Item
8. Financial Statements and Supplementary Data
The
supplementary information required by this item is included in Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Socket Mobile, Inc.:
Opinion on the Financial Statements
We have audited the accompanying balance sheets
of Socket Mobile, Inc. (“the Company”) as of December 31, 2019 and 2018, the related statements of operations, stockholders’
equity, and cash flows for each of the years in the two-year period ended December 31, 2019 and the related notes (collectively
referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations
and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles
generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required
to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/
Sadler, Gibb & Associates, LLC
We
have served as the Company’s auditor since 2013.
Salt
Lake City, UT
March
26, 2020
SOCKET MOBILE, INC.
|
BALANCE SHEETS
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
958,860
|
|
|
$
|
1,084,991
|
|
Accounts receivable, net
|
|
|
2,837,006
|
|
|
|
2,367,177
|
|
Inventories, net
|
|
|
3,178,908
|
|
|
|
2,272,328
|
|
Prepaid expenses and other current assets
|
|
|
312,127
|
|
|
|
307,832
|
|
Deferred cost on shipments to distributors
|
|
|
233,823
|
|
|
|
165,024
|
|
Total current assets
|
|
|
7,520,724
|
|
|
|
6,197,352
|
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Machinery and office equipment
|
|
|
2,195,405
|
|
|
|
2,188,835
|
|
Computer equipment
|
|
|
1,336,445
|
|
|
|
992,531
|
|
|
|
|
3,531,850
|
|
|
|
3,181,366
|
|
Accumulated depreciation
|
|
|
(2,667,340
|
)
|
|
|
(2,492,154
|
)
|
Property and equipment, net
|
|
|
864,510
|
|
|
|
689,212
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
4,427,000
|
|
|
|
4,427,000
|
|
Other long-term assets
|
|
|
202,611
|
|
|
|
236,565
|
|
Deferred tax assets
|
|
|
5,506,934
|
|
|
|
5,780,938
|
|
Operating lease right-of-use asset
|
|
|
936,708
|
|
|
|
1,265,648
|
|
Total assets
|
|
$
|
19,458,487
|
|
|
$
|
18,596,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
2,084,848
|
|
|
$
|
1,533,456
|
|
Accrued payroll and related expenses
|
|
|
566,350
|
|
|
|
512,307
|
|
Deferred revenue on shipments to distributors
|
|
|
611,029
|
|
|
|
396,974
|
|
Short term portion of deferred service revenue
|
|
|
32,900
|
|
|
|
33,644
|
|
Bank lines of credit
|
|
|
1,412,449
|
|
|
|
1,316,778
|
|
Term loan – current portion
|
|
|
333,333
|
|
|
|
500,000
|
|
Operating lease – current portion
|
|
|
419,288
|
|
|
|
376,160
|
|
Finance lease – current portion
|
|
|
8,291
|
|
|
|
15,697
|
|
Total current liabilities
|
|
|
5,468,488
|
|
|
|
4,685,016
|
|
|
|
|
|
|
|
|
|
|
Long term portion of deferred service revenue
|
|
|
40,711
|
|
|
|
31,291
|
|
Long-term portion of term loan
|
|
|
—
|
|
|
|
333,333
|
|
Long term portion of operating lease
|
|
|
715,062
|
|
|
|
1,134,350
|
|
Long-term portion of finance lease
|
|
|
—
|
|
|
|
8,290
|
|
Total liabilities
|
|
|
6,224,261
|
|
|
|
6,192,280
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value: Authorized – 20,000,000 shares,
|
|
|
|
|
|
|
|
|
Issued
and outstanding – 6,017,674 shares at December 31, 2019 and
5,883,109 shares at December 31, 2018
|
|
|
6,018
|
|
|
|
5,883
|
|
Additional paid-in capital
|
|
|
61,066,971
|
|
|
|
60,523,901
|
|
Accumulated deficit
|
|
|
(47,838,763
|
)
|
|
|
(48,125,349
|
)
|
Total stockholders’ equity
|
|
|
13,234,226
|
|
|
|
12,404,435
|
|
Total liabilities and stockholders’ equity
|
|
$
|
19,458,487
|
|
|
$
|
18,596,715
|
|
See
accompanying notes.
SOCKET MOBILE, INC.
|
STATEMENTS OF OPERATIONS
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Revenues
|
|
$
|
19,253,105
|
|
|
$
|
16,454,426
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
9,152,462
|
|
|
|
7,998,018
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
10,100,643
|
|
|
|
8,456,408
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,893,563
|
|
|
|
3,640,296
|
|
Sales and marketing
|
|
|
3,015,431
|
|
|
|
2,981,902
|
|
General and administrative
|
|
|
2,585,279
|
|
|
|
2,420,198
|
|
Total operating expenses
|
|
|
9,494,273
|
|
|
|
9,042,396
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
606,370
|
|
|
|
(585,988
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense and other, net
|
|
|
(100,656
|
)
|
|
|
(128,612
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income taxes
|
|
|
505,714
|
|
|
|
(714,600
|
)
|
Income tax benefit (expense)
|
|
|
(219,128
|
)
|
|
|
143,459
|
|
Net income (loss)
|
|
$
|
286,586
|
|
|
$
|
(571,141
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
|
$
|
(0.09
|
|
Fully diluted
|
|
$
|
0.05
|
|
|
$
|
(0.09
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,984,381
|
|
|
|
6,094,709
|
|
Fully diluted
|
|
|
6,207,731
|
|
|
|
6,094,709
|
|
See
accompanying notes.
SOCKET MOBILE, INC.
|
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Total
|
|
|
Common Stock
|
|
Paid-In
|
|
Accumulated
|
|
Stockholders’
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Equity
|
Balance at December 31, 2017
|
|
|
7,011,128
|
|
|
|
7,011
|
|
|
|
64,777,620
|
|
|
|
(47,554,208
|
)
|
|
|
17,230,423
|
|
Exercise of stock options
|
|
|
121,981
|
|
|
|
122
|
|
|
|
279,055
|
|
|
|
—
|
|
|
|
279,177
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
487,806
|
|
|
|
—
|
|
|
|
487,806
|
|
Cost of tender offer
|
|
|
(1,250,000
|
)
|
|
|
(1,250
|
)
|
|
|
(5,020,580
|
)
|
|
|
—
|
|
|
|
(5,021,830
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(571,141
|
)
|
|
|
(571,141
|
)
|
Balance at December 31, 2018
|
|
|
5,883,109
|
|
|
$
|
5,883
|
|
|
$
|
60,523,901
|
|
|
$
|
(48,125,349
|
)
|
|
$
|
12,404,435
|
|
Exercise of stock options
|
|
|
24,494
|
|
|
|
25
|
|
|
|
23,289
|
|
|
|
—
|
|
|
|
23,314
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
519,891
|
|
|
|
—
|
|
|
|
519,891
|
|
Restricted stock grants
|
|
|
110,071
|
|
|
|
110
|
|
|
|
(110
|
)
|
|
|
—
|
|
|
|
—
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
286,586
|
|
|
|
286,586
|
|
Balance at December 31, 2019
|
|
|
6,017,674
|
|
|
$
|
6,018
|
|
|
$
|
61,066,971
|
|
|
$
|
(47,838,763
|
)
|
|
$
|
13,234,226
|
|
See
accompanying notes.
SOCKET MOBILE, INC.
|
STATEMENTS OF CASH FLOWS
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
286,586
|
|
|
$
|
(571,141
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
519,891
|
|
|
|
487,806
|
|
Depreciation and amortization
|
|
|
462,930
|
|
|
|
432,042
|
|
Changes in deferred taxes
|
|
|
274,004
|
|
|
|
(143,459
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(469,829
|
)
|
|
|
320,148
|
|
Inventories
|
|
|
(906,580
|
)
|
|
|
(74,062
|
)
|
Prepaid expenses and other current assets
|
|
|
(4,295
|
)
|
|
|
77,677
|
|
Other long-term assets
|
|
|
(1,320
|
)
|
|
|
435
|
|
Accounts payable and accrued expenses
|
|
|
551,392
|
|
|
|
421,222
|
|
Accrued payroll and related expenses
|
|
|
54,043
|
|
|
|
(118,692
|
)
|
Net deferred revenue on shipments to distributors
|
|
|
145,256
|
|
|
|
(56,256
|
)
|
Deferred service revenue
|
|
|
8,676
|
|
|
|
3,952
|
|
Change in deferred rent
|
|
|
(47,220
|
)
|
|
|
(29,527
|
)
|
Net cash provided by operating activities
|
|
|
873,534
|
|
|
|
750,145
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(595,154
|
)
|
|
|
(423,700
|
)
|
Capitalized software costs
|
|
|
(7,800
|
)
|
|
|
—
|
|
Net cash used in investing activities
|
|
|
(602,954
|
)
|
|
|
(423,700
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
Payments on operating leases
|
|
|
(15,696
|
)
|
|
|
(28,420
|
)
|
Proceeds from borrowings under bank line of credit agreement
|
|
|
17,423,000
|
|
|
|
13,546,964
|
|
Repayments of borrowings under bank line of credit agreement
|
|
|
(17,327,329
|
)
|
|
|
(12,230,186
|
)
|
Proceeds from bank term loan
|
|
|
—
|
|
|
|
4,000,000
|
|
Repayments of bank term loan
|
|
|
(500,000
|
)
|
|
|
(3,166,667
|
)
|
Common stock repurchases and related expenses
|
|
|
—
|
|
|
|
(5,021,830
|
)
|
Stock options exercised
|
|
|
23,314
|
|
|
|
279,177
|
|
Net cash used in financing activities
|
|
|
(396,711
|
)
|
|
|
(2,620,962
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(126,131
|
)
|
|
|
(2,294,517
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
1,084,991
|
|
|
|
3,379,508
|
|
Cash and cash equivalents at end of year
|
|
$
|
958,860
|
|
|
$
|
1,084,991
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
100,048
|
|
|
$
|
105,082
|
|
See
accompanying notes.
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE
1 — Organization and Summary of Significant Accounting Policies
Organization
and Business
Socket
Mobile, Inc. (the “Company”) is a leading manufacturer of data capture products for mobile applications used in Retail,
Commercial Services, Industrial & Manufacturing, Transportation & Logistics, and Health Care. The Company produces a family
of data capture products that connect over Bluetooth and work with applications running on smartphones, tablets and mobile computers
using operating systems from Apple® (iOS), Google™ (Android™) and Microsoft® (Windows®). The Company focuses
on serving the needs of software application developers as the scanner sales are primarily driven by the deployment of barcode
and RFID/NFC enabled mobile applications.
The
Company designs its own products and subcontracts the manufacturing of product components to independent third-party contract
manufacturers who are in the U.S., Mexico, Singapore, China, Malaysia and Taiwan and who have the equipment, know-how and capacity
to manufacture products to the Company’s specifications. Final products are assembled, tested, packaged, and distributed
at and from its Newark, California facility. The Company offers its products worldwide through two-tier distribution enabling
customers to purchase from a large number of on-line resellers around the world including some application developers. The geographic
regions served by the Company include the Americas, Europe, Asia Pacific and Africa.
The
Company was founded in March 1992 as Socket Communications, Inc. and reincorporated in Delaware in 1995 prior to the Company’s
initial public offering in June 1995. The Company began doing business as Socket Mobile, Inc. in January 2007 to better reflect
its market focus on the mobile business market, and changed its legal name to Socket Mobile, Inc. in April 2008. The Company’s
common stock trades on the NASDAQ Marketplace under the symbol “SCKT.” The Company’s principal executive offices
are located at 39700 Eureka Drive, Newark, CA 94560.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets
and liabilities at the date of the financial statements as well as the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates, and such differences may be material to the financial statements.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with a maturity date of 90 days or less at date of purchase to be cash
equivalents. For the years ended December 31, 2019 and 2018, all of the Company’s cash and cash equivalents consisted of
amounts held in demand deposit accounts in banks. The aggregate cash balance on deposit in these accounts are insured by the Federal
Deposit Insurance Corporation up to $250,000. The Company’s cash balance on deposit in these accounts may, at times, exceed
the federally insured limits. The Company has never experienced any losses in such accounts.
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Fair
Value of Financial Instruments
The
carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable and foreign exchange contracts
approximate fair value due to the relatively short period of time to maturity.
Derivative
Financial Instruments
The
Company's primary objective for holding derivative financial instruments is to manage foreign currency risks. The Company's derivative
financial instruments are recorded at fair value and are included in other current assets, other assets, other accrued liabilities
or long-term debt depending on the contractual maturity and whether the Company has a gain or loss. The Company's accounting policies
for these instruments are based on whether they meet the Company's criteria for designation as hedging transactions, either as
cash flow or fair value hedges. A hedge of the exposure to variability in the cash flows of an asset or a liability, or of a forecasted
transaction, is referred to as a cash flow hedge. A hedge of the exposure to changes in fair value of an asset or a liability,
or of an unrecognized firm commitment, is referred to as a fair value hedge. The criteria for designating a derivative as a hedge
include the instrument's effectiveness in risk reduction and, in most cases, a one-to-one matching of the derivative instrument
to its underlying transaction. Gains and losses on derivatives that do not qualify for hedge accounting are recognized immediately
in earnings. The Company regularly enters into forward foreign currency contracts to reduce exposures related to rate changes
in certain foreign currencies.
The
Company records its forward foreign currency contracts at fair value. At December 31, 2019 and 2018, the Company had no open forward
foreign currency contracts.
Foreign
Currency
The
functional currency for the Company is the U.S. dollar. However, the Company requires European distributors to purchase products
in Euros and British pounds and pays the expenses of European employees in Euros and British pounds. The Company hedges a significant
portion of the European receivables balance denominated in Euros to reduce the foreign currency risk associates with these assets.
In 2019, the total net adjustment for the effects of changes in foreign currency on cash balances, collections, payables, and
derivatives used to hedge foreign currency risks, was a net loss of $2,300 compared to a net loss of $20,000 in 2018.
Accounts
Receivable Allowances
The
Company estimates the amount of uncollectible accounts receivable at the end of each reporting period based on the aging of the
receivable balance, current and historical customer trends, and communications with its customers. Amounts are written off only
after considerable collection efforts have been made and the amounts are determined to be uncollectible. The following describes
activity in the allowance for doubtful accounts for the years ended December 31, 2019 and 2018:
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Year
|
|
Balance at
Beginning of Year
|
|
Charged to
Costs and
Expenses
|
|
Amounts
Written Off
|
|
Balance at
End of
Year
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
$
|
89,058
|
|
|
$
|
—
|
|
|
$
|
(48,407
|
)
|
|
$
|
40,651
|
|
|
2018
|
|
|
$
|
89,058
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
89,058
|
|
Inventories
Inventories
consist principally of raw materials and sub-assemblies stated at the lower of standard cost, which approximates actual costs
(first-in, first-out method), or market. Market is defined as replacement cost, but not in excess of estimated net realizable
value or less than estimated net realizable value less a normal margin. At the end of each reporting period, the Company compares
its inventory on hand to its forecasted requirements for the next nine-month period and reserves the cost of any inventory that
is surplus, less any amounts that the Company believes it can recover from the disposal of goods or that the Company specifically
believes will be saleable past a nine- month horizon. The Company’s sales forecasts are based upon historical trends, communications
from customers, and marketing data regarding market trends and dynamics. Changes in the amounts recorded for surplus or obsolete
inventory are included in cost of revenue. Inventories, net of write-downs, at December 31, 2019 and 2018 consisted of the following:
|
|
December 31,
|
|
|
2019
|
|
2018
|
Raw materials and sub-assemblies
|
|
$
|
3,767,588
|
|
|
$
|
2,785,154
|
|
Finished goods
|
|
|
241,681
|
|
|
|
335,335
|
|
Inventory reserves
|
|
|
(830,361
|
)
|
|
|
(848,161
|
)
|
Inventory, net
|
|
$
|
3,178,908
|
|
|
$
|
2,272,328
|
|
Prepaid
Expenses and Other Current Assets
Prepaid
expenses and other current assets consist of various payments that the Company has made in advance for goods or services to be
received in the future. Prepaid expenses and other current assets at December 31, 2019 and 2018 consisted of the following:
|
|
December 31,
|
|
|
2019
|
|
2018
|
Prepaid insurance
|
|
$
|
47,884
|
|
|
$
|
18,061
|
|
Product certification costs
|
|
|
83,749
|
|
|
|
74,919
|
|
Prepaid inventory purchases
|
|
|
77,606
|
|
|
|
110,301
|
|
Others
|
|
|
102,888
|
|
|
|
104,551
|
|
Prepaid expenses and other current assets
|
|
$
|
312,127
|
|
|
$
|
307,832
|
|
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Property
and Equipment
Property
and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method, over the estimated
useful lives of the assets ranging from one to five years. Assets under finance leases are amortized in a manner consistent with
the Company’s normal depreciation policy for owned assets, or the remaining lease term as applicable. Depreciation expense
in the years ended December 31, 2019 and 2018, was $419,856 and $397,392, respectively.
Goodwill
Goodwill
is tested for impairment annually as of September 30th or more frequently when events or circumstances indicate that the carrying
value of the Company's single reporting unit more likely than not exceeds its fair value. The Company performed its annual goodwill
impairment analysis as of September 30, 2019. The Company used the two-step test as required to assess goodwill for impairment.
The first step of the goodwill impairment test consisted of comparing the carrying value of the reporting unit to its fair value.
Management estimated the fair value of the Company's reporting unit using various methods and compared the fair value to the carrying
amount (net book value) to ascertain if potential goodwill impairment existed. The Company utilized methods that focused on its
ability to produce income ("Income Approach") and the Company’s market capitalization ("Market Capitalization
Approach"). Key assumptions utilized in the determination of fair value in step one of the test included the following: the
Company's market capitalization; revenue and expense forecasts used in the evaluation were based on trends of historical performance
and management's estimate of future performance; cash flows utilized in the discounted cash flow analysis were estimated using
a weighted average cost of capital determined to be appropriate for the Company. No impairment of goodwill was recorded in the
years ended December 31, 2019 and 2018.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to significant concentrations of credit risk include cash, cash equivalents and
accounts receivable. The Company invests its cash in demand deposit accounts in banks. To date, the Company has not experienced
losses on the investments. The Company’s trade accounts receivables are primarily with distributors. The Company performs
ongoing credit evaluations of its customers’ financial condition, but the Company generally requires no collateral. Reserves
are maintained for potential credit losses, and such losses have been within management’s expectations. Customers who accounted
for at least 10% of the Company’s accounts receivable balances at December 31, 2019 and December 31, 2018 were as follows:
|
|
December 31,
|
|
|
2019
|
|
2018
|
Ingram Micro Inc.
|
|
|
45
|
%
|
|
|
41
|
%
|
Bluestar, Inc.
|
|
|
32
|
%
|
|
|
19
|
%
|
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
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, 2019, 34% of the Company’s accounts payable balances
were concentrated with top three suppliers. For the years ended December 31, 2019 and 2018, top three suppliers accounted for
55% 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.
In 2019, distribution revenue was approximately $19.0 million, compared to $16.2 million in 2018
At
December 31, 2019, the deferred revenue and deferred cost on shipments to distributors were approximately $611,000 and $234,000
respectively, compared to approximately $397,000 and $165,000, respectively, at December 31, 2018.
The
Company also earns revenue from its SocketCare services program which provides for extended warranty and accidental breakage coverage
for selected products. For the year ended December 31, 2019 and 2018, the SocketCare revenue was $0.3 million and 0.2 million,
respectively. 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 SocketCare service revenue is classified as
deferred service revenue and presented on the Company’s balance sheet in its short- and long-term components. At December
31, 2019, the balance of unrecognized SocketCare service revenue was $73,611.
Leases
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires a lessee to recognize a liability representing
future lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For operating
leases, a lessee is required to recognize at inception a right-of-use asset and a lease liability equal to the net present value
of the lease payments, with lease expense recognized over the lease term on a straight-line basis. For leases with a term of twelve
months or less, ASU 2016-02 allows a reporting entity to make an accounting policy election to not recognize a right-of-use asset
and a lease liability, and to recognize lease expense on a straight-line basis. ASU No. 2016-02 is effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Entities
are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest
comparative period in the financial statements. The Company adopted ASU 2016-02 effective January 1, 2019, which had no impact
on the Company’s Statements of Operations. The most significant impact was the recognition of right-of-use assets and liabilities
for the operating lease. Adoption of the standard required the Company to restate the reported results in its earliest comparable
period, January 1, 2018, including the recognition of additional operating lease right-of-use assets and liabilities. As a result,
there was an increase in assets and corresponding liabilities of approximately $1.57 million on January 1, 2018. At December 31,
2019, the balances of right-of-use assets and liabilities for the operating lease are approximately $0.93 million and $1.13 million,
respectively, compared to approximately $1.27 million and $1.51 million, respectively, at December 31, 2018.
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, 2019 and 2018:
Year
|
|
Balance at
Beginning of Year
|
|
Additional Warranty Reserves
|
|
Amounts
Charged to Reserves
|
|
Balance at
End of
Year
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
$
|
78,871
|
|
|
$
|
89,702
|
|
|
$
|
(89,702
|
)
|
|
$
|
78,871
|
|
|
2018
|
|
|
$
|
78,871
|
|
|
$
|
56,383
|
|
|
$
|
(56,383
|
)
|
|
$
|
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 2019 and 2018 was $43,074 and $34,650
respectively. The amount of unamortized capitalized software costs as of December 31, 2019 and 2018 was $138,000 and $173,000,
respectively.
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Advertising
Costs
Advertising
costs are charged to sales and marketing as incurred. The Company incurred $17,539 and $75,286, in advertising costs during 2019
and 2018, 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
Income (Loss) Per Share
The
following table sets forth the reconciliation of basic shares to diluted shares and the computation of basic and diluted net income
(loss) per share:
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
Net income (loss)
|
|
$
|
286,586
|
|
|
$
|
(571,141
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used in computing
net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,984,381
|
|
|
|
6,094,709
|
|
Fully diluted
|
|
|
6,207,731
|
|
|
|
6,094,709
|
|
Net income (loss) per share applicable to common stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
|
$
|
(0.09
|
)
|
Fully diluted
|
|
$
|
0.05
|
|
|
$
|
(0.09
|
)
|
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
In
2019 and 2018, options to purchase 2,169,436 and 2,374,124 shares, respectively, of the Company’s Common Stock were excluded
from the calculation of the diluted earnings per share because their effect would be anti-dilutive.
Stock-Based
Compensation Expense
The
Company has incentive plans that reward employees with stock options and restricted stocks. 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, 2019 and 2018 are as follows:
|
|
Years Ended December 31,
|
Revenues: (in thousands)
|
|
2019
|
|
2018
|
United States
|
|
$
|
14,558
|
|
|
$
|
12,562
|
|
Europe
|
|
|
2,431
|
|
|
|
2,526
|
|
Asia and rest of world
|
|
|
2,264
|
|
|
|
1,366
|
|
|
|
$
|
19,253
|
|
|
$
|
16,454
|
|
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, 2019 and 2018 were as follows:
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
Ingram Micro Inc.
|
|
|
38
|
%
|
|
|
32
|
%
|
BlueStar, Inc.
|
|
|
21
|
%
|
|
|
21
|
%
|
ScanSource, Inc.
|
|
|
*
|
|
|
|
10
|
%
|
___________________________
* less than 10% of total revenues for year ended December 31, 2019.
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Recently
Issued Financial Accounting Standards
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 adopted Topic 842 on January 1, 2019, as the date of our initial application
of the standard. Consequently, financial information for the comparative periods is updated. Our finance and operating lease commitments
are 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 increased our total assets and total liabilities that we reported relative to such amounts prior to adoption.
In
June 2016, the FASB issued ASU 2016-13("ASU 2016-13"), Financial Instruments-Credit Losses. Subsequently, the FASB issued
ASU 2019-05, Financial Instruments- Credit Losses (Topic 326): Targeted Transition Relief and codification improvements to Topic
326 in ASU 2019-11, ASU 2019-04 and ASU 2018-19. The amendments update guidance on reporting credit losses for financial assets.
These amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures,
reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive
cash. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2019, including interim
periods within those fiscal years. All entities may adopt the amendments through a cumulative-effect adjustment to retained earnings
as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach).
The ASU is effective for fiscal years beginning after December 15, 2020. Subsequent to September 30, 2019, the FASB issued ASU
2019-10, "Financial Instruments - Credit Loss (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),"
which defers the effective date for public filers that are considered small reporting companies ("SRC") as defined by
the Securities and Exchange Commission to fiscal years beginning after December 15, 2022, including interim periods within those
fiscal years. Since the Company is an SRC, implementation is not needed until January 1, 2023. The Company will continue to evaluate
the effect of adopting ASU 2016-13 on the Company's financial statements and disclosures.
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 all other recently issued accounting
standards are not expected to have a material impact on the Company’s financial position or results of operations upon adoption.
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE
2 — 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.
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.
Sixth
Financing Agreement
On
June 14, 2019, the Company entered into the Sixth Amended and Restated Business Financing Agreement with the Bank. The Bank waived
the default which occurred for the month ended April 30, 2019 when the Company’s Asset Coverage Ratio was 1.13 to 1.00,
instead of the required 1.25 to 1.00. The Bank also increased the Eligible Receivable threshold for Ingram Micro from 50% to 60%
of domestic receivables, and from 35% to 50% of all receivables (including both domestic and foreign receivables).
Seventh
Financing Agreement
On
January 8, 2020, the Company entered into the Seventh Amended and Restated Business Financing Agreement with the Bank which extends
the maturity date of the Company’s revolving line of credit to January 31, 2022.
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
In
2019, total repayment under the term loan was $0.5 million. Total amount borrowed under the domestic and international lines was
$17.42 million and the total repayment was $17.33 million. Amounts outstanding under the term loan and bank credit facilities
at December 31, 2019 are as follows:
|
|
December 31, 2019
|
Term loan
|
|
$
|
333,333
|
|
Less: current-portion of term loan
|
|
|
(333,333
|
)
|
Long-term portion of term loan
|
|
$
|
—
|
|
|
|
December 31, 2019
|
Lines of credit -domestic line
|
|
$
|
1,204,915
|
|
Lines of credit -EXIM line
|
|
|
207,534
|
|
Total lines of credit
|
|
$
|
1,412,449
|
|
Total
interest expenses on the term loan and on the amounts drawn under the Company’s bank credit lines for 2019 were $44,541
and $55,571, respectively. 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, 2019 and December 31, 2018 was $14,466 and $13,546, respectively. At December
31, 2019, the Company’s unused available line of credit was approximately $0.4 million.
NOTE
3 — Commitments and Contingencies
Operating
Lease Obligations
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 1st of each year.
The
Company recognizes operating lease expense on a straight-line basis over the lease term. Rental expense under the operating lease
for the years ended December 31, 2019 and 2018 was $412,833.
Cash
payments included in the measurement of our operating lease liabilities were $460,053 for 2019, compared to $442,359 for 2018.
Future
minimum lease payments under the operating lease at December 31, 2019 are shown below:
Annual minimum payments:
|
|
Amount
|
2020
|
|
$
|
478,455
|
|
2021
|
|
|
497,594
|
|
2022
|
|
|
253,675
|
|
Total minimum payments
|
|
|
1,229,724
|
|
Less: Present value factor
|
|
|
(253,675
|
)
|
Total operating lease liabilities
|
|
|
1,134,349
|
|
Less: Current portion of operating lease
|
|
|
(419,288
|
)
|
Long-term portion of operating
lease
|
|
$
|
715,062
|
|
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Finance
Lease Obligations
The
Company leases certain of its equipment under finance leases. The leases are collateralized by the underlying assets. At December
31, 2019 and 2018, property and equipment with costs of $100,584, were subject to such financing arrangements. The accumulated
depreciation of the assets associated with the finance leases as of December 31, 2019 and December 31, 2018, amounted to $92,571
and $76,546 respectively.
Future
minimum payments under financing lease and equipment financing arrangements as of December 31, 2019 are as follows:
Annual minimum payments:
|
|
Amount
|
2020
|
|
$
|
8,455
|
|
Less amount representing interest
|
|
|
(164
|
)
|
Present value of net minimum payments
|
|
$
|
8,291
|
|
Current portion of finance leases
|
|
|
(8,291
|
)
|
Long-term portion of finance leases
|
|
$
|
—
|
|
Purchase
Commitments
At
December 31, 2019, the Company’s non-cancelable purchase commitments for inventory to be used in the ordinary course of
business during 2020 were approximately $3,554,000.
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
4 — Stock-Based Compensation Plan
Stock-Based
Compensation Program
The
Company has one share-based compensation 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 restricted stock
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.
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Stock-Based
Compensation Information
The
stock-based compensation expense included in the Company’s statements of income for the years ended December 31, 2019 and
2018, consisted of the following:
|
|
Years Ended December 31,
|
Income Statement Classification
|
|
2019
|
|
2018
|
Cost of revenues
|
|
$
|
94,803
|
|
|
$
|
81,141
|
|
Research and development
|
|
|
151,121
|
|
|
|
128,552
|
|
Sales and marketing
|
|
|
121,633
|
|
|
|
126,312
|
|
General and administrative
|
|
|
152,334
|
|
|
|
151,801
|
|
|
|
$
|
519,891
|
|
|
$
|
487,806
|
|
As
of December 31, 2019, the remaining unamortized stock-based compensation expense was $967,893 and is expected to be amortized
over a weighted average period of 2.67 years.
Stock
Options – Stock option awards have an exercise price equal to the closing price on the date of grant, expire in
ten years from the date of grant and vest over a four-year period at 25% per year. 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 2019 and 2018 was $1.08 and $1.62, respectively, using the following weighted-average assumptions:
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
Risk-free interest rate (%)
|
|
|
1.614
|
%
|
|
|
2.96
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Volatility factor
|
|
|
42.58
|
%
|
|
|
56.02
|
%
|
Expected option life (years)
|
|
|
7.2
|
|
|
|
6.4
|
|
The
risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant; the dividend yield is calculated as the
ratio of dividends paid per share of common stock to the stock price on the date of grant; the expected life is based on historical
and expected exercise behavior; and volatility is based on the historical volatility of the Company’s stock price over the
expected life of the option.
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
The
table below presents the information related to stock option activity for the years ended December 31, 2019 and 2018:
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
Total intrinsic value of stock options exercised
|
|
$
|
16,568
|
|
|
$
|
197,130
|
|
Cash received from stock option exercises
|
|
$
|
23,314
|
|
|
$
|
279,176
|
|
Changes
in stock options as of and for the years ended December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
Outstanding
Options
|
|
|
|
Shares
Available
For Grant
|
|
|
|
Number
of Shares
|
|
|
|
Weighted
Average
Price Per Share
|
|
|
|
Remaining Contractual Term
(in years)
|
|
|
|
Intrinsic
Value
|
|
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
|
|
|
|
|
|
|
|
|
|
Increase in shares authorized
|
|
|
235,324
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(551,256
|
)
|
|
|
551,256
|
|
|
$
|
2.20
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
(24,494
|
)
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
508,100
|
|
|
|
(508,100
|
)
|
|
$
|
2.92
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
|
308,871
|
|
|
|
2,392,786
|
|
|
$
|
2.40
|
|
|
|
5.58
|
|
|
$
|
193,170
|
|
Exercisable
|
|
|
|
|
|
|
1,714,299
|
|
|
$
|
2.34
|
|
|
|
4.17
|
|
|
$
|
193,170
|
|
Unvested
|
|
|
|
|
|
|
683,589
|
|
|
$
|
2.50
|
|
|
|
9.08
|
|
|
|
—
|
|
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, 2019 and 2018, a total of 235,324 and 280,445 additional shares, respectively, became
available for grant from the 2004 Plan.
The
following table summarizes information about stock options outstanding and exercisable at December 31, 2019:
|
|
|
|
|
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
|
|
|
|
340,380
|
|
|
|
3.58
|
|
|
$
|
1.05
|
|
|
|
340,380
|
|
|
$
|
1.05
|
|
|
$1.50 - $1.82
|
|
|
|
141,855
|
|
|
|
2.08
|
|
|
$
|
1.73
|
|
|
|
141,855
|
|
|
$
|
1.73
|
|
|
$1.89 - $2.27
|
|
|
|
513,647
|
|
|
|
6.08
|
|
|
$
|
2.07
|
|
|
|
369,493
|
|
|
$
|
2.07
|
|
|
$2.32 - $2.49
|
|
|
|
474,860
|
|
|
|
6.00
|
|
|
$
|
2.34
|
|
|
|
135,317
|
|
|
$
|
2.34
|
|
|
$2.50 - $2.75
|
|
|
|
318,182
|
|
|
|
6.17
|
|
|
$
|
2.69
|
|
|
|
300,210
|
|
|
$
|
2.69
|
|
|
$2.82 - $2.93
|
|
|
|
219,374
|
|
|
|
8.17
|
|
|
$
|
2.93
|
|
|
|
107,459
|
|
|
$
|
2.93
|
|
|
$3.04 - $3.88
|
|
|
|
200,880
|
|
|
|
3.67
|
|
|
$
|
3.37
|
|
|
|
194,901
|
|
|
$
|
3.37
|
|
|
$4.22 - $4.49
|
|
|
|
183,608
|
|
|
|
7.42
|
|
|
$
|
4.24
|
|
|
|
124,684
|
|
|
$
|
4.24
|
|
|
$0.95 - $4.49
|
|
|
|
2,392,786
|
|
|
|
5.58
|
|
|
$
|
2.40
|
|
|
|
1,714,299
|
|
|
$
|
2.40
|
|
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Restricted
stock - The restricted stocks
are issued to employees and consultants and are held in escrow by the Company until the shares vest on the schedule of 15% after
year one, 20% after year two, 25% after year three and 40% after year four, subject to the employees and consultants being a continuing
service provider on the vesting dates. If the service or employment is terminated, unvested shares revert to the Company. Shares
are registered at grant, so share owners may vote at the annual stockholder meeting. Restricted stocks are granted at zero cost
basis. Compensation cost of the restricted stocks is recognized on a straight-line basis over the 4-year vesting period.
The
following table summarizes information about restricted stocks as of and for the years ended December 31, 2019:
|
|
Number of
restricted
stock
|
|
Weighted
average grant-
date fair value
|
Granted
|
|
|
127,871
|
|
|
$
|
1.94
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
Forfeited / Cancelled
|
|
|
(17,800
|
)
|
|
$
|
1.90
|
|
Restricted stock outstanding at December 31, 2019
|
|
|
110,071
|
|
|
$
|
1.94
|
|
NOTE
5 — Shares Reserved
Common
stock reserved for future issuance was as follows:
|
|
December 31,
|
|
|
2019
|
|
2018
|
Stock option grants outstanding (see Note 4)
|
|
|
2,392,786
|
|
|
|
2,374,124
|
|
Reserved for future stock option grants (see Note 4)
|
|
|
308,871
|
|
|
|
116,703
|
|
|
|
|
2,701,657
|
|
|
|
2,490,827
|
|
NOTE
6 — 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. Effective September 1, 2019, the Company started to provide
a match to employees’ 401(k) savings at 3% of employees’ contribution up to $100 per month. Administrative expenses
relating to the 401(k) Plan are not significant.
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE
7 — Income Taxes
The
Company recorded a net income tax expense $219,000 for 2019, compared to an income tax benefit of $143,000 for 2018.
The
components of income taxes for the periods ended December 31, 2019 and 2018 are as follows:
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
Federal
|
|
$
|
(54,876
|
)
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Total Current
|
|
|
(54,876
|
)
|
|
|
—
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
199,634
|
|
|
|
(50,858
|
)
|
State
|
|
|
74,370
|
|
|
|
(92,601
|
)
|
Total Deferred
|
|
|
274,004
|
|
|
|
(143,459
|
)
|
Income tax (benefit) expense
|
|
$
|
219,128
|
|
|
$
|
(143,459
|
)
|
Reconciliation
of the statutory federal income tax rate to the Company's effective tax rate:
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
Federal tax at statutory rate
|
|
|
21.00
|
%
|
|
|
21.00
|
%
|
State income tax rate
|
|
|
6.98
|
%
|
|
|
6.98
|
%
|
Remeasurement of deferred taxes
|
|
|
—
|
|
|
|
—
|
|
Expenses and credits not benefited
|
|
|
27.51
|
%
|
|
|
(7.90
|
%)
|
Provision for taxes
|
|
|
55.49
|
%
|
|
|
20.08
|
%
|
As
of December 31, 2019, the Company did not recognize deferred tax assets relating to an excess tax benefit for stock-based compensation
deduction of $2,539,000. 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, 2019, the Company released valuation allowance
against substantially all deferred tax assets. Significant components of net deferred tax assets are valued approximately as follows:
SOCKET
MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
|
|
December 31,
|
Deferred tax assets:
|
|
2019
|
|
2018
|
Net operating loss carryforwards
|
|
$
|
4,546,000
|
|
|
$
|
4,849,000
|
|
Credits
|
|
|
1,014,000
|
|
|
|
942,000
|
|
Capitalized research and development costs
|
|
|
—
|
|
|
|
—
|
|
Other acquired intangibles
|
|
|
—
|
|
|
|
6,000
|
|
Accruals not currently deductible
|
|
|
685,000
|
|
|
|
648,000
|
|
Depreciation
|
|
|
58,000
|
|
|
|
75,000
|
|
Total deferred tax assets
|
|
|
6,303,000
|
|
|
|
6,520,000
|
|
Valuation allowance for deferred tax assets
|
|
|
(626,000
|
)
|
|
|
(569,000
|
)
|
Net deferred tax assets
|
|
|
5,677,000
|
|
|
|
5,951,000
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Acquired intangibles
|
|
|
(170,000
|
)
|
|
|
(170,000
|
)
|
Net deferred tax assets
|
|
$
|
5,507,000
|
|
|
$
|
5,781,000
|
|
As
of December 31, 2019, the Company had net operating loss carryforwards for federal income tax purposes of approximately $20,623,000
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 $626,000. As of December 31, 2019, the Company had net operating loss carryforwards
for California state income tax purposes of approximately $10,713,000, which will expire at various dates in 2029 and through
2038, and state research and development tax credits of approximately $388,000, which can be carried forward indefinitely.
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, 2019
|
|
$
|
942,000
|
|
Decreases in UTBs taken in prior years
|
|
|
—
|
|
Increases in UTBs taken in current years
|
|
|
77,000
|
|
Ending balance at December 31, 2019
|
|
$
|
1,019,000
|
|
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
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
8— Subsequent Events
On
January 8, 2020, the Company entered into the Seventh Amended and Restated Business Financing Agreement with the Bank which extends
the maturity date of the Company’s revolving line of credit to January 31, 2022.
As
of March 23, 2020, 287,000 restricted stocks at an average price of $1.52 per share have been granted from the 2004 Equity Incentive
Plan subsequent to December 31, 2019.