UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
| ( | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the fiscal year ended
| () | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______. |
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Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Securities registered pursuant to Section 12(g) of the Exchange Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [ ] [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES [ ] [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] NO [ ]
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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accelerated filer [ ] Accelerated filer [ ]
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [ ]
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by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ]
As
of June 30, 2021, the aggregate market value of the registrant’s Common Stock ($0.001 par value) held by non-affiliates of the
registrant was $
Number of shares of Common Stock ($0.001 par value) outstanding as of March 25, 2022: shares.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13, and 14 of Part III are incorporated by reference from the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on June 15, 2022. Such Proxy Statement will be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
TABLE OF CONTENTS
PART I
Forward-Looking Statements
This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements forecasting our future financial condition and results, our future operating activities, market acceptance of our products, expectations for general market growth of mobile computing devices, growth in demand for our data capture products, expansion of the markets that we serve, expansion of the distribution channels for our products, and the timing of the introduction and availability of new products, as well as other forecasts discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Words such as “may,” “will,” “predicts,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words, and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements are based on current expectations, estimates, and projections about our industry, management’s beliefs and assumptions. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties; therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements. Factors that could cause actual results and outcomes to differ materially include, but are not limited to: volatility in the world economy generally and in the markets we serve in particular, including the impact of the COVID-19 pandemic and Russia’s military action against Ukraine; the risk of delays in the availability of our products due to technological, market or financial factors including the availability of product components and necessary working capital; our ability to successfully develop, introduce and market future products; our ability to effectively manage and contain our operating costs; the availability of third-party hardware and software that our products are intended to work with; product delays associated with new model introductions and product changeovers by the makers of products that our products are intended to work with; continued growth in demand for barcode scanners; market acceptance of emerging standards such as RFID/Near Field Communications and of our related data capture products; the ability of our strategic relationships to benefit our business as expected; our ability to enter into additional distribution relationships; and other factors described in this Form 10-K including “Item 1A. Risk Factors” and recent Form 8-K and Form 10-Q reports filed with the Securities and Exchange Commission. We assume no obligation to update such forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.
You should read the following discussion in conjunction with the financial statements and notes included elsewhere in this report, and other information contained in other reports and documents filed from time to time with the Securities and Exchange Commission.
Item 1. Business
General
We are a leading provider of data capture and delivery solutions for enhanced productivity in workforce mobilization. Our data capture solutions are incorporated into mobile applications used in point of sale (POS), commercial services (field workers), asset tracking, manufacturing process and quality control, transportation and logistics (goods tracking and movement), event management (ticketing, entry, access control, and identification), medical and education.
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We were founded in March 1992 as Socket Communications, Inc. and reincorporated in Delaware in 1995 prior to our initial public offering in June 1995. We have financed our operations since inception primarily from the sale of equity capital or convertible debt, receivables-based revolving lines of credit and term loans with our bank. We began doing business as Socket Mobile, Inc. in January 2007 to better reflect our market focus on the mobile business market and changed our legal name to Socket Mobile, Inc. in April 2008. Our common stock trades on the NASDAQ Capital Market under the symbol “SCKT”. Our principal executive offices are located at 39700 Eureka Drive, Newark, CA 94560, and our phone number is (510) 933-3000.
Our Internet home page is located at http://www.socketmobile.com; however, the information on, or that can be accessed through, our home page is not part of this Annual Report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to such reports are available free of charge on or through our internet home page as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
Products
Our primary products are cordless data capture devices incorporating barcode scanning or RFID/Near Field Communications (NFC) technologies that connect over Bluetooth. All products work with applications running on smartphones, mobile computers and tablets using operating systems from Apple® (iOS), Google™ (Android™) and Microsoft® (Windows®). We offer an easy-to-use software developer kit (Capture-SDK) to application providers, which enables them to provide their consumers our advanced barcode scanning features. Our products are integrated by the application providers and are marketed by the application providers or their resellers. The number of application providers supporting our data capture solutions continues to grow.
Companion SocketScan family. Our Companion SocketScan family consists of the ergonomic and independent S700 series, including 1D Linear Imaging (S700), 1D Laser (S730), 1D/2D Universal Barcode (S740) and 1D/2D/MRZ Ultimate Barcode Scanner(S760), available in multiple vivid colors: blue, green, red, white, yellow and black.
Companion DuraScan Family. Our DuraScan® 700 Series 1D Linear Imaging (D700), 1D Laser (D730), 1D/2D Universal Barcode(D740, D745, D750, D755), and 1D/2D/MRZ Ultimate Barcode Scanner (D760), are designed to be durable barcode scanners with IP54-rated outer casing to withstand tougher environments. Universal Barcode Scanners (D740, D750, D760) read all common 1D, stacked, 2D and postal codes. D740 is priced competitively with a 1D barcode scanner, making D740 the affordable 2D option available in the market. D760 includes MRZ (machine-readable zone) support, making it capable of scanning passports, visas and other travel documents. D745 and D755 are medical-grade, universal scanners.
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Attachable Family. Our attachable scanners include DuraSled and SocketScan 800 Series scanners. DuraSled is a barcode scanning sled designed for durability. It combines a phone with a scanner to create a one-handed solution. DuraSled protects phones from impact damage and provides a robust charging solution for all environments. It is easy-to-use and ideal for delivery services, stock counting, ticketing and other application-driven, mobile solutions. The DuraSled series is compatible with iPod, iPhone, and Samsung..
SocketScan 800 Series cordless barcode scanners, 1D linear imaging (S800) and 2D (S840, S860) are attachable to smartphones, tablets and other mobile devices with an easily detachable clip or DuraCase, creating a one-handed solution. S860 includes MRZ (machine-readable zone) support, making it capable of scanning passports, visas and other travel documents in addition to barcodes. SocketScan 800 Series scanners may be used stand-alone as well.
Contactless RFID/NFC reader writer. Our contactless product line includes D600 and S550. The D600, an ergonomically handheld model with IP54-rated outer casing, can read and write many different types of electronic SmartTags or transfer data with near field communication. The S550, a contactless membership card reader/writer, is designed to facilitate tap-and-go smart card and NFC applications. Both combines the latest 13.56 MHz contactless technology with Bluetooth LE connectivity
Software Developer Kit (Capture-SDK). Our Software Developer Kit (Capture-SDK) supports all our data capture devices with a single integration, making it easier for a developer to integrate our data capture capabilities into their application. With the installation of our data capture software, the application providers’ consumer can choose any of our products that work best for them. Our Capture-SDK enables the application provider to modify captured data, control the placement of the barcoded or RFID data in their application, and control the feedback to the user that the transaction and transmission was successfully completed. Our Capture-SDK also supports the built-in camera in a customer’s smartphone or tablet to be used for occasional or lower volume data collection requirements. The Capture-SDK uses tools integrated with software building environments such as CocoaPods, Maven and NuGet, adds support for high level frameworks such as Flutter, Xamarin, JavaScript and Java, and adds other features to make it easier for application providers to integrate our data capture software into their applications.
We design our own products and are responsible for all associated test equipment. We subcontract the manufacturing of all our product components to independent third-party contract manufacturers located in the United States, Mexico, Taiwan, Singapore, Malaysia and China that have the equipment, know-how and capacity to manufacture products to our specifications. We perform final product assembly, test and packaging at, and distribute our products from, our Newark, California facility. We offer our products worldwide through two-tier distribution enabling customers to purchase from large numbers of on-line resellers around the world including application providers who resell their own solutions along with our data capture products.
We believe growth in mobile applications and the mobile workforce are resulting from technical advances in mobile technologies, cost reductions in mobile devices and the growing adoption by businesses of mobile applications for smartphones and tablets, building a growing demand for our products. Our data capture products address the need for speed and accuracy by today’s mobile workers and by the systems supporting those workers, thereby enhancing their productivity and allowing them to exploit time sensitive opportunities and improve customer satisfaction.
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Our Mission, Vision and Core Values
Our mission is to supply innovative and cost-effective data capture tools for businesses that use mobile platforms to conduct business in mobile environments.
Our vision is to manage the complexity of capturing and delivering data across a spectrum of data sources, network technologies and mobile systems so that our customers can concentrate on applications of the data. Our customers are application providers and their consumers in need of data capture solutions.
We have embraced the following core values:
Accountability: We take ownership and responsibility for our actions and performance. We learn from our mistakes and celebrate our successes.
Customer Focus: We live by and for our customers' success. We want to earn their top-of-mind choice, enhance their final customer experience, and create value through our relationship.
Excellence: We take pride in what we make and do and value the creativity, talent, ambition, and drive of each employee to be his or her best and to achieve superior results.
Integrity: We are honest and ethical in all our dealings with each other, customers, business partners, suppliers, competitors and other stakeholders. We say what we mean and mean what we say.
Mutual Respect: We value people's differences and diverse opinions, and we treat each other fairly.
Marketing Dynamics
Application provider relationships. We actively support application providers to integrate our data capture solutions into their applications. We provide an easy-to-use software developer kit (Capture-SDK) and training and technical support to our application providers. We support the marketing activities of our application providers in promoting the applications that include our products. Once our data capture products are integrated by the application provider, our products become an ingredient of the application solution and part of the application provider’s marketing program. We provide regular Capture-SDK updates including updates that support the latest operating system updates provided by Apple, Google and Microsoft. We spend extensive engineering time and resources to ensure that our cordless data capture products are compatible with a wide variety of the most popular smartphones, tablets and mobile computers running a variety of operating systems. We comply with the standards set by the standard-setting bodies whose technologies are used in our products such as Bluetooth SIG, NFC Forum, GS1, and AIM Global.
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Mobile Markets. Our revenues are primarily driven by sales of barcode scanners integrated into mPOS (moble Point of Sale) applications used with Apple tablets and other mobile devices. Many mPOS application providers develop software for smaller retailers, an underserved market, using tablets as cash registers. Other mobile markets addressed by application providers include commercial services (field workers), asset tracking, manufacturing process and quality control, transportation and logistics (goods tracking and movement), event management (ticketing, entry, access control, and identification), medical and education. We expect these markets to increase the use of mobile applications and the demand for barcode scanners.
Expanded and improved product offerings. We offer a wide range of products that enable application providers and their consumers to design their mobile systems to meet their specific requirements, and we encourage our distributors to support the full range of our products. The goal is for customers to view Socket Mobile as a primary source for their mobile data capture needs. Our products include stand-alone barcode scanners in both durable and standard cases, attachable barcode scanners and RFID/NFC reader/writer. We provide a software developer kit to application providers to enable our advanced data capture software to be easily integrated into applications. See “Item 1 Business. The Company and its Products” for a more detailed description of our products.
We design our products to comply with the regulations of the many worldwide agencies that regulate the safety, performance and use of electronic products.
Competitive pricing. We have designed our products to be priced competitively although we are subject to changes in component pricing by our suppliers. We update our products from time to time and work with our vendors to achieve reductions in component pricing.
Worldwide product availability. We distribute our products through a worldwide distribution network that places products into geographic regions to shorten purchasing time and provides a credit shield to us. Our largest distributors are Ingram Micro®, ScanSource® and Blue Star, and they support a worldwide network of on-line resellers including Shopify®, Amazon.com, and CDW®. We also offer products on our own online stores.
Strong Brand Name. We believe that our products make a difference in the daily work life of mobile workers and the people they serve. We are building a brand image focused on business mobility. This image closely associates us with business mobility solutions and to reflect this image, we began doing business as Socket Mobile, Inc. in January 2007 and changed our legal name to Socket Mobile, Inc. in April 2008. We stress with customers the design of our products for the markets they serve, emphasizing quality and standards-based connectivity. Mobility requires products that are compact and designed to be handled while mobile, with low power consumption to extend time between charges, and easy to use. We strive to offer high performance products in a wide range of competitive prices. Through our developer support program, we work closely with application providers who are developing productivity enhancing applications for the mobile workforce. Our overall company brand identity and positioning goal is to be a leading provider of easy-to-deploy business mobility data capture systems to the business mobility market.
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Competition and Competitive Risks
The overall market for mobile handheld data capture solutions is both complex and competitive. Our barcode scanning hardware products compete with similar hardware products in all our markets in the United States, Europe and Asia, and we differentiate our products with our software developer kit and our underlying data capture software designed to work with smartphones, tablets and other mobile computers running the Apple, Android and Windows operating systems. Our longtime focus on creating innovative mobile solutions for the mobile workforce has resulted in good brand name recognition and reputation. We believe that our brand name identifies our products as durable, dependable, ergonomic, and easy to use, all features designed for a mobile worker while mobile, and the breadth of our product offerings, including the extensive advanced features of our software and software developer kit, will continue to differentiate us relative to our competitors.
Cordless Barcode Scanning. We offer a full range of handheld cordless barcode scanners connecting to smartphones, tablets and other computing devices over Bluetooth. Our Software Developer Kit (Capture-SDK) enables application providers to integrate the features of our Data Capture software into their applications and helps differentiate our products. Our Cordless Barcode Scanners face competition from similar products from Koamtec, Code Corporation and Opticon (Japan). Barcodes may also be scanned using the built-in camera in smartphones or tablets with applications from Scandit or Manatee Works. However, scanning using the built-in camera is typically slower and harder to aim than a dedicated device. Users may choose a barcode scanner that connects directly to an Apple tablet, iPhone or computer such as offered by Infinite Peripherals and Honeywell. Users also may choose more rugged barcode scanners as an alternative, some of which are integrated into computing devices from manufacturers such as Datalogic, Honeywell®, and Zebra Technologies. Many of these devices are not Apple certified. Many connect to Apple devices over Bluetooth in keyboard emulation mode and do not offer extensive tools for application providers such as our software developer kit (Capture-SDK) to integrate features of our sophisticated data collection scanning software and hardware needed to meet the consumers’ requirement.
Contactless RFID/NFC Reader/Writer. We developed and commenced sales in 2017 of a Contactless RFID/NFC Reader/Writer, D600 version of our durable handheld barcode scanner. The D600 can read and write many different types of electronic SmartTags which are used in many applications today, like digital wallet applications for loyalty cards, identification cards, payment cards, coupons and event tickets. In 2020, we launched a Contactless Membership Card Reader/Writer, S550 which enables us to expand our business into the emerging market for tap-and-go solutions that have traditionally been limited to payment solutions, such as Apple Pay, but can now be used for ticketing, access and identification applications. We believe we are an early entrant into this market and do not face significant head to head competition from alternative reader/writer devices.
Proprietary Technology and Intellectual Property
We have been granted 56 U.S. patents and 13 design patents and have other patent applications under review. We have registered trademarks with the U.S. Patent and Trademark Office for the mark “Socket”, our logo, DuraScan, and SocketScan.
We have developed technological building blocks that enhance our ability to design new hardware and software products, to offer products which run on multiple software and hardware platforms, and to manufacture and package products efficiently.
We own and control the design of our barcode scanners, enabling us to modify its features or software to meet specific customer requirements.
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We have developed software programs that provide unique functions and features for our data collection products. For example, our data collection software enables our barcode scanning products to scan a variety of barcodes and to route the data to many different types of data files on operating systems used in Apple, Android and Windows mobile devices. We use Bluetooth technology to provide a completely functional Bluetooth solution enabling connections and data transfers between Bluetooth-enabled devices. Our companion applications assist Apple iOS, Android, and Windows users with the proper setup and use of our data capture products.
We rely on a combination of patent, copyright, trademark and trade secret laws, and confidentiality procedures to protect our proprietary rights. As part of our confidentiality procedures, we generally enter into non-disclosure agreements with our employees, distributors and strategic partners, and limit access to our software, documentation and other proprietary information. Despite these precautions, it may be possible for a third-party to copy or otherwise obtain and use our products or technology without authorization, or to develop similar technology independently. In addition, we may not be able to effectively protect our intellectual property rights in certain foreign countries. From time to time, we receive communications from third parties asserting that our products infringe, or may infringe, their proprietary rights. Litigation could be brought against us that could result in significant additional expense or compel us to discontinue or redesign some of our products.
Personnel
Our future success will depend in significant part upon the continued service of certain of our key technical and senior management personnel, and our continuing ability to attract, assimilate and retain highly qualified technical, managerial and sales and marketing personnel. Our total employee headcount was 53 and 48 as of December 31, 2021 and 2020, respectively. Our employees are not represented by a union, and we consider our employee relationships to be good. As of December 31, 2021, we had 14 persons in sales, marketing and customer service, 15 persons in development engineering, 7 persons in finance and administration, and 17 persons in operations.
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Item 1A. Risk Factors
Ownership of the Company’s securities involves a number of risks and uncertainties. Potential investors should carefully consider the risks and uncertainties described below and the other information in this Annual Report on Form 10-K before deciding whether to invest in the Company’s securities. The Company’s business, financial condition or results of operations could be materially adversely affected by any of these risks. The risks described below are not the only ones facing the Company. Additional risks that are currently unknown to the Company or that the Company currently considers immaterial may also impair its business or adversely affect its financial condition or results of operations.
We could be materially adversely affected by the ongoing COVID-19 pandemic for which we are unable to predict the ultimate impact as the extent and duration of the COVID-19 pandemic is uncertain.
The ongoing COVID-19 pandemic has resulted in widespread impacts on the global economy, and the unfavorable impacts we may experience include:
| • | Reductions or volatility in demand for one or more of our products which may be caused by the temporary inability of consumers to purchase our products due to illness, business closures, or financial hardship; and shifts in demand away from one or more of our higher-priced products to lower-priced products. If prolonged, such impacts can further increase the difficulty in planning our operations, which may adversely impact our results, liquidity and financial condition. |
| • | Inability to meet our customers’ needs due to disruptions in our manufacturing operations. |
| • | Failure of third parties on which we rely, including our suppliers, contract manufacturers, and distributors, to meet their obligations to the Company, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties, which may adversely impact our operations, liquidity and financial condition. |
Despite our efforts to manage and remedy these impacts to the Company, there is considerable uncertainty regarding the extent to which COVID-19 will spread and the extent and duration of measures to try to contain the virus. The ultimate impact of the COVID-19 pandemic depends on factors beyond our knowledge or control. Additionally, other new variants of COVID-19 could emerge in the future. The potential impact of possible future variants cannot be predicted at this time, and we cannot predict with any certainty the degree to, or the time period over, which our liquidity, financial position, results of operations and cash flows will be affected by this pandemic.
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A deterioration in global economic conditions may have adverse impacts on our business and financial condition in ways that we currently cannot predict and may limit our ability to raise additional funds.
If global economic conditions deteriorate, it may have a negative impact on our business and our financial condition. We may face significant challenges if conditions in the financial markets worsen. The impact of such future developments on our business, including as a result of the COVID-19 pandemic and Russia’s military action against Ukraine, is highly uncertain and cannot be predicted. If the overall economy is negatively impacted for an extended period, our results of operations, financial position and cash flows may be materially adversely affected. In addition, a severe prolonged economic downturn could result in a variety of risks to the business, including weakening our ability to develop potential businesses and a decreased ability to raise additional capital when needed on acceptable terms, if at all.
We may not maintain ongoing profitability.
To maintain ongoing profitability, we must accomplish numerous objectives, including achieving continued growth in our business, providing ongoing support to application providers who support the use of our data capture solutions, and developing successful new products. We cannot foresee with any certainty whether we will be able to achieve these objectives in the future. Accordingly, we may not generate sufficient revenue or control our expenses enough to maintain ongoing profitability. If we cannot maintain ongoing profitability, we will not be able to support our operations from positive cash flows, and we would be required to use our existing cash to support operating losses. If we are unable to secure the necessary capital to replace that cash, we may need to suspend some or all of our current operations.
We may require additional capital in the future, but that capital may not be available on reasonable terms, if at all, or on terms that would not cause substantial dilution to investors’ stock holdings.
We may need to raise capital to fund our growth or operating losses in future periods. Our forecasts are highly dependent on factors beyond our control, including market acceptance of our products and delays in deployments by businesses of applications that use our data capture products. Even if we maintain profitable operating levels, we may need to raise capital to provide sufficient working capital to fund our growth. If capital requirements vary materially from those currently planned, we may require additional capital sooner than expected. There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to us, if at all.
If application providers are not successful in their efforts to develop, market and sell their applications into which our software and products are incorporated, we may not achieve our sales projections.
We are dependent upon application providers to integrate our scanning and software products into their applications designed for mobile workers using smartphones, tablets and mobile computers, and to successfully market and sell those application products and solutions into the marketplace. We focus on serving the needs of application providers as sales of our data capture products are application driven. However, these application providers may take considerable time to complete development of their applications, may experience delays in their development timelines, may develop competing applications, may be unsuccessful in marketing and selling their application products and solutions to customers, or may experience delays in customer deployments and implementations, which would adversely affect our ability to achieve our revenue projections.
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Failure to maintain effective internal controls could have a material adverse effect on our business, operating results and stock price.
We have evaluated and will continue to evaluate our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires an annual management assessment of the design and effectiveness of our internal control over financial reporting. If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to revenue recognition and access to assets, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.
Despite security protections, our business records and information could be hacked by unauthorized personnel.
We protect our business records and information from access by unauthorized personnel and are not aware of any instances where such data has been compromised. We maintain adequate segregation of duties in safeguarding our assets and related records and monitor our systems to detect any attempts to bypass our controls and procedures which we evaluate and update from time to time. We are aware that unauthorized efforts to access our business records and information with sophisticated tools could bypass our controls and procedures and we remain alert to that possibility.
Our quarterly operating results may fluctuate in future periods, which could cause our stock price to decline.
We expect to experience quarterly fluctuations in operating results in the future. We generally ship orders as received, and as a result we may have little backlog. Quarterly revenues and operating results therefore depend on the volume and timing of orders received during the quarter, which are difficult to forecast. Historically, we have often recognized a substantial portion of our revenue in the last month of the quarter. This subjects us to the risk that even modest delays in orders or in the manufacture of products relating to orders received, may adversely affect our quarterly operating results. Our operating results may also fluctuate due to factors such as:
| • | the demand for our products; |
| • | the size and timing of customer orders; |
| • | unanticipated delays or problems in our introduction of new products and product enhancements; |
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| • | the introduction of new products and product enhancements by our competitors; |
| • | the timing of the introduction and deployments of new applications that work with our products; |
| • | changes in the revenues attributable to royalties and engineering development services; |
| • | product mix; |
| • | timing of software enhancements; |
| • | changes in the level of operating expenses; |
| • | competitive conditions in the industry including competitive pressures resulting in lower average selling prices; |
| • | timing of distributors’ shipments to their customers; |
| • | delays in supplies of key components used in the manufacturing of our products; and |
| • | general economic conditions and conditions specific to our customers’ industries. |
Because we base our staffing and other operating expenses on anticipated revenues, unanticipated declines or delays in the receipt of orders can cause significant variations in operating results from quarter to quarter. As a result of any of the foregoing factors, or a combination, our results of operations in any given quarter may be below the expectations of public market analysts or investors, in which case the market price of our common stock would be adversely affected.
In order to maintain the availability of our bank lines of credit we must remain in compliance with the covenants as specified under the terms of the credit agreements and the bank may exercise discretion in making advances to us.
Our credit agreements with our bank requires us to remain in compliance with the covenants specified under the terms of the agreement. The agreements also contain customary affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, grant liens, make investments, incur indebtedness, merge or consolidate, dispose of assets, make acquisitions, pay dividends or make distributions, repurchase stock, enter into transactions with affiliates and enter into restrictive agreements, in each case subject to customary exceptions for a credit facility of this size and type. The agreements also contain customary events of default including, among others, payment defaults, breaches of covenants, bankruptcy and insolvency events, cross defaults with certain material indebtedness, judgment defaults, and breaches of representations and warranties. Upon an event of default, our bank may declare all or a portion of our outstanding obligations payable to be immediately due and payable and exercise other rights and remedies provided for under the agreement. During the existence of an event of default, interest on the obligations could be increased. The agreements may be terminated by us or by our bank at any time. Upon such termination, our bank would no longer make advances under the credit agreement and outstanding advances would be repaid as receivables are collected. All advances are at our bank’s discretion and our bank is not obligated to make advances.
Deferred tax assets comprise a significant portion of our assets and are dependent upon future tax profitability to realize the benefits.
We have recorded deferred tax assets on our balance sheet because we believe that it is more likely than not that we will generate sufficient tax profitability in the future to realize the tax savings that our deferred tax assets represent. If we do not achieve and maintain sufficient profitability, the tax savings represented by our deferred tax assets may never be realized and we would need to recognize a loss for those deferred tax assets.
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We may be unable to manufacture our products because we are dependent on a limited number of qualified suppliers for our components.
Several of our component parts are produced by one or a limited number of suppliers. Shortages or delays could occur in these essential components due to an interruption of supply or increased demand in the industry. Suppliers may choose to restrict credit terms or require advance payment causing delays in the procurement of essential materials. If we are unable to procure certain component parts, we could be required to reduce our operations while we seek alternative sources for these components, which could have a material adverse effect on our financial results. To the extent that we acquire extra inventory stocks to protect against possible shortages, we would be exposed to additional risks associated with holding inventory, such as obsolescence, excess quantities, or loss.
If we fail to develop and introduce new products rapidly and successfully, we will not be able to compete effectively, and our ability to generate sufficient revenues will be negatively affected.
The market for our products is prone to rapidly changing technology, evolving industry standards and short product life cycles. If we are unsuccessful at developing and introducing new products and services on a timely basis that include the latest technologies, conform to the newest standards, and that are appealing to end users, we will not be able to compete effectively, and our ability to generate significant revenues will be seriously harmed.
The development of new products and services can be very difficult and requires high levels of innovation. The development process is also lengthy and costly. Short product life cycles for smartphones and tablets expose our products to the risk of obsolescence and require frequent new product upgrades and introductions. We will be unable to introduce new products and services into the market on a timely basis and compete successfully if we fail to:
| • | invest significant resources in research and development, sales and marketing, and customer support; |
| • | identify emerging trends, demands and standards in the field of mobile computing products; |
| • | enhance our products by adding additional features; |
| • | maintain superior or competitive performance in our products; and |
| • | anticipate our end users’ needs and technological trends accurately. |
We cannot be sure that we will have sufficient resources to make adequate investments in research and development or that we will be able to identify trends or make the technological advances necessary to be competitive.
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We may not be able to collect receivables from customers who experience financial difficulties.
Our accounts receivables are derived primarily from distributors. We perform ongoing credit evaluations of our customers’ financial conditions but generally require no collateral from our customers. Reserves are maintained for potential credit losses, and such losses have historically been within such reserves. However, many of our customers may be thinly capitalized and may be prone to failure in adverse market conditions. Although our collection history has been good, from time to time a customer may not pay us because of financial difficulty, bankruptcy or liquidation. If global financial conditions have an impact on our customers’ ability to pay us in a timely manner, and consequently, we may experience increased difficulty in collecting our accounts receivable, and we may have to increase our reserves in anticipation of increased uncollectible accounts.
We could face increased competition in the future, which would adversely affect our financial performance.
The market in which we operate is very competitive. Our future financial performance is contingent on a number of unpredictable factors, including that:
| • | some of our competitors have greater financial, marketing, and technical resources than we do; |
| • | we periodically face intense price competition, particularly when our competitors have excess inventories and discount their prices to clear their inventories; and |
| • | certain manufacturers of tablets and mobile phones offer products with built-in functions, such as Bluetooth wireless technology or barcode scanning, that compete with our products. |
Increased competition could result in price reductions, fewer customer orders, reduced margins, and loss of market share. Our failure to compete successfully against current or future competitors could harm our business, operating results and financial condition.
If we do not correctly anticipate demand for our products, our operating results will suffer.
The demand for our products depends on many factors and is difficult to forecast as we introduce and support more products, and as competition in the markets for our products intensifies. If demand is lower than forecasted levels, we could have excess production resulting in higher inventories of finished products and components, which could lead to write-downs or write-offs of some or all of the excess inventories, and reductions in our cash balances. Lower than forecasted demand could also result in excess manufacturing capacity at our third-party manufacturers and in our failure to meet minimum purchase commitments, each of which may lower our operating results.
If demand increases beyond forecasted levels, we would have to rapidly increase production at our third-party manufacturers. We depend on suppliers to provide additional volumes of components, and suppliers might not be able to increase production rapidly enough to meet unexpected demand. Even if we were able to procure enough components, our third-party manufacturers might not be able to produce enough of our devices to meet our customer demand. In addition, rapid increases in production levels to meet unanticipated demand could result in higher costs for manufacturing and supply of components and other expenses. These higher costs could lower our profit margins. Further, if production is increased rapidly, manufacturing yields could decline, which may also lower operating results.
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We rely primarily on distributors to distribute our products, and our sales would suffer if any of these distributors stops distributing our products effectively.
Because we distribute and fulfill resellers’ orders for our products primarily through distributors, we are subject to risks associated with channel distribution, such as risks related to their inventory levels and support for our products. Our distribution channels may build up inventories in anticipation of growth in their sales. If such growth in their sales does not occur as anticipated, the inventory build-up could contribute to higher levels of product returns. The lack of sales by any one significant participant in our distribution channels could result in excess inventories and adversely affect our operating results and working capital liquidity. During the twelve months ended September 30, 2021 and 2020, Ingram Micro® and BlueStar together represented approximately 54% and 55%, respectively, of our worldwide sales. We expect that a significant portion of our sales will continue to depend on sales to a limited number of distributors.
Our agreements with distributors are generally nonexclusive and may be terminated on short notice by them without cause. Our distributors are not within our control, are not obligated to purchase products from us, and may offer competitive lines of products simultaneously. Sales growth is contingent in part on our ability to enter into additional distribution relationships and expand our sales channels. We cannot predict whether we will be successful in establishing new distribution relationships, expanding our sales channels or maintaining our existing relationships. A failure to enter into new distribution relationships, to expand our sales channels, or to maintain our existing relationships could adversely impact our ability to grow our sales.
We allow our distribution channels to return a portion of their inventory to us for full credit against other purchases. In addition, in the event we reduce our prices, we credit our distributors for the difference between the purchase price of products remaining in their inventory and our reduced price for such products. Actual returns and price protection may adversely affect future operating results and working capital liquidity by reducing our accounts receivable and increasing our inventory balances, particularly since we seek to continually introduce new and enhanced products and are likely to face increasing price competition.
We depend on alliances and other business relationships with third parties, and a disruption in these relationships would hinder our ability to develop and sell our products.
We depend on strategic alliances and business relationships with leading participants in various segments of the mobile applications market to help us develop and market our products. Our strategic partners may revoke their commitment to our products or services at any time in the future or may develop their own competitive products or services. Accordingly, our strategic relationships may not result in sustained business alliances, successful product or service offerings, or the generation of significant revenues. Failure of one or more of such alliances could result in delay or termination of product development projects, failure to win new customers, or loss of confidence by current or potential customers.
We have devoted significant research and development resources to design products to work with a number of operating systems used in mobile devices including Apple® (iOS), Google™ (Android™) and Microsoft® (Windows®). Such design activities have diverted financial and personnel resources from other development projects. These design activities are not undertaken pursuant to any agreement under which Apple, Google or Microsoft is obligated to collaborate or to support the products produced from such collaboration. Consequently, these organizations may terminate their collaborations with us for a variety of reasons, including our failure to meet agreed-upon standards or for reasons beyond our control, such as changing market conditions, increased competition, discontinued product lines, and product obsolescence.
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Our intellectual property and proprietary rights may be insufficient to protect our competitive position.
Our business depends on our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark, trade secret laws, and other restrictions on disclosure to protect our proprietary technologies. We cannot be sure that these measures will provide meaningful protection for our proprietary technologies and processes. We cannot be sure that any patent issued to us will be sufficient to protect our technology. The failure of any patents to provide protection to our technology would make it easier for our competitors to offer similar products. In connection with our participation in the development of various industry standards, we may be required to license certain of our patents to other parties, including our competitors that develop products based upon the adopted standards.
We also generally enter into confidentiality agreements with our employees, distributors, and strategic partners, and generally control access to our documentation and other proprietary information. Despite these precautions, it may be possible for a third-party to copy or otherwise obtain and use our products, services, or technology without authorization, develop similar technology independently, or design around our patents.
Additionally, effective copyright, trademark, and trade secret protection may be unavailable or limited in certain foreign countries.
We may become subject to claims of intellectual property rights infringement, which could result in substantial liability.
In the course of operating our business, we may receive claims of intellectual property infringement or otherwise become aware of potentially relevant patents or other intellectual property rights held by other parties. Many of our competitors have large intellectual property portfolios, including patents that may cover technologies that are relevant to our business. In addition, many smaller companies, universities, and individuals have obtained or applied for patents in areas of technology that may relate to our business. The industry is moving towards aggressive assertion, licensing, and litigation of patents and other intellectual property rights.
If we are unable to obtain and maintain licenses on favorable terms for intellectual property rights required for the manufacture, sale, and use of our products, particularly those products which must comply with industry standard protocols and specifications to be commercially viable, our results of operations or financial condition could be adversely impacted.
In addition to disputes relating to the validity or alleged infringement of other parties’ rights, we may become involved in disputes relating to our assertion of our own intellectual property rights. Whether we are defending the assertion of intellectual property rights against us or asserting our intellectual property rights against others, intellectual property litigation can be complex, costly, protracted, and highly disruptive to business operations by diverting the attention and energies of management and key technical personnel. Plaintiffs in intellectual property cases often seek injunctive relief, and the measures of damages in intellectual property litigation are complex and often subjective or uncertain. Thus, any adverse determinations in this type of litigation could subject us to significant liabilities and costs.
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New industry standards may require us to redesign our products, which could substantially increase our operating expenses.
Standards for the form and functionality of our products are established by standards committees. These independent committees establish standards, which evolve and change over time, for different categories of our products. We must continue to identify and ensure compliance with evolving industry standards so that our products are interoperable and we remain competitive. Unanticipated changes in industry standards could render our products incompatible with products developed by major hardware manufacturers and software application providers. Should any major changes, even if anticipated, occur, we would be required to invest significant time and resources to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards for a significant period of time, we would miss opportunities to sell our products for use with new hardware components from mobile computer manufacturers and OEMs, thus affecting our business.
Undetected flaws and defects in our products may disrupt product sales and result in expensive and time-consuming remedial action.
Our hardware and software products may contain undetected flaws, which may not be discovered until customers have used the products. From time to time, we may temporarily suspend or delay shipments or divert development resources from other projects to correct a particular product deficiency. Efforts to identify and correct errors and make design changes may be expensive and time consuming. Failure to discover product deficiencies in the future could delay product introductions or shipments, require us to recall previously shipped products to make design modifications, or cause unfavorable publicity, any of which could adversely affect our business and operating results.
The loss of one or more of our senior personnel could harm our existing business.
A number of our officers and senior managers have been employed for more than twenty years by us, including our President, Chief Financial Officer, Vice President of Operations and Vice President of Engineering/Chief Technical Officer. Our future success will depend upon the continued service of key officers and senior managers. Competition for officers and senior managers is intense, and there can be no assurance that we will be able to retain our existing senior personnel. The loss of one or more of our officers or key senior managers could adversely affect our ability to compete.
The expensing of options and restricted stocks will continue to reduce our operating results such that we may find it necessary to change our business practices to attract and retain employees.
We have been using stock options and restricted stocks as a key component of our employee compensation packages. We believe that stock options and restricted stocks provide an incentive to our employees to maximize long-term stockholder value and, through the use of vesting, encourage valued employees to remain with us. The expensing of employee stock options and restricted stocks adversely affects our net income and earnings per share, will continue to adversely affect future quarters, and will make profitability harder to achieve. In addition, we may decide in response to the effects of expensing stock options and restricted stock on our operating results to reduce the number of stock options or restricted stocks granted to employees or to grant to fewer employees. This could adversely affect our ability to retain existing employees or attract qualified candidates, and also could increase the cash compensation we would have to pay to them.
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If we are unable to attract and retain highly skilled sales and marketing and product development personnel, our ability to develop and market new products and product enhancements will be adversely affected.
We believe our ability to achieve increased revenues and to develop successful new products and product enhancements will depend in part upon our ability to attract and retain highly skilled sales and marketing and product development personnel. Our products involve a number of new and evolving technologies, and we frequently need to apply these technologies to the unique requirements of mobile products. Our personnel must be familiar with both the technologies we support and the unique requirements of the products to which our products connect. Competition for such personnel is intense, and we may not be able to attract and retain such key personnel. In addition, our ability to hire and retain such key personnel will depend upon our ability to raise capital or achieve increased revenue levels to fund the costs associated with such key personnel. Failure to attract and retain such key personnel will adversely affect our ability to develop and market new products and product enhancements.
Our operating results could be harmed by economic, political, regulatory and other risks associated with export sales.
Our operating results are subject to the risks inherent in export sales, including:
| • | longer payment cycles; |
| • | unexpected changes in regulatory requirements, import and export restrictions and tariffs; |
| • | difficulties in managing foreign operations; |
| • | the burdens of complying with a variety of foreign laws; |
| • | greater difficulty or delay in accounts receivable collection; |
| • | potentially adverse tax consequences; and |
| • | political and economic instability (such as Russia’s military action against Ukraine).. |
Our export sales are primarily denominated in Euros for our sales to European distributors and in British pounds for our sales to UK distributors. Accordingly, an increase in the value of the United States dollar relative to Euro or British pound could make our products more expensive and therefore potentially less competitive in European markets. Declines in the value of the Euro or pound relative to the United States dollar may result in foreign currency losses relating to collection of receivables denominated if left unhedged.
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Our facilities or operations could be adversely affected by events outside our control, such as natural disasters or health epidemics.
Our corporate headquarters is located in a seismically active region in Northern California. If major disasters such as earthquakes occur, or our information system or communications network breaks down or operates improperly, our headquarters and production facilities may be seriously damaged, or we may have to stop or delay production and shipment of our products. In addition, we may be affected by health epidemic or pandemics, such as the current COVID-19 pandemic, or geopolitical instability, such as Russia’s military action against Ukraine. We may incur expenses or delays relating to such events outside of our control, which could have a material adverse impact on our business, operating results and financial condition.
The sale of a substantial number of shares of our common stock could cause the market price of our common stock to decline.
Sales of a substantial number of shares of our common stock in the public market could adversely affect the market price for our common stock. The market price of our common stock could also decline if one or more of our significant stockholders decided for any reason to sell substantial amounts of our common stock in the public market.
As of March 25, 2022, we had 7,273,051 shares of common stock outstanding. Substantially all of these shares are freely tradable in the public market, either without restriction or subject, in some cases, only to S-3 prospectus delivery requirements and, in other cases, only to manner of sale, volume, and notice requirements of Rule 144 under the Securities Act.
As of March 25, 2022, we had 1,353,923 shares of common stock subject to outstanding options under our stock option plans, and 288,393 shares of common stock were available for future issuance under the plans. We have registered the shares of common stock subject to outstanding options and reserved for issuance under our stock option plans. Accordingly, the shares of common stock underlying vested options will be eligible for resale in the public market as soon as the options are exercised.
Volatility in the trading price of our common stock could negatively impact the price of our common stock.
During the period from January 1, 2021 through March 25, 2022, our common stock price fluctuated between a high of $35.00 and a low of $0.76. We have experienced low trading volumes in our stock, and thus relatively small purchases and sales can have a significant effect on our stock price. The trading price of our common stock could be subject to wide fluctuations in response to many factors, some of which are beyond our control, including general economic conditions and the outlook of securities analysts and investors on our industry. In addition, the stock markets in general, and the markets for high technology stocks in particular, have experienced high volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
We lease a 37,100 square-foot office facility in Newark, California under a lease expiring in June 2022. This facility houses our headquarters and manufacturing operations and is used by all segments of the Company.
In February 2022, the Company entered into an operating lease agreement for an approximately 35,913 square foot facility in Fremont, California where it will move its office and manufacturing operations. The lease agreement is for a base term of 87 months and a monthly rent obligation of $50,278.20, subject to annual increases of 3%. The lease commences on May 1, 2022 and the Company is provided with three months of free rent.
Item 3. Legal Proceedings
We are currently not a party to any material legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
The Company’s common stock is traded on the NASDAQ Marketplace under the symbol “SCKT.”
On March 25, 2022, the closing sales price for our common stock as reported on the NASDAQ Marketplace was $3.89. We had approximately 10,000 beneficial stockholders of record as of March 25, 2022. We have not paid dividends on our common stock, and we currently intend to retain future earnings for use in our business and do not anticipate paying dividends in the foreseeable future.
The information required by this item regarding equity compensation plans is incorporated by reference to the information set forth in Item 12 of this Annual Report on Form 10-K.
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Performance Graph
The performance graph shown below shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities under that section, and shall not be deemed to be incorporated by reference into any filing of Socket Mobile, Inc. under the Securities Act of 1933, as amended, or the Exchange Act. The performance graph below shows a five-year comparison of cumulative total stockholder return, calculated on a dividend reinvestment basis and based on a $100 investment, from December 31, 2016 through December 31, 2021 comparing the return on the Company's common stock with the Russell 2000 Index and the NASDAQ Computer & Data Processing Index. No dividends have been declared or paid on the common stock during such period. Historical stock price performance is not necessarily indicative of future stock price performance.
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Recent Sales of Unregistered Securities.
None.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the financial statements and the notes thereto in Item 8, “Financial Statements and Supplementary Data.”
| Years Ended December 31, | ||||||||||||||||||||
| (Amounts in thousands, except per share) | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||
| Income Statement Data: | ||||||||||||||||||||
| Revenues | $ | 21,286 | $ | 16,454 | $ | 19,253 | $ | 15,700 | $ | 23,199 | ||||||||||
| Gross profit | $ | 11,390 | $ | 8,456 | $ | 10,101 | $ | 8,335 | $ | 12,436 | ||||||||||
| Operating expenses | $ | 8,972 | $ | 9,042 | $ | 9,494 | $ | 12,686 | $ | 9,739 | ||||||||||
| Net income (loss) before income taxes | $ | 2,338 | $ | (715 | ) | $ | 506 | $ | (3,330 | ) | $ | 2,564 | ||||||||
| Income tax benefit (expense) | $ | (3,218 | ) | $ | 144 | $ | (219 | ) | $ | 51 | $ | 1,903 | ||||||||
| Net income (loss) | $ | (880 | ) | $ | (571 | ) | $ | 287 | $ | (3,279 | ) | $ | 4,466 | |||||||
| Net income (loss) per share: | ||||||||||||||||||||
Basic | $ | (0.14 | ) | $ | (0.09 | ) | $ | 0.05 | $ | (0.51 | ) | $ | 0.58 | |||||||
| Diluted | $ | (0.14 | ) | $ | (0.09 | ) | $ | 0.05 | $ | (0.51 | ) | $ | 0.48 | |||||||
| Weighted average shares outstanding: | ||||||||||||||||||||
| Basic | 6,293 | 6,095 | 5,984 | 6,036 | 6,991 | |||||||||||||||
| Diluted | 6,293 | 6,095 | 6,208 | 6,036 | 8,923 | |||||||||||||||
| At December 31, | ||||||||||||||||||||
| 2017 | 2018 | 2019 | 2020 | 2021 | ||||||||||||||||
| Balance Sheet Data: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 3,380 | $ | 1,085 | $ | 959 | $ | 2,122 | $ | 6,096 | ||||||||||
| Total assets | $ | 20,405 | $ | 19,148 | $ | 20,009 | $ | 15,609 | $ | 25,575 | ||||||||||
| Bank line of credit | $ | — | $ | 1,317 | $ | 1,413 | $ | — | $ | — | ||||||||||
| Term loan | $ | — | $ | 833 | $ | 333 | $ | — | $ | 625 | ||||||||||
| Related party convertible notes payable | $ | — | $ | — | $ | — | $ | 1,272 | $ | 1,201 | ||||||||||
| Convertible notes payable | $ | — | $ | — | $ | — | $ | 170 | $ | 144 | ||||||||||
| Capital leases and deferred rent - long term portion | $ | 271 | $ | — | $ | — | $ | — | $ | — | ||||||||||
| Operating lease | $ | — | $ | 1,511 | $ | 1,134 | $ | 741 | $ | 258 | ||||||||||
| Total stockholders’ equity | $ | 17,781 | $ | 12,956 | $ | 13,785 | $ | 11,173 | $ | 20,046 | ||||||||||
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
We financed our business in 2021 through available cash and cash flows from operating activities and financing activities. As of December 31, 2021, our cash balance was $6.1 million as compared to $2.1 million at December 31, 2020.
Generally, our net cash provided by operating activities is used to fund our day-to-day operating activities. Our largest source of operating cash flows is cash collections from our customers. Our primary short- and long-term liquidity requirements primarily arise from inventory purchases, employee-related expenditures, leasing of facilities, and general operating expenses, and interest and principal repayments related to our outstanding indebtedness. Net cash provided by operating activities was $2.1 million for 2021 compared to $0.8 million in 2020.
In 2021 and 2020, we used $0.7 million and $0.5 million, respectively, in investing activities related to expenditures on production tooling for new products and purchases of computer software and hardware. We expect to continue our investing activities, including capital expenditures. Furthermore, cash reserves may be used to repurchase common stock under our stock repurchase programs.
Net cash provided by financing activities during 2021 was $2.5 million, compared to $895,000 during 2020. Financing activities in 2021 consisted primarily of $1.9 million in proceeds from the exercise of employee stock options and a net borrowing of $625,000 on the CalCap Loan (as defined in Note 3, Bank Financing Arrangements, of the Notes to Financial Statements included in this Annual Report on From 10-K). Financing activities in 2020 consisted of proceeds of a loan of $1.06 million under the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and a loan of $150,000 from the U.S. Small Business Administration (“SBA”) under its Economic Injury Disaster (“EIDL”) assistance program, offset by an approximately $1.41 million net payment of borrowings under our bank lines of credit, an approximately $333,000 repayment on our term loan and a $150,000 repayment on the SBA loan. The subordinated convertible note financing added approximately $1.43 million to net cash in 2020.
We can also borrow under the existing $2.5 million revolving credit facility that matures on January 31, 2023. On December 31, 2021, the Company had no outstanding drawings against the revolving credit facility.
The primary factors that influence our liquidity include the amount and timing of our revenues, cash collections from our customers, cash payments to our suppliers, capital expenditures, acquisitions, and share repurchases. We believe that our existing balances of cash, and capital resources, inclusive of available borrowing capacity on the revolving credit facility and funds generated from operations, are sufficient to meet anticipated capital requirements, fund our operations and support our growth. Our cash requirements, however, are subject to change as business conditions change.
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Critical Accounting Policies
Our significant accounting policies are described in Note 1, Organization and Summary of Significant Accounting Policies, of the Notes to Financial Statements included in our Annual Reports on Form 10-Kfor the years ended December 31, 2021 and 2020. The application of these policies requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on a combination of historical experience and reasonable judgment applied to other facts. Actual results may differ from these estimates, and such differences may be material to the financial statements. In addition, the use of different assumptions or judgments may result in different estimates. We believe our critical accounting policies that are subject to these estimates are: Revenue Recognition and Accounts Receivable Reserves, Inventory Valuation, Stock-Based Compensation, Income Taxes and Valuation of Goodwill.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States “”GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates, and such differences may be material to the financial statements.
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 antidilutive.
Revenue Recognition and Deferred Revenue
On January 1, 2017, we adopted ASC 606 “Revenue from Contracts with Customers” and implemented a new revenue recognition policy. Under the new policy, we recognize 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, 2021, the deferred revenue and deferred cost on shipments to distributors were approximately $407,000 and $159,000, respectively, compared to approximately $451,000 and $170,000, respectively, as of December 31, 2020.
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We generally recognize 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 rights of return except under warranty.
We earn revenue from an extended warranty service program offered on select products. Revenues from the extended warranty service 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 our balance sheet in its short and long-term components.
We also earn revenue from services performed in connection with consulting and engineering development arrangements. For those contracts that include contract milestones or acceptance criteria we recognize revenue as such milestones are achieved or as such acceptance occurs. In some instances, the acceptance criteria in the contract requires acceptance after all services are complete and all other elements have been delivered, in which case revenue recognition is deferred until those requirements are met.
Accounts Receivable Allowance
We estimate the amount of uncollectible receivables at the end of each reporting period based on the aging of the receivable balance, historical trends, and communications with our customers. If actual bad debts are significantly different from our estimates our operating results will be affected.
Inventory Valuation
Our inventories primarily consist of component parts used to assemble our products after we receive orders from our customers. We purchase or have manufactured the component parts required by our engineering bill of materials. The timing and quantity of our purchases are based on order forecasts, the lead time requirements of our vendors, and on economic order quantities. At the end of each reporting period, we compare our inventory on hand to our forecasted requirements for the next nine-month period and reserve the cost of any inventory that is a surplus, less any amounts that we believe we can recover from disposal of goods or that we specifically believe will be saleable past a nine-month horizon. Our sales forecasts are based upon historical trends, communications from customers, and marketing data regarding market trends and dynamics. Surplus or obsolete inventory can also be created by changes to our engineering bill of materials. Charges for the amounts we record as surplus or obsolete inventory are included in cost of revenue.
Stock-Based Compensation
We account for share-based awards to employees, including grants of employee stock options and restricted stocks, in our financial statements based on the grant date fair values of the share-based awards. We use a binomial lattice valuation model to estimate the fair value of stock option grants. The binomial lattice model incorporates calculations for expected volatility, risk-free interest rates, employee exercise patterns and post-vesting employment termination behavior, and these factors affect the estimate of the fair value of the stock option grants.
Valuation of Goodwill
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU) 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this update eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable.
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The Company tests its goodwill for impairment annually as of September 30th or more frequently when events or circumstances indicate that the carrying value of the Company’s single reporting unit more likely than not exceeds its fair value. The Company wrote off its entire goodwill of $4.4 million as measured on September 30, 2020.
Income Taxes
The Company accounts for income taxes under the asset and liability method under ASC 740, “Income Taxes,” 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, The Company determines deferred tax assets and liabilities based on 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.
The
Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making
such a determination, the Company considers 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 the Company determines
that it would be able to realize its deferred tax assets in the future in excess of the net recorded amount, it would make an adjustment
to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) the Company determines 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, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
Results of Operations for Years Ended December 31, 2021 and 2020
Revenues
Revenue for 2021 was $23.2 million, an increase of 48% compared to revenue of $15.7 million for 2020. Revenue of Companion SocketScan products represented 69% of our 2021 revenue and increased 58% compared to 2020. Our Companion DuraScan products, which are weatherproof and ruggedized and primarily targeted at commercial, industrial, warehousing and outdoor application and their associated customers, represented about 16% of 2021 revenue and increased 37% compared to 2020. We upgraded all our DuraScan products to support themed field-replaceable battery, increased the durability and added healthcare specific options. Our Attachable scanners, DuraSled and 800 Series, made up of approximately 7% of our 2021 revenue and increased approximately 4% compared to 2020. The increase in revenue was driven by strong application-driven demand, particularly in retail as the economy reopened.
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Gross Margins
Annual gross margins on revenue increased slightly to 53.6% in 2021 from 53.1% in 2020. The improvement in margins compared to last year can be primarily attributed to higher revenues and the absorption of fixed manufacturing overhead. The improvement was partially offset by higher component costs and higher shipping costs.
Research and Development Expense
Research and development expenses in 2021 were approximately $4.0 million, an increase of 26% compared to expenses of approximately $3.1 million in 2020. The increases were primarily attributable to an increase in personnel expenses, (as we had realized a benefit in 2020 from our short-term cost reduction initiatives in this area), higher employee incentive-based compensation expense associated with improved financial performance, the inclusion of amortization and depreciation expenses of newly acquired intangible assets and equipment, and increased fees paid for contractors and consultants assisting with product development.
Research and development expenses as a percentage of revenue were 17% in 2021 and 20% in 2020. We believe that a continued commitment to Research and Development activities is essential to maintain or achieve a leadership position for our existing products, to provide innovative new product offerings, and to provide engineering support for key customers. In addition, we consider our ability to accelerate time to market for new products to be critical to our revenue growth. Therefore, we expect to continue to make significant Research and Development investments in the future. The investment percentage is impacted by revenue levels and investing cycles.
Sales and Marketing Expense
Sales and marketing expenses in 2021 were approximately $3.0 million, an increase of approximately 5% compared to $2.8 million in 2020. The increase in expense in 2021 was primarily due to increased fees paid for contractors and consultants assisting with website development and upgrades, the hiring of additional employee, and a reduction in the benefit realized from our short-term cost reduction initiatives of 2020, such benefit having not continued into 2021.
General and Administrative Expense
General and administrative expense in 2021 was $2.8 million, an increase of 22% compared to $2.3 million in 2020. The increase in expense during 2021 was due to higher employee incentive-based compensation expense associated with improved financial performance (as we had realized a benefit in 2020 from our short-term cost reduction initiatives in this area), higher professional fees associated with the filing of a shelf registration statement, higher proxy distribution costs resulting from a greatly increased number of beneficial owners of the Company’s stock and increased insurance costs.
| 26 |
Interest Expense, net of Interest Income
Interest expense and other, net of interest income and other, was approximately $199,000 in 2021 compared to approximately $97,000 in 2020. Interest expense in 2021 was primarily related to the subordinated convertible notes (see Note 4, Secured Subordinated Convertible Notes Payable, of the Notes to Financial Statements included in this Annual Report on Form 10-K for further information) and interest on bank term loan. Interest expense in 2020 was primarily related to interest on the bank term loan and credit line facilities, as well as secured subordinated convertible notes payable. Average total outstanding balance of bank term loan and credit lines during 2020 was $0.48 million. Additionally, interest expense in each of the comparable periods includes interest on equipment lease financing obligations.
Interest income reflects interest earned on cash balances. Interest income was nominal in each of the comparable periods, reflecting low average rates of return.
Income Taxes
The Company's effective tax rate was negative 45.6% in 2021 compared to 0% in 2020. The 2021 effective tax rate included discrete income tax benefits of $9.2 million resulting from the disqualifying disposition of incentive stock options and $0.5 million relating to stock-based compensation. The 2020 effective tax rate included the goodwill impairment charge of $4.47 million and stock-based compensation of $0.51 million, partially offset by $1.06 million for PPP loan forgiveness, which arrived a Federal taxable income of $0.29 million. The State taxable income, however, was $1.3 million due to the expenses on which the PPP loan proceeds were spent on are non-deductible in California. No deferred tax expense or benefit was recorded in 2020. As of January 1, 2020, the Company recognized a net cumulative-effect adjustment of $2.6 million ($0.5 million tax effected) related to the recognition of previously unrecognized windfall tax benefits resulting from the adoption of ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”. The adjustment increased net deferred tax assets and reduced Accumulated Deficit by the same amount.
Our net operating loss carryforwards do not begin expiring until the end of 2023 if not used. The Company’s deferred tax asset, primarily representing future income tax savings from the application of net operating loss carry forwards, was valued at $7.96 million and $6.06 million as of December 31, 2021 and 2020, respectively.
Quarterly Results of Operations
The following table sets forth summary quarterly statements of operations data for each of the quarters in 2020 and 2021. This unaudited quarterly information has been prepared on the same basis as the annual information presented elsewhere herein, and, in our opinion, includes all adjustments (consisting only of normal recurring entries) necessary for a fair presentation of the information for the quarters presented. The operating results for any quarter are not necessarily indicative of results for any future period.
| 27 |
Quarter Ended (unaudited) | ||||||||||||||||||||||||||||||||
| (amounts in thousands, except per share amounts) | Mar 31, 2020 | Jun 30, 2020 | Sep 30, 2020 | Dec 31, 2020 | Mar 31, 2021 | Jun 30, 2021 | Sep 30, 2021 | Dec 31, 2021 | ||||||||||||||||||||||||
| Summary Quarterly Data: | ||||||||||||||||||||||||||||||||
| Revenue | $ | 4,221 | $ | 2,715 | $ | 4,109 | $ | 4,655 | $ | 4,813 | $ | 5,953 | $ | 6,319 | $ | 6,114 | ||||||||||||||||
| Cost of revenue | 1,997 | 1,354 | 1,835 | 2,179 | 2,239 | 2,698 | 2,896 | 2,929 | ||||||||||||||||||||||||
| Gross profit | 2,224 | 1,361 | 2,274 | 2,476 | 2,574 | 3,255 | 3,423 | 3,185 | ||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||
| Research and development | 881 | 859 | 681 | 719 | 931 | 972 | 1,014 | 1,047 | ||||||||||||||||||||||||
| Sales and marketing | 768 | 722 | 658 | 700 | 660 | 734 | 788 | 820 | ||||||||||||||||||||||||
| General and administrative | 666 | 590 | 486 | 529 | 741 | 735 | 667 | 630 | ||||||||||||||||||||||||
| Goodwill impairment charges | — | — | 4,427 | — | — | — | — | — | ||||||||||||||||||||||||
| Total operating expenses | 2,315 | 2,171 | 6,252 | 1,948 | 2,332 | 2,441 | 2,469 | 2,497 | ||||||||||||||||||||||||
| Extinguishment of debt income and other income | — | 50 | — | 1,049 | 10 | — | — | 55 | ||||||||||||||||||||||||
| Interest income (expense) and other, net | 1 | (8 | ) | (24 | ) | (46 | ) | (49 | ) | (51 | ) | (50 | ) | (49 | ) | |||||||||||||||||
| Income tax (expense) benefit | — | — | (1 | ) | 52 | — | 1,864 | (260 | ) | 299 | ||||||||||||||||||||||
| Net income (loss) | $ | (90 | ) | $ | (768 | ) | $ | (4,003 | ) | $ | 1,583 | $ | 203 | $ | 2,627 | $ | 644 | $ | 993 | |||||||||||||
| Basic net income (loss) per share | $ | (0.01 | ) | $ | (0.13 | ) | $ | (0.62 | ) | $ | 0.24 | $ | 0.03 | $ | 0.34 | $ | 0.08 | $ | 0.13 | |||||||||||||
| Fully diluted net income (loss) per share | $ | (0.01 | ) | $ | (0.13 | ) | $ | (0.62 | ) | $ | 0.22 | $ | 0.03 | $ | 0.27 | $ | 0.07 | $ | 0.11 | |||||||||||||
We generally ship orders as received and therefore quarterly revenue and operating results depend on the volume and timing of orders received during the quarter, which are difficult to forecast. Historically, we have recognized a substantial portion of our revenue in the last month of the quarter. Operating results may also fluctuate due to factors such as the demand for our products, the size and timing of customer orders, the introduction of new products and product enhancements by us or our competitors, product mix, timing of software enhancements, manufacturing supply shortages, changes in the level of operating expenses, and competitive conditions in the industry. Because our staffing and other operating expenses are based on anticipated revenue, a substantial portion of which is not typically generated until the end of each quarter, delays in the receipt of orders can cause significant variations in operating results from quarter to quarter.
Contractual Obligations
Our contractual obligations as of December 31, 2021 are outlined in the table shown below:
| Payments Due by Period | ||||||||||||||||||||
Contractual Obligations |
Total | 1 year | 2 to 3 years | 4 to 5 years | More than 5 years | |||||||||||||||
| Unconditional purchase obligations with contract manufacturers | $ | 12,624,000 | $ | 11,911,000 | $ | 713,000 | $ | — | $ | — | ||||||||||
| Operating leases | 263,000 | 263,000 | — | — | — | |||||||||||||||
| Total contractual obligations | $ | 12,887,000 | $ | 12,174,000 | $ | 713,000 | $ | — | $ | — | ||||||||||
Off-Balance Sheet Arrangements
As of December 31, 2021, we had no off-balance sheet arrangements as defined in Item 303 of Regulation S-K.
| 28 |
Recent Accounting Pronouncements
See Note 1, Organization and Summary of Significant Accounting Policies, of the Notes to Financial Statements included in this Annual Report on Form 10-K for additional information regarding the status of recent accounting pronouncements.
| 29 |
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our bank term loan and credit line facilities. Amounts outstanding under the term loan bear interest at lender's prime rate (minimum of 4.25%) plus 1.75%. Our bank credit line facilities of up to $2.5 million have variable interest rates based upon the lender's prime rate (minimum of 4.25%) plus 0.75%, for both the domestic line (up to $2.0 million) and the international line (up to $0.5 million). Accordingly, interest rate increases could increase our interest expense on outstanding term loan and credit line balances.
Foreign Currency Risk
A substantial majority of our revenue, expense and purchasing activities are transacted in U.S. dollars. However, we require our European distributors to purchase our products in Euros and we pay the expenses of our European employees in Euros and British pounds. We may enter into selected future purchase commitments with foreign suppliers that may be paid in the local currency of the supplier. We hedge a significant portion of our European receivables balance denominated in Euros to reduce the foreign currency risk associated with these assets, and we have not been subject to significant losses from material foreign currency fluctuations. Based on a sensitivity analysis of our net foreign currency denominated assets and expenses at the beginning, during and at the end of the quarter ended December 31, 2021, an adverse change of 10% in exchange rates would have resulted in a decrease in our net income for the fourth quarter 2021 of approximately $71,900 if left unprotected. For the fourth quarter of 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. We will continue to monitor, assess, and mitigate through hedging activities, our risks related to foreign currency fluctuations.
| 30 |
Item 8. Financial Statements and Supplementary Data
The supplementary information required by this item is included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Socket Mobile, Inc.:
Opinion on the Financial Statements We have audited the accompanying balance sheets of Socket Mobile, Inc. (“the Company”) as of December 31, 2021 and 2020, the related statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated
or required to be communicated to the audit committee and that: (1) related to accounts or disclosures that are material to the financial
statements and (2) involved our especially challenging, subjective, or complex judgements. The communication of critical audit matters
does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical matter
below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
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Deferred Tax Asset Valuation Allowance Assessment
Critical Audit Matter Description
As described in note 9 to the consolidated financial statements, the Company uses the asset and liability method to account for income taxes. Deferred tax assets and liabilities 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 Company utilizes an undiscounted cash flow model to help determine the expected usage of the deferred tax asset and related need for a valuation allowance.
We identified the evaluation of the deferred tax asset valuation allowance assessment as a critical audit matter because of the significant estimates and assumptions management used in the undiscounted cash flow analysis. Performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
| 32 |
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures consisted of the following:
• Testing management’s process for developing the accounting estimate for the allowance.
• Evaluating the appropriateness of the undiscounted cash flow model used by management.
• Testing the completeness and accuracy of underlying data used in the undiscounted cash flow model.
• Evaluating the significant assumptions used by management related to revenues, gross margin, other operating expenses, and income taxes to discern whether they are reasonable considering (i) the current and past performance of the entity; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.
• Professionals with specialized skill and knowledge were utilized by the Firm to assist in the evaluation of the undiscounted cash flow model.
/s/
We have served as the Company’s auditor since 2013.
March 30, 2022
| 33 |
| SOCKET MOBILE, INC. | ||||||||
| BALANCE SHEETS | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Deferred cost on shipments to distributors | ||||||||
| Total current assets | ||||||||
| Property and equipment | ||||||||
| Machinery and office equipment | ||||||||
| Computer equipment | ||||||||
| Property and equipment, gross | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Other long-term assets | ||||||||
| Deferred tax assets | ||||||||
| Operating lease right-of-use asset | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accrued payroll and related expenses | ||||||||
| Deferred revenue on shipments to distributors | ||||||||
| Short term portion of deferred service revenue | ||||||||
| Notes payable – current portion | ||||||||
| Subordinated convertible notes payable, net of discount | ||||||||
| Subordinated convertible notes payable, net of discount-related party | ||||||||
| Operating lease – current portion | ||||||||
| Total current liabilities | ||||||||
| Long-term portion of note payable | ||||||||
| Long term portion of operating lease | ||||||||
| Long-term portion of deferred service revenue | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
Common stock, par value: Authorized – shares, Issued and outstanding – shares at December 31, 2021 and shares at December 31, 2020 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes.
| 34 |
SOCKET MOBILE, INC. | ||||||||
| STATEMENTS OF OPERATIONS | ||||||||
| Years Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenues | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Research and development | ||||||||
| Sales and marketing | ||||||||
| General and administrative | ||||||||
| Goodwill impairment charges | ||||||||
| Total operating expenses | ||||||||
| Operating income (loss) | ( | ) | ||||||
| Interest expense, net | ( | ) | ( | ) | ||||
| Other income | ||||||||
| Extinguishment of debt | ||||||||
| Net income (loss) before income taxes | ( | ) | ||||||
| Income tax benefit (expense) | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Net income (loss) per share: | ||||||||
| Basic | $ | $ | ( | ) | ||||
| Fully diluted | $ | $ | ( | ) | ||||
| Weighted average shares outstanding: | ||||||||
| Basic | ||||||||
| Fully diluted | ||||||||
See accompanying notes.
| 35 |
| SOCKET MOBILE, INC. | |||||||||||||||||||
| STATEMENTS OF STOCKHOLDERS’ EQUITY | |||||||||||||||||||
| Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | ||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | |||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ( | ) | $ | |||||||||||||
| Repurchase of common stock | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
| Cancellation of restricted stock | ( | ) | ( | ) | |||||||||||||||
| Exercise of stock options | |||||||||||||||||||
| Stock-based compensation | — | ||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ||||||||||||||
| Balance at December 31, 2020 | ( | ) | |||||||||||||||||
| Vesting of restricted stock | 40,125 | ( | ) | ||||||||||||||||
| Repurchase of common stock | (758 | ) | ( | ) | ( | ) | ( | ) | |||||||||||
| Cancellation of restricted stock | ( | ) | ( | ) | |||||||||||||||
| Conversion of convertible note | |||||||||||||||||||
| Issuance of common stock for intangible assets | |||||||||||||||||||
| Exercise of stock options | |||||||||||||||||||
| Stock-based compensation | — | ||||||||||||||||||
| Net income | — | ||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | ) | $ | |||||||||||||
See accompanying notes.
| 36 |
| SOCKET MOBILE, INC. | ||||||||
| STATEMENTS OF CASH FLOWS | ||||||||
| Years Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Operating activities | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Stock-based compensation | ||||||||
| Depreciation and amortization | ||||||||
| Deferred tax benefits | ( | ) | ||||||
| Forgiveness of PPP loan | ( | ) | ||||||
| Amortization of debt discount | ||||||||
| Goodwill impairment charges | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other non-current assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Accrued payroll and related expenses | ( | ) | ||||||
| Net deferred revenue on shipments to distributors | ( | ) | ( | ) | ||||
| Deferred service revenue | ( | ) | ( | ) | ||||
| Net change in operating lease | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| Investing activities | ||||||||
| Purchase of equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Payments on operating leases | ( | ) | ||||||
| Common stock repurchase and related expenses | ( | ) | ( | ) | ||||
| Proceeds from borrowings under bank line of credit agreement | ||||||||
| Repayments of borrowings under bank line of credit agreement | ( | ) | ||||||
| Repayments of bank term loan | ( | ) | ||||||
| Proceeds from note payable | ||||||||
| Repayments of note payable | ( | ) | ( | ) | ||||
| Proceeds from subordinated convertible notes payable, net of discount | ||||||||
| Proceeds from subordinated convertible notes payable, net of discount-related party | ||||||||
| Stock options exercised | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of year | ||||||||
| Cash and cash equivalents at end of year | $ | $ | ||||||
| Supplemental cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash investing and financing activities | ||||||||
| Conversion of note payable | $ | |||||||
| Acquisition of intangible assets | $ | |||||||
See accompanying notes.
| 37 |
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
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.
| 38 |
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 $
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 Beginning of Year | Charged to Costs and Expenses | Amounts Written Off | Balance at End of Year | ||||||||||||||
| 2021 | $ | $ | $ | $ | ||||||||||||||
| 2020 | $ | $ | $ | $ | ||||||||||||||
| 39 |
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 | $ | $ | ||||||
| Finished goods | ||||||||
| Inventory reserves | ( | ) | ( | ) | ||||
| Inventory, net | $ | $ | ||||||
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 | $ | $ | |||||||
| Product certification costs | |||||||||
| Prepaid inventory purchases | |||||||||
| Prepaid maintenance contracts and other prepaid expenses | |||||||||
| Prepaid expenses and other current assets | $ | $ | |||||||
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 $
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 $
| 40 |
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. | % | % | |||||||
| ScanSource, Inc. | % | % | |||||||
| BlueStar, Inc. | % | % | |||||||
| Bluestar Europe Distribution BV | * | % | |||||||
*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,
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 $
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 $
| 41 |
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 $
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 Beginning of Year | Additional Warranty Reserves | Amounts Charged to Reserves | Balance at End of Year | ||||||||||||||
| 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||
| 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||
| 42 |
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, third party development costs including consultants and outside services, 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 $
Advertising Costs
Advertising
costs are charged to sales and marketing as incurred. The Company incurred $
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.
| 43 |
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.
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) | $ | $ | ( | ) | ||||
| Net income (loss) allocated to restricted stock award | ( | ) | ||||||
| Adjusted net income (loss) for basic earnings per share | $ | $ | ( | ) | ||||
| Convertible note interest | ||||||||
| Adjusted net income (loss) before interest for diluted earnings per share | $ | $ | ( | ) | ||||
| Denominator: Weighted average shares outstanding used in computing net income (loss) per share: | ||||||||
| Basic | ||||||||
| Fully diluted | ||||||||
| Net income (loss) per share applicable to common stockholders: | ||||||||
| Basic | $ | $ | ( | ) | ||||
| Fully diluted | $ | $ | ( | ) | ||||
In 2021, the shares used in computing diluted net income per share do not include dilutive stock options and shares of restricted stocks as the effect is anti-dilutive. In 2020, the shares used in computing diluted net loss per share do not include 2,437,006 dilutive stock options and shares of restricted stocks, nor 1,047,945 dilutive conversion shares as the effect is anti-dilutive given the Company’s loss.
| 44 |
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
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 | $ | $ | ||||||
| Europe | ||||||||
| Asia and rest of world | ||||||||
| Total | $ | $ | ||||||
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. | % | % | |||||||
| BlueStar, Inc. | % | % | |||||||
| ScanSource, Inc. | % | * | |||||||
| * | Customer accounted for less than 10% of the Company’s total revenues | ||||||||
| 45 |
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.
NOTE 2 — Acquisition of Intangible Assets
On February 26, 2021, the Company entered into the 2021 Technology Transfer Agreement with SpringCard SAS (“SpringCard”). SpringCard is a market leader at the forefront of innovative electronic design and development. Its contactless and wireless solutions support a wide range of customers, from large international corporations to locally focused companies.
Under the 2021 Technology Transfer Agreement, the Company acquired an irrevocable, perpetual, non-exclusive, transferable, worldwide, unlimited, unrestricted, royalty-free, fully paid-up right and license to SpringCard’s Contactless Technology Package for use in the Company’s Contactless Reader/Writer products, D600 and S550. SpringCard received 184,332 shares of the Company’s common stock, subject to a collar, and a 10-year warrant to purchase up to an aggregate of 50,000 shares of the Company’s common stock at the price of $10.85 per share in four equal lots of 12,500 shares each, with each lot exercisable on or after January 1st of 2022, 2023, 2024 and 2025, respectively, until the expiration date of the warrant. The common stock was issued on March 29, 2021. The fair value of intangible assets acquired is based on the closing stock price of $7.65 on March 29, 2021. On April 20, 2021, the Company agreed to pay SpringCard the sum of $192,293 to resolve all issues that have arisen due to clerical issues in the implementation of the 2021 Technology Transfer Agreement. The Company and SpringCard both agreed that, with this payment, the Company shall have no further financial obligation to SpringCard under the 2021 Technology Transfer Agreement.
The
Condensed Balance Sheets include the intangible assets of the acquired technology at the carrying amount, net of amortization of $
| 46 |
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
The SpringCard intangible assets will be amortized over their estimated useful lives of fifteen years on a straight-line basis, which commenced on April 1, 2021. The estimated future amortization of intangible assets is as follows:
| Fiscal Year | Amount | |||||
| 2022 | $ | |||||
| 2023 | ||||||
| 2024 | ||||||
| 2025 | ||||||
| Thereafter | ||||||
| Total | $ | |||||
NOTE 3 — Bank Financing Arrangements
The Company initially entered into a Business Financing Agreement with Western Alliance Bank (the “Bank”), an Arizona corporation, on February 27, 2014, and this agreement has been amended and extended through the years.
Seventh Financing Agreement
On January 8, 2020, the Company entered into the Seventh Business Financing Modification Agreement with the Bank which extended the maturity date of the Company’s revolving line of credit to January 31, 2022.
Eighth Financing Agreement
On August 28, 2020, the Company entered into the Eighth Business Financing Modification Agreement and Consent with the Bank. The Bank consented to the issuance of subordinated debt in an amount less than $2,000,000, at an annual interest rate of less than 10%, such debt maturing in no sooner than 3 years.
Amended and Restated Business Financing Agreement
On
First Financing Agreement
On February 9, 2022, the Company entered into the First Business Financing Modification Agreement with the Bank. The Bank consented to the share repurchase program of up to $1.8 million. Future audit of accounts receivables will be performed once every twelve months. The Bank increased the credit limit for business credit cards to $250,000.
| 47 |
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Amounts outstanding under the CalCap Loan as of December 31, 2021 are as follows:
| December 30, 2021 | ||||
| Current portion of CalCap Loan | $ | |||
| Long-term portion of CalCap Loan | ||||
| CalCap Loan | $ | |||
Interest expense on the CalCap Loan for twelve months ended December 31, 2021 was $36,302. Accrued interest payable related to the amounts outstanding under the CalCap Loan as of December 31, 2021 was $1,858.
During the twelve months ended December 31, 2020, total repayment of the term loan, initiated in March 2018 (the “Term Loan”), was $333,333. The total amount borrowed under the domestic and international lines of credit was $5,630,000 and the total repayment was $7,042.449.
Interest expense on the Term Loan for the twelve months ended December 31, 2020 was $6,152. Interest expense on the amounts drawn under the Company’s bank credit lines during the twelve months ended December 31, 2020 was $20,461. There were no amounts borrowed at year end on the Company’s bank credit lines as of December 31, 2021 and December 31, 2020.
NOTE 4 — Secured Subordinated Convertible Notes Payable
On August 31, 2020, the Company completed a secured subordinated convertible note financing of $1,530,000, including $1,350,000 from officers, directors, and family members. Because the Financing involved such parties related to the Company, a special committee of the Board comprising the Board’s disinterested directors approved the Financing.
The funds raised are used to increase the Company’s working capital balances. The notes have a three-year term that accrue interest at 10% per annum and mature on August 30, 2023. The interest on the notes is payable quarterly in cash. The holder of each note may require the Company to repay the principal amount of the note plus accrued interest at any time after August 31, 2021. The principal amount of each note is convertible at any time, at the option of the holder, into shares of the Company’s common stock at a conversion price of $1.46 per share, which was the market closing price of the common stock on Friday, August 28, 2020, the closing date of the financing. The notes did not contain a beneficial conversion feature because the conversion price is higher than the market closing price on the date of the notes payable. The notes are secured by the assets of the Company and are subordinated to amounts outstanding under the Company’s working capital bank line of credit with Western Alliance Bank.
Total issuance costs associated with the financing is $96,515, and the costs are presented in the balance sheet as a direct deduction from the notes payable balance of $1,530,000 as a contra-liability. The issuance costs are amortized over three years, the term of the notes payable, and the amortization expense is reported as interest expense. The amortization of debt discount was $33,091 and $11,030 for the year ended December 31, 2021 and 2020, respectively. The remaining debt discount of $55,152 will be amortized through August 30, 2023.
| 48 |
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Total interest expenses recognized related to the convertible note were $174,842 and $62,172 for the years ended December 31, 2021 and 2020, respectively.
During the year ended December 31, 2021, two noteholders elected to convert note principal of $130,000 into shares of the Company’s common stock, $0.001 par value per shares, at the conversion price.
NOTE 5 — Commitments and Contingencies
Operating Lease Obligations
The
Company leases office space under a non-cancelable operating lease that provides the Company approximately 37,100 square feet in
Newark, California. The lease agreement expires on June 30, 2022. In February 2022, the Company entered into a
The
operating lease expense under existing agreement was allocated in cost of goods sold and operating costs based on department headcount
and amounted to $
On
December 31, 2021, the balances of right-of-use assets and liabilities for the existing operating leases were approximately $
Cash
payments included in the measurement of our existing operating lease liabilities were $
Future minimum lease payments under the existing operating lease as of December 31, 2021 are shown below:
| Annual minimum payments: | Amount | |||
| 2022 | ||||
| Total minimum payments | ||||
| Less: Imputed interest | ( | ) | ||
| Total operating lease liabilities | ||||
| Less: Current portion of operating lease | ( | ) | ||
| Long-term portion of operating lease | $ | |||
Purchase Commitments
On
December 31, 2021, the Company’s non-cancelable purchase commitments for inventory to be used in the ordinary course of business
during 2022 were approximately $
| 49 |
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Legal Matters
The Company is subject to disputes, claims, requests for indemnification and lawsuits arising in the ordinary course of business. Under the indemnification provisions of the Company’s customer agreements, the Company routinely agrees to indemnify and defend its customers against infringement of any patent, trademark, copyright, trade secrets, or other intellectual property rights arising from customers’ legal use of the Company’s products or services. The exposure to the Company under these indemnification provisions is generally limited to the total amount paid for the indemnified products. However, certain indemnification provisions potentially expose the Company to losses in excess of the aggregate amount received from the customer. To date, there have been no claims against the Company by its customers pertaining to such indemnification provisions, and no amounts have been recorded. The Company is currently not a party to any material legal proceedings.
Stock-Based Compensation Program
The Company has one share-based compensation plan in effect in the two years presented: the 2004 Equity Incentive Plan (the “2004 Plan”). The 2004 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock, stock appreciation rights, and performance awards to employees, directors, and consultants of the Company. Upon ratification of the 2004 Plan by the shareholders in June 2004, shares in the 1995 Plan that had been reserved but not issued, as well as any shares issued that would otherwise return to the 1995 Plan as a result of termination of options or repurchase of shares, were added to the shares reserved for issuance under the 2004 Plan. The Company grants incentive stock options and restricted stock at an exercise price per share equal to the fair market value per share of common stock on the date of grant. The vesting and exercise provisions are determined by the Board of Directors, with a maximum term of ten years. The 2004 Plan expires on April 23, 2024.
The 2004 Plan provides for an annual increase in the number of shares authorized under the plan to be added on the first day of each fiscal year equal to the least amount of 400,000 shares, 4% of the outstanding shares on that date, or an amount as determined by the Board of Directors. On January 1, 2021 and 2020, a total of 244,105 and 240,707 additional shares, respectively, became available for grant from the 2004 Plan.
Stock-Based Compensation Information
The stock-based compensation expense included in the Company’s statements of income for the years ended December 31, 2021 and 2020, consisted of the following:
| Years Ended December 31, | ||||||||
| Income Statement Classification | 2021 | 2020 | ||||||
| Cost of revenues | $ | $ | ||||||
| Research and development | ||||||||
| Sales and marketing | ||||||||
| General and administrative | ||||||||
| Stock-based compensation expenses | $ | $ | ||||||
| 50 |
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2021, the remaining unamortized stock-based compensation expense was $ and is expected to be amortized over a weighted average period of years.
Stock Options – Stock option awards have an exercise price equal to the closing price on the date of grant, expire in ten years from the date of grant and vest over a four-year period at 25% per year. The Company calculates the value of each stock option grant, estimated on the date of grant, using binomial lattice option pricing model. The weighted-average estimated fair value of stock options granted during 2021 and 2020 was $ and $, respectively, using the following weighted-average assumptions:
| Years Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Risk-free interest rate (%) | % | % | ||||||
| Dividend yield | ||||||||
| Volatility factor | % | % | ||||||
| Expected option life (years) | ||||||||
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant; the dividend yield is calculated as the ratio of dividends paid per share of common stock to the stock price on the date of grant; the expected life is based on historical and expected exercise behavior; and volatility is based on the historical volatility of the Company’s stock price over the expected life of the option.
The table below presents the information related to stock option activity for the years ended December 31, 2021 and 2020:
| Years Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Total intrinsic value of stock options exercised | $ | $ | ||||||
| Cash received from stock option exercises | $ | $ | ||||||
The following summarizes stock option activity under the 2004 Plan as of and for the years ended December 31, 2021 and 2020:
| Outstanding Options | |||||||||||||||
Number of Shares | Weighted Average Exercise Price Per Share | Remaining Contractual Term (in years) |
Intrinsic | ||||||||||||
| Balance as of December 31, 2019 | $ | ||||||||||||||
| Granted | $ | ||||||||||||||
| Exercised | ( | ) | $ | ||||||||||||
| Canceled | ( | ) | $ | ||||||||||||
| Balance as of December 31, 2020 | $ | ||||||||||||||
| Granted | $ | ||||||||||||||
| Exercised | ( | ) | $ | ||||||||||||
| Canceled | ( | ) | $ | ||||||||||||
| Balance as of December 31, 2021 | $ | $ | |||||||||||||
| Exercisable | $ | $ | |||||||||||||
| Unvested | $ | $ | |||||||||||||
| 51 |
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
Stock options outstanding as of December 31, 2021 are summarized below:
| Options Outstanding | Options Exercisable | ||||||||||||||||||||
Range of Exercise Prices |
Number of Options Outstanding | Weighted Average Remaining Life (Years) |
Weighted Average Exercise Price |
Number of Options Exercisable |
Weighted Average Exercise Price | ||||||||||||||||
| $0.95. - $1.25 | 226,438 | 2.67 | $ | 1.07 | 218,730 | $ | 1.07 | ||||||||||||||
| $1.50 - $1.90 | 217,825 | 5.50 | $ | 1.84 | 169,826 | $ | 1.84 | ||||||||||||||
| $2.00 - $2.32 | 359,196 | 6.50 | $ | 2.29 | 246,921 | $ | 2.28 | ||||||||||||||
| $2.36 - $2.75 | 149,475 | 5.08 | $ | 2.61 | 145,725 | $ | 2.61 | ||||||||||||||
| $2.92 - $2.93 | 116,824 | 6.25 | $ | 2.93 | 101,650 | $ | 2.93 | ||||||||||||||
| $3.70 - $4.49 | 126,365 | 5.25 | $ | 4.08 | 126,365 | $ | 4.08 | ||||||||||||||
| $5.00 - $8.58 | 182,000 | 9.92 | $ | 6.39 | 18,292 | $ | 6.47 | ||||||||||||||
| $0.95 - $8.58 | 1,378,123 | 4.50 | $ | 2.81 | 1,027,509 | $ | 2.36 | ||||||||||||||
As of December 31, 2021, the remaining unamortized stock option compensation expense was $ and is expected to be amortized over a weighted average period of years.
Restricted stock – The Company issues restricted stocks to employees and consultants and holds shares of such stock in escrow until the shares vest on the schedule of 15% after year one, 20% after year two, 25% after year three and 40% after year four, subject to the employees and consultants being a continuing service provider on the vesting dates. If the service or employment is terminated, unvested shares revert to the Company. Shares are registered at grant, so share owners may vote at the annual stockholder meeting. Shares of restricted stocks are granted at zero cost basis. Compensation cost of the shares of restricted stocks issued by the Company is recognized on a straight-line basis over the 4-year vesting period.
| 52 |
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
The following summarizes information related to restricted stock activity under the 2004 Plan for the years ended December 31, 2021 and 2020:
| Number of Restricted Stocks | Weighted Average Price Per Share | |||||||
| Unvested as of December 31, 2019 | 110,071 | $ | 1.94 | |||||
| Granted | 392,680 | $ | 1.50 | |||||
| Vested | (17,306 | ) | $ | 1.94 | ||||
| Forfeited | (43,245 | ) | $ | 1.65 | ||||
| Unvested as of December 31, 2020 | 442,200 | $ | 1.58 | |||||
| Granted | 312,112 | $ | 2.89 | |||||
| Vested | (59,659 | ) | $ | 1.65 | ||||
| Forfeited | (48,528 | ) | $ | 2.00 | ||||
| Unvested as December 31, 2021 | 646,125 | $ | 3.32 | |||||
As of December 31, 2021, the remaining unamortized restricted stock compensation expense was $ and is expected to be amortized over a weighted average period of years.
NOTE 7 — Shares Reserved
Common stock reserved for future issuance was as follows:
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Stock option grants outstanding (see Note 6) | ||||||||
| Secured subordinated convertible notes (see Note 4) | ||||||||
| Stock warrants issued to SpringCard SAS (see Note 2) | ||||||||
| 2004 Equity Incentive Plan | ||||||||
| 2,595,707 | 3,436,102 | |||||||
NOTE 8 — Retirement Plan
The Company has a tax-deferred savings plan, the Socket Mobile, Inc. 401(k) Plan (“401(k) Plan”), for the benefit of qualified employees. The 401(k) Plan is designed to provide employees with an accumulation of funds at retirement. Qualified employees may elect to make contributions to the 401(k) Plan on a monthly basis. Effective September 1, 2019, the Company started to provide a match to employees’ 401(k) savings at 3% of employees’ contribution up to $100 per month. Administrative expenses relating to the 401(k) Plan are not significant.
NOTE 9 — Income Taxes
The Company's entire pretax income / (loss) for the years ended December 31, 2021 and December 31, 2020 was from its U.S. domestic operations.
| 53 |
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
The components of income taxes for the periods ended December 31, 2021 and 2020 are as follows:
| Years Ended December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Current: | ||||||||||||||
| Federal | $ | $ | ( | ) | ||||||||||
| State | ||||||||||||||
| Total Current | ( | ) | ||||||||||||
| Deferred: | ||||||||||||||
| Federal | ( | ) | ||||||||||||
| State | ( | ) | ||||||||||||
| Total Deferred | ( | ) | ||||||||||||
| Income tax (benefit) expense | $ | ( | ) | $ | ||||||||||
A reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows:
| Years Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Income at US statutory rate | % | % | ||||||
| State taxes, net of federal benefit | - | % | - | % | ||||
| Goodwill impairment | % | - | % | |||||
| PPP loan forgiveness | % | % | ||||||
| Valuation allowance | % | % | ||||||
| Stock compensation | - | % | - | % | ||||
| NOL true up | - | % | % | |||||
| Tax credits | - | % | % | |||||
| Other | - | % | - | % | ||||
| Provision for taxes | % | % | ||||||
The principal components of deferred tax assets and (liabilities) are as follows for the period ended:
| December 31, | ||||||||
| Deferred tax assets: | 2021 | 2020 | ||||||
| Net operating loss carryforwards | $ | $ | ||||||
| Tax credits | ||||||||
| Amortization | ||||||||
| Accruals & reserves | ||||||||
| Lease liabilities | ||||||||
| Depreciation | ||||||||
| Share-based compensation | ||||||||
| Total deferred tax assets | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax assets | ||||||||
| Deferred tax liabilities: | ||||||||
| Amortization | ||||||||
| ROU assets | ||||||||
| Net deferred tax asset (liability) | $ | $ | ||||||
| 54 |
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
As
of December 31, 2021, the Company had U.S. federal net operating loss carryforwards of $
As
of December 31, 2021, the Company had U.S. federal research and development credit carryforwards of $
As of December 31, 2021, the Company is in a net deferred tax asset position before valuation allowance. The deferred tax assets consist principally of net operating loss carryforwards. The future realization of the tax benefits from existing temporary differences and tax attributes ultimately depends on the existence of sufficient taxable income. In assessing the realization of the deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company also considers past operating results, projected future taxable income, and tax planning strategies in making this assessment. As of December 31, 2021, after consideration of all available evidence, both positive and negative, the Company continues to maintain a full valuation allowance against the Company’s deferred tax assets related to U.S. federal R&D tax credits because they are more likely than not to expire unused. The net change in the total valuation allowance for the years ended December 31, 2021 and 2020 was an increase of less than $0.1 million and a decrease of less than $0.1 million, respectively.
The future realization of the Company's net operating loss carryforwards and other tax attributes may also be limited by the change in ownership rules under the U.S. Internal Revenue Code Section 382 (“Section 382”). Under Section 382, if a corporation undergoes an ownership change (as defined in Section 382), the corporation’s ability to utilize its net operating loss carryforwards and other tax attributes to offset income may be limited. The Company has not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes.
The following table summarizes the activity related to the Company's unrecognized tax benefits:
| Amount | |||||
| Balance as of January 1, 2020 | $ | ||||
| Increases (decreases) for current year tax provisions | |||||
| Increases (decreases) for prior year tax provisions | ( | ) | |||
| Decreases for expiration of statute of limitations | — | ||||
| Settlements | — | ||||
| Balance as of December 31, 2020 | |||||
| Increases (decreases) for current year tax provisions | |||||
| Increases (decreases) for prior year tax provisions | ( | ) | |||
| Decreases for expiration of statute of limitations | — | ||||
| Settlements | — | ||||
| Balance as of December 31, 2021 | $ | ||||
| 55 |
SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS
The Company files income tax returns in the U.S. federal jurisdiction and in California, and is therefore subject to tax examination by two taxing authorities. The Company is not currently under examination and is not aware of any issues under review that could result in significant payments, accruals or material deviation from its tax positions. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service and state tax authorities to the extent utilized in a future period. As of December 31, 2021, the tax years from 2018 to present remain open to examination by relevant taxing jurisdictions to which the Company is subject. However, to the extent the Company utilizes net operating losses from years prior to 2018, the statute remains open to the extent of the net operating losses or other credits that are utilized.
The
calculation and assessment of the Company's tax exposures generally involve the uncertainties in the application of complex tax laws
and regulations for federal and state jurisdictions. A tax benefit from an uncertain tax position may be recognized when it is more likely
than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation, on the basis
of the technical merits. As of December 31, 2021 and 2020, the Company had
NOTE 10 — Subsequent Events
In January 2022, the Company’s Board of Directors authorized a share repurchase program of up to $1.8 million. The Company has entered into a share repurchase arrangement with a financial institution during the trading window.
In February 2022, the Company entered into an operating lease agreement for an approximately 35,913 square foot facility in Fremont, California where it will move its office and manufacturing operations. The lease agreement is for a base term of 87 months and a monthly rent obligation of $50,278.20, subject to annual increases of 3%. The lease commences on May 1, 2022 and the Company is provided with three months of free rent.
On February 1, 2022, 233,800 shares of restricted stocks at a price of $3.77 per share have been granted from the 2004 Equity Incentive Plan subsequent to December 31, 2021. The shares include annual refresher grants to all continuing employees with a weighting reflecting the level of responsibility and performance of the employee and initial grants to three newly hired employees.
As of March 25, 2022, the Company has issued 24,200 shares of common stock for the exercise of stock options.
| 56 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not Applicable.
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable assurances with respect to financial statement preparation. Further, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework issued in 2013. This assessment included review of the documentation of controls, testing of operating effectiveness of controls and a conclusion on this assessment.
Based on our assessment using those criteria, we believe that, as of December 31, 2021, our internal control over financial reporting is effective.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which exempts non-accelerated filers from Section 404(b) of the Sarbanes-Oxley Act of 2002.
| 57 |
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the last fiscal quarter covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
| 58 |
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required hereunder is incorporated by reference from our Proxy Statement to be filed in connection with our annual meeting of stockholders to be held on June 15, 2022.
Item 11. Executive Compensation
The information required hereunder is incorporated by reference from our Proxy Statement to be filed in connection with our annual meeting of stockholders to be held on June 15, 2022.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain information required hereunder is incorporated by reference from our Proxy Statement to be filed in connection with our annual meeting of stockholders to be held on June 15, 2022.
The following table provides information as of December 31, 2021 about our common stock that may be issued under the Company’s existing equity compensation plans. For additional information about the stock-based compensation plans see Note 6, Stock-Based Compensation Plan, of the Notes to Financial Statements included in this Annual Report on Form 10-K .
Number of securities to be issued upon exercise of outstanding options |
Weighted average exercise price of outstanding options |
Number of securities remaining available for future issuance under equity compensation plans | ||||
Equity compensation plans approved by security holders (1) |
1,378,122 |
$ 2.81 |
208,681 |
| (1) | Consists of the 2004 Equity Incentive Plan. Pursuant to an affirmative vote by security holders in June 2004, an annual increase in the number of shares authorized under the 2004 Equity Incentive Plan is added on the first day of each fiscal year equal to the least of (a) 400,000 shares, (b) four percent of the total outstanding shares of the Company’s common stock on that date, or (c) a lesser amount as determined by the Board of Directors. As a result, a total of 287,355 shares became available for grant under the 2004 Equity Incentive Plan on January 1, 2022, in addition to those set forth in the table above. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain information required hereunder is incorporated by reference from our Proxy Statement to be filed in connection with our annual meeting of stockholders to be held on June 15, 2022.
| 59 |
Item 14. Principal Accounting Fees and Services
Certain information required hereunder is incorporated by reference from our Proxy Statement to be filed in connection with our annual meeting of stockholders to be held on June 15, 2022.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this report:
| 1. | All financial statements. |
| INDEX TO FINANCIAL STATEMENTS | PAGE | ||
| Report
of Sadler Gibb, Independent Registered Public Accounting Firm ((PCAOB ID No: |
30 | ||
| Balance Sheets | 33 | ||
| Statements of Income | 34 | ||
| Statements of Stockholders' Equity | 35 | ||
| Statements of Cash Flows | 36 | ||
| Notes to Financial Statements | 37 |
| 2. | Financial statement schedules. |
All financial statement schedules are omitted because they are not applicable or not required or because the required information is included in the financial statements or notes herein.
| 3. | Exhibits. |
See Index to Exhibits on page 61. The Exhibits listed on the accompanying Index to Exhibits are filed or incorporated by reference as part of this report.
(b) Exhibits:
See Index to Exhibits on page 61. The Exhibits listed on the accompanying Index to Exhibits are filed or incorporated by reference as part of this report.
| 60 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SOCKET MOBILE, INC. | |||
| Registrant | |||
| Date: March 30, 2022 | /s/ Kevin J. Mills | ||
| Kevin J. Mills | |||
| President and Chief Executive Officer | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| /s/
Kevin J. Mills Kevin J. Mills |
|
March 30, 2022 | ||
| /s/
Charlie Bass Charlie Bass |
Chairman of the Board | March 30, 2022 | ||
| /s/
Lynn Zhao Lynn Zhao |
Vice President of Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) and Director |
March 30, 2022 | ||
| /s/
Bill Parnell Bill Parnell |
Director | March 30, 2022 | ||
| /s/
Brenton E. MacDonald. Brenton E. MacDonald |
Director | March 30, 2022 | ||
| /s/
David W. Dunlap David W. Dunlap |
Director | March 30, 2022 | ||
| /s/
Ivan Lazarev Ivan Lazarev |
Director | March 30, 2022 |
| 61 |
Index to Exhibits
| Exhibit Number |
Description |
| 3.1 (1) | Amended and Restated Certificate of Incorporation. |
| 3.2 | Certificate of Amendment to the Restated Certificate, as filed June 20, 2013 |
| 3.3 (2) | Bylaws, as amended February 17, 2008. |
| 4.1 (3) | Form of Secured Subordinated Convertible Note issued August 31, 2020. |
| 10.1 (4)* | Form of Indemnification Agreement entered into between the Company and its directors and officers. |
| 10.2 (5)* |
2004 Equity Incentive Plan and forms of agreement thereunder. |
| 10.3 (6)* |
| 10.4 (7) |
| 10.5 (8) |
Second Amendment to Standard Industrial/Commercial Multi-Lessee Lease – Net dated August 3, 2010. |
| 10.6 (9) |
Third Amendment to Standard Industrial/Commercial Multi-Tenant Lease – Net dated December 28, 2012. |
| 10.7 (10) |
| 10.8 (11) |
| 10.9 (12) |
Form of Employment Agreement dated May 1, 2017 between the Company and the officers of the Company. |
| 10.10 (13) |
| 62 |
| 10.11 (14) |
| 10.12 (15) |
| 10.13 (16) |
| 10.14 (17) |
| 10.15 (18) |
| 10.16 (19) |
| 10.17 (20) |
| 11.1 | Computation of Earnings per Share (see Statements of Operations in Item 8). |
| 14.1 (21) | Code of Business Conduct and Ethics. |
| 23.1 | Consent of Sadler Gibb & Associates, LLC, Independent Registered Public Accounting Firm. |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101 | Inline XBRL Document. |
| 104 | Cover Page Interactive Data File. |
_________
* Executive compensation plan or arrangement.
| (1) | Incorporated by reference to exhibits filed with the Company’s Form 10-K filed on March 16, 2009 |
| 63 |
| (2) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on February 20, 2008. |
| (3) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on September 1, 2020. |
| (4) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on March 8, 2012. |
| (5) | Incorporated by reference to Appendix C filed with the Company’s Form DEF 14A filed on April 29, 2004 and Item 4 on Form 8-K filed on June 5, 2013 reporting extension of the Plan to April 23, 2024. |
| (6) | Incorporated by reference to Appendix B filed with the Company’s Form DEF 14A filed on March 16, 2011. |
| (7) | Incorporated by reference to exhibits filed with the Company’s Form 10-Q filed on November 13, 2006. |
| (8) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on August 30, 2010. |
| (9) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on January 4, 2013. |
| (10) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on November 19, 2010. |
| (11) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on March 7, 2014. |
| (12) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on May 4, 2017. |
| (13) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on March 3, 2016. |
| (14) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on March 21, 2017. |
| 64 |
| (15) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on February 2, 2018. |
| (16) | Incorporated by reference to the Company’s Schedule TO filed on February 2, 2018. |
| (17) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on June 8, 2018. |
| (18) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on January 14, 2020. |
| (19) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on February 3, 2021. |
| (20) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on March 4, 2021. |
| (21) | Incorporated by reference to exhibits filed with the Company’s Form 10-K filed on March 10, 2006. |