenses on the term loan and on the amounts drawn under the Company’s bank credit lines for 2018 were $94,594
and $37,201, respectively. Accrued interest payable related to the amounts outstanding under the term loan and the bank credit
facilities at December 31, 2018 was $13,546. At December 31, 2018, the Company’s unused available line of credit was approximately
$0.2 million.
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
No
amount was borrowed under the lines of credit with Western Alliance Bank during 2017, and the total borrowing capacity was approximately
$1,583,000 at December 31, 2017.
NOTE
4 — Commitments and Contingencies
Operating
Lease
The
Company leases office space under a non-cancelable operating lease that provides the Company approximately 37,100 square feet
in Newark, California. The lease agreement expires on June 30, 2022. Monthly base rent increases four percent per year annually
on July 1
st
of each year.
Future
minimum lease payments under the operating lease at December 31, 2018 are shown below:
Annual minimum payments:
|
|
Amount
|
|
2019
|
|
|
$
|
460,053
|
|
|
2020
|
|
|
|
478,455
|
|
|
2021
|
|
|
|
497,594
|
|
|
2022
|
|
|
|
253,675
|
|
|
Total minimum payments
|
|
|
$
|
1,689,777
|
|
Rental
expense under all operating leases for the years ended December 31, 2018 and 2017 was $438,680 and $435,686, respectively. The
amount of deferred rent at December 31, 2018 and December 31, 2017 was $244,862 and $274,388, respectively.
Capital
Lease Obligations
The
Company leases certain of its equipment under capital leases. The leases are collateralized by the underlying assets. At December
31, 2018 and 2017, property and equipment with costs of $100,584, were subject to such financing arrangements. The accumulated
depreciation of the assets associated with the capital leases as of December 31, 2018 and December 31, 2017, amounted to $76,546
and $51,400 respectively.
Future
minimum payments under capital lease and equipment financing arrangements as of December 31, 2018 are as follows:
Annual minimum payments:
|
|
Amount
|
2019
|
|
$
|
16,838
|
|
2020
|
|
|
8,454
|
|
Total minimum payments
|
|
|
25,292
|
|
Less amount representing interest
|
|
|
(1,305
|
)
|
Present value of net minimum payments
|
|
$
|
23,987
|
|
Short term portion of capital leases
|
|
|
(15,697
|
)
|
Long term portion of capital leases
|
|
$
|
8,290
|
|
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Purchase
Commitments
At
December 31, 2018, the Company’s non-cancelable purchase commitments for inventory to be used in the ordinary course of
business during 2019 were approximately $5,922,000.
Legal
Matters
The
Company is subject to disputes, claims, requests for indemnification and lawsuits arising in the ordinary course of business.
Under the indemnification provisions of the Company’s customer agreements, the Company routinely agrees to indemnify and
defend its customers against infringement of any patent, trademark, copyright, trade secrets, or other intellectual property rights
arising from customers’ legal use of the Company’s products or services. The exposure to the Company under these indemnification
provisions is generally limited to the total amount paid for the indemnified products. However, certain indemnification provisions
potentially expose the Company to losses in excess of the aggregate amount received from the customer. To date, there have been
no claims against the Company by its customers pertaining to such indemnification provisions, and no amounts have been recorded.
The Company is currently not a party to any material legal proceedings.
NOTE
5 — Stock-Based Compensation Plan
Stock
Option Plan
The
Company has one Stock Option Plan in effect in the two years presented: the 2004 Equity Incentive Plan (the “2004 Plan”).
The 2004 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock, stock appreciation
rights, and performance awards to employees, directors, and consultants of the Company. Upon ratification of the 2004 Plan by
the shareholders in June 2004, shares in the 1995 Plan that had been reserved but not issued, as well as any shares issued that
would otherwise return to the 1995 Plan as a result of termination of options or repurchase of shares, were added to the shares
reserved for issuance under the 2004 Plan. The Company grants incentive stock options and non-statutory stock options at an exercise
price per share equal to the fair market value per share of common stock on the date of grant. The vesting and exercise provisions
are determined by the Board of Directors, with a maximum term of ten years. The 2004 Plan expires on April 23, 2024.
The
Company calculates the value of each stock option grant, estimated on the date of grant, using binomial lattice option pricing
model. The weighted-average estimated fair value of stock options granted during 2018 and 2017 was $1.62 and $2.60, respectively,
using the following weighted-average assumptions:
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Risk-free interest rate (%)
|
|
|
2.96
|
%
|
|
|
2.34
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Volatility factor
|
|
|
56.02
|
%
|
|
|
69.62
|
%
|
Expected option life (years)
|
|
|
6.4
|
|
|
|
5.9
|
|
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
The
table below presents the information related to stock option activity for the years ended December 31, 2018 and 2017:
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Total intrinsic value of stock options exercised
|
|
$
|
197,130
|
|
|
$
|
333,849
|
|
Cash received from stock option exercises
|
|
$
|
279,176
|
|
|
$
|
331,719
|
|
Changes
in stock options for the years ended December 31, 2018 and 2017 are as follows:
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
Options
Available
For Grant
|
|
|
|
Number
of Shares
|
|
|
|
Weighted
Average
Price Per Share
|
|
|
|
Remaining Contractual Term
(in years)
|
|
|
|
Intrinsic
Value
|
|
Balance at December 31, 2016
|
|
|
95,981
|
|
|
|
2,161,085
|
|
|
$
|
2.27
|
|
|
|
|
|
|
|
|
|
Increase in shares authorized
|
|
|
235,136
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(275,300
|
)
|
|
|
275,300
|
|
|
$
|
4.13
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
(159,839
|
)
|
|
$
|
2.08
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
29,520
|
|
|
|
(29,520
|
)
|
|
$
|
2.98
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
85,337
|
|
|
|
2,247,026
|
|
|
$
|
2.50
|
|
|
|
|
|
|
|
|
|
Increase in shares authorized
|
|
|
280,445
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(281,300
|
)
|
|
|
281,300
|
|
|
$
|
2.86
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
(121,981
|
)
|
|
$
|
2.29
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
32,221
|
|
|
|
(32,221
|
)
|
|
$
|
3.61
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
116,703
|
|
|
|
2,374,124
|
|
|
$
|
2.54
|
|
|
|
4.75
|
|
|
$
|
166,266
|
|
Exercisable
|
|
|
|
|
|
|
1,894,933
|
|
|
$
|
2.37
|
|
|
|
3.75
|
|
|
|
166,266
|
|
Unvested
|
|
|
|
|
|
|
479,191
|
|
|
$
|
3.19
|
|
|
|
8.58
|
|
|
|
—
|
|
The
2004 Plan provides for an annual increase in the number of shares authorized under the plan to be added on the first day of each
fiscal year equal to the least amount of 400,000 shares, 4% of the outstanding shares on that date, or an amount as determined
by the Board of Directors. On January 1, 2018 and 2017, a total of 280,445 and 235,136 additional shares, respectively, became
available for grant from the 2004 Plan.
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
The
following table summarizes information about stock options outstanding and exercisable at December 31, 2018:
|
|
|
|
|
Options Outstanding
|
|
|
|
|
Options Exercisable
|
|
Range of
Exercise
Prices
|
|
|
|
Number of
Options Outstanding
|
|
|
|
Weighted Average Remaining Life (Years)
|
|
|
|
Weighted
Average Exercise Price
|
|
|
|
Number of Options Exercisable
|
|
|
|
Weighted Average Exercise Price
|
|
|
$0.95
- $1.25
|
|
|
|
364,874
|
|
|
|
4.58
|
|
|
$
|
1.04
|
|
|
|
364,874
|
|
|
$
|
1.04
|
|
|
$1.50 - $1.82
|
|
|
|
141,855
|
|
|
|
3.08
|
|
|
$
|
1.73
|
|
|
|
141,855
|
|
|
$
|
1.73
|
|
|
$1.89 - $2.27
|
|
|
|
392,509
|
|
|
|
4.67
|
|
|
$
|
2.13
|
|
|
|
376,620
|
|
|
$
|
2.13
|
|
|
$2.36 - $2.92
|
|
|
|
525,742
|
|
|
|
4.00
|
|
|
$
|
2.63
|
|
|
|
392,414
|
|
|
$
|
2.62
|
|
|
$2.93 - $3.54
|
|
|
|
677,769
|
|
|
|
4.33
|
|
|
$
|
3.05
|
|
|
|
476,003
|
|
|
$
|
3.08
|
|
|
$3.70 - $4.49
|
|
|
|
271,375
|
|
|
|
8.25
|
|
|
$
|
4.12
|
|
|
|
143,167
|
|
|
$
|
4.05
|
|
|
$0.95 - $4.49
|
|
|
|
2,374,124
|
|
|
|
4.75
|
|
|
$
|
2.54
|
|
|
|
1,894,933
|
|
|
$
|
2.37
|
|
Stock-Based
Compensation Expense
The
stock-based compensation expense included in the Company’s statements of income for the years ended December 31, 2018 and
2017, consisted of the following:
|
|
Years Ended December 31,
|
Income Statement Classification
|
|
2018
|
|
2017
|
Cost of revenues
|
|
$
|
81,141
|
|
|
$
|
64,834
|
|
Research and development
|
|
|
128,552
|
|
|
|
104,205
|
|
Sales and marketing
|
|
|
126,312
|
|
|
|
111,087
|
|
General and administrative
|
|
|
151,801
|
|
|
|
146,824
|
|
|
|
$
|
487,806
|
|
|
$
|
426,950
|
|
As
of December 31, 2018, the total remaining unamortized stock-based compensation expense was $906,605 and is expected to be amortized
over a weighted average period of 2.41 years.
NOTE
6 — Shares Reserved
Common
stock reserved for future issuance was as follows:
|
|
December 31,
|
|
|
2018
|
|
2017
|
Stock option grants outstanding (see Note 5)
|
|
|
2,374,124
|
|
|
|
2,247,026
|
|
Reserved for future stock option grants
(see Note 5)
|
|
|
116,703
|
|
|
|
85,337
|
|
|
|
|
2,490,827
|
|
|
|
2,332,363
|
|
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE
7 — Retirement Plan
The
Company has a tax-deferred savings plan, the Socket Mobile, Inc. 401(k) Plan (“401(k) Plan”), for the benefit of qualified
employees. The 401(k) Plan is designed to provide employees with an accumulation of funds at retirement. Qualified employees may
elect to make contributions to the 401(k) Plan on a monthly basis. No contributions were made by the Company during the years
ended December 31, 2018 and 2017. Administrative expenses relating to the 401(k) Plan are not significant.
NOTE
8 — Income Taxes
The
Company recorded income tax benefit of $143,000 for 2018 compared to income tax expense of $3.77 million for 2017. Net loss in
2018 results in a setup of additional deferred tax asset (tax loss carryforwards) with a 20-year expiration. Net operating loss
carryforwards do not begin expiring until the end of 2023 if not used. We expect a return to profitable operating results and
full utilization of the NOL benefits. The 2017 income tax expense included deferred tax expense of $1.07 million and federal and
state alternative minimum tax expense of $51,000.
The
Tax Cuts and Jobs Act was enacted on December 22, 2017. The Tax Act eliminates alternative minimum taxes and lowers the U.S. federal
corporate income tax from 34% to 21% effective January 1, 2018. The Company remeasured its net deferred tax assets as of
December 31, 2017 at the new enacted tax rate, and accordingly, recorded tax expense of $2.6 million from the write-down of deferred
tax assets in 2017.
The
components of income taxes for the periods ended December 31, 2018 and 2017 are as follows:
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
39,274
|
|
State
|
|
|
—
|
|
|
|
11,803
|
|
Total Current
|
|
|
—
|
|
|
|
51,077
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(50,858
|
)
|
|
|
3,758,849
|
|
State
|
|
|
(92,601
|
)
|
|
|
(40,923
|
)
|
Total Deferred
|
|
|
(143,459
|
)
|
|
|
3,717,926
|
|
Income tax (benefit) expense
|
|
$
|
(143,459
|
)
|
|
$
|
3,769,003
|
|
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Reconciliation
of the statutory federal income tax rate to the Company's effective tax rate:
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Federal tax at statutory rate
|
|
|
21.00
|
%
|
|
|
34.00
|
%
|
State income tax rate
|
|
|
6.98
|
%
|
|
|
5.83
|
%
|
Remeasurement of deferred taxes
|
|
|
—
|
|
|
|
(155.41
|
%)
|
Expenses and credits not benefited
|
|
|
(7.90
|
%)
|
|
|
—
|
|
Provision for taxes
|
|
|
20.08
|
%
|
|
|
(115.58
|
%)
|
As
of December 31, 2018, the Company did not recognize deferred tax assets relating to an excess tax benefit for stock-based compensation
deduction of $2,523,000. Unrecognized deferred tax benefits will be accounted for as a credit to additional paid-in capital when
realized through a reduction in income taxes payable.
Deferred
income tax reflects the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. At December 31, 2018, the Company released valuation allowance
against substantially all deferred tax assets. Significant components of net deferred tax assets are as follows:
|
|
December 31,
|
Deferred tax assets:
|
|
2018
|
|
2017
|
Net operating loss carryforwards
|
|
$
|
4,849,000
|
|
|
$
|
4,777,000
|
|
Credits
|
|
|
942,000
|
|
|
|
806,000
|
|
Capitalized research and development costs
|
|
|
—
|
|
|
|
—
|
|
Other acquired intangibles
|
|
|
6,000
|
|
|
|
17,000
|
|
Accruals not currently deductible
|
|
|
648,000
|
|
|
|
677,000
|
|
Depreciation
|
|
|
75,000
|
|
|
|
44,000
|
|
Total deferred tax assets
|
|
|
6,520,000
|
|
|
|
6,321,000
|
|
Valuation allowance for deferred tax assets
|
|
|
(569,000
|
)
|
|
|
(506,000
|
)
|
Net deferred tax assets
|
|
|
5,951,000
|
|
|
|
5,815,000
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Acquired intangibles
|
|
|
(170,000
|
)
|
|
|
(178,000
|
)
|
Net deferred tax assets
|
|
$
|
5,781,000
|
|
|
$
|
5,637,000
|
|
As
of December 31, 2018, the Company had net operating loss carryforwards for federal income tax purposes of approximately $21,619,000
which will expire at various dates beginning in 2023 and through 2038. Full valuation allowance is maintained for federal research
and development tax credits of approximately $568,000. As of December 31, 2018, the Company had net operating loss carryforwards
for California state income tax purposes of approximately $12,018,000, which will expire at various dates in 2029 and through
2038, and state research and development tax credits of approximately $374,000, which can be carried forward indefinitely.
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
The
Company has determined that utilization of existing net operating losses against future taxable income is not limited by Section 382
of the Internal Revenue Code. Future ownership changes, however, may limit the Company’s ability to fully utilize its existing
net operating loss carryforwards against any future taxable income.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits (“UTBs”), excluding interest and penalties,
is as follows:
|
|
Amount
|
Beginning balance at January 1, 2018
|
|
$
|
866,000
|
|
Decreases in UTBs taken in prior years
|
|
|
—
|
|
Decreases in UTBs taken in current years
|
|
|
76,000
|
|
Ending balance at December 31, 2018
|
|
$
|
942,000
|
|
It
is the Company's policy to include interest and penalties related to tax positions as a component of income tax expense. No interest
was accrued for the period ended December 31, 2018. The Company estimates that the unrecognized tax benefit will not change significantly
within the next twelve months.
The
Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company is not currently
under audit in any of its jurisdictions where income tax returns are filed.
NOTE
9— Subsequent Events
As
of March 25, 2019, 165,600 stock options and 116,050 restricted stock units at an average price of $1.90 per share have been granted
from the 2004 Equity Incentive Plan subsequent to December 31, 2018.
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS