| 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 provider of data capture and delivery solutions for mobile applications used in
Retail, Commercial Services, Industrial & Manufacturing, Transportation & Logistics, and Health Care. Our products include data
capture devices that utilize Bluetooth or RFID/NFC technology, designed to interface with applications running on smartphones, tablets
and mobile computers. These applications operate on diverse operating systems, including Apple® (iOS), Google™ (Android™)
and Microsoft® (Windows®). Additionally, the Company offers camera-based barcode scanning software. The Company focuses on serving
the needs of software application providers, with our sales 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 Fremont, California
facility. In addition to its own online stores, the Company offers its products worldwide through two-tier distribution, allowing customers
to purchase from numerous online resellers worldwide, 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
40675 Encyclopedia Circle, Fremont, CA 94538. 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. 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. In March 2023, the Company
entered into an Insured Cash Sweep (“ICS”) Deposit Placement Agreement with IntraFi Network LLC through its bank, Bridge
Bank – a division of Western Alliance Bank. The ICS program allows the Company’s demand or savings products to benefit from
unlimited FDIC insurance, which helps the Company maintain the entire deposit on its balance sheet and provides additional security during
times of market uncertainty. As of December 31, 2023, the Company’s cash was held in demand deposit accounts under FDIC insurance
through the ICS program. The Company has never experienced any losses in its funds in bank accounts. SOCKET
MOBILE, INC. Fair
Value of Financial Instruments The
carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable and foreign exchange contracts
is close to their 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. In 2023, the total net adjustment for the
effects of changes in foreign currency on cash balances, collections, and payables was a net gain of $12,550 $41,300 Accounts
Receivable Allowances Trade
accounts receivables are recorded at the net invoice value and are not interest bearing. 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 table describes the activity in the allowance for doubtful accounts for
the years ended December 31, 2023 and 2022:
Year Balance
at Charged
to Amounts
Balance
at
2023 $ 40,651 $ — $ — $ 40,651
2022 $ 40,651 $ — $ — $ 40,651 Inventories Inventories consist principally
of raw materials and sub-assemblies stated at the lower of standard cost, which approximates actual costs (first-in, first-out method),
or market. Market is defined as replacement cost, but not in excess of estimated net realizable value or less than estimated net realizable
value less a normal margin. We purchase or have manufactured the component parts by our engineering bill of materials. The timing and
quantity of our purchases are based on order forecast, the lead time requirements of our vendors, and economic order quantities. At the
end of each reporting period, the Company compares its inventory on hand to its forecasted requirements for the next twelve-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 twelve-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,
2023 and 2022 consisted of the following:
December
31,
2023 2022
Raw materials
and sub-assemblies $ 5,839,176 $ 6,193,453
Finished goods 500,814 289,181
Inventory reserves (930,943 ) (880,943 )
Inventory, net $ 5,409,047 $ 5,601,691 SOCKET
MOBILE, INC. 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, 2023 and 2022 consisted of the following:
December
31,
2023 2022
Prepaid insurance $ 75,626 $ 92,644
Product certification costs 75,604 87,293
Prepaid inventory purchases 123,736 196,512
Prepaid maintenance contracts
and other prepaid expenses 165,764 240,739
Prepaid expenses and other
current assets $ 440,730 $ 617,188 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. Computer software and hardware are amortized over two to three years, while machinery and
equipment are typically amortized over three years. Manufacturing tooling is amortized over a span of two to three years, and
improvements to leasehold are amortized over the remaining lease term. 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 expenses in the years ended December 31, 2023 and 2022, were $787,881 and $594,793 ,
respectively. Intangible
Assets The
Company’s intangible assets consist of completed technologies and acquired license rights. Intangible assets are amortized over
their estimated useful lives based upon the estimated economic value derived from the related intangible assets. Amortization is computed
using the straight-line method over the estimated useful lives of the assets. For the years ended December 31, 2023 and 2022, the amortization
expenses of intangible assets were $127,296 Impairment
of Long-Lived Assets The
Company reviews its long-lived assets for impairment annually and whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the asset. If such assets are
impaired, the impairment recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. For
the years ended December 31, 2023 and 2022, we did not recognize any impairment loss of its long-lived assets. 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 investments. SOCKET
MOBILE, INC. The
Company’s trade accounts receivable is 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, 2023 and December 31, 2022 were as follows:
December
31,
2023 2022
Ingram Micro Inc. 20 % 14 %
Synnex Corporation 14 % *
ScanSource, Inc. 13 % 11 %
Nippon Primex, Inc. 11 % 14 %
Bluestar, Inc. * 46 %
* Customer accounted
for less than 10% of the Company’s accounts receivable balances Concentration
of Suppliers Several
of the Company’s component parts are produced by a sole or limited number of suppliers. Shortages could occur in these essential
materials due to increased demand, or to an interruption of supply. Suppliers may choose to restrict credit terms or require advance
payments causing delays in the procurement of essential materials. If the Company were unable to procure certain of such materials, it
could have a material adverse effect upon its results. As of December 31, 2023, 27% 55% 56% Revenue
Recognition and Deferred Revenue With
the adoption of ASC 606 “Revenue from Contracts with Customers” in 2017, the Company 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. As of December 31, 2023, the deferred revenue and deferred cost on shipments to
distributors were approximately $825,670 $322,580 $594,793 $266,327 The
Company generally recognizes revenues on sales to customers other than distributors upon shipment provided that contract with the customer
is identified, performance obligations in the contract are satisfied, and the price is determined. Most of our customers other than distributors
do not have a right of return except under warranty. The
Company also generates revenue through its SocketCare services program, which offers extended warranty and accidental breakage coverage
for select products. For the year ended December 31, 2023 and 2022, the SocketCare revenues were approximately $21,400 $22,000 $32,698 $34,366 SOCKET
MOBILE, INC. 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 affect 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 The Company adopted ASU 2016-02 effective January 1, 2019. On May 1, 2022, the
Company entered into a building lease agreement for its corporate headquarters located in Fremont, CA. As of December 31, 2023, the balances
of right-of-use assets and liabilities for the operating leases were approximately $3.09 $3.29 $3.56 $3.74 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 table describes activity in the reserves for product warranty costs for the years
ended December 31, 2023 and 2022:
Year Balance
at Additional
Warranty Reserves Amounts
Balance
at
2023 $ 78,871 $ 13,417 $ (13,417 ) $ 78,871
2022 $ 78,871 $ 14,475 $ (14,475 ) $ 78,871 Research
and Development Research and development expenditures
are charged to operations as incurred. The major components of research and development costs include salaries and employee benefits,
stock-based compensation expense, third party development costs including consultants and outside services, and allocations of overhead
and occupancy costs. In 2023, these costs amounted to $4.83 $4.36 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 2023 and 2022 were $7,262
and $43,572 ,
respectively. The amount of unamortized capitalized software costs as of December 31, 2023 and 2022 were zero and $7,262, respectively. SOCKET
MOBILE, INC. Advertising
Costs Advertising
costs are charged to sales and marketing as incurred. The Company incurred $23,827 $31,146 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. 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. SOCKET
MOBILE, INC. Earnings
(Loss) Per Share The basic computation of earnings
(loss) per share is based on the weighted average number of shares outstanding during the period presented in accordance with Accounting
Standards Codification (“ASC”) 260, “Earnings Per Share”. The computation of diluted earnings per common share
is based on the weighted average number of shares outstanding during the period plus the common stock equivalents which would arise from
the exercise of stock options and warrants outstanding using the treasury stock method and the average market price per share during
the period. Common stock equivalents are not included in the diluted earnings per share calculation when their effect is anti-dilutive. 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,
2023 2022
Numerator:
Net
income (loss) $ (1,919,154 ) $ 86,931
Net income
(loss) allocated to restricted stock award — (8,820 )
Adjusted
net income (loss) for basic earnings per share $ (1,919,154 ) $ 78,111
Convertible
note interest — —
Adjusted
net income (loss) before interest for diluted earnings per share $ (1,919,154 ) $ 78,111
Denominator: Weighted
average shares outstanding used in computing net income (loss) per share:
Basic 7,230,074 7,184,847
Dilutive impact of stock
compensation awards — 348,077
Fully
diluted 7,230,074 7,532,924
Net income (loss) per
share applicable to common stockholders:
Basic $ (0.27 ) $ 0.01
Fully
diluted $ (0.27 ) $ 0.01 In
2023, the shares used in computing diluted net loss per share do not include 1,151,114 stock
options, 991,199 shares of unvested restricted stocks, 50,000 warrants, and 2,152,934 shares for convertible notes as their
effects are anti-dilutive. In 2022, the shares used in computing diluted net income per share do not include 342,765 stock
options that were out of the money under the treasury stock method approach, along with 844,976 shares of unvested restricted
stocks. Furthermore, 958,904 shares for convertible notes are excluded as their anti-dilutive effects, stemming from the
convertible note interest exceeding the earnings per share. 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 grant date. 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, which is
usually the service 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. SOCKET
MOBILE, INC. Revenues
for the geographic areas for the years ended December 31, 2023 and 2022 are as follows:
Years
Ended December 31,
Revenues: (in
thousands) 2023 2022
United
States $ 12,539 $ 15,765
Europe 2,426 2,612
Asia and
rest of world 2,069 2,861
Total $ 17,034 $ 21,238 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, 2023 and 2022 were as follows:
Years
Ended December 31,
2023 2022
Ingram Micro Inc. 22% 26%
BlueStar, Inc. 22% 24%
ScanSource,
Inc. 14% 11%
*Customer accounted for less than 10% of
total revenues Recently
Issued Financial Accounting Standards In June 2016, the FASB issued ASU No. 2016-13, "Financial
Instruments – Credit Losses – Measurement of Credit Losses on Financial Instruments," which changes how entities measure
credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU
replaces the "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost. For trade and other receivables,
held-to-maturity debt securities, contract assets, loans and other instruments, entities are now required to use a new forward-looking
"expected loss" model that generally will result in the earlier recognition of allowances for losses. The Company began reporting on
topics required by ASU 2016-13 for the year ended December 31, 2023. The adoption did not have a material impact on the Company's financial
position or results of operations. From
time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company
as of the specified effective date. Unless otherwise discussed, management believes that all other recently issued accounting standards
are not expected to have a material impact on the Company’s financial position or results of operations upon adoption. |
