NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
March
31, 2021
NOTE
1 — Basis
of Presentation
The
accompanying unaudited condensed financial statements of Socket Mobile, Inc. (the “Company”) have been prepared in accordance
with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form
10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring accruals considered necessary for fair presentation have been included. The results of operations for the interim
periods are not necessarily indicative of the operating results for the full fiscal year or any future period. These financial statements
should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2020.
We
continue to monitor developments of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic to our businesses, operating
results, cash flows, liquidity and financial condition will be primarily driven by the severity and duration of the pandemic, the impact
of new strains and variants of the coronavirus, the pandemic’s impact on the economies and the administration of vaccines. Those
primary drivers are beyond our knowledge and control, and as a result, it is difficult to predict the cumulative impact that pandemic
will have on our future sales, operating results, cash flows and financial condition. Furthermore, the impact to our businesses, operating
results, cash flows, liquidity and financial condition may be further adversely impacted if the COVID-19 global pandemic continues to
exist or worsens for a prolonged period of time or if plans to administer vaccines are delayed.
NOTE
2 — Summary of Significant Accounting Policies
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and 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
Equivalents and Fair Value of Financial Instruments
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.
At March 31, 2021 and December 31, 2020, 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.
The
carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, debt and foreign exchange contracts
approximate fair value due to the relatively short period of time to maturity.
SOCKET
MOBILE, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
March
31, 2021
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. At March 31, 2021, the deferred revenue and deferred cost
on shipments to distributors were $524,872 and $178,834, respectively, compared to $450,591 and $170,016, respectively, at December 31,
2020.
The
Company also earns revenue from its SocketCare extended warranty program, which provides extended warranty and accidental breakage coverage
for selected products. For the quarters ended March 31, 2021 and 2020, SocketCare revenue was approximately $7,400 and $9,900, respectively.
A SocketCare warranty purchased at the time of product purchase provides for coverage in either a three-year or a five-year term. The
Company additionally offers comprehensive coverage and warranty term extensions. Revenues from SocketCare services 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 March 31, 2021, the balance of
unrecognized SocketCare service revenue was approximately $47,000.
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 Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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 March 31, 2021, the balances of right-of-use assets and liabilities for the operating
lease are approximately $0.51 million and $0.62 million, respectively, compared to approximately $0.60 million and $0.74 million, respectively,
at December 31, 2020.
SOCKET
MOBILE, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
March
31, 2021
Goodwill
In
January 2017, the FASB issued 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.
No
goodwill impairment of goodwill was recorded in the quarter ended March 31, 2021.
Recently
Issued Financial Accounting Standards
From
time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company
as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards that
are not yet effective will not have a material impact on the Company’s financial position, results of operations or cash flows
upon adoption.
NOTE
3 — Acquisition
On
February 26, 2021, the Company entered into the 2021 Technology Transfer Agreement with SpringCard SAS (“SpringCard”). SpringCard
is a market leader at the forefront of innovative electronic design and development. Its contactless and wireless solutions support a
wide range of customers, from large international corporations to locally focused companies.
Under
the 2021 Technology Transfer Agreement, the Company acquired an irrevocable, perpetual, non-exclusive, transferable, worldwide, unlimited,
unrestricted, royalty-free, fully paid-up right and license to SpringCard’s Contactless Technology Package for use in the Company’s
Contactless Reader/Writer products, D600 and S550. SpringCard received 184,332 shares of the Company’s common stock, subject to
a collar, and a 10-year warrant to purchase up to an aggregate of 50,000 shares of the Company’s common stock at the price of $10.85
per share in four equal lots of 12,500 shares each, with each lot exercisable on or after January 1st of 2022, 2023, 2024 and 2025, respectively,
until the expiration date of warrant. The common stock was issued on March 29, 2021. The fair value of intangible assets acquired is
based on the closing stock price of $7.65 on March 29, 2021. On April 20, 2021, the Company agreed to pay SpringCard the sum of $192,293
to resolve all issues that have arisen due to clerical issues in the implementation of the 2021 Technology Transfer Agreement. The Company
and SpringCard both agreed that, with this payment, the Company shall have no further financial obligation to SpringCard under the 2021
Technology Transfer Agreement. The Unaudited Condensed Balance Sheets include the intangible assets of the acquired technology at the
value of $1,909,433.
SOCKET
MOBILE, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
March
31, 2021
The SpringCard intangible
assets will be amortized over their estimated useful lives of fifteen years on a straight-line basis, commencing April 1, 2021. The estimated
future amortization of intangible assets is as follows:
Fiscal Year
|
Amount
|
|
2021 (April 1, 2021 to December 31, 2021)
|
|
$
|
95,472
|
|
|
2022
|
|
|
127,296
|
|
|
2023
|
|
|
127,296
|
|
|
2024
|
|
|
127,296
|
|
|
2025
|
|
|
127,296
|
|
|
Thereafter
|
|
|
1,304,777
|
|
|
|
|
$
|
1,909,433
|
|
NOTE
4 — Inventories
Inventories
consist principally of raw materials and sub-assemblies, which are stated at the lower of cost (first-in, first-out) or market. Inventories
at March 31, 2021 and December 31, 2020 were as follows:
|
|
March 31,
|
|
December 31,
|
|
|
2021
|
|
2020
|
Raw materials and sub-assemblies
|
|
$
|
4,087,028
|
|
|
$
|
3,642,377
|
|
Finished goods
|
|
|
393,831
|
|
|
|
281,104
|
|
Inventory reserves
|
|
|
(755,943
|
)
|
|
|
(727,639
|
)
|
Inventory, net
|
|
$
|
3,724,916
|
|
|
$
|
3,195,842
|
|
NOTE
5 — Bank Financing Arrangements
The
Company initially entered into a Business Financing Agreement with Western Alliance Bank (the “Bank”), an Arizona corporation,
on February 27, 2014, and this agreement has been amended and extended through the years.
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.
Amended
and Restated Business Financing Agreement
On
January 29, 2021, the Company entered into an Amended and Restated Business Financing Agreement (the “Financing Agreement”)
with the Bank. The agreement increased the Domestic Line of Credit to $3.0 million, including a $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 on February
16, 2021. The Company will make a principal reduction payment of $125,000, plus all accrued but unpaid interest on the 30th day of each
of April, July, October and January. The Financing Agreement also extended the maturity date of both the Domestic and EXIM Line of Credit
to January 31, 2023.
SOCKET
MOBILE, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
March
31, 2021
Amounts
outstanding under the CalCap loan at March 31, 2021 are as follows:
|
|
March 31, 2021
|
Long-term portion of CalCap loan
|
|
$
|
500,000
|
|
Current portion of CalCap loan
|
|
|
500,000
|
|
CalCap loan
|
|
$
|
1,000,000
|
|
During
the three months ended March 31, 2020, total repayment of the term loan was $125,000. Total amount borrowed under the domestic and international
lines was $3,980,000 and the total repayment was $3,452,957. Amounts outstanding under the term loan and bank credit facilities at March
31, 2020 are $208,333 and $1,939,492, respectively.
Interest
expense on the CalCap loan for three months ended March 31, 2021 was $4,306. Accrued interest payable related to the amounts outstanding
under the CalCap loan at March 31, 2021 was $2,917. Interest expense on the term loan for the three months ended March 31, 2020 was $4,027.
Interest expense on the amounts drawn under the Company’s bank credit lines during the three months ended March 31, 2020 was $15,601.
Accrued interest payable related to the amounts outstanding under the term loan and bank credit facilities as of March 31, 2020 was $14,560.
NOTE
6 — 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 original 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 quarter ended
March 31, 2021 was $8,273. The remaining debt discount of $79,970 will be amortized through August 30, 2023.
SOCKET
MOBILE, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
March
31, 2021
As
of March 31, 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.
Total
interest expense recognized related to the convertible note for the quarter ended March 31, 2021 was $44,544.
NOTE
7 — Segment Information and Concentrations
Segment
Information
The
Company operates in the mobile barcode scanning and RFID/NFC data capture market. Mobile scanning typically consists of mobile devices
such as smartphones or tablets, with mobile scanning or NFC 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 three months ended March 31, 2021 and 2020 were as follows:
|
|
Three Months Ended March 31,
|
Revenues:
|
|
2021
|
|
2020
|
United States
|
|
$
|
3,563,055
|
|
|
$
|
3,143,409
|
|
Europe
|
|
|
777,580
|
|
|
|
615,529
|
|
Asia and rest of world
|
|
|
472,344
|
|
|
|
461,748
|
|
Total revenues
|
|
$
|
4,812,979
|
|
|
$
|
4,220,686
|
|
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 the Company’s total revenues for the three months ended March 31, 2021 and 2020 were as follows:
|
|
Three Months Ended March 31,
|
|
|
2021
|
|
2020
|
Ingram Micro, Inc.
|
|
|
25
|
%
|
|
|
36
|
%
|
BlueStar, Inc.
|
|
|
29
|
%
|
|
|
17
|
%
|
SOCKET
MOBILE, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
March
31, 2021
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 and 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 March 31, 2021 and December 31, 2020 were as follows:
|
|
March 31,
|
|
December 31,
|
|
|
2021
|
|
2020
|
Ingram Micro Inc.
|
|
|
30
|
%
|
|
|
34
|
%
|
BlueStar, Inc.
|
|
|
30
|
%
|
|
|
29
|
%
|
ScanSource, Inc.
|
|
|
12
|
%
|
|
|
13
|
%
|
Bluestar Europe Distribution BV
|
|
|
*
|
|
|
|
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 due 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. For the three months ended March 31, 2021 and 2020, the top two suppliers accounted
for 37% and 60%, respectively, of the inventory purchases. At March 31, 2021 and December 31, 2020, 17% and 15%, respectively, of the
Company’s accounts payable balances were concentrated with a single supplier.
NOTE
8 — Stock-Based Compensation
The
Company recognizes the compensation cost in the financial statements for all stock-based awards to employees, including grants of stock
options and restricted stocks, based on the fair value of the awards as of the date that the awards are issued. Compensation cost for
stock-based awards is recognized on a straight-line basis over the vesting period.
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. There were no stock options granted for the three months ended
March 31, 2021 and 2020.
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 each of 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. For
the three months ended March 31, 2021 and 2020, the Company awarded 285,950 and 287,000 shares of restricted stock, respectively. Due
to the existence of restrictions on sale or transfer until the stocks vest, the Company does not count the restricted stocks as issued
and outstanding shares until they vest.
SOCKET
MOBILE, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
March
31, 2021
Total
stock-based compensation expense for the three months ended March 31, 2021 and 2020, was $148,772 and $132,065, respectively.
NOTE
9 — 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:
|
|
Three Months Ended March 31,
|
|
|
2021
|
|
2020
|
Numerator:
|
|
|
|
|
Net income (loss)
|
|
$
|
202,902
|
|
|
$
|
(90,327
|
|
Net income (loss) allocated to restricted stock award
|
|
|
17,365
|
|
|
|
(1,547
|
)
|
Adjusted net income (loss) for basic earnings per share
|
|
$
|
185,537
|
|
|
$
|
(88,780
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used in computing
net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,484,391
|
|
|
|
6,014,007
|
|
Effect of dilutive stock options
|
|
|
821,597
|
|
|
|
—
|
|
Diluted
|
|
|
7,305,988
|
|
|
|
6,014,007
|
|
Net income (loss) per share applicable to common stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
0.03
|
|
|
$
|
(0.01
|
)
|
In
the three months ended March 31, 2021, 50,000 warrants and 1,007,081 conversion shares were excluded as their effect would be anti-dilutive.
In
the three months ended March 31, 2020, 2,536,925 stock options and restricted stock were excluded in the calculation of diluted net loss
per share because their effect would be anti-dilutive.
SOCKET
MOBILE, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
March
31, 2021
NOTE
10 — 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 also signed a two-year equipment operating lease agreement in June 2020.
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 using a discount rate of 6.25% per annum.
The
operating lease expense was allocated in cost of goods sold and operating costs based on department headcount and amounted to $107,765
and $103,208 for the first quarter of 2021 and 2020, respectively.
On
March 31, 2021, the balances of right-of-use assets and liabilities for the operating lease are approximately $0.51 million and $0.63
million, respectively, compared to approximately $0.61 million and $0.74 million, respectively, at December 31, 2020.
Cash
payments included in the measurement of our operating lease liabilities were $126,516 and $117,268 for the three months ended March 31,
2021 and 2020, respectively.
Future
minimum lease payments under the operating lease at March 31, 2021 are shown below:
Annual minimum payments:
|
|
Amount
|
2021 (April 1 to December 31, 2021)
|
|
|
389,305
|
|
2022 (through June 30, 2022)
|
|
|
262,789
|
|
Total minimum payments
|
|
|
652,094
|
|
Less: Present value factor
|
|
|
(26,352
|
)
|
Total operating lease liabilities
|
|
|
625,742
|
|
Less: Current portion of operating lease
|
|
|
(495,695
|
)
|
Long-term portion of operating lease
|
|
$
|
130,047
|
|
Finance
Lease Obligations
The
new standard, ASU 2016-02 classifies lessee leases into two types, operating and finance. On March 31, 2021, the Company has no equipment
under finance lease. On March 31, 2020, equipment with a cost of $100,584 was subject to financing arrangements. The accumulated depreciation
of the assets associated with the finance leases as of March 31, 2020 amounted to $96,578.
Purchase
Commitments
As
of March 31, 2021, the Company has non-cancelable purchase commitments for inventory to be used in the ordinary course of business of
approximately $8,689,000.
SOCKET
MOBILE, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
March
31, 2021
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
11 — Subsequent Events
Between
April 1, 2021 and May 10, 2021, 45,000 stock options and 8,125 restricted stocks have been granted from the 2004 Equity Incentive Plan.