| 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 providers 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 providers. 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 GAAP 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. SOCKET
MOBILE, INC. NOTES TO 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, 2021 and 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. 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 2021, 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 $ 31,100 10,700 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, 2021 and 2020:
Year Balance at Charged to Amounts Balance at
2021 $ 40,651 $ — $ — $ 40,651
2020 $ 40,651 $ — $ — $ 40,651 SOCKET
MOBILE, INC. NOTES TO FINANCIAL STATEMENTS 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, 2021 and 2020 consisted of the following:
December 31,
2021 2020
Raw materials and sub-assemblies $ 5,757,869 $ 3,642,377
Finished goods 277,598 281,104
Inventory reserves (880,943 ) (727,639 )
Inventory, net $ 5,154,524 $ 3,195,842 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, 2021 and 2020 consisted of the following:
December 31,
2021 2020
Prepaid insurance $ 94,923 $ 82,296
Product certification costs 61,557 75,592
Prepaid inventory purchases 131,635 93,859
Prepaid maintenance contracts and other prepaid expenses 107,046 83,639
Prepaid expenses and other current assets $ 395,161 $ 335,386 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, 2021 and 2020, was $ 620,115 553,328 Goodwill 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 No SOCKET
MOBILE, INC. NOTES TO FINANCIAL STATEMENTS 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 as of December 31, 2021 and December 31, 2020 were as follows:
December 31,
2021 2020
Ingram Micro, Inc. 28 % 34 %
ScanSource, Inc. 24 % 13 %
BlueStar, Inc. 21 % 29 %
Bluestar Europe Distribution BV — * 11 %
* Customer accounted
for less than 10% of the Company 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. As of December 31, 2021, 20 54 64 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. On December 31, 2021, the deferred revenue and deferred
cost on shipments to distributors were approximately $ 407,235 158,977 450,591 170,016 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, 2021 and 2020, the SocketCare revenue was $ 26,000 35,000 31,409 54,316 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. As of December 31,
2021,the balances of right-of-use assets and liabilities for the existing operating leases were approximately $ 210,839
and $ 258,097 ,
respectively, compared to approximately $ 609,331 ,
and $ 741,351 ,
respectively, on December 31, 2020. In February 2022, the Company entered into a 87-month lease agreement in Fremont, CA. The new space
is approximately 35,913 square feet and will serve as the location for the Company’s new Corporate Headquarters, including office
space and manufacturing. The Company will account for this lease as an operating lease under ASC 842, “Leases.”. 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, 2021 and 2020:
Year Balance at Additional Warranty Reserves Amounts Balance at
2021 $ 78,871 $ 13,910 $ (13,910 ) $ 78,871
2020 $ 78,871 $ 73,734 $ (73,734 ) $ 78,871 SOCKET
MOBILE, INC. NOTES TO FINANCIAL STATEMENTS 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 2021 and 2020 was $ 43,572 Advertising
Costs Advertising
costs are charged to sales and marketing as incurred. The Company incurred $ 13,627 19,863 Income
Taxes We
account for income taxes under the asset and liability method under ASC 740 which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method,
we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets
and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change
in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We
recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such
a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences,
projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to
realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax
asset valuation allowance, which would reduce the provision for income taxes. SOCKET
MOBILE, INC. NOTES TO FINANCIAL STATEMENTS We
record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is
more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those
tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than
50 percent likely to be realized upon ultimate settlement with the related tax authority. 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,
2021 2020
Numerator:
Net income (loss) $ 4,466,257 $ (3,278,601 )
Net income (loss) allocated to restricted stock award (380,547 ) 188,375
Adjusted net income (loss) for basic earnings per share $ 4,085,710 $ (3,090,223 )
Convertible note interest 175,876 —
Adjusted net income (loss) before interest for diluted earnings per share $ 4,261,586 $ (2,571,114 )
Denominator: Weighted average shares outstanding used in computing net income
(loss) per share:
Basic 6,991,194 6,036,310
Fully diluted 8,923,487 6,036,310
Net income (loss) per share applicable to common stockholders:
Basic $ 0.58 $ (0.51 )
Fully diluted $ 0.48 $ (0.51 ) In
2021, the shares used in computing diluted net income per share do not include 691,125 SOCKET
MOBILE, INC. NOTES TO FINANCIAL STATEMENTS Stock-Based
Compensation Expense The
Company has incentive plans that reward employees with stock options and shares of 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 providers whose applications are designed to work with Company’s products. Revenues
for the geographic areas for the years ended December 31, 2021 and 2020 are as follows:
Years Ended December 31,
Revenues: (in thousands) 2021 2020
United States $ 17,455 $ 12,137
Europe 3,493 2,209
Asia and rest of world 2,251 1,354
Total $ 23,199 $ 15,700 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, 2021 and 2020 were as follows:
Years Ended December 31,
2021 2020
Ingram Micro, Inc. 30 % 31 %
BlueStar, Inc. 23 % 23 %
ScanSource, Inc. 11 % — *
* Customer
accounted for less than 10% of the Company’s total revenues SOCKET
MOBILE, INC. NOTES TO FINANCIAL STATEMENTS Recently
Issued Financial Accounting Standards In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes, which simplifies
the accounting for income taxes by removing certain exceptions to the general principles of ASC 740. The amendments also improve
consistent application of and simplify GAAP for other areas of ASC 740 by clarifying and amending existing guidance. ASU 2019-12 is effective
for fiscal years beginning after December 15, 2020. Depending on the amendment, adoption may be applied on a retrospective, modified
retrospective, or prospective basis. The Company adopted ASU 2019-12 as of January 1, 2021 and it did not have an impact on the Company's
financial statements. 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. |
