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 our 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, 2020 and 2019, 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.
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 2020, 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 gain of $10,700 compared to a net loss of $2,300 in 2019.
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, 2020 and 2019:
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
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
$
|
40,651
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40,651
|
|
|
2019
|
|
|
$
|
89,058
|
|
|
$
|
—
|
|
|
$
|
(48,407
|
)
|
|
$
|
40,651
|
|
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, 2020 and 2019 consisted of the following:
|
|
December 31,
|
|
|
2020
|
|
2019
|
Raw materials and sub-assemblies
|
|
$
|
3,642,377
|
|
|
$
|
3,767,588
|
|
Finished goods
|
|
|
281,104
|
|
|
|
241,681
|
|
Inventory reserves
|
|
|
(727,639
|
)
|
|
|
(830,361
|
)
|
Inventory, net
|
|
$
|
3,195,842
|
|
|
$
|
3,178,908
|
|
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, 2020 and 2019 consisted of the following:
|
|
December 31,
|
|
|
2020
|
|
2019
|
Prepaid insurance
|
|
$
|
82,296
|
|
|
$
|
47,884
|
|
Product certification costs
|
|
|
75,592
|
|
|
|
83,749
|
|
Prepaid inventory purchases
|
|
|
93,859
|
|
|
|
77,606
|
|
Prepaid maintenance contracts and other prepaid expenses
|
|
|
83,639
|
|
|
|
102,888
|
|
Prepaid expenses and other current assets
|
|
$
|
335,386
|
|
|
$
|
312,127
|
|
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, 2020 and 2019, was $553,328 and $419,856, respectively.
Goodwill
In
January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU) 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this update
eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing
the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which
the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount
of goodwill allocated to that reporting unit. In addition, income tax effects from any tax-deductible goodwill on the carrying
amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable.
The
Company tests its goodwill 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.
As
of September 30, 2020, the Company experienced a triggering event due to a drop in its stock price, which had been negatively
impacted by the economic downturn caused by COVID-19 pandemic and performed a quantitative analysis for potential impairment of
its goodwill. The Company's fair value measurement approach combines the income approach, which estimates fair value based upon
projections of future revenues, expenses, and cash flows discounted to its present value, and market valuation technique. The
income valuation technique uses estimates and assumptions including the projected future cash flows, discount rate reflecting
the risk attributable to the Company, perpetual growth rate, and projected future economic and market conditions. Under the market
approach, the principal assumption included an estimate for a control premium. As a result of the analysis, the Company determined
the carrying value exceeded its fair value and recorded a non-cash goodwill impairment charge of $4,427,000 at September 30, 2020.
No impairment of goodwill was recorded in the year ended December 31, 2019.
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.
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
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, 2020 and December 31, 2019 were as follows:
|
|
December 31,
|
|
|
2020
|
|
2019
|
Ingram Micro Inc.
|
|
|
34
|
%
|
|
|
45
|
%
|
Bluestar, Inc.
|
|
|
29
|
%
|
|
|
32
|
%
|
ScanSource, Inc.
|
|
|
13
|
%
|
|
|
*
|
|
Bluestar Europe DistributionBV
|
|
|
11
|
%
|
|
|
*
|
|
* Customer accounted for less than 10% of the Company’s 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, 2020, 15% of the Company’s accounts payable balances
were concentrated with top two suppliers. For the years ended December 31, 2020 and 2019, top three suppliers accounted for 64%
and 55%, respectively, of inventory purchases.
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 2020, distribution revenue was approximately $13.7 million, compared to $17.2 million in 2019. On December 31, 2020, the deferred
revenue and deferred cost on shipments to distributors were approximately $451,000 and $170,000 respectively, compared to approximately
$611,000 and $234,000, respectively, at December 31, 2019.
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, 2020 and 2019, the SocketCare revenue was $35,000 and $42,000, 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, 2020,
the balance of unrecognized SocketCare service revenue was $54,000.
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Cost
of Sales and Gross Margins
Cost
of sales primarily consists of the costs to manufacture our products, including the costs of materials, contract manufacturing,
shipping costs, personnel and related expenses including stock-based compensation, equipment and facility expenses, warranty costs
and inventory excess and obsolete provisions. The factors that impact our gross margins are the cost of materials, the mix of
products and the extent to which we are able to efficiently utilize our manufacturing capacity.
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. The Company adopted ASU 2016-02 effective January
1, 2019. At December 31, 2020, the balances of right-of-use assets and liabilities for the operating lease are approximately $0.60
million and $0.74 million, respectively, compared to approximately $0.93 million and $1.13 million, respectively, at December
31, 2019.
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, 2020 and 2019:
Year
|
|
Balance at
Beginning of Year
|
|
Additional Warranty Reserves
|
|
Amounts
Charged to Reserves
|
|
Balance at
End of
Year
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
$
|
78,871
|
|
|
$
|
73,734
|
|
|
$
|
(73,734
|
)
|
|
$
|
78,871
|
|
|
2019
|
|
|
$
|
78,871
|
|
|
$
|
89,702
|
|
|
$
|
(89,702
|
)
|
|
$
|
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 2020 and 2019 was $43,572 and $43,074
respectively. The amount of unamortized capitalized software costs as of December 31, 2020 and 2019 was approximately $94,000
and $138,000, respectively.
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Advertising
Costs
Advertising
costs are charged to sales and marketing as incurred. The Company incurred $19,863 and $17,539, in advertising costs during 2020
and 2019, 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,
|
|
|
2020
|
|
2019
|
Numerator:
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,278,601
|
)
|
|
$
|
286,586
|
|
Net income (loss) allocated to restricted stock award
|
|
|
188,375
|
|
|
|
—
|
|
Adjusted net income (loss) for basic earnings per share
|
|
$
|
(3,090,226
|
)
|
|
$
|
286,586
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used in computing net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,036,310
|
|
|
|
5,984,381
|
|
Fully diluted
|
|
|
6,036,310
|
|
|
|
6,207,731
|
|
Net income (loss) per share applicable to common stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.51
|
)
|
|
$
|
0.05
|
|
Fully diluted
|
|
$
|
(0.51
|
)
|
|
$
|
0.05
|
|
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
In 2020, the shares used in computing diluted net loss per share do not include 2,437,006 dilutive stock options and restricted stocks,
nor 1,047,945 dilutive conversion shares as the effect is anti-dilutive given the Company’s loss. In 2019, 2,169,436 stock options
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, 2020 and 2019 are as follows:
|
|
Years Ended December 31,
|
Revenues: (in thousands)
|
|
2020
|
|
2019
|
United States
|
|
$
|
12,137
|
|
|
$
|
14,558
|
|
Europe
|
|
|
2,209
|
|
|
|
2,431
|
|
Asia and rest of world
|
|
|
1,354
|
|
|
|
2,264
|
|
|
|
$
|
15,700
|
|
|
$
|
19,253
|
|
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.
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Major
Customers
Customers
who accounted for at least 10% of total revenues for the years ended December 31, 2020 and 2019 were as follows:
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
Ingram Micro Inc.
|
|
|
31
|
%
|
|
|
38
|
%
|
BlueStar, Inc.
|
|
|
23
|
%
|
|
|
21
|
%
|
Recently
Issued Financial Accounting Standards
In
August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and
Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)” (“ASU 2020-06”).
ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including
convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative,
which aims to reduce unnecessary complexity in U.S. GAAP. The ASU’s amendments are effective for fiscal years beginning
after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2020-06
will have on its financial statements.
In
October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivable-Nonrefundable fees and
other costs. The amendments in that Update shortened the amortization period for certain purchased callable debt securities held
at a premium by requiring that entities amortize the premium associated with those callable debt securities within the scope of
paragraph 310-20-25-33 to the earliest call date. The amendments affect the guidance in Accounting Standards Update No. 2017-08,
receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.
The amendments is this update become effective for fiscal years, and interim periods within those fiscal years beginning after
December 15, 2020. Early adoption is not permitted. The Company is currently evaluating the impact ASU 2020-08 will have on its
financial statements.
In
October 2020, the FASB issued ASU 2020-10, Codification Improvements. This update ensures all disclosure guidance that requires
or provides an option for an entity to provide notes to the financial statements is included in the Disclosure Section (Section
50) of the Codification. This update also provides various codification improvements in which the original guidance was unclear.
This update becomes effective for annual periods beginning after December 15, 2020 and early adoption is permitted for any annual
or interim period for which financial statements have not been issued. The Company does not expect the adoption of this new standard
will have a material impact on its financial condition or results of operations.
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
The
Company entered the first Financing Agreement with Western Alliance Bank, an Arizona corporation in 2014, and the agreement has
been amended and extended through the years.
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.
Eighth
Financing Agreement
On
August 28, 2020, the Company entered into the Eighth Amended and Restated Business Financing Agreement with the Bank. The Bank
consented to the issuance of subordinated debt in the amount less than $2,000,000, at the annual interest rate less than 10% and
maturing no sooner than 3 years.
During
the twelve months ended December 31, 2020, total repayments of the term loan was $333,333. Total amount borrowed under the domestic
and international lines was $5,630,000 and the total repayments was $7,042,449. At December 31, 2020, the available borrowing
capacity was approximately $1,487,000. There were no amounts outstanding under the term loan and bank credit facilities on December
31, 2020.
Total
interest expenses on the term loan and on the amounts drawn under the Company’s bank credit lines for 2020 were $6,152 and
$20,461, respectively. 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. Accrued interest payable related to the amounts outstanding under the term
loan and the bank credit facilities at December 31, 2020 and December 31, 2019 was zero and $14,466, respectively.
NOTE
3 — Term loans
PPP
Loan
On
April 20, 2020, the Company received $1,058,700 of loan proceeds under the Paycheck Protection Program (“PPP”) which
was established as part of the Coronavirus Aid, Relief, and Economic Act (“CARES Act”) and is administered by the
U.S. Small Business Administration (“SBA”). The application for these funds requires the Company to, in good faith,
certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company.
This certification further requires the Company to take into account the current business activity and the ability to access other
sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business.
The receipt of these funds, and the forgiveness of the loan, is dependent on the Company having initially qualified for the loan
and qualifying for the forgiveness of such loan based on its future adherence to the forgiveness criteria. The loan has a fixed
interest rate of 1% and matures in two years. Payments of principal and interest are deferred for a period of six months from
the date on which the PPP loan is distributed. The PPP loan was primarily used to cover payroll costs, rent, and utility costs
during the covered period. On December 10, 2020, the Company received a notice from Western Alliance Bank that the full principal
amount of the PPP loan and the accrued interest were forgiven.
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Economic
Injury Disaster Loan (EIDL)
On
June 26, 2020, the Company executed the standard loan documents required for a securing loan of $150,000 offered by the U.S. Small
Business Administration under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact
of the COVID-19 pandemic on the Company’s business. Proceeds of the EIDL were used for working capital purposes. Interest
accrues at the rate of 3.75% per annum and accrues from the date of inception. Installment payments, including principal and interest,
are due monthly beginning June 26, 2021 (twelve months from the date of the EIDL) in the amount of $731. The balance of principal
and interest is payable 30 years from the date of the EIDL. The EIDL is secured by a security interest on all of the Company’s
assets. On August 28, 2020, the Company paid off the Economic Injury Disaster Loan in full.
On
June 23, 2020, the Company received $10,000 from US Small Business Administration as part of Economic Injury Disaster Loan (“EIDL”).
This was a grant and does not need to be repaid. The Company recorded it as other income in Q2 2020.
NOTE
4 — Secured Subordinated Convertible Notes Payable
On
August 31, 2020, the Company completed a secured subordinated convertible note financing of $1,530,000, including $1,350,000 from
officers, directors, and family members. Because the Financing involved such parties related to the Company, a special committee
of the Board comprising the Board’s disinterested directors approved the Financing.
The
funds raised are used to increase the Company’s working capital balances. The notes have a three-year term that accrue interest
at 10% per annum and mature on August 30, 2023. The interest on the notes is payable quarterly in cash. The holder of each note
may require the Company to repay the principal amount of the note plus accrued interest at any time after August 31, 2021. The
principal amount of each note is convertible at any time, at the option of the holder, into shares of the Company’s common
stock at a conversion price of $1.46 per share, which was the market closing price of the common stock on Friday, August 28, 2020,
the closing date of the financing. The notes did not contain a beneficial conversion feature because the conversion price is higher
than the market closing price on the date of the notes payable. The notes are secured by the assets of the Company and are subordinated
to amounts outstanding under the Company’s working capital bank line of credit with Western Alliance Bank.
Total
issuance costs associated with the financing is $96,515, and the costs are presented in the balance sheet as a direct
deduction from the notes payable balance of $1,530,000 as a contra-liability. The issuance costs are amortized over three
years, the term of the notes payable, and the amortization expense is reported as interest expense. The amortization of debt
discount for the year ended December 31, 2020 was $11,030. The remaining debt discount of $88,243 will be amortized through August 30, 2023.
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Total
interest expense recognized related to the convertible note for the year ended December 31, 2020 was $62,172.
As
of February 22, 2021, two noteholders elected to convert note principal of $130,000 into shares of Common Stock, $0.001 par value
per shares, at the conversion price.
NOTE
5 — Commitments and Contingencies
Operating
Lease Obligations
The
Company adopted ASU 2016-02, Leases (Topic 842) effective January 1, 2019 and restated its reported results in January 2018, including
the recognition of additional operating lease right-of-use assets and liabilities. On January 1, 2018, the Company recognized operating lease right-of-use assets and operating lease liabilities in the amount of approximately
$1.57 million and $1.85 million, respectively, which represented the presented the present value of future lease payments using a discount
rate of 6.25% per annum.
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. Operating lease expense is recognized on a straight-line basis over the lease term. In June
2020, the Company also signed a new two-year equipment operating lease agreement. The Company will pay $1,519 in monthly installments
starting in September of 2020 through June 2022.
The
operating lease expense was allocated in cost of goods sold and operating costs based on department headcount and amounted to
$418,909 and $412,833 for the twelve-month periods ended December 31, 2020 and 2019, respectively.
On
December 30, 2020, the balances of right-of-use assets and liabilities for the operating leases were approximately $0.61 million
and $0.74 million, respectively, compared to approximately $0.94 million, and $1.13 million, respectively, on December 31, 2019.
Cash
payments included in the measurement of our operating lease liabilities were $478,461 and $460,053 for the twelve-month periods
ended December 30, 2020 and 2019, respectively.
Future
minimum lease payments under the operating lease at December 31, 2020 are shown below:
Annual minimum payments:
|
|
Amount
|
2021
|
|
|
515,822
|
|
2022
|
|
|
262,789
|
|
Total minimum payments
|
|
|
778,611
|
|
Less: Present value factor
|
|
|
(37,260
|
)
|
Total operating lease liabilities
|
|
|
741,351
|
|
Less: Current portion of operating lease
|
|
|
(483,254
|
)
|
Long-term portion of operating lease
|
|
$
|
258,097
|
|
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Finance
Lease Obligations
The
new standard, ASU 2016-02 classifies lessee leases into two types, operating and finance. The Company leases certain of its equipment
under finance leases. The leases are collateralized by the underlying assets. On December 31, 2020, the Company has no equipment
subject to financing arrangement, compared to equipment with a cost of $100,584 on December 31, 2019. The accumulated depreciation
of the assets associated with the finance leases as of December 31, 2019 amounted $92,571.
Purchase
Commitments
On
December 31, 2020, the Company’s non-cancelable purchase commitments for inventory to be used in the ordinary course of
business during 2021 were approximately $6,256,000.
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
6 — 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.
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, 2020 and 2019, a total of 240,707 and 235,324 additional shares, respectively, became
available for grant from the 2004 Plan.
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, 2020 and
2019, consisted of the following:
|
|
Years Ended December 31,
|
Income Statement Classification
|
|
2020
|
|
2019
|
Cost of revenues
|
|
$
|
86,649
|
|
|
$
|
94,803
|
|
Research and development
|
|
|
137,537
|
|
|
|
151,121
|
|
Sales and marketing
|
|
|
121,802
|
|
|
|
121,633
|
|
General and administrative
|
|
|
161,063
|
|
|
|
152,334
|
|
|
|
$
|
507,051
|
|
|
$
|
519,891
|
|
As
of December 31, 2020, the remaining unamortized stock-based compensation expense was $935,882 and is expected to be amortized
over a weighted average period of 2.61 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 2020 and 2019 was $0.50 and $1.08, respectively, using the following weighted-average assumptions:
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
Risk-free interest rate (%)
|
|
|
0.68
|
%
|
|
|
1.614
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Volatility factor
|
|
|
43.62
|
%
|
|
|
42.58
|
%
|
Expected option life (years)
|
|
|
7.4
|
|
|
|
7.2
|
|
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.
The
table below presents the information related to stock option activity for the years ended December 31, 2020 and 2019:
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
Total intrinsic value of stock options exercised
|
|
$
|
167,882
|
|
|
$
|
16,568
|
|
Cash received from stock option exercises
|
|
$
|
168,065
|
|
|
$
|
23,314
|
|
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
The
following summarizes stock option activity under the 2004 Plan as of and for the years ended December 31, 2020 and 2019:
|
|
|
Outstanding
Options
|
|
|
|
Number
of Shares
|
|
|
|
Weighted
Average
Price Per Share
|
|
|
|
Remaining Contractual Term
(in years)
|
|
|
|
Intrinsic
Value
|
|
Balance at December 31, 2018
|
|
|
2,374,124
|
|
|
$
|
2.54
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
551,256
|
|
|
$
|
2.20
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(24,494
|
)
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(508,100
|
)
|
|
$
|
2.92
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
|
2,392,786
|
|
|
$
|
2.40
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
37,000
|
|
|
$
|
1.08
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(100,239
|
)
|
|
$
|
1.68
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(334,741
|
)
|
|
$
|
2.84
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
|
1,994,806
|
|
|
$
|
2.42
|
|
|
|
5.50
|
|
|
$
|
690,769
|
|
Exercisable
|
|
|
1,602,695
|
|
|
$
|
2.34
|
|
|
|
4.75
|
|
|
$
|
603,382
|
|
Unvested
|
|
|
392,111
|
|
|
$
|
2.31
|
|
|
|
8.33
|
|
|
$
|
87,387
|
|
Stock
options outstanding as of December 31, 2020 are summarized below:
|
|
|
|
|
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
|
|
|
|
352,081
|
|
|
|
3.25
|
|
|
$
|
1.06
|
|
|
|
325,873
|
|
|
$
|
1.06
|
|
|
$1.50
- $1.82
|
|
|
|
99,540
|
|
|
|
1.00
|
|
|
$
|
1.74
|
|
|
|
99,540
|
|
|
$
|
1.74
|
|
|
$1.89 - $2.27
|
|
|
|
456,891
|
|
|
|
5.17
|
|
|
$
|
2.07
|
|
|
|
368,771
|
|
|
$
|
2.11
|
|
|
$2.32 - $2.49
|
|
|
|
407,826
|
|
|
|
7.58
|
|
|
$
|
2.34
|
|
|
|
200,125
|
|
|
$
|
2.35
|
|
|
$2.50 - $2.75
|
|
|
|
241,188
|
|
|
|
5.33
|
|
|
$
|
2.71
|
|
|
|
241,188
|
|
|
$
|
2.71
|
|
|
$2.82 - $2.93
|
|
|
|
195,355
|
|
|
|
7.17
|
|
|
$
|
2.93
|
|
|
|
141,206
|
|
|
$
|
2.93
|
|
|
$3.10 - $3.88
|
|
|
|
73,400
|
|
|
|
6.00
|
|
|
$
|
3.69
|
|
|
|
71,600
|
|
|
$
|
3.70
|
|
|
$4.22 - $4.49
|
|
|
|
168,525
|
|
|
|
6.42
|
|
|
$
|
4.25
|
|
|
|
154,392
|
|
|
$
|
4.24
|
|
|
$0.95 - $4.49
|
|
|
|
1,994,806
|
|
|
|
5.50
|
|
|
$
|
2.42
|
|
|
|
1,602,695
|
|
|
$
|
2.34
|
|
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
As
of December 31, 2020, the remaining unamortized stock option compensation expense was $383,720 and is expected to be amortized
over a weighted average period of 1.92 years.
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 summarizes information related to Restricted Stock activity under the 2004 Plan for the years ended December 31, 2020
and 2019:
|
|
|
Number
of Restricted Stocks
|
|
Weighted
Average
Price
Per Share
|
Unvested
as of December 31, 2018
|
|
|
—
|
|
—
|
Granted
|
|
|
127,871
|
|
$ 1.94
|
Vested
|
|
|
—
|
|
—
|
Forfeited
|
|
|
(17,800)
|
|
$ 1.90
|
Unvested
as of December 31, 2019
|
|
|
110,071
|
|
$ 1.94
|
Granted
|
|
|
392,680
|
|
$ 1.50
|
Vested
|
|
|
(17,306)
|
|
$ 1.94
|
Forfeited
|
|
|
(43,245)
|
|
$
1.65
|
Unvested
as December 31, 2020
|
|
|
442,200
|
|
$ 1.58
|
As
of December 31, 2020, the remaining unamortized restricted stock compensation expense was $552,162 and is expected to be amortized
over a weighted average period of 3.10 years.
NOTE
7 — Shares Reserved
Common
stock reserved for future issuance was as follows:
|
|
December 31,
|
|
|
2020
|
|
2019
|
Stock option grants outstanding (see Note 6)
|
|
|
1,994,806
|
|
|
|
2,392,786
|
|
Reserved for future grants
|
|
|
393,351
|
|
|
|
308,871
|
|
|
|
|
2,388,157
|
|
|
|
2,701,657
|
|
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE
8 — 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.
NOTE
9 — Income Taxes
The
Company recorded a net income tax benefit of approximately $51,000 for 2020, compared to an income tax expenses of approximately
$219,000 for 2019.
The
components of income taxes for the periods ended December 31, 2020 and 2019 are as follows:
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
Current:
|
|
|
|
|
Federal
|
|
$
|
(55,676
|
)
|
|
$
|
(54,876
|
)
|
State
|
|
|
4,918
|
|
|
|
—
|
|
Total Current
|
|
|
(50,758
|
)
|
|
|
(54,876
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
199,634
|
|
State
|
|
|
—
|
|
|
|
74,370
|
|
Total Deferred
|
|
|
—
|
|
|
|
274,004
|
|
Income tax (benefit) expense
|
|
$
|
(50,758
|
)
|
|
$
|
219,128
|
|
Reconciliation
of the statutory federal income tax rate to the Company's effective tax rate:
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
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
|
|
|
(27.98
|
)%
|
|
|
27.51
|
%
|
Provision for taxes
|
|
|
0
|
%
|
|
|
55.49
|
%
|
As
of December 31, 2020, the Company did not recognize deferred tax assets relating to an excess tax benefit for stock-based compensation
deduction of $2,622,000. 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.
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
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. Significant components of net deferred tax assets are valued approximately as follows:
|
|
December 31,
|
Deferred tax assets:
|
|
2020
|
|
2019
|
Net operating loss carryforwards
|
|
$
|
4,330,000
|
|
|
$
|
4,546,000
|
|
Credits
|
|
|
948,000
|
|
|
|
1,014,000
|
|
Capitalized research and development costs
|
|
|
—
|
|
|
|
—
|
|
Other acquired intangibles
|
|
|
37,000
|
|
|
|
—
|
|
Accruals not currently deductible
|
|
|
597,000
|
|
|
|
685,000
|
|
Depreciation
|
|
|
140,000
|
|
|
|
58,000
|
|
Total deferred tax assets
|
|
|
6,052,000
|
|
|
|
6,303,000
|
|
Valuation allowance for deferred tax assets
|
|
|
(545,000
|
)
|
|
|
(626,000
|
)
|
Net deferred tax assets
|
|
|
5,507,000
|
|
|
|
5,677,000
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Acquired intangibles
|
|
|
—
|
|
|
|
(170,000
|
)
|
Net deferred tax assets
|
|
$
|
5,507,000
|
|
|
$
|
5,507,000
|
|
As
of December 31, 2020, the Company had net operating loss carryforwards for federal income tax purposes of approximately $20,081,000
which will expire at various dates beginning in 2023 and through 2040. Full valuation allowance is maintained for federal research
and development tax credits of approximately $548,000. As of December 31, 2019, the Company had net operating loss carryforwards
for California state income tax purposes of approximately $9,890,000, which will expire at various dates in 2032 and through 2038,
and state research and development tax credits of approximately $406,000, 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, 2020
|
|
$
|
1,019,000
|
|
Decreases in UTBs in prior years
|
|
|
(32,000
|
)
|
Increases in UTBs in current years
|
|
|
77,000
|
|
Ending balance at December 31, 2020
|
|
$
|
1,064,000
|
|
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, 2020. 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
10 — Subsequent Events
On
January 29, 2021, the Company entered into an Amended and Restated Business Financing Agreement with Western Alliance Bank, an
Arizona corporation which increased the Domestic Line of Credit to $3.0 million that includes $2.0 million revolving facility
and $1.0 million nonformula loan. The $1.0 million Nonformula loan was enrolled in the CalCAP Collateral Support Program and advanced
at closing. The Company will make a principal reduction payment of $125,000, plus all accrued but unpaid interest on the 30th
day of each April, July, October, and January. The Financing Agreement also extended the maturity date of both Domestic and EXIM
Line of Credit to January 31, 2023.
On February 1, 2021, 285,950 restricted stocks at a price of $2.58 per share have been granted from the 2004 Equity Incentive Plan subsequent
to December 31, 2020. The shares include annual refresher grants to all continuing employees with a weighting reflecting the level of
responsibility and performance of the employee and initial grants to two newly hired employees.
On
February 26, 2021, the Company entered into the 2021 Technology Transfer Agreement with SpringCard SAS (the
“SAS”). Under the new agreement, the Company acquired a perpetual, royalty-free license to SAS’ core
contactless technology for use in the Company’s DuraScan D600 and SocketScan S550 Contactless Reader/Writer
products. SAS received: (i) $2,000,000 in shares of the Company’s common stock (“Common Stock”) valued at $10.85 per share or
184,332 shares, subject to a collar whereby, if SAS sells any such shares, up to an aggregate of 92,166 shares, within 14 days following
the stock transfer date (as defined in the Agreement) at a gross sale price less than $10.00 per share, the Company will pay SAS in cash
the lesser of $350,000 or a collar payment equal to the difference between such gross sale price and $10.00 per share; and (ii) a 10-year
warrant to purchase up to an aggregate of 50,000 shares of Common Stock at the price of $10.85 per share (the “Warrant”).
The Warrant is divided into four equal lots of 12,500 shares each, with each lot exercisable on or after each of the following dates until
the expiration date of warrant: January 1, 2022, January 1, 2023, January 1, 2024, and January 1, 2025.
As of March 19, 2021, the Company has issued 712,919 shares of common stock for the exercise of
stock options and 89,400 shares for conversion of the convertible notes.