| Note 1 - Organization and Summary of Significant Accounting Policies | NOTE
1 — Organization and Summary of Significant Accounting Policies Organization
and Business Socket
Mobile, Inc. (the “Company”) is a leading producer of data capture products for mobile applications used in mobile
point of sale (mPOS), enterprise mobility, asset tracking, control systems, logistics, event management, medical and education.
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 barcode scanner sales are primarily
driven by the deployment of barcode enabled mobile applications. In
2016, the Company also offered a family of SoMo® (“ So Mo The
Company designs its own products and subcontracts the manufacturing of product components to independent third-party contract
manufacturers who are located in the U.S., Mexico, Singapore 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, the Middle East, Africa and Asia Pacific. 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. As of December 31, 2017 and 2016, 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 has never experienced any losses in such accounts. 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, 2017 and 2016, 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 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 2017,
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 $3,400 compared to a net loss of $25,500 in 2016. 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, 2017 and 2016:
Year Balance at Charged to Amounts Balance at
2017 $ 89,058 $ — $ — $ 89,058
2016 $ 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 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, 2017 and 2016 consisted of the following:
December 31,
2017 2016
Raw materials and sub-assemblies $ 3,016,327 $ 2,665,185
Finished goods 67,120 64,359
Inventory reserves (885,181 ) (1,192,105 )
Inventory, net $ 2,198,266 $ 1,537,439 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, 2017 and 2016 consisted of the following:
December 31,
2017 2016
Prepaid insurance $ 37,496 $ 40,307
Prepaid project development costs 58,755 83,600
Prepaid inventory purchases 114,927 43,700
Other 174,330 91,857
Prepaid expenses and other current assets $ 385,508 $ 259,464 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 capital 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, 2017 and 2016, was $313,653 and $279,392, 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, 2017. 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
two years ended December 31, 2017. Deferred
Rent The
Company operates its headquarters under a non-cancelable operating lease. The Company recognizes rent expense under its lease
on a straight-line basis measured over the term of the lease. The excess of accumulated rental expense measured on a straight-lined
basis over actual accumulated rent paid is recorded as a liability on the Company’s balance sheet in its short and long
term components. Deferred rent at December 31, 2017 and December 31, 2016 was $274,388 and $286,901 respectively. 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, 2017 and December 31, 2016 were as follows:
December 31,
2017 2016
Ingram Micro Inc. 37 % 49 %
Bluestar, Inc. 23 % 30 %
ScanSource, Inc. 10 % *
Ingram Micro Pan Europe GmbH 10 % *
*Customer accounts for less than
10% of accounts receivable balances Concentration
of Suppliers Several
of the Company’s component parts are produced by a sole or limited number of suppliers. Shortages could occur in these essential
materials due to increased demand, or to an interruption of supply. Suppliers may choose to restrict credit terms or require advance
payments causing delays in the procurement of essential materials. If the Company were unable to procure certain of such materials,
it could have a material adverse effect upon its results. At December 31, 2017, 12% and 10% of the Company’s accounts payable
balances were concentrated with the top two suppliers. For the years ended December 31, 2017 and 2016, the top two suppliers accounted
for 52% and 65%, respectively, of the inventory purchases in each of these years. Revenue
Recognition and Deferred Revenue On
January 1, 2017, the Company adopted ASU No. 2014-09 (now ASC 606 “Revenue from Contracts with Customers”) and implemented
a new revenue recognition policy. To reflect the period-specific effects of applying the new policy, the Company reclassified
the balance of net deferred revenue on shipments to distributors in the amount of $1,062,642 as of December 31, 2016 to a refund
liability of $2,010,441 (deferred revenue on shipments to distributors) and an asset of $947,799 (deferred cost on shipments to
distributors). The effect of the change in 2017 was a one-time reduction (debit) to net deferred revenue in the amount of $836,000
less the deferred tax effects of $234,000 for a net improvement in retained deficit of $602,000. The deferred revenue and deferred
cost on shipments to distributors were $492,611 and $204,405, respectively, at December 31, 2017. The
Company defers revenue on advance payments from customers when performance obligations have yet to be completed and/or services
performed. The
Company earns revenue from services performed in connection with consulting and engineering development arrangements. For those
agreements that include contract milestones or acceptance criteria, revenue is recognized as such milestones are achieved or as
such acceptance occurs. The
Company also earns revenue from its SocketCare services program which provides for extended warranty and accidental breakage coverage
for selected products. Service purchased at the time of product purchase provides for coverage in three-year and five-year terms.
The Company additionally offers comprehensive coverage and program term extensions. Revenues from the SocketCare services program
are recognized ratably over the life of the extended warranty contract. The amount of unrecognized warranty service revenue is
classified as deferred service revenue and presented on the Company’s balance sheet in its short and long term components. 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, 2017 and 2016:
Year Balance at Additional Warranty Reserves Amounts Balance at
2017 $ 78,871 $ 53,115 $ (53,115 ) $ 78,871
2016 $ 78,871 $ 34,385 $ (34,385 ) $ 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, , 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.
No amortization expense on software development costs included in costs of revenues for both 2016 and 2017. The amount of
unamortized capitalized software costs as of December 31, 2017 and 2016 was $208,000 and $0, respectively. Advertising
Costs Advertising
costs are charged to sales and marketing as incurred. The Company incurred $61,262 and $45,303, in advertising costs during 2017
and 2016, 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,
2017 2016
Numerator:
Net income (loss) $ (1,430,731 ) $ 12,147,088
Convertible note interest — 117,421
Adjusted diluted net income (loss) $ (1,430,731 ) $ 12,264,509
Denominator:
Weighted average shares outstanding used in computing
Basic 6,292,898 5,793,245
Effect of dilutive stock options and convertible notes payable — 1,026,576
Diluted 6,292,898 6,819,821
Net income (loss) per share applicable to common stockholders:
Basic $ (0.23 ) $ 2.10
Diluted $ (0.23 ) $ 1.80 For
the 2016 period presented, the diluted shares outstanding include the dilutive effect of assumed conversion of convertible notes
and assumed exercise of all in-the-money employee stock options, which is calculated based on the average share price for the
2016 fiscal period using the treasury stock method. Under the treasury stock method, the hypothetically received proceeds from
the exercise of in-the-money options and warrants are assumed to be used to repurchase shares. For 2016, options to purchase totaling
1,551,727 shares of the Company’s Common Stock were excluded from the calculation of the diluted earnings per share because
the exercise prices were greater than or equal to the average price of the common shares, and therefore their inclusion would
have been anti-dilutive. Due to net loss for 2017, options to purchase 2,247,026 shares of the Company’s Common Stock were
excluded from the calculation of the diluted earnings per share because they are anti-dilutive. Basic and diluted EPS are the
same for 2017. Stock-Based
Compensation Expense The
Company has incentive plans that reward employees with stock options. The amount of compensation cost for these stock-based awards
is measured based on the fair value of the awards as of the date that the awards are issued. The fair values of stock options
are generally determined using a binomial lattice valuation model which incorporates assumptions about expected volatility, risk-free
interest rate, dividend yield, and expected life. Compensation cost for stock-based awards is recognized on a straight-line basis
over the vesting period. Segment
Information Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief executive officer in deciding how to allocate resources and in assessing performance. The
Company operates in the mobile barcode and RFID/NFC scanning 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, 2017 and 2016 are as follows:
Years Ended December 31,
Revenues: (in thousands) 2017 2016
United States $ 16,621 $ 16,851
Europe 3,572 2,843
Asia and rest of world 1,093 1,094
$ 21,286 $ 20,788 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, 2017 and 2016 were as follows:
Years Ended December 31,
2017 2016
Ingram Micro Inc. 37 % 29 %
BlueStar, Inc. 17 % 22 %
ScanSource, Inc. 16 % 18 % Recently
Issued Financial Accounting Standards In
August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting
for Hedging Activities" ("ASU 2017-12"). ASU 2017-12 amends the hedge accounting recognition and presentation
requirements in ASC 815 to improve the transparency and understandability of information conveyed to financial statement users
about an entity’s risk management activities to better align the entity’s financial reporting for hedging relationships
with those risk management activities and to reduce the complexity of and simplify the application of hedge accounting. ASU 2017-12
will be effective for the Company on January 1, 2019 and is not expected to have a significant impact on its consolidated
financial statements. In
January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates
the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment.
Under these amendments, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its
carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s
fair value. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December
15, 2019, and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment
testing performed after January 1, 2017. The Company does not presently anticipate that the adoption of ASU 2016-15 will have
a material impact on its consolidated financial statements. In
March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), which simplifies several aspects of the
accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory
tax withholding requirements, as well as classification in the statement of cash flows. The new guidance removes the present requirement
to delay recognition of a windfall tax benefit until it reduces current taxes payable; instead, it is required to be recognized
at the time of settlement, subject to normal valuation allowance considerations. The Company adopted the new standard on January
1, 2017. In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 is amended by ASU 2017-13 and ASU 2018-01,
which FASB issued in September 2017 and January 2018, respectively. ASU 2016-02 requires a lessee to recognize assets and liabilities
on the balance sheet for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company expects that
its operating lease commitments will be subject to the new standard and recognized as lease liabilities and right-of-use assets
upon the adoption of ASU 2016-02. The Company does not anticipate that the adoption of ASU 2016-02 will have a material impact
on its financial statements. In
January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities, which amends the guidance regarding the classification and measurement of financial instruments.
Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value
option, and the presentation and disclosure requirements for financial instruments.. In February 2018, the FASB issued ASU 2018-03,
“Technical Corrections and Improvements to Financial Instruments (Subtopic 825-10) – Recognition and Measurement of
Financial Assets and Financial Liabilities”. This update was issued to clarify certain narrow aspects of guidance concerning
the recognition of financial assets and liabilities established in ASU No. 2016-01. This includes an amendment to clarify that
an entity measuring an equity security using the measurement alternative may change its measurement approach to a fair valuation
method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security
and all identical or similar investments of the same issued. The update is effective for fiscal years beginning after December
15, 2017 and interim periods within those fiscal years beginning after June 15, 2018. Early adoption is not permitted except for
the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific
credit risk in other comprehensive income. Upon adoption of ASU 2016-01, an entity should apply the amendments by means of a cumulative-effect
adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. The Company
does not presently anticipate that the adoption of ASU 2016-01 will have a material impact on its financial statements. In
July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. ASU 2015-11 requires that inventory be
measured at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course
of business, less reasonably predictable costs of completion, disposal, and transportation. Inventory measured using last-in,
first-out or the retail inventory method are excluded from the scope of ASU 2015-11 which is effective for fiscal years beginning
after December 15, 2016, and interim periods within those fiscal years. The implementation of ASU 2015-11 had no material impact
on the Company’s consolidated financial statements. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is amended
by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, ASU 2016-20, ASU 2017-10, ASU 2017-13 and ASU 2017-14, which
FASB issued in August 2015, March 2016, April 2016, May 2016, May 2016, December 2016, May 2017, September 2017 and November 2017,
respectively (collectively, the amended ASU 2014-09). The amended ASU 2014-09 provides a single comprehensive model for the recognition
of revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific
guidance. It requires an entity to recognize revenue when the entity transfers promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amended
ASU 2014-09 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s). The
amended ASU 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows
arising from customer contracts, including qualitative and quantitative information about contracts with customers, significant
judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The effective date
for the amended ASU 2014-09 is December 15, 2017 with early adoption permitted. The Company early adopted the new standard effective
January 1, 2017. The effect of the change on January 1, 2017 was a one-time reduction (debit) to net deferred revenue and a one-time
improvement (credit) to retained deficit in the amount of $602,000. 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. |
