| 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 manufacturer of data capture products for mobile applications used in Retail,
Commercial Services, Industrial & Manufacturing, Transportation & Logistics, and Health Care. The Company produces a family
of data capture products that connect over Bluetooth and work with applications running on smartphones, tablets and mobile computers
using operating systems from Apple® (iOS), Google™ (Android™) and Microsoft® (Windows®). The Company
focuses on serving the needs of software application developers as the scanner sales are primarily driven by the deployment of
barcode and RFID/NFC enabled mobile applications. The
Company designs its own products and subcontracts the manufacturing of product components to independent third-party contract
manufacturers who are in the U.S., Mexico, Singapore, China, Malaysia and Taiwan and who have the equipment, know-how and capacity
to manufacture products to the Company’s specifications. Final products are assembled, tested, packaged, and distributed
at and from its Newark, California facility. The Company offers its products worldwide through two-tier distribution enabling
customers to purchase from a large number of on-line resellers around the world including some application developers. The geographic
regions served by the Company include the Americas, Europe, Asia Pacific and Africa. The
Company was founded in March 1992 as Socket Communications, Inc. and reincorporated in Delaware in 1995 prior to the Company’s
initial public offering in June 1995. The Company began doing business as Socket Mobile, Inc. in January 2007 to better reflect
its market focus on the mobile business market, and changed its legal name to Socket Mobile, Inc. in April 2008. The Company’s
common stock trades on the NASDAQ Marketplace under the symbol “SCKT.” The Company’s principal executive offices
are located at 39700 Eureka Drive, Newark, CA 94560. Use
of Estimates The
preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets
and liabilities at the date of the financial statements as well as the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates, and such differences may be material to the financial statements. Cash
and Cash Equivalents The
Company considers all highly liquid investments purchased with a maturity date of 90 days or less at date of purchase to be cash
equivalents. For the years ended December 31, 2019 and 2018, all of the Company’s cash and cash equivalents consisted of
amounts held in demand deposit accounts in banks. The aggregate cash balance on deposit in these accounts are insured by the Federal
Deposit Insurance Corporation up to $250,000. The Company’s cash balance on deposit in these accounts may, at times, exceed
the federally insured limits. The Company has never experienced any losses in such accounts. Fair
Value of Financial Instruments The
carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable and foreign exchange contracts
approximate fair value due to the relatively short period of time to maturity. Derivative
Financial Instruments The
Company's primary objective for holding derivative financial instruments is to manage foreign currency risks. The Company's derivative
financial instruments are recorded at fair value and are included in other current assets, other assets, other accrued liabilities
or long-term debt depending on the contractual maturity and whether the Company has a gain or loss. The Company's accounting policies
for these instruments are based on whether they meet the Company's criteria for designation as hedging transactions, either as
cash flow or fair value hedges. A hedge of the exposure to variability in the cash flows of an asset or a liability, or of a forecasted
transaction, is referred to as a cash flow hedge. A hedge of the exposure to changes in fair value of an asset or a liability,
or of an unrecognized firm commitment, is referred to as a fair value hedge. The criteria for designating a derivative as a hedge
include the instrument's effectiveness in risk reduction and, in most cases, a one-to-one matching of the derivative instrument
to its underlying transaction. Gains and losses on derivatives that do not qualify for hedge accounting are recognized immediately
in earnings. The Company regularly enters into forward foreign currency contracts to reduce exposures related to rate changes
in certain foreign currencies. The
Company records its forward foreign currency contracts at fair value. At December 31, 2019 and 2018, the Company had no open forward
foreign currency contracts. Foreign
Currency The
functional currency for the Company is the U.S. dollar. However, the Company requires European distributors to purchase products
in Euros and British pounds and pays the expenses of European employees in Euros and British pounds. The Company hedges a significant
portion of the European receivables balance denominated in Euros to reduce the foreign currency risk associates with these assets.
In 2019, the total net adjustment for the effects of changes in foreign currency on cash balances, collections, payables, and
derivatives used to hedge foreign currency risks, was a net loss of $2,300 compared to a net loss of $20,000 in 2018. Accounts
Receivable Allowances The
Company estimates the amount of uncollectible accounts receivable at the end of each reporting period based on the aging of the
receivable balance, current and historical customer trends, and communications with its customers. Amounts are written off only
after considerable collection efforts have been made and the amounts are determined to be uncollectible. The following describes
activity in the allowance for doubtful accounts for the years ended December 31, 2019 and 2018:
Year Balance at Charged to Amounts Balance at
2019 $ 89,058 $ — $ (48,407 ) $ 40,651
2018 $ 89,058 $ — $ — $ 89,058 Inventories Inventories
consist principally of raw materials and sub-assemblies stated at the lower of standard cost, which approximates actual costs
(first-in, first-out method), or market. Market is defined as replacement cost, but not in excess of estimated net realizable
value or less than estimated net realizable value less a normal margin. At the end of each reporting period, the Company compares
its inventory on hand to its forecasted requirements for the next nine-month period and reserves the cost of any inventory that
is surplus, less any amounts that the Company believes it can recover from the disposal of goods or that the Company specifically
believes will be saleable past a nine- month horizon. The Company’s sales forecasts are based upon historical trends, communications
from customers, and marketing data regarding market trends and dynamics. Changes in the amounts recorded for surplus or obsolete
inventory are included in cost of revenue. Inventories, net of write-downs, at December 31, 2019 and 2018 consisted of the following:
December 31,
2019 2018
Raw materials and sub-assemblies $ 3,767,588 $ 2,785,154
Finished goods 241,681 335,335
Inventory reserves (830,361 ) (848,161 )
Inventory, net $ 3,178,908 $ 2,272,328 Prepaid
Expenses and Other Current Assets Prepaid
expenses and other current assets consist of various payments that the Company has made in advance for goods or services to be
received in the future. Prepaid expenses and other current assets at December 31, 2019 and 2018 consisted of the following:
December 31,
2019 2018
Prepaid insurance $ 47,884 $ 18,061
Product certification costs 83,749 74,919
Prepaid inventory purchases 77,606 110,301
Others 102,888 104,551
Prepaid expenses and other current assets $ 312,127 $ 307,832 Property
and Equipment Property
and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method, over the estimated
useful lives of the assets ranging from one to five years. Assets under finance leases are amortized in a manner consistent with
the Company’s normal depreciation policy for owned assets, or the remaining lease term as applicable. Depreciation expense
in the years ended December 31, 2019 and 2018, was $419,856 and $397,392, respectively. Goodwill Goodwill
is tested for impairment annually as of September 30th or more frequently when events or circumstances indicate that the carrying
value of the Company's single reporting unit more likely than not exceeds its fair value. The Company performed its annual goodwill
impairment analysis as of September 30, 2019. The Company used the two-step test as required to assess goodwill for impairment.
The first step of the goodwill impairment test consisted of comparing the carrying value of the reporting unit to its fair value.
Management estimated the fair value of the Company's reporting unit using various methods and compared the fair value to the carrying
amount (net book value) to ascertain if potential goodwill impairment existed. The Company utilized methods that focused on its
ability to produce income ("Income Approach") and the Company’s market capitalization ("Market Capitalization
Approach"). Key assumptions utilized in the determination of fair value in step one of the test included the following: the
Company's market capitalization; revenue and expense forecasts used in the evaluation were based on trends of historical performance
and management's estimate of future performance; cash flows utilized in the discounted cash flow analysis were estimated using
a weighted average cost of capital determined to be appropriate for the Company. No impairment of goodwill was recorded in the
years ended December 31, 2019 and 2018. Concentration
of Credit Risk Financial
instruments that potentially subject the Company to significant concentrations of credit risk include cash, cash equivalents and
accounts receivable. The Company invests its cash in demand deposit accounts in banks. To date, the Company has not experienced
losses on the investments. The Company’s trade accounts receivables are primarily with distributors. The Company performs
ongoing credit evaluations of its customers’ financial condition, but the Company generally requires no collateral. Reserves
are maintained for potential credit losses, and such losses have been within management’s expectations. Customers who accounted
for at least 10% of the Company’s accounts receivable balances at December 31, 2019 and December 31, 2018 were as follows:
December 31,
2019 2018
Ingram Micro Inc. 45 % 41 %
Bluestar, Inc. 32 % 19 % Concentration
of Suppliers Several
of the Company’s component parts are produced by a sole or limited number of suppliers. Shortages could occur in these essential
materials due to increased demand, or to an interruption of supply. Suppliers may choose to restrict credit terms or require advance
payments causing delays in the procurement of essential materials. If the Company were unable to procure certain of such materials,
it could have a material adverse effect upon its results. At December 31, 2019, 34% of the Company’s accounts payable balances
were concentrated with top three suppliers. For the years ended December 31, 2019 and 2018, top three suppliers accounted for
55% of the inventory purchases in each of these years. Revenue
Recognition and Deferred Revenue On
January 1, 2017, the Company adopted ASC 606 “Revenue from Contracts with Customers” and implemented a new revenue
recognition policy. Instead of deferring 100% of revenue and cost of revenue until products are sold by distributors, the new
policy recognizes revenue on sales to distributors when shipping of product is completed and title transfers to the distributor,
less a reserve for estimated product returns (sales and cost of sales). The reserves are based on estimates of future returns
calculated from actual return history, primarily from stock rotations, plus knowledge of pending returns outside of the norm.
In 2019, distribution revenue was $19.0 million, compared to $16.2 million in 2018 At
December 31, 2019, the deferred revenue and deferred cost on shipments to distributors were approximately $611,000 and $234,000
respectively, compared to approximately $397,000 and $165,000, respectively, at December 31, 2018. The
Company also earns revenue from its SocketCare services program which provides for extended warranty and accidental breakage coverage
for selected products. For the year ended December 31, 2019 and 2018, the SocketCare revenue was $0.3 million and 0.2 million,
respectively. Service purchased at the time of product purchase provides for coverage in three-year and five-year terms. The Company
additionally offers comprehensive coverage and program term extensions. Revenues from the SocketCare services program are recognized
ratably over the life of the extended warranty contract. The amount of unrecognized SocketCare service revenue is classified as
deferred service revenue and presented on the Company’s balance sheet in its short- and long-term components. At December
31, 2019, the balance of unrecognized SocketCare service revenue was $73,611. Leases In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires a lessee to recognize a liability representing
future lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For operating
leases, a lessee is required to recognize at inception a right-of-use asset and a lease liability equal to the net present value
of the lease payments, with lease expense recognized over the lease term on a straight-line basis. For leases with a term of twelve
months or less, ASU 2016-02 allows a reporting entity to make an accounting policy election to not recognize a right-of-use asset
and a lease liability, and to recognize lease expense on a straight-line basis. ASU No. 2016-02 is effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Entities
are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest
comparative period in the financial statements. The Company adopted ASU 2016-02 effective January 1, 2019, which had no impact
on the Company’s Statements of Operations. The most significant impact was the recognition of right-of-use assets and liabilities
for the operating lease. Adoption of the standard required the Company to restate the reported results in its earliest comparable
period, January 1, 2018, including the recognition of additional operating lease right-of-use assets and liabilities. As a result,
there was an increase in assets and corresponding liabilities of approximately $1.57 million on January 1, 2018. At December 31,
2019, the balances of right-of-use assets and liabilities for the operating lease are approximately $0.93 million and $1.13 million,
respectively, compared to approximately $1.27 million and $1.51 million, respectively, at December 31, 2018. Warranty The
Company’s products typically carry a one-year warranty. The Company reserves for estimated product warranty costs at the
time revenue is recognized based upon the Company’s historical warranty experience, and additionally for any known product
warranty issues. If actual costs differ from initial estimates, the Company records the difference in the period they are identified.
Actual claims are charged against the warranty reserve. The following describes activity in the reserves for product warranty
costs for the years ended December 31, 2019 and 2018:
Year Balance at Additional Warranty Reserves Amounts Balance at
2019 $ 78,871 $ 89,702 $ (89,702 ) $ 78,871
2018 $ 78,871 $ 56,383 $ (56,383 ) $ 78,871 Research
and Development Research
and development expenditures are charged to operations as incurred. The major components
of research and development costs include salaries and employee benefits, stock-based compensation expense, , and allocations of overhead
and occupancy costs. Software
Development Costs Costs
incurred to develop computer software to be sold or otherwise marketed are charged to expense until technological feasibility
of the product has been established. Once technological feasibility has been established, computer software development costs
(consisting primarily of internal labor costs) are capitalized and reported at the lower of amortized cost or estimated realizable
value. Purchased software development cost is recorded at cost. When a product is ready for general release, its capitalized costs
are amortized on a product-by-product basis. The annual amortization is the straight-line method over the remaining estimated
economic life (a period of three to five years) of the product. Amortization of capitalized software development costs is included
in the cost of revenues line on the statements of operations. If the future revenue of a product is less than anticipated,
impairment of the related unamortized development costs could occur, which could impact the Company’s results of operations.
Amortization expense on software development costs included in costs of revenues for 2019 and 2018 was $43,074 and $34,650
respectively. The amount of unamortized capitalized software costs as of December 31, 2019 and 2018 was $138,000 and $173,000,
respectively. Advertising
Costs Advertising
costs are charged to sales and marketing as incurred. The Company incurred $17,539 and $75,286, in advertising costs during 2019
and 2018, respectively. Income
Taxes The
Company uses the asset and liability method to account for income taxes. Deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and
laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance against deferred
tax assets when it is more likely than not that such assets will not be realized. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the enactment date. The
Company recognizes the tax benefit from uncertain tax positions if it is more likely than not that the tax positions will be sustained
on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the
largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. It is the Company's policy
to include interest and penalties related to tax positions as a component of income tax expense. Shipping
and handling costs Shipping
and handling costs are included in the cost of revenues in the statement of operations. Net
Income (Loss) Per Share The
following table sets forth the reconciliation of basic shares to diluted shares and the computation of basic and diluted net income
(loss) per share:
Years Ended December 31,
2019 2018
Numerator:
Net income (loss) $ 286,586 $ (571,141 )
Denominator:
Weighted average shares outstanding used in computing
Basic 5,984,381 6,094,709
Fully diluted 6,207,731 6,094,709
Net income (loss) per share applicable to common stockholders:
Basic $ 0.05 $ (0.09 )
Fully diluted $ 0.05 $ (0.09 ) In
2019 and 2018, options to purchase 2,169,436 and 2,374,124 shares, respectively, of the Company’s Common Stock were excluded
from the calculation of the diluted earnings per share because their effect would be anti-dilutive. Stock-Based
Compensation Expense The
Company has incentive plans that reward employees with stock options and restricted stocks. The amount of compensation cost for
these stock-based awards is measured based on the fair value of the awards as of the date that the awards are issued. The fair
values of stock options are generally determined using a binomial lattice valuation model which incorporates assumptions about
expected volatility, risk-free interest rate, dividend yield, and expected life. Compensation cost for stock-based awards is recognized
on a straight-line basis over the vesting period. Segment
Information Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief executive officer in deciding how to allocate resources and in assessing performance. The
Company operates in the mobile barcode scanning and RFID reader/writer market. Mobile scanning typically consists of mobile devices
such as smartphones or tablets, with mobile scanning peripherals for data collection, and third-party vertical applications software.
The Company distributes its products in the United States and foreign countries primarily through distributors and resellers.
The Company markets its products primarily through application developers whose applications are designed to work with Company’s
products. Revenues
for the geographic areas for the years ended December 31, 2019 and 2018 are as follows:
Years Ended December 31,
Revenues: (in thousands) 2019 2018
United States $ 14,558 $ 12,562
Europe 2,431 2,526
Asia and rest of world 2,264 1,366
$ 19,253 $ 16,454 Export
revenues are attributable to countries based on the location of the Company’s customers. The Company does not hold long-lived
assets in foreign locations. Major
Customers Customers
who accounted for at least 10% of total revenues for the years ended December 31, 2019 and 2018 were as follows:
Years Ended December 31,
2019 2018
Ingram Micro Inc. 38 % 32 %
BlueStar, Inc. 21 % 21 %
ScanSource, Inc. * 10 % ___________________________ Recently
Issued Financial Accounting Standards In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance: ASU 2017-13,
ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, Topic 842). Topic 842 requires lessees to classify leases
as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater
than 12 months regardless of the lease classification. We adopted Topic 842 on January 1, 2019, as the date of our initial application
of the standard. Consequently, financial information for the comparative periods is updated. Our finance and operating lease commitments
are subject to the new standard and recognized as finance and operating lease liabilities and right-of-use assets upon our adoption
of Topic 842, which increased our total assets and total liabilities that we reported relative to such amounts prior to adoption. In
June 2016, the FASB issued ASU 2016-13("ASU 2016-13"), Financial Instruments-Credit Losses. Subsequently, the FASB issued
ASU 2019-05, Financial Instruments- Credit Losses (Topic 326): Targeted Transition Relief and codification improvements to Topic
326 in ASU 2019-11, ASU 2019-04 and ASU 2018-19. The amendments update guidance on reporting credit losses for financial assets.
These amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures,
reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive
cash. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2019, including interim
periods within those fiscal years. All entities may adopt the amendments through a cumulative-effect adjustment to retained earnings
as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach).
The ASU is effective for fiscal years beginning after December 15, 2020. Subsequent to September 30, 2019, the FASB issued ASU
2019-10, "Financial Instruments - Credit Loss (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),"
which defers the effective date for public filers that are considered small reporting companies ("SRC") as defined by
the Securities and Exchange Commission to fiscal years beginning after December 15, 2022, including interim periods within those
fiscal years. Since the Company is an SRC, implementation is not needed until January 1, 2023. The Company will continue to evaluate
the effect of adopting ASU 2016-13 on the Company's financial statements and disclosures. From
time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company
as of the specified effective date. Unless otherwise discussed, management believes that all other recently issued accounting
standards are not expected to have a material impact on the Company’s financial position or results of operations upon adoption. |
