10-K 1 k10-2019.htm FORM 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

| (X) | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______.

Commission file number 1-13810

SOCKET MOBILE, INC.

(Exact name of registrant as specified in its charter)

Delaware |  | 94-3155066
(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)

39700 Eureka Drive, Newark, CA 94560

(Address of principal executive offices including zip code)

(510) 933-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of Each Class |  | Name of Exchange on Which Registered
Common Stock, $0.001 Par Value per Share |  | NASDAQ

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 [ ] NO [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 [ ] NO [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. YES [X] NO [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [ X ] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

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.

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]

Emerging growth company [ ]

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]

As of June 30, 2019, the aggregate market value of the registrant’s Common Stock ($0.001 par value) held by non-affiliates of the registrant was $10,787,934 based on the closing sale price as reported on the NASDAQ Marketplace system.

Number of shares of Common Stock ($0.001 par value) outstanding as of March 23, 2020: 6,301,474 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 May 27, 2020. 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 |
| Item 1. | Business | 1
| Item 1A. | Risk Factors | 8
| Item 1B. | Unresolved Staff Comments | 19
| Item 2. | Properties | 19
| Item 3. | Legal Proceedings | 19
| Item 4. | Mine Safety Disclosures | 19
PART II |
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 20
| Item 6. | Selected Financial Data | 22
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk | 30
| Item 8. | Financial Statements and Supplementary Data | 30
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 54
| Item 9A. | Controls and Procedures | 54
| Item 9B. | Other Information | 55
PART III |
| Item 10. | Directors, Executive Officers and Corporate Governance | 56
| Item 11. | Executive Compensation | 56
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 56
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | 56
| Item 14. | Principal Accounting Fees and Services | 57
PART IV |
| Item 15. | Exhibits, Financial Statement Schedules | 57
SIGNATURES | 58
Index to Exhibits | 59

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 made by management. These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; 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: weakness in the world economy generally and in the markets we serve in particular; 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; or 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

The Company and its Products

We are a leading innovator of data capture and delivery solutions for enhanced productivity in workforce mobilization. Our products 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. 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 developers, which enables them to provide their users with our advanced barcode scanning features. Our products are integrated in their application solutions and are marketed by the application developers or the resellers of their applications. The number of our registered developers for data capture applications continues to grow.

| 1 |

Table of Contents

Durable companion cordless barcode scanners. Our DuraScan® 700 Series Linear Barcode Scanner (D700), Laser Barcode Scanner (D730) and Universal Barcode Scanner (D740, D750, 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.

Standard companion cordless barcode scanners. In April 2018, we introduced SocketScan® 700 Series barcode scanners to replace the Series 7 scanners. The SocketScan® 700 Series include 1D linear imaging (S700), 1D laser (S730) and Universal Barcode (S740) barcode scanners, available in five vivid colors: blue, green, red, white and yellow. S740 reads all common 1D, stacked, 2D and postal codes.

DuraSled and Attachable cordless barcode scanners. Our 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. DuraCase models support iPhone 6/7/8, iPhone 6/7/8 Plus, iPod touch, Samsung J3/J5 and Samsung S7. New DuraCase models are introduced from time to time as new mobile phones are released. 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.

In 2019, We expanded our product line with a new family of products; DuraSled for the iPhone models 6,7,8, X and 11. The DuraSled combines the iPhone and a scanner to make a single-handed solution. The DuraSled both protects the phones from impact damage and provides a robust charging solution for all environments.

Contactless RFID/NFC reader writer. Our contactless product line includes the D600 Contactless Reader/Writer and the S550 Contactless Membership Card Reader/Writer. 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 will enable 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. S550 is currently available for the developers.

| 2 |

Table of Contents

Software Developer Kit (Capture SDK). Our Software Developer Kit (Capture SDK) supports all our data capture devices with a single installation, making it easy for a developer to integrate our data capture capabilities into their application. Installing our data capture software enables their customers to choose any of our products that work best for them. Our Capture SDK enables the developer 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 build environments such as CocoaPods, Maven and NuGet, adds support for high level frameworks such as Xamarin, Cordova and Java, and adds other features to make it easier for developers to integrate our data capture software into their applications.

Socket Mobile designs its own products and is responsible for all associated test equipment. Socket Mobile uses third party contract manufacturers to make many components. We perform final product assembly, test, package and distribute our products at and 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 developers 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.

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 developers and their customers 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.

| 3 |

Table of Contents

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.

General

Total employee headcount at December 31, 2019 and 2018 was 56. We subcontract the manufacturing of all our product components to independent third-party contract manufacturers located in the United States, Mexico, Taiwan, Singapore, China and Malaysia that have the equipment, know-how and capacity to manufacture products to our specifications. We assemble, test and distribute our products from our facilities in Newark, California. Our products are sold through a worldwide network of distributors and on-line resellers, application developers, and value-added resellers.

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 in February 2018, a term loan 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 practical after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

Marketing Dynamics

Developer Relationships. We actively support software application developers to integrate our products into their applications through our registered developer program. We provide an easy to use software developer kit (Capture SDK) and training and technical support to our registered developers. We support the marketing activities of our registered developers in promoting the applications that include our products. Once our data collection products are integrated into a developer’s application, our products become an ingredient of the application solution and part of the developer’s marketing program for that application. 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 and NFC Forum.

| 4 |

Table of Contents

Mobile Markets. Our revenues in 2019 and 2018 were primarily driven by sales of barcode scanners integrated into retail point of sale applications for use with Apple tablets and other mobile devices. Many point of sale application providers develop software for smaller retailers, an underserved market, using tablets as cash registers. Other mobile markets addressed by registered developers 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 mobile barcode scanners.

Expanded and improved product offerings. We offer a wide range of products that enable application developers and their customers 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 and reader/writer. We provide a software developer kit to registered developers to enable our advanced data capture software to be easily integrated into developer 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 times 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 Amazon.com, CDW®, and Barcodes, Inc. 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 developers 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.

| 5 |

Table of Contents

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 registered third-party application developers 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, especially as the camera pixel count gets larger. 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 software developers such as our software developer kit (Capture SDK) to integrate features of our sophisticated data collection scanning software into data capture applications.

Contactless RFID/NFC Reader/Writer. Socket Mobile 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. We have also introduced 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. S550 is currently available for the developers. 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 41 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.

| 6 |

Table of Contents

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.

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. We recently introduced companion applications to assist Apple iOS and Android 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 as of December 31, 2019 and 2018 was 56. Our employees are not represented by a union, and we consider our employee relationships to be good. As of December 31, 2019, we had 15 persons in sales, marketing and customer service, 12 persons in development engineering, 8 persons in finance and administration, and 21 persons in operations.

| 7 |

Table of Contents

Item 1A. Risk Factors

Global economic conditions may have a negative impact on our business and financial condition in ways that we currently cannot predict and may further limit our ability to raise additional funds.

Global economic conditions may have an impact on our business and our financial condition. We may face significant challenges if global economic growth slows down and conditions in the financial markets worsen. The current Covid-19 pandemic could potentially slowdown product purchases due to worldwide curtailment of business activities to slow down the spread of the coronavirus. Should these conditions cause our revenues to be materially less than forecast, we may find it necessary to initiate reductions in our expenses and defer product development program. In addition, our ability to access the capital markets and raise funds required for our operations may be severely restricted at a time when we would like, or need, to do so, which could have an adverse effect on our ability to meet our current and future funding requirements and on our flexibility to react to changing economic and business conditions.

We may not maintain ongoing profitability.

To maintain ongoing profitability, we must accomplish numerous objectives, including continued growth in our business, ongoing support to registered developers whose applications support the use of our data capture products, and the development of 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 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 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.

| 8 |

Table of Contents

If application developers 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 developers 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 developers as sales of our data capture products are application driven. However, these developers 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.

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.

| 9 |

Table of Contents

The decision by British voters to exit the European Union (“Brexit”) may negatively impact our financial results and cause realignment of our European and U.K. distribution channels.

Our products sold in Europe are primarily sold online through third party distributors and resellers operating within the European Common Market, some of whom are based in the U.K. and others whom are based outside of the U.K. All distributors within the European Common Market including the U.K. prior to exit may sell our products anywhere within the common market. Our distributors’ customers may purchase our products from any of these distributors. The impact from Brexit remains uncertain, but the UK’s exit will likely change the trading relationship between the U.K. and the European Union which could affect the cost of goods imported into and exported from the U.K., could increase currency volatility that could drive a weaker British pound which could cause prices of our products sold in the U.K. to increase or profit margins to decline, may affect the ability of our distributors operating within the U.K. to sell our products into the European Common Market on competitive terms, and may affect the ability of our distributors operating within the European Common Market but outside of the U.K. to sell our products into the U.K. on competitive terms. With a range of outcomes still possible, the impact from Brexit will depend, in part, on the final outcome of tariff, trade, regulatory and other negotiations.

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;

| • | 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.

| 10 |

Table of Contents

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 maintain compliance with an asset coverage ratio of no less than 1.25 to 1.0, measured monthly. The agreement contains 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 agreement also contains 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 agreement 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 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.

Goodwill comprises a significant portion of our assets and may be subject to impairment write-downs in future periods which would substantially increase our losses, make it more difficult to achieve profitability, and could cause our stock price to decline.

We review our goodwill for impairment at least annually as of September 30th, and more often if factors suggest potential impairment. Many factors are considered in evaluating goodwill including our market capitalization, comparable companies within our industry, our estimates of our future performance, and discounted cash flow analysis. Many of these factors are highly subjective and may be negatively impacted by our financial results and market conditions in the future. We may incur goodwill impairment charges in the future and any future write-downs of our goodwill would adversely affect our operating results, make it more difficult to maintain profitability, and as a result the market price of our common stock could be adversely affected.

| 11 |

Table of Contents

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.

| 12 |

Table of Contents

A significant portion of our revenue currently comes from a limited number of distributors, and any decrease in revenue from these distributors could harm our business.

A significant portion of our revenue comes from a limited number of distributors. In 2019 and 2018, Ingram Micro® and BlueStar together represented approximately 59% and 53%, respectively, of our worldwide revenues. We expect that a significant portion of our revenue will continue to depend on sales to a limited number of distributors. We do not have long-term commitments from our distributors to carry our products, and any of our distributors may from quarter to quarter comprise a significant concentration of our revenues. Any of our distributors could choose to stop selling some or all of our products at any time, and each of these companies also carries our competitors’ products. If we lose our relationship with any of our significant distributors, we would experience disruption and delays in marketing our products.

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.

| 13 |

Table of Contents

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.

We rely primarily on distributors to sell our products, and our sales would suffer if any of these distributors stops selling our products effectively.

Because we sell 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.

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.

| 14 |

Table of Contents

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.

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.

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.

| 15 |

Table of Contents

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.

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 developers. 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.

| 16 |

Table of Contents

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 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 and attract qualified candidates, and also could increase the cash compensation we would have to pay to them.

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.

| 17 |

Table of Contents

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.

Our facilities or operations could be adversely affected by events outside out control, such as natural disasters or health epidemics.

Our corporate headquarters is located in 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 the current health epidemic, Covid-19 if such an epidemic persists for an extended period of time. 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 23, 2020, we had 6,301,474 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 23, 2020, we had 2,249,925 shares of common stock subject to outstanding options under our stock option plans, and 298,568 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, 2019 through March 23, 2020, our common stock price fluctuated between a high of $2.80 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.

| 18 |

Table of Contents

Item 1B. Unresolved Staff Comments

None.

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. We believe that our current facilities are sufficient and adequate to meet our needs for the foreseeable future.

Item 3. Legal Proceedings

We are currently not a party to any material legal proceedings.

Item 4. Mine Safety Disclosures

Not applicable.

| 19 |

Table of Contents

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 23, 2020, the closing sales price for our common stock as reported on the NASDAQ Marketplace was $1.04. We had approximately 2,300 beneficial stockholders of record as of March 23, 2020. 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.

| 20 |

Table of Contents

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, 2014 through December 31, 2019 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.

| 21 |

Table of Contents

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) |  | 2015 |  | 2016 |  | 2017 |  | 2018 |  | 2019
Income Statement Data: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Revenues |  | $ | 18,400 |  |  | $ | 20,788 |  |  | $ | 21,286 |  |  | $ | 16,454 |  |  | $ | 19,253 |
Gross profit |  | $ | 8,935 |  |  | $ | 10,434 |  |  | $ | 11,390 |  |  | $ | 8,456 |  |  | $ | 10,101 |
Operating expenses |  | $ | 6,806 |  |  | $ | 7,871 |  |  | $ | 8,972 |  |  | $ | 9,042 |  |  | $ | 9,494 |
Net income (loss) before income taxes |  | $ | 1,849 |  |  | $ | 2,432 |  |  | $ | 2,338 |  |  | $ | (715 | ) |  | $ | 506 |
Income tax benefit (expense) |  | $ | (32 | ) |  | $ | 9,715 |  |  | $ | (3,769 | ) |  | $ | 144 |  |  | $ | (219 | )
Net income (loss) |  | $ | 1,817 |  |  | $ | 12,147 |  |  | $ | (1,431 | ) |  | $ | (571 | ) |  | $ | 287 |
Net income (loss) per share: Basic |  | $ | 0.33 |  |  | $ | 2.10 |  |  | $ | (0.23 | ) |  | $ | (0.09 | ) |  | $ | 0.05 |
Diluted |  | $ | 0.30 |  |  | $ | 1.80 |  |  | $ | (0.23 | ) |  | $ | (0.09 | ) |  | $ | 0.05 |
Weighted average shares outstanding: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | 5,555 |  |  |  | 5,793 |  |  |  | 6,293 |  |  |  | 6,095 |  |  |  | 5,984 |
Diluted |  |  | 5,975 |  |  |  | 6,820 |  |  |  | 6,293 |  |  |  | 6,095 |  |  |  | 6,208 |
|  |  | At December 31,
|  |  | 2015 |  |  |  | 2016 |  |  |  | 2017 |  |  |  | 2018 |  |  |  | 2019 |
Balance Sheet Data: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 938 |  |  | $ | 1,319 |  |  | $ | 3,380 |  |  | $ | 1,085 |  |  | $ | 959 |
Total assets |  | $ | 9,688 |  |  | $ | 21,587 |  |  | $ | 19,854 |  |  | $ | 18,597 |  |  | $ | 19,458 |
Bank line of credit |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 1,317 |  |  | $ | 1,413 |
Term loan |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 833 |  |  | $ | 333 |
Related party convertible notes payable |  | $ | 753 |  |  | $ | 753 |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Short term notes payable |  | $ | 500 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Capital leases and deferred rent - long term portion |  | $ | 305 |  |  | $ | 327 |  |  | $ | 271 |  |  | $ | — |  |  | $ | — |
Operating lease |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 1,134 |  |  | $ | 1,511 |
Total stockholders’ equity |  | $ | 3,343 |  |  | $ | 16,170 |  |  | $ | 17,230 |  |  | $ | 12,405 |  |  | $ | 13,234 |

| 22 |

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources

After a profitable growth from 2013 through 2017, we reported a net loss in 2018 due to lower revenues caused by a longer than expected transition to the new SocketScan products. In 2019, we have returned to profitable growth. We generated $19.3 million in revenue in 2019, an increase of 17% compared to revenue of $16.5 million in 2018. Net income before tax in 2019 was $0.5 million compared to net loss before tax of $0.7 million in 2018. As of December 31, 2019, we had approximately $1.0 million cash including $1.4 million advanced on our bank lines of credit and $0.3 million term loan, compared to $1.1 million cash including $1.3 million advanced on our bank lines of credit and $0.8 million term loan at December 31, 2018. We require cash for financing our receivables and inventories, paying operating expenses and capital expenditures. We meet our liquidity needs and finance our capital expenditures from funds provided by operations along with borrowings under the revolving credit lines. We believe our current cash resources, projected operating cash flow, and remaining capacity under our continuing bank lines of credit are sufficient to cover all of our expected working capital needs and planned capital expenditures.

Critical Accounting Policies

Our significant accounting policies are described in Note 1 to our financial statements for the years ended December 31, 2019 and 2018. 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 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 loss per share is based on the weighted average number of shares outstanding during the period presented in accordance with ASC 260, "Earnings Per Share”. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the period plus the common stock equivalents which would arise from the exercise of stock options and warrants outstanding using the treasury stock method and the average market price per share during the period. Common stock equivalents are not included in the diluted earnings per share calculation when their effect is anti-dilutive.

| 23 |

Table of Contents

Revenue Recognition and Accounts Receivable Reserves

On January 1, 2017, we adopted ASC 606 “Revenue from Contracts with Customers” and implemented a new revenue recognition policy. Previously we deferred 100% of revenue and cost of revenue until products are sold by distributors. 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. At December 31, 2019, the deferred revenue and deferred cost on shipments to distributors were approximately $611,000 and $234,000, respectively, compared to approximately $397,000 and $165,000, respectively, at December 31, 2018.

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.

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.

| 24 |

Table of Contents

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

Goodwill is tested for impairment at least annually as of September 30th and between annual tests if indicators of potential impairment exist. We have determined that we have one reporting unit for purposes of goodwill testing and we test goodwill for impairment at the reporting unit level. Prior to performing the goodwill impairment test we determine whether any triggering events are present that could cause impairment of goodwill. We then perform a test to assess goodwill for impairment. The test requires a determination of whether the fair value of the reporting unit is less than its carrying value. If the fair value exceeds the carrying value, goodwill is not impaired, otherwise, we would recognize an impairment charge for the amount by which the carrying value exceeds the estimated fair value. Goodwill would not be reduced below zero.

If the carrying value of the reporting unit is zero or negative, no qualitative assessment is required.

We estimate the fair value of our reporting unit utilizing up to three valuation methods: market capitalization, income approach and market approach. Revenue and expense forecasts used in the evaluation of goodwill are based on trends of historical performance and our estimate of future performance. We determined that the fair value of the Company's reporting unit at September 30, 2019, the date of the Company’s annual impairment test, exceeded its carrying value and as a result, goodwill is considered not impaired. Furthermore, we determined there were no indicators of impairment in the subsequent fourth quarter 2019.

Revenues

Revenue for 2019 was $19.3 million, an increase of 17% compared to revenue of $16.5 million for 2018. Revenue in 2019 was driven by the growth of our SocketScan products which represented 58% of revenue and grew at 22% compared to 2018. Revenue in 2018 was impacted by a longer than expected transition to the new SocketScan products and lack of corporate deployments.

Our DuraScan products, which are weatherproof and ruggedized and primarily targeted at commercial, industrial, warehousing and outdoor application and their associated customers. In 2019, the DuraScan products represented about 19% of revenue, but only grew at 1% compared to 2018. We redesigned and retooled DuraScan products to improve their durability and to add field upgradeable battery option in 2019, which we believe will help to grow this portion of our business significantly going forward.

| 25 |

Table of Contents

Our DuraSled and attachable scanners made up 12% of our 2019 revenue and grew at a modest 5% compared to 2018. This DuraSled family of products is designed to be used as a single-handed solution combined with a phone. In 2019, we upgraded our solution to support both the iPhone 10 and 11, enabling us to offer a complete range of iPhone solutions, with support for iPhone 6’s to iPhone 11’s.

Gross Margins

Annual gross margins on revenue increased slightly to 52.5% in 2019 from 51.4% in 2018.

Research and Development Expense

Research and development expenses in 2019 were $3.9 million, an increase of 7% compared to expense of $3.6 million one year ago. Increase in the level of research and development expenses was due to slightly increased personnel-related costs as well as outside services and consulting.

Research and Development expenses as a percentage of revenue were 20% in 2019 compared to 22% in 2018. 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 expense in 2019 remained flat compared to 2018. Increases in outside services and consulting expenses in 2019 were offset by lower advertising expenses in 2019.

General and Administrative Expense

General and administrative expense in 2019 was $2.6 million, an increase of 7% compared to $2.4 million in 2018. Increases in general and administrative expense were primarily due to an increase in personnel-related costs and higher levels of achievement on performance plans in 2019 as well as additional consulting expenses.

Interest Expense, net of Interest Income

Interest expense and other, net of interest income and other, was $101,000 in 2019 compared to $129,000 in 2018. Interest expenses in both 2019 and 2018 were primarily related to interest on bank term loan and credit line facilities (see “NOTE 2 — Bank Financing Arrangements” for more information). Average total outstanding balance of bank term loan and credit lines during 2019 was $1.49 million, compared to $1.94 million during 2018. Additionally, interest expense in each of the comparable periods includes interest on equipment lease financing obligations.

| 26 |

Table of Contents

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 Tax Cuts and Jobs Act of 2017, effective on January 1, 2018, eliminates alternative minimum taxes and lowers the U.S. federal corporate income tax from 34% to 21%. California corporate net income tax rate is 6.98% after allowing for federal deductibility. In 2019, our stock-based compensation of $519,891 is the primary permanent difference between financial and tax income, which increased our taxable income and the effective tax rate. We recorded a deferred tax expense of $274,000 in 2019, compared to a deferred tax benefit of $143,000 in 2018 with the expectation of a return to profitable operating results and full utilization of our net operating loss carryforwards. Our net operating loss carryforwards do not begin expiring until the end of 2023 if not used. Our deferred tax asset, primarily representing future income tax savings from the application of net operating loss carry forwards, was valued at $5,507,000 at December 31, 2019.

Quarterly Results of Operations

The following table sets forth summary quarterly statements of operations data for each of the quarters in 2018 and 2019. 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.

|  | Quarter Ended (unaudited)
(amounts in thousands, except per share amounts) |  | Mar 31, 2018 |  | Jun 30, 2018 |  | Sep 30, 2018 |  | Dec 31, 2018 |  | Mar 31, 2019 |  | Jun 30, 2019 |  | Sep 30, 2019 |  | Dec 31, 2019
Summary Quarterly Data: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Revenue |  | $ | 3,981 |  |  | $ | 4,192 |  |  | $ | 4,137 |  |  | $ | 4,144 |  |  | $ | 4,629 |  |  | $ | 5,060 |  |  | $ | 4,980 |  |  | $ | 4,584 |
Cost of revenue |  |  | 1,917 |  |  |  | 2,060 |  |  |  | 1,960 |  |  |  | 2,061 |  |  |  | 2,229 |  |  |  | 2,430 |  |  |  | 2,344 |  |  |  | 2,149 |
Gross profit |  |  | 2,064 |  |  |  | 2,132 |  |  |  | 2,177 |  |  |  | 2,083 |  |  |  | 2,400 |  |  |  | 2,630 |  |  |  | 2,636 |  |  |  | 2,435 |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Research and development |  |  | 947 |  |  |  | 917 |  |  |  | 885 |  |  |  | 892 |  |  |  | 894 |  |  |  | 998 |  |  |  | 1,015 |  |  |  | 987 |
Sales and marketing |  |  | 738 |  |  |  | 734 |  |  |  | 739 |  |  |  | 771 |  |  |  | 756 |  |  |  | 771 |  |  |  | 785 |  |  |  | 703 |
General and administrative |  |  | 664 |  |  |  | 625 |  |  |  | 584 |  |  |  | 546 |  |  |  | 703 |  |  |  | 643 |  |  |  | 707 |  |  |  | 533 |
Total operating expenses |  |  | 2,349 |  |  |  | 2,276 |  |  |  | 2,208 |  |  |  | 2,209 |  |  |  | 2,353 |  |  |  | 2,412 |  |  |  | 2,507 |  |  |  | 2,223 |
Interest income (expense) and other, net |  |  | (20 | ) |  |  | (48 | ) |  |  | (32 | ) |  |  | (29 | ) |  |  | (28 | ) |  |  | (29 | ) |  |  | (25 | ) |  |  | (17 | )
Income tax (expense) benefit |  |  | 80 |  |  |  | 54 |  |  |  | 18 |  |  |  | (8 | ) |  |  | (7 | ) |  |  | (69 | ) |  |  | (10 | ) |  |  | (134 | )
Net income (loss) |  | $ | (225 | ) |  | $ | (138 | ) |  | $ | (45 | ) |  | $ | (163 | ) |  | $ | 12 |  |  | $ | 120 |  |  | $ | 94 |  |  | $ | 61 |
Basic net income (loss) per share |  | $ | (0.03 | ) |  | $ | (0.02 | ) |  | $ | (0.01 | ) |  | $ | (0.03 | ) |  | $ | 0.00 |  |  | $ | 0.02 |  |  | $ | 0.02 |  |  | $ | 0.01 |
Fully diluted net income (loss) per share |  | $ | (0.03 | ) |  | $ | (0.02 | ) |  | $ | (0.01 | ) |  | $ | (0.03 | ) |  | $ | 0.00 |  |  | $ | 0.02 |  |  | $ | 0.01 |  |  | $ | 0.01 |

| 27 |

Table of Contents

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.

Cash Flows and Contractual Obligations

As reflected in our Statements of Cash Flows, net cash provided by operating activities in 2019 was $0.87 million, compared to $0.75 million in 2018. We calculate net cash provided by or used in operating activities by increasing our net income ($0.3 million in 2019) or reducing our net loss ($0.6 million in 2018) by the expenses, such as stock-based compensation expense, depreciation, amortization of intangible assets, and deferred tax expense, that did not require the use of cash, and by increasing our net loss by the benefits, such as deferred tax benefits, that did not generate cash. The net amounts were $1.26 million and $0.78 million in 2019 and 2018, respectively. In addition, we report increases in assets and reductions in liabilities as uses of cash and decreases in assets and increases in liabilities as sources of cash, together referred to as changes in operating assets and liabilities. In 2019, changes in operating assets and liabilities resulted in a net use of cash of $0.67 million which was primarily due to the buildup of inventories to support rising sales and to secure long lead time components, and due to increase in accounts receivables driven by higher levels of shipments in the second half of Q4 2019 compared to Q4 2018. The use of cash was partially offset by an increase in accounts payable due to deferred payments at year end. In 2018, changes in operating assets and liabilities resulted in a net source of cash of $0.54 million which was primarily from an increase in accounts payable due to deferred payments at year end and a reduction in accounts receivable due to lower levels of shipments in the second half of Q4 2018 compared to Q4 2017. The source of cash was partially offset by a decrease of accrued payroll and related expense.

In 2019 and 2018, we used $0.6 million and $0.4 million, respectively, in investing activities related to expenditures on production tooling for new products and purchases of computer software and hardware.

Net cash used in financing activities was $0.4 million in 2019, compared $2.6 million in 2018. Financing activities in 2019 consisted primarily of a $0.5 million paydown of the bank term loan. Financing activities in 2018 consisted primarily of the $5.0 million use of cash related to repurchase of company stock, partially offset by net $0.8 million borrowed on our term loan, net $1.3 million borrowed on our bank lines of credit, and $0.3 million proceeds from the exercise of stock options.

| 28 |

Table of Contents

Our contractual obligations at December 31, 2019 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 |  | $ | 3,554,000 |  |  | $ | 3,554,000 |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Operating leases |  |  | 1,230,000 |  |  |  | 479,000 |  |  |  | 751,000 |  |  |  | — |  |  |  | — |
Financing leases |  |  | 8,000 |  |  |  | 8,000 |  |  |  | — |  |  |  | — |  |  |  | — |
Total contractual obligations |  | $ | 4,792,000 |  |  | $ | 4,041,000 |  |  | $ | 751,000 |  |  | $ | — |  |  | $ | — |

Off-Balance Sheet Arrangements

As of December 31, 2019, we had no off-balance sheet arrangements as defined in Item 303 of Regulation S-K.

Recent Accounting Pronouncements

See Note 1 of "Notes to Financial Statements" of this Annual Report for additional information regarding the status of recent accounting pronouncements.

| 29 |

Table of Contents

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. Based on a sensitivity analysis during the three months ended December 31, 2019, an increase of 1% in the interest rate would have increased our fourth quarter borrowing costs by approximately $3,000.

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, 2019, an adverse change of 10% in exchange rates would have resulted in a decrease in our net income for the fourth quarter 2019 of approximately $54,000 if left unprotected. For the fourth quarter of 2019, the total net adjustment for the effects of changes in foreign currency on cash balances, collections, payables, and derivatives used to hedge foreign currency risks, was a net loss of $2,300. We will continue to monitor, assess, and mitigate through hedging activities, our risks related to foreign currency fluctuations.

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.”

| 30 |

Table of Contents

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, 2019 and 2018, the related statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2019 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, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, 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.

/s/ Sadler, Gibb & Associates, LLC

We have served as the Company’s auditor since 2013.

Salt Lake City, UT

March 26, 2020

| 31 |

Table of Contents

SOCKET MOBILE, INC.
BALANCE SHEETS
|  | December 31,
|  | 2019 |  | 2018
ASSETS
Current assets: |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 958,860 |  |  | $ | 1,084,991 |
Accounts receivable, net |  |  | 2,837,006 |  |  |  | 2,367,177 |
Inventories, net |  |  | 3,178,908 |  |  |  | 2,272,328 |
Prepaid expenses and other current assets |  |  | 312,127 |  |  |  | 307,832 |
Deferred cost on shipments to distributors |  |  | 233,823 |  |  |  | 165,024 |
Total current assets |  |  | 7,520,724 |  |  |  | 6,197,352 |
Property and equipment: |  |  |  |  |  |  |  |
Machinery and office equipment |  |  | 2,195,405 |  |  |  | 2,188,835 |
Computer equipment |  |  | 1,336,445 |  |  |  | 992,531 |
|  |  | 3,531,850 |  |  |  | 3,181,366 |
Accumulated depreciation |  |  | (2,667,340 | ) |  |  | (2,492,154 | )
Property and equipment, net |  |  | 864,510 |  |  |  | 689,212 |
Goodwill |  |  | 4,427,000 |  |  |  | 4,427,000 |
Other long-term assets |  |  | 202,611 |  |  |  | 236,565 |
Deferred tax assets |  |  | 5,506,934 |  |  |  | 5,780,938 |
Operating lease right-of-use asset |  |  | 936,708 |  |  |  | 1,265,648 |
Total assets |  | $ | 19,458,487 |  |  | $ | 18,596,715 |
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities: |  |  |  |  |  |  |  |
Accounts payable and accrued expenses |  | $ | 2,084,848 |  |  | $ | 1,533,456 |
Accrued payroll and related expenses |  |  | 566,350 |  |  |  | 512,307 |
Deferred revenue on shipments to distributors |  |  | 611,029 |  |  |  | 396,974 |
Short term portion of deferred service revenue |  |  | 32,900 |  |  |  | 33,644 |
Bank lines of credit |  |  | 1,412,449 |  |  |  | 1,316,778 |
Term loan – current portion |  |  | 333,333 |  |  |  | 500,000 |
Operating lease – current portion |  |  | 419,288 |  |  |  | 376,160 |
Finance lease – current portion |  |  | 8,291 |  |  |  | 15,697 |
Total current liabilities |  |  | 5,468,488 |  |  |  | 4,685,016 |
Long term portion of deferred service revenue |  |  | 40,711 |  |  |  | 31,291 |
Long-term portion of term loan |  |  | — |  |  |  | 333,333 |
Long term portion of operating lease |  |  | 715,062 |  |  |  | 1,134,350 |
Long-term portion of finance lease |  |  | — |  |  |  | 8,290 |
Total liabilities |  |  | 6,224,261 |  |  |  | 6,192,280 |
Commitments and contingencies |  |  | — |  |  |  | — |
Stockholders’ equity: |  |  |  |  |  |  |  |
Common stock, $0.001 par value: Authorized – 20,000,000 shares, |  |  |  |  |  |  |  |
Issued and outstanding – 6,017,674 shares at December 31, 2019 and 5,883,109 shares at December 31, 2018 |  |  | 6,018 |  |  |  | 5,883 |
Additional paid-in capital |  |  | 61,066,971 |  |  |  | 60,523,901 |
Accumulated deficit |  |  | (47,838,763 | ) |  |  | (48,125,349 | )
Total stockholders’ equity |  |  | 13,234,226 |  |  |  | 12,404,435 |
Total liabilities and stockholders’ equity |  | $ | 19,458,487 |  |  | $ | 18,596,715 |

See accompanying notes.

| 32 |

Table of Contents

SOCKET MOBILE, INC.
STATEMENTS OF OPERATIONS
|  | Years Ended December 31,
|  | 2019 |  | 2018
Revenues |  | $ | 19,253,105 |  |  | $ | 16,454,426 |
Cost of revenues |  |  | 9,152,462 |  |  |  | 7,998,018 |
Gross profit |  |  | 10,100,643 |  |  |  | 8,456,408 |
Operating expenses: |  |  |  |  |  |  |  |
Research and development |  |  | 3,893,563 |  |  |  | 3,640,296 |
Sales and marketing |  |  | 3,015,431 |  |  |  | 2,981,902 |
General and administrative |  |  | 2,585,279 |  |  |  | 2,420,198 |
Total operating expenses |  |  | 9,494,273 |  |  |  | 9,042,396 |
Operating income (loss) |  |  | 606,370 |  |  |  | (585,988 | )
Interest expense and other, net |  |  | (100,656 | ) |  |  | (128,612 | )
Net income (loss) before income taxes |  |  | 505,714 |  |  |  | (714,600 | )
Income tax benefit (expense) |  |  | (219,128 | ) |  |  | 143,459 |
Net income (loss) |  | $ | 286,586 |  |  | $ | (571,141 | )
Net income (loss) per share: |  |  |  |  |  |  |  |
Basic |  | $ | 0.05 |  |  | $ | (0.09 |
Fully diluted |  | $ | 0.05 |  |  | $ | (0.09 |
Weighted average shares outstanding: |  |  |  |  |  |  |  |
Basic |  |  | 5,984,381 |  |  |  | 6,094,709 |
Fully diluted |  |  | 6,207,731 |  |  |  | 6,094,709 |

See accompanying notes.

| 33 |

Table of Contents

SOCKET MOBILE, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
|  |  |  | Additional |  |  |  | Total
|  | Common Stock |  | Paid-In |  | Accumulated |  | Stockholders’
|  | Shares |  | Amount |  | Capital |  | Deficit |  | Equity
Balance at December 31, 2017 |  |  | 7,011,128 |  |  |  | 7,011 |  |  |  | 64,777,620 |  |  |  | (47,554,208 | ) |  |  | 17,230,423 |
Exercise of stock options |  |  | 121,981 |  |  |  | 122 |  |  |  | 279,055 |  |  |  | — |  |  |  | 279,177 |
Stock-based compensation |  |  | — |  |  |  | — |  |  |  | 487,806 |  |  |  | — |  |  |  | 487,806 |
Cost of tender offer |  |  | (1,250,000 | ) |  |  | (1,250 | ) |  |  | (5,020,580 | ) |  |  | — |  |  |  | (5,021,830 | )
Net loss |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (571,141 | ) |  |  | (571,141 | )
Balance at December 31, 2018 |  |  | 5,883,109 |  |  | $ | 5,883 |  |  | $ | 60,523,901 |  |  | $ | (48,125,349 | ) |  | $ | 12,404,435 |
Exercise of stock options |  |  | 24,494 |  |  |  | 25 |  |  |  | 23,289 |  |  |  | — |  |  |  | 23,314 |
Stock-based compensation |  |  | — |  |  |  | — |  |  |  | 519,891 |  |  |  | — |  |  |  | 519,891 |
Restricted stock grants |  |  | 110,071 |  |  |  | 110 |  |  |  | (110 | ) |  |  | — |  |  |  | — |
Net income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 286,586 |  |  |  | 286,586 |
Balance at December 31, 2019 |  |  | 6,017,674 |  |  | $ | 6,018 |  |  | $ | 61,066,971 |  |  | $ | (47,838,763 | ) |  | $ | 13,234,226 |

See accompanying notes.

| 34 |

Table of Contents

SOCKET MOBILE, INC.
STATEMENTS OF CASH FLOWS
|  | Years Ended December 31,
|  | 2019 |  | 2018
Operating activities |  |  |  |  |  |  |  |
Net income (loss) |  | $ | 286,586 |  |  | $ | (571,141 | )
Adjustments to reconcile net loss to net cash provided by operating activities: |  |  |  |  |  |  |  |
Stock-based compensation |  |  | 519,891 |  |  |  | 487,806 |
Depreciation and amortization |  |  | 462,930 |  |  |  | 432,042 |
Changes in deferred taxes |  |  | 274,004 |  |  |  | (143,459 | )
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |
Accounts receivable |  |  | (469,829 | ) |  |  | 320,148 |
Inventories |  |  | (906,580 | ) |  |  | (74,062 | )
Prepaid expenses and other current assets |  |  | (4,295 | ) |  |  | 77,677 |
Other long-term assets |  |  | (1,320 | ) |  |  | 435 |
Accounts payable and accrued expenses |  |  | 551,392 |  |  |  | 421,222 |
Accrued payroll and related expenses |  |  | 54,043 |  |  |  | (118,692 | )
Net deferred revenue on shipments to distributors |  |  | 145,256 |  |  |  | (56,256 | )
Deferred service revenue |  |  | 8,676 |  |  |  | 3,952 |
Change in deferred rent |  |  | (47,220 | ) |  |  | (29,527 | )
Net cash provided by operating activities |  |  | 873,534 |  |  |  | 750,145 |
Investing activities |  |  |  |  |  |  |  |
Purchase of equipment |  |  | (595,154 | ) |  |  | (423,700 | )
Capitalized software costs |  |  | (7,800 | ) |  |  | — |
Net cash used in investing activities |  |  | (602,954 | ) |  |  | (423,700 | )
Financing activities |  |  |  |  |  |  |  |
Payments on operating leases |  |  | (15,696 | ) |  |  | (28,420 | )
Proceeds from borrowings under bank line of credit agreement |  |  | 17,423,000 |  |  |  | 13,546,964 |
Repayments of borrowings under bank line of credit agreement |  |  | (17,327,329 | ) |  |  | (12,230,186 | )
Proceeds from bank term loan |  |  | — |  |  |  | 4,000,000 |
Repayments of bank term loan |  |  | (500,000 | ) |  |  | (3,166,667 | )
Common stock repurchases and related expenses |  |  | — |  |  |  | (5,021,830 | )
Stock options exercised |  |  | 23,314 |  |  |  | 279,177 |
Net cash used in financing activities |  |  | (396,711 | ) |  |  | (2,620,962 | )
Net increase (decrease) in cash and cash equivalents |  |  | (126,131 | ) |  |  | (2,294,517 | )
Cash and cash equivalents at beginning of year |  |  | 1,084,991 |  |  |  | 3,379,508 |
Cash and cash equivalents at end of year |  | $ | 958,860 |  |  | $ | 1,084,991 |
Supplemental cash flow information |  |  |  |  |  |  |  |
Cash paid for interest |  | $ | 100,048 |  |  | $ | 105,082 |

See accompanying notes.

| 35 |

Table of Contents

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 developers as the scanner sales are primarily driven by the deployment of barcode and RFID/NFC enabled mobile applications.

The Company designs its own products and subcontracts the manufacturing of product components to independent third-party contract manufacturers who are in the U.S., Mexico, Singapore, China, Malaysia and Taiwan and who have the equipment, know-how and capacity to manufacture products to the Company’s specifications. Final products are assembled, tested, packaged, and distributed at and from its Newark, California facility. The Company offers its products worldwide through two-tier distribution enabling customers to purchase from a large number of on-line resellers around the world including some application developers. The geographic regions served by the Company include the Americas, Europe, Asia Pacific and Africa.

The Company was founded in March 1992 as Socket Communications, Inc. and reincorporated in Delaware in 1995 prior to the Company’s initial public offering in June 1995. The Company began doing business as Socket Mobile, Inc. in January 2007 to better reflect its market focus on the mobile business market, and changed its legal name to Socket Mobile, Inc. in April 2008. The Company’s common stock trades on the NASDAQ Marketplace under the symbol “SCKT.” The Company’s principal executive offices are located at 39700 Eureka Drive, Newark, CA 94560.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates, and such differences may be material to the financial statements.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a maturity date of 90 days or less at date of purchase to be cash equivalents. For the years ended December 31, 2019 and 2018, all of the Company’s cash and cash equivalents consisted of amounts held in demand deposit accounts in banks. The aggregate cash balance on deposit in these accounts are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company’s cash balance on deposit in these accounts may, at times, exceed the federally insured limits. The Company has never experienced any losses in such accounts.

| 36 |

Table of Contents

SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS

Fair Value of Financial Instruments

The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable and foreign exchange contracts approximate fair value due to the relatively short period of time to maturity.

Derivative Financial Instruments

The Company's primary objective for holding derivative financial instruments is to manage foreign currency risks. The Company's derivative financial instruments are recorded at fair value and are included in other current assets, other assets, other accrued liabilities or long-term debt depending on the contractual maturity and whether the Company has a gain or loss. The Company's accounting policies for these instruments are based on whether they meet the Company's criteria for designation as hedging transactions, either as cash flow or fair value hedges. A hedge of the exposure to variability in the cash flows of an asset or a liability, or of a forecasted transaction, is referred to as a cash flow hedge. A hedge of the exposure to changes in fair value of an asset or a liability, or of an unrecognized firm commitment, is referred to as a fair value hedge. The criteria for designating a derivative as a hedge include the instrument's effectiveness in risk reduction and, in most cases, a one-to-one matching of the derivative instrument to its underlying transaction. Gains and losses on derivatives that do not qualify for hedge accounting are recognized immediately in earnings. The Company regularly enters into forward foreign currency contracts to reduce exposures related to rate changes in certain foreign currencies.

The Company records its forward foreign currency contracts at fair value. At December 31, 2019 and 2018, the Company had no open forward foreign currency contracts.

Foreign Currency

The functional currency for the Company is the U.S. dollar. However, the Company requires European distributors to purchase products in Euros and British pounds and pays the expenses of European employees in Euros and British pounds. The Company hedges a significant portion of the European receivables balance denominated in Euros to reduce the foreign currency risk associates with these assets. In 2019, the total net adjustment for the effects of changes in foreign currency on cash balances, collections, payables, and derivatives used to hedge foreign currency risks, was a net loss of $2,300 compared to a net loss of $20,000 in 2018.

Accounts Receivable Allowances

The Company estimates the amount of uncollectible accounts receivable at the end of each reporting period based on the aging of the receivable balance, current and historical customer trends, and communications with its customers. Amounts are written off only after considerable collection efforts have been made and the amounts are determined to be uncollectible. The following describes activity in the allowance for doubtful accounts for the years ended December 31, 2019 and 2018:

| 37 |

Table of Contents

SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS

Year |  | Balance at Beginning of Year |  | Charged to Costs and Expenses |  | Amounts Written Off |  | Balance at End of Year
| 2019 |  |  | $ | 89,058 |  |  | $ | — |  |  | $ | (48,407 | ) |  | $ | 40,651 |
| 2018 |  |  | $ | 89,058 |  |  | $ | — |  |  | $ | — |  |  | $ | 89,058 |

Inventories

Inventories consist principally of raw materials and sub-assemblies stated at the lower of standard cost, which approximates actual costs (first-in, first-out method), or market. Market is defined as replacement cost, but not in excess of estimated net realizable value or less than estimated net realizable value less a normal margin. At the end of each reporting period, the Company compares its inventory on hand to its forecasted requirements for the next nine-month period and reserves the cost of any inventory that is surplus, less any amounts that the Company believes it can recover from the disposal of goods or that the Company specifically believes will be saleable past a nine- month horizon. The Company’s sales forecasts are based upon historical trends, communications from customers, and marketing data regarding market trends and dynamics. Changes in the amounts recorded for surplus or obsolete inventory are included in cost of revenue. Inventories, net of write-downs, at December 31, 2019 and 2018 consisted of the following:

|  | December 31,
|  | 2019 |  | 2018
Raw materials and sub-assemblies |  | $ | 3,767,588 |  |  | $ | 2,785,154 |
Finished goods |  |  | 241,681 |  |  |  | 335,335 |
Inventory reserves |  |  | (830,361 | ) |  |  | (848,161 | )
Inventory, net |  | $ | 3,178,908 |  |  | $ | 2,272,328 |

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of various payments that the Company has made in advance for goods or services to be received in the future. Prepaid expenses and other current assets at December 31, 2019 and 2018 consisted of the following:

|  | December 31,
|  | 2019 |  | 2018
Prepaid insurance |  | $ | 47,884 |  |  | $ | 18,061 |
Product certification costs |  |  | 83,749 |  |  |  | 74,919 |
Prepaid inventory purchases |  |  | 77,606 |  |  |  | 110,301 |
Others |  |  | 102,888 |  |  |  | 104,551 |
Prepaid expenses and other current assets |  | $ | 312,127 |  |  | $ | 307,832 |

| 38 |

Table of Contents

SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method, over the estimated useful lives of the assets ranging from one to five years. Assets under finance leases are amortized in a manner consistent with the Company’s normal depreciation policy for owned assets, or the remaining lease term as applicable. Depreciation expense in the years ended December 31, 2019 and 2018, was $419,856 and $397,392, respectively.

Goodwill

Goodwill is tested for impairment annually as of September 30th or more frequently when events or circumstances indicate that the carrying value of the Company's single reporting unit more likely than not exceeds its fair value. The Company performed its annual goodwill impairment analysis as of September 30, 2019. The Company used the two-step test as required to assess goodwill for impairment. The first step of the goodwill impairment test consisted of comparing the carrying value of the reporting unit to its fair value. Management estimated the fair value of the Company's reporting unit using various methods and compared the fair value to the carrying amount (net book value) to ascertain if potential goodwill impairment existed. The Company utilized methods that focused on its ability to produce income ("Income Approach") and the Company’s market capitalization ("Market Capitalization Approach"). Key assumptions utilized in the determination of fair value in step one of the test included the following: the Company's market capitalization; revenue and expense forecasts used in the evaluation were based on trends of historical performance and management's estimate of future performance; cash flows utilized in the discounted cash flow analysis were estimated using a weighted average cost of capital determined to be appropriate for the Company. No impairment of goodwill was recorded in the years ended December 31, 2019 and 2018.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk include cash, cash equivalents and accounts receivable. The Company invests its cash in demand deposit accounts in banks. To date, the Company has not experienced losses on the investments. The Company’s trade accounts receivables are primarily with distributors. The Company performs ongoing credit evaluations of its customers’ financial condition, but the Company generally requires no collateral. Reserves are maintained for potential credit losses, and such losses have been within management’s expectations. Customers who accounted for at least 10% of the Company’s accounts receivable balances at December 31, 2019 and December 31, 2018 were as follows:

|  | December 31,
|  | 2019 |  | 2018
Ingram Micro Inc. |  |  | 45 | % |  |  | 41 | %
Bluestar, Inc. |  |  | 32 | % |  |  | 19 | %

| 39 |

Table of Contents

SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS

Concentration of Suppliers

Several of the Company’s component parts are produced by a sole or limited number of suppliers. Shortages could occur in these essential materials due to increased demand, or to an interruption of supply. Suppliers may choose to restrict credit terms or require advance payments causing delays in the procurement of essential materials. If the Company were unable to procure certain of such materials, it could have a material adverse effect upon its results. At December 31, 2019, 34% of the Company’s accounts payable balances were concentrated with top three suppliers. For the years ended December 31, 2019 and 2018, top three suppliers accounted for 55% of the inventory purchases in each of these years.

Revenue Recognition and Deferred Revenue

On January 1, 2017, the Company adopted ASC 606 “Revenue from Contracts with Customers” and implemented a new revenue recognition policy. Instead of deferring 100% of revenue and cost of revenue until products are sold by distributors, the new policy recognizes revenue on sales to distributors when shipping of product is completed and title transfers to the distributor, less a reserve for estimated product returns (sales and cost of sales). The reserves are based on estimates of future returns calculated from actual return history, primarily from stock rotations, plus knowledge of pending returns outside of the norm. In 2019, distribution revenue was approximately $19.0 million, compared to $16.2 million in 2018

At December 31, 2019, the deferred revenue and deferred cost on shipments to distributors were approximately $611,000 and $234,000 respectively, compared to approximately $397,000 and $165,000, respectively, at December 31, 2018.

The Company also earns revenue from its SocketCare services program which provides for extended warranty and accidental breakage coverage for selected products. For the year ended December 31, 2019 and 2018, the SocketCare revenue was $0.3 million and 0.2 million, respectively. Service purchased at the time of product purchase provides for coverage in three-year and five-year terms. The Company additionally offers comprehensive coverage and program term extensions. Revenues from the SocketCare services program are recognized ratably over the life of the extended warranty contract. The amount of unrecognized SocketCare service revenue is classified as deferred service revenue and presented on the Company’s balance sheet in its short- and long-term components. At December 31, 2019, the balance of unrecognized SocketCare service revenue was $73,611.

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires a lessee to recognize a liability representing future lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For operating leases, a lessee is required to recognize at inception a right-of-use asset and a lease liability equal to the net present value of the lease payments, with lease expense recognized over the lease term on a straight-line basis. For leases with a term of twelve months or less, ASU 2016-02 allows a reporting entity to make an accounting policy election to not recognize a right-of-use asset and a lease liability, and to recognize lease expense on a straight-line basis. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company adopted ASU 2016-02 effective January 1, 2019, which had no impact on the Company’s Statements of Operations. The most significant impact was the recognition of right-of-use assets and liabilities for the operating lease. Adoption of the standard required the Company to restate the reported results in its earliest comparable period, January 1, 2018, including the recognition of additional operating lease right-of-use assets and liabilities. As a result, there was an increase in assets and corresponding liabilities of approximately $1.57 million on January 1, 2018. At December 31, 2019, the balances of right-of-use assets and liabilities for the operating lease are approximately $0.93 million and $1.13 million, respectively, compared to approximately $1.27 million and $1.51 million, respectively, at December 31, 2018.

| 40 |

Table of Contents

SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS

Warranty

The Company’s products typically carry a one-year warranty. The Company reserves for estimated product warranty costs at the time revenue is recognized based upon the Company’s historical warranty experience, and additionally for any known product warranty issues. If actual costs differ from initial estimates, the Company records the difference in the period they are identified. Actual claims are charged against the warranty reserve. The following describes activity in the reserves for product warranty costs for the years ended December 31, 2019 and 2018:

Year |  | Balance at Beginning of Year |  | Additional Warranty Reserves |  | Amounts Charged to Reserves |  | Balance at End of Year
| 2019 |  |  | $ | 78,871 |  |  | $ | 89,702 |  |  | $ | (89,702 | ) |  | $ | 78,871 |
| 2018 |  |  | $ | 78,871 |  |  | $ | 56,383 |  |  | $ | (56,383 | ) |  | $ | 78,871 |

Research and Development

Research and development expenditures are charged to operations as incurred. The major components of research and development costs include salaries and employee benefits, stock-based compensation expense, 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 2019 and 2018 was $43,074 and $34,650 respectively. The amount of unamortized capitalized software costs as of December 31, 2019 and 2018 was $138,000 and $173,000, respectively.

| 41 |

Table of Contents

SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS

Advertising Costs

Advertising costs are charged to sales and marketing as incurred. The Company incurred $17,539 and $75,286, in advertising costs during 2019 and 2018, respectively.

Income Taxes

The Company uses the asset and liability method to account for income taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance against deferred tax assets when it is more likely than not that such assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company recognizes the tax benefit from uncertain tax positions if it is more likely than not that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. It is the Company's policy to include interest and penalties related to tax positions as a component of income tax expense.

Shipping and handling costs

Shipping and handling costs are included in the cost of revenues in the statement of operations.

Net Income (Loss) Per Share

The following table sets forth the reconciliation of basic shares to diluted shares and the computation of basic and diluted net income (loss) per share:

|  | Years Ended December 31,
|  | 2019 |  | 2018
Numerator: |  |  |  |
Net income (loss) |  | $ | 286,586 |  |  | $ | (571,141 | )
Denominator: |  |  |  |  |  |  |  |
Weighted average shares outstanding used in computing net income (loss) per share: |  |  |  |  |  |  |  |
Basic |  |  | 5,984,381 |  |  |  | 6,094,709 |
Fully diluted |  |  | 6,207,731 |  |  |  | 6,094,709 |
Net income (loss) per share applicable to common stockholders: |  |  |  |  |  |  |  |
Basic |  | $ | 0.05 |  |  | $ | (0.09 | )
Fully diluted |  | $ | 0.05 |  |  | $ | (0.09 | )

| 42 |

Table of Contents

SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS

In 2019 and 2018, options to purchase 2,169,436 and 2,374,124 shares, respectively, of the Company’s Common Stock were excluded from the calculation of the diluted earnings per share because their effect would be anti-dilutive.

Stock-Based Compensation Expense

The Company has incentive plans that reward employees with stock options and restricted stocks. The amount of compensation cost for these stock-based awards is measured based on the fair value of the awards as of the date that the awards are issued. The fair values of stock options are generally determined using a binomial lattice valuation model which incorporates assumptions about expected volatility, risk-free interest rate, dividend yield, and expected life. Compensation cost for stock-based awards is recognized on a straight-line basis over the vesting period.

Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief executive officer in deciding how to allocate resources and in assessing performance.

The Company operates in the mobile barcode scanning and RFID reader/writer market. Mobile scanning typically consists of mobile devices such as smartphones or tablets, with mobile scanning peripherals for data collection, and third-party vertical applications software. The Company distributes its products in the United States and foreign countries primarily through distributors and resellers. The Company markets its products primarily through application developers whose applications are designed to work with Company’s products.

Revenues for the geographic areas for the years ended December 31, 2019 and 2018 are as follows:

|  | Years Ended December 31,
Revenues: (in thousands) |  | 2019 |  | 2018
United States |  | $ | 14,558 |  |  | $ | 12,562 |
Europe |  |  | 2,431 |  |  |  | 2,526 |
Asia and rest of world |  |  | 2,264 |  |  |  | 1,366 |
|  | $ | 19,253 |  |  | $ | 16,454 |

Export revenues are attributable to countries based on the location of the Company’s customers. The Company does not hold long-lived assets in foreign locations.

Major Customers

Customers who accounted for at least 10% of total revenues for the years ended December 31, 2019 and 2018 were as follows:

|  | Years Ended December 31,
|  | 2019 |  | 2018
Ingram Micro Inc. |  |  | 38 | % |  |  | 32 | %
BlueStar, Inc. |  |  | 21 | % |  |  | 21 | %
ScanSource, Inc. |  |  | * |  |  |  | 10 | %

___________________________
* less than 10% of total revenues for year ended December 31, 2019.

| 43 |

Table of Contents

SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS

Recently Issued Financial Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, Topic 842). Topic 842 requires lessees to classify leases as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification. We adopted Topic 842 on January 1, 2019, as the date of our initial application of the standard. Consequently, financial information for the comparative periods is updated. Our finance and operating lease commitments are subject to the new standard and recognized as finance and operating lease liabilities and right-of-use assets upon our adoption of Topic 842, which increased our total assets and total liabilities that we reported relative to such amounts prior to adoption.

In June 2016, the FASB issued ASU 2016-13("ASU 2016-13"), Financial Instruments-Credit Losses. Subsequently, the FASB issued ASU 2019-05, Financial Instruments- Credit Losses (Topic 326): Targeted Transition Relief and codification improvements to Topic 326 in ASU 2019-11, ASU 2019-04 and ASU 2018-19. The amendments update guidance on reporting credit losses for financial assets. These amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). The ASU is effective for fiscal years beginning after December 15, 2020. Subsequent to September 30, 2019, the FASB issued ASU 2019-10, "Financial Instruments - Credit Loss (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)," which defers the effective date for public filers that are considered small reporting companies ("SRC") as defined by the Securities and Exchange Commission to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Since the Company is an SRC, implementation is not needed until January 1, 2023. The Company will continue to evaluate the effect of adopting ASU 2016-13 on the Company's financial statements and disclosures.

From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that all other recently issued accounting standards are not expected to have a material impact on the Company’s financial position or results of operations upon adoption.

| 44 |

Table of Contents

SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 2 — Bank Financing Arrangements

Third Financing Agreement

On January 31, 2018, the Company entered into an Amended and Restated Business Financing Agreement (the “Third Financing Agreement”) with Western Alliance Bank (the “Bank), that provides for a $2.5 million revolving line of credit and a $4.0 million term loan that the Company may use to repurchase shares of common stock. Pursuant to the revolving line of credit, the Company is permitted to borrow up to the lesser of $2.5 million or 80% of eligible accounts receivables. Amounts outstanding under the line of credit bear interest at the “U.S. Prime Rate” published by the Wall Street Journal plus 0.75%. Interest is payable monthly on the line of credit, and the principal is due upon the maturity date of January 31, 2020. Amounts outstanding under the term loan bear interest at the “U.S. Prime Rate” published by the Wall Street Journal plus 1.75%. Following a three-month interest only period, the term loan is payable in 45 equal monthly installments of principal and interest (see “Forth Financing Agreement” and “Fifth Financing Agreement” for subsequent changes affecting the term loan and financial covenants). The loans are secured by all of the Company’s present and future assets, including intellectual property and general intangibles. Termination of the revolving line of credit or term loan prior to its termination date may be subject to early termination fees, subject to certain exceptions. Amounts repaid or prepaid under the term loan may not be reborrowed. At the end of each quarter through the quarter ending December 31, 2018, the Company is required to prepay outstanding term loan principal in an amount equal to 25% of excess cash flow, as set forth in the Third Financing Agreement, for the most recent quarter ended. The Company is also obligated to pay customary fees for a loan facility of this size and type.

The Third Financing Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company’s 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 Company is also required to maintain compliance with an asset coverage ratio (unrestricted cash maintained with the Bank plus Eligible Receivables, divided by the total amount of the Obligations) measured monthly, which requirements increase during the term of the Financing Agreement, a fixed charge coverage ratio of no less than 1.75 to 1.0, measured quarterly, and a total funded debt to trailing twelve months EBITDA multiple of not more than 1.75 to 1.0, measured monthly.

The Third Financing Agreement also contains 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, the Bank may declare all or a portion of the Company’s outstanding obligations payable to be immediately due and payable and exercise other rights and remedies provided for under the Financing Agreement. During the existence of an event of default, interest on the obligations could be increased.

On March 1, 2018, the Company received proceeds of $4.0 million under the provisions of the term loan for a common stock repurchase. On March 9, 2018, the Company completed a tender offer to purchase and retire 1,250,000 shares of common stock from multiple investors at a purchase price of $3.90 per share, for an aggregate cost of approximately $4.9 million, excluding fees and expenses relating to the tender offer.

On April 12, 2018, the Company advised the Bank that its operating results for the quarter ended March 31, 2018 were not expected to be in compliance with two financial covenants, the first a Fixed Charge Coverage Ratio and the second a Total Funded Debt to EBITDA ratio. The Company reported the non-compliance in its Form 10-Q for the quarter ended March 31, 2018. The Bank verbally agreed to forbear the events of default subject to further modification of the Financing Agreement. The Company subsequently paid down the term loan from $4.0 million at March 31, 2018 to $1.0 million at June 30, 2018. The paydowns were made from its cash and revolving lines of credit.

| 45 |

Table of Contents

SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS

Fourth Financing Agreement

On June 4, 2018, the Company entered into an Amended and Restated Business Financing Agreement (the “Fourth Financing Agreement”) with the Bank. In the Fourth Financing Agreement, the Bank recognizes the repayment of the outstanding term loan balance to $1.0 million by June 30, 2018. The remaining balance is repayable in 24 equal monthly installments. The Fixed Charge Coverage Ratio is replaced with a commitment to maintain cash plus available credit at or above the term loan balance. The Total Funded Debt to EBITDA ratio and the excess cash flow application provisions that were designed to accelerate the pay down of the term loan balance are removed. The Bank permanently waived the defaults resulting from March 31, 2018 results when paydown of the term loan balance to $1.0 million by June 30, 2018 was achieved. In the Fourth Financing Agreement, the Company is required to maintain compliance with the Asset Coverage Ratio measured monthly.

Fifth Financing Agreement

On July 30, 2018, the Company entered into an Amended and Restated Business Financing Agreement (the “Fifth Financing Agreement”) with the Bank. The Company is required to maintain daily cash plus available credit at or above 90% of the outstanding principal balance of the term loan until the Asset Coverage Ratio is at 1.25 to 1.0. The minimum Asset Coverage Ratio increased to 1.2 to 1.0 on October 1, 2018. From December 31, 2018 onwards, the ratio increased to 1.25 to 1.0.

The Company was in complete compliance with all the required covenants during Q3 and Q4 2018. On December 31, 2018, the sum of Company’s unrestricted cash on deposit with the Bank plus availability was $1.24 million, $0.49 million more than 90% of the outstanding principal balance of the term loan, or $0.75 million, and the Asset Coverage Ratio was 1.48 to 1.0.

Sixth Financing Agreement

On June 14, 2019, the Company entered into the Sixth Amended and Restated Business Financing Agreement with the Bank. The Bank waived the default which occurred for the month ended April 30, 2019 when the Company’s Asset Coverage Ratio was 1.13 to 1.00, instead of the required 1.25 to 1.00. The Bank also increased the Eligible Receivable threshold for Ingram Micro from 50% to 60% of domestic receivables, and from 35% to 50% of all receivables (including both domestic and foreign receivables).

Seventh Financing Agreement

On January 8, 2020, the Company entered into the Seventh Amended and Restated Business Financing Agreement with the Bank which extends the maturity date of the Company’s revolving line of credit to January 31, 2022.

| 46 |

Table of Contents

SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS

In 2019, total repayment under the term loan was $0.5 million. Total amount borrowed under the domestic and international lines was $17.42 million and the total repayment was $17.33 million. Amounts outstanding under the term loan and bank credit facilities at December 31, 2019 are as follows:

|  | December 31, 2019
Term loan |  | $ | 333,333 |
Less: current-portion of term loan |  |  | (333,333 | )
Long-term portion of term loan |  | $ | — |

|  | December 31, 2019
Lines of credit -domestic line |  | $ | 1,204,915 |
Lines of credit -EXIM line |  |  | 207,534 |
Total lines of credit |  | $ | 1,412,449 |

Total interest expenses on the term loan and on the amounts drawn under the Company’s bank credit lines for 2019 were $44,541 and $55,571, respectively. Total interest expenses on the term loan and on the amounts drawn under the Company’s bank credit lines for 2018 were $94,594 and $37,201, respectively. Accrued interest payable related to the amounts outstanding under the term loan and the bank credit facilities at December 31, 2019 and December 31, 2018 was $14,466 and $13,546, respectively. At December 31, 2019, the Company’s unused available line of credit was approximately $0.4 million.

NOTE 3 — 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. Monthly base rent increases four percent per year annually on July 1st of each year.

The Company recognizes operating lease expense on a straight-line basis over the lease term. Rental expense under the operating lease for the years ended December 31, 2019 and 2018 was $412,833.

Cash payments included in the measurement of our operating lease liabilities were $460,053 for 2019, compared to $442,359 for 2018.

Future minimum lease payments under the operating lease at December 31, 2019 are shown below:

Annual minimum payments: |  | Amount
2020 |  | $ | 478,455 |
2021 |  |  | 497,594 |
2022 |  |  | 253,675 |
Total minimum payments |  |  | 1,229,724 |
Less: Present value factor |  |  | (253,675 | )
Total operating lease liabilities |  |  | 1,134,349 |
Less: Current portion of operating lease |  |  | (419,288 | )
Long-term portion of operating lease |  | $ | 715,062 |

| 47 |

Table of Contents

SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS

Finance Lease Obligations

The Company leases certain of its equipment under finance leases. The leases are collateralized by the underlying assets. At December 31, 2019 and 2018, property and equipment with costs of $100,584, were subject to such financing arrangements. The accumulated depreciation of the assets associated with the finance leases as of December 31, 2019 and December 31, 2018, amounted to $92,571 and $76,546 respectively.

Future minimum payments under financing lease and equipment financing arrangements as of December 31, 2019 are as follows:

Annual minimum payments: |  | Amount
2020 |  | $ | 8,455 |
Less amount representing interest |  |  | (164 | )
Present value of net minimum payments |  | $ | 8,291 |
Current portion of finance leases |  |  | (8,291 | )
Long-term portion of finance leases |  | $ | — |

Purchase Commitments

At December 31, 2019, the Company’s non-cancelable purchase commitments for inventory to be used in the ordinary course of business during 2020 were approximately $3,554,000.

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.

NOTE 4 — Stock-Based Compensation Plan

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.

| 48 |

Table of Contents

SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS

Stock-Based Compensation Information

The stock-based compensation expense included in the Company’s statements of income for the years ended December 31, 2019 and 2018, consisted of the following:

|  | Years Ended December 31,
Income Statement Classification |  | 2019 |  | 2018
Cost of revenues |  | $ | 94,803 |  |  | $ | 81,141 |
Research and development |  |  | 151,121 |  |  |  | 128,552 |
Sales and marketing |  |  | 121,633 |  |  |  | 126,312 |
General and administrative |  |  | 152,334 |  |  |  | 151,801 |
|  | $ | 519,891 |  |  | $ | 487,806 |

As of December 31, 2019, the remaining unamortized stock-based compensation expense was $967,893 and is expected to be amortized over a weighted average period of 2.67 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 2019 and 2018 was $1.08 and $1.62, respectively, using the following weighted-average assumptions:

|  | Years Ended December 31,
|  | 2019 |  | 2018
Risk-free interest rate (%) |  |  | 1.614 | % |  |  | 2.96 | %
Dividend yield |  |  | — |  |  |  | — |
Volatility factor |  |  | 42.58 | % |  |  | 56.02 | %
Expected option life (years) |  |  | 7.2 |  |  |  | 6.4 |

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.

| 49 |

Table of Contents

SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS

The table below presents the information related to stock option activity for the years ended December 31, 2019 and 2018:

|  | Years Ended December 31,
|  | 2019 |  | 2018
Total intrinsic value of stock options exercised |  | $ | 16,568 |  |  | $ | 197,130 |
Cash received from stock option exercises |  | $ | 23,314 |  |  | $ | 279,176 |

Changes in stock options as of and for the years ended December 31, 2019 and 2018 are as follows:

|  |  |  |  |  |  | Outstanding Options
|  |  | Shares Available For Grant |  |  |  | Number of Shares |  |  |  | Weighted Average Price Per Share |  |  |  | Remaining Contractual Term (in years) |  |  |  | Intrinsic Value |
Balance at December 31, 2017 |  |  | 85,337 |  |  |  | 2,247,026 |  |  | $ | 2.50 |  |  |  |  |  |  |  |  |
Increase in shares authorized |  |  | 280,445 |  |  |  | — |  |  |  |  |  |  |  |  |  |  |  |  |
Granted |  |  | (281,300 | ) |  |  | 281,300 |  |  | $ | 2.86 |  |  |  |  |  |  |  |  |
Exercised |  |  | — |  |  |  | (121,981 | ) |  | $ | 2.29 |  |  |  |  |  |  |  |  |
Canceled |  |  | 32,221 |  |  |  | (32,221 | ) |  | $ | 3.61 |  |  |  |  |  |  |  |  |
Balance at December 31, 2018 |  |  | 116,703 |  |  |  | 2,374,124 |  |  | $ | 2.54 |  |  |  |  |  |  |  |  |
Increase in shares authorized |  |  | 235,324 |  |  |  | — |  |  |  |  |  |  |  |  |  |  |  |  |
Granted |  |  | (551,256 | ) |  |  | 551,256 |  |  | $ | 2.20 |  |  |  |  |  |  |  |  |
Exercised |  |  | — |  |  |  | (24,494 | ) |  | $ | 0.95 |  |  |  |  |  |  |  |  |
Canceled |  |  | 508,100 |  |  |  | (508,100 | ) |  | $ | 2.92 |  |  |  |  |  |  |  |  |
Balance at December 31, 2019 |  |  | 308,871 |  |  |  | 2,392,786 |  |  | $ | 2.40 |  |  |  | 5.58 |  |  | $ | 193,170 |
Exercisable |  |  |  |  |  |  | 1,714,299 |  |  | $ | 2.34 |  |  |  | 4.17 |  |  | $ | 193,170 |
Unvested |  |  |  |  |  |  | 683,589 |  |  | $ | 2.50 |  |  |  | 9.08 |  |  |  | — |

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, 2019 and 2018, a total of 235,324 and 280,445 additional shares, respectively, became available for grant from the 2004 Plan.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2019:

|  |  |  |  | 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 |  |  |  | 340,380 |  |  |  | 3.58 |  |  | $ | 1.05 |  |  |  | 340,380 |  |  | $ | 1.05 |
| $1.50 - $1.82 |  |  |  | 141,855 |  |  |  | 2.08 |  |  | $ | 1.73 |  |  |  | 141,855 |  |  | $ | 1.73 |
| $1.89 - $2.27 |  |  |  | 513,647 |  |  |  | 6.08 |  |  | $ | 2.07 |  |  |  | 369,493 |  |  | $ | 2.07 |
| $2.32 - $2.49 |  |  |  | 474,860 |  |  |  | 6.00 |  |  | $ | 2.34 |  |  |  | 135,317 |  |  | $ | 2.34 |
| $2.50 - $2.75 |  |  |  | 318,182 |  |  |  | 6.17 |  |  | $ | 2.69 |  |  |  | 300,210 |  |  | $ | 2.69 |
| $2.82 - $2.93 |  |  |  | 219,374 |  |  |  | 8.17 |  |  | $ | 2.93 |  |  |  | 107,459 |  |  | $ | 2.93 |
| $3.04 - $3.88 |  |  |  | 200,880 |  |  |  | 3.67 |  |  | $ | 3.37 |  |  |  | 194,901 |  |  | $ | 3.37 |
| $4.22 - $4.49 |  |  |  | 183,608 |  |  |  | 7.42 |  |  | $ | 4.24 |  |  |  | 124,684 |  |  | $ | 4.24 |
| $0.95 - $4.49 |  |  |  | 2,392,786 |  |  |  | 5.58 |  |  | $ | 2.40 |  |  |  | 1,714,299 |  |  | $ | 2.40 |

| 50 |

Table of Contents

SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS

Restricted stock - The restricted stocks are issued to employees and consultants and are held in escrow by the Company 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. Restricted stocks are granted at zero cost basis. Compensation cost of the restricted stocks is recognized on a straight-line basis over the 4-year vesting period.

The following table summarizes information about restricted stocks as of and for the years ended December 31, 2019:

|  | Number of restricted stock |  | Weighted average grant- date fair value
Granted |  |  | 127,871 |  |  | $ | 1.94 |
Vested |  |  | — |  |  |  | — |
Forfeited / Cancelled |  |  | (17,800 | ) |  | $ | 1.90 |
Restricted stock outstanding at December 31, 2019 |  |  | 110,071 |  |  | $ | 1.94 |

NOTE 5 — Shares Reserved

Common stock reserved for future issuance was as follows:

|  | December 31,
|  | 2019 |  | 2018
Stock option grants outstanding (see Note 4) |  |  | 2,392,786 |  |  |  | 2,374,124 |
Reserved for future stock option grants (see Note 4) |  |  | 308,871 |  |  |  | 116,703 |
|  |  | 2,701,657 |  |  |  | 2,490,827 |

NOTE 6 — 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.

| 51 |

Table of Contents

SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 7 — Income Taxes

The Company recorded a net income tax expense $219,000 for 2019, compared to an income tax benefit of $143,000 for 2018.

The components of income taxes for the periods ended December 31, 2019 and 2018 are as follows:

|  | Years Ended December 31,
|  | 2019 |  | 2018
Current: |  |  |  |
Federal |  | $ | (54,876 | ) |  | $ | — |
State |  |  | — |  |  |  | — |
Total Current |  |  | (54,876 | ) |  |  | — |
Deferred: |  |  |  |  |  |  |  |
Federal |  |  | 199,634 |  |  |  | (50,858 | )
State |  |  | 74,370 |  |  |  | (92,601 | )
Total Deferred |  |  | 274,004 |  |  |  | (143,459 | )
Income tax (benefit) expense |  | $ | 219,128 |  |  | $ | (143,459 | )

Reconciliation of the statutory federal income tax rate to the Company's effective tax rate:

|  | Years Ended December 31,
|  | 2019 |  | 2018
Federal tax at statutory rate |  |  | 21.00 | % |  |  | 21.00 | %
State income tax rate |  |  | 6.98 | % |  |  | 6.98 | %
Remeasurement of deferred taxes |  |  | — |  |  |  | — |
Expenses and credits not benefited |  |  | 27.51 | % |  |  | (7.90 | %)
Provision for taxes |  |  | 55.49 | % |  |  | 20.08 | %

As of December 31, 2019, the Company did not recognize deferred tax assets relating to an excess tax benefit for stock-based compensation deduction of $2,539,000. Unrecognized deferred tax benefits will be accounted for as a credit to additional paid-in capital when realized through a reduction in income taxes payable.

Deferred income tax reflects the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. At December 31, 2019, the Company released valuation allowance against substantially all deferred tax assets. Significant components of net deferred tax assets are valued approximately as follows:

| 52 |

Table of Contents

SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS

|  | December 31,
Deferred tax assets: |  | 2019 |  | 2018
Net operating loss carryforwards |  | $ | 4,546,000 |  |  | $ | 4,849,000 |
Credits |  |  | 1,014,000 |  |  |  | 942,000 |
Capitalized research and development costs |  |  | — |  |  |  | — |
Other acquired intangibles |  |  | — |  |  |  | 6,000 |
Accruals not currently deductible |  |  | 685,000 |  |  |  | 648,000 |
Depreciation |  |  | 58,000 |  |  |  | 75,000 |
Total deferred tax assets |  |  | 6,303,000 |  |  |  | 6,520,000 |
Valuation allowance for deferred tax assets |  |  | (626,000 | ) |  |  | (569,000 | )
Net deferred tax assets |  |  | 5,677,000 |  |  |  | 5,951,000 |
Deferred tax liability: |  |  |  |  |  |  |  |
Acquired intangibles |  |  | (170,000 | ) |  |  | (170,000 | )
Net deferred tax assets |  | $ | 5,507,000 |  |  | $ | 5,781,000 |

As of December 31, 2019, the Company had net operating loss carryforwards for federal income tax purposes of approximately $20,623,000 which will expire at various dates beginning in 2023 and through 2038. Full valuation allowance is maintained for federal research and development tax credits of approximately $626,000. As of December 31, 2019, the Company had net operating loss carryforwards for California state income tax purposes of approximately $10,713,000, which will expire at various dates in 2029 and through 2038, and state research and development tax credits of approximately $388,000, which can be carried forward indefinitely.

The Company has determined that utilization of existing net operating losses against future taxable income is not limited by Section 382 of the Internal Revenue Code. Future ownership changes, however, may limit the Company’s ability to fully utilize its existing net operating loss carryforwards against any future taxable income.

A reconciliation of the beginning and ending amount of unrecognized tax benefits (“UTBs”), excluding interest and penalties, is as follows:

|  | Amount
Beginning balance at January 1, 2019 |  | $ | 942,000 |
Decreases in UTBs taken in prior years |  |  | — |
Increases in UTBs taken in current years |  |  | 77,000 |
Ending balance at December 31, 2019 |  | $ | 1,019,000 |

| 53 |

Table of Contents

SOCKET MOBILE, INC.
NOTES TO FINANCIAL STATEMENTS

It is the Company's policy to include interest and penalties related to tax positions as a component of income tax expense. No interest was accrued for the period ended December 31, 2018. The Company estimates that the unrecognized tax benefit will not change significantly within the next twelve months.

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company is not currently under audit in any of its jurisdictions where income tax returns are filed.

NOTE 8— Subsequent Events

On January 8, 2020, the Company entered into the Seventh Amended and Restated Business Financing Agreement with the Bank which extends the maturity date of the Company’s revolving line of credit to January 31, 2022.

As of March 23, 2020, 287,000 restricted stocks at an average price of $1.52 per share have been granted from the 2004 Equity Incentive Plan subsequent to December 31, 2019.

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.

| 54 |

Table of Contents

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, 2019. 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, 2019, 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.

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.

| 55 |

Table of Contents

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 May 27, 2020.

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 May 27, 2020.

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 May 27, 2020.

The following table provides information as of December 31, 2019 about our common stock that may be issued under the Company’s existing equity compensation plans. For additional information about the equity compensation plans see Note 5 to the Company’s Financial Statements.

|  | 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) |  |  | 2,392,786 |  |  |  | $2.40 |  |  |  | 308,871 |

| (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 240,707 shares became available for grant under the 2004 Equity Incentive Plan on January 1, 2020, 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 May 27, 2020.

| 56 |

Table of Contents

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 May 27, 2020.

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 |  | 30 |
Balance Sheets |  | 31 |
Statements of Income |  | 32 |
Statements of Stockholders' Equity |  | 33 |
Statements of Cash Flows |  | 34 |
Notes to Financial Statements |  | 35 |

| 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 57. 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 57. The Exhibits listed on the accompanying Index to Exhibits are filed or incorporated by reference as part of this report.

| 57 |

Table of Contents

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, hereunto duly authorized.

|  | SOCKET MOBILE, INC.
|  | Registrant
Date: March 26, 2020 |  |  | /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 |  | President and Chief Executive Officer (Principal Executive Officer) and Director |  | March 26, 2020
/s/ Charlie Bass Charlie Bass |  | Chairman of the Board |  | March 26, 2020
/s/ Lynn Zhao Lynn Zhao |  | Vice President of Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) and Director |  | March 26, 2020
/s/ Bill Parnell Bill Parnell |  | Director |  | March 26, 2020
/s/ Brenton E. MacDonald. Brenton E. MacDonald |  | Director |  | March 26, 2020
/s/ David W. Dunlap David W. Dunlap |  | Director |  | March 26, 2020
/s/ Ivan Lazarev Ivan Lazarev |  | Director |  | March 26, 2020

| 58 |

Table of Contents

Index to Exhibits

Exhibit Number |  | Description

| 3.1 (1) | Amended and Restated Certificate of Incorporation.

| 3.2 (2) | Bylaws, as amended February 17, 2008.

| 10.1 (3) | Form of Indemnification Agreement entered into between the Company and its directors and officers.

| 10.2 (4)* | 2004 Equity Incentive Plan and forms of agreement thereunder.

| 10.3 (5)* | Form of Management Incentive Variable Compensation Plan between the Company and certain eligible participants.

| 10.4 (6) | Standard Industrial /Commercial Multi-Tenant Lease by and between Del Norte Farms, Inc. and the Company dated October 24, 2006 (assigned to Newark Eureka Industrial Capital, LLC September 17, 2007).

| 10.5 (7) | Second Amendment to Standard Industrial/Commercial Multi-Lessee Lease – Net dated August 30, 2010.

| 10.6 (8) | Third Amendment to Standard Industrial /Commercial Multi-Tenant Lease – Net dated December 28, 2012.

| 10.7 (9) | Warrants for the Purchase of Shares of Common Stock Issued November 19, 2010 to the Investor and the Placement Agent in connection with a private placement.

| 10.8 (10) | Loan and Security Agreement dated February 27, 2014 by and between the Company and Bridge Bank, National Association.

| 10.9 (11) | Form of Employment Agreement dated May 1, 2017 between the Company and the officers of the Company.

| 10.10 (12) | Business Financing Modification Agreement dated February 26, 2016 by and between the Company and Western Alliance Bank, an Arizona corporation.

| 59 |

Table of Contents

| 10.11 (13) | Business Financing Modification Agreement dated March 20, 2017 by and between the Company and Western Alliance Bank, an Arizona corporation.

| 10.12 (14) | Business Financing Modification Agreement dated January 31, 2018 by and between the Company and Western Alliance Bank, an Arizona corporation.

| 10.13 (15) | Tender Offer Statement to purchase up to 1,250,000 shares of common stock at a price not greater than $4.25 nor less than $3.75 per share.

| 10.14 (16) | Business Financing Modification Agreement dated June 7, 2018 by and between the Company and Western Alliance Bank, an Arizona corporation.

| 10.15 (17) | Business Financing Modification Agreement dated January 14, 2020 by and between the Company and Western Alliance Bank, an Arizona corporation.

| 11.1 | Computation of Earnings per Share (see Statements of Operations in Item 8).

| 14.1 (18) | 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.

_________

* Executive compensation plan or arrangement.

| (1) | Incorporated by reference to exhibits filed with the Company’s Form 10-K filed on March 16, 2009.

| (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 March 12, 2012.

| (4) | 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.

| 60 |

Table of Contents

| (5) | Incorporated by reference to Appendix B filed with the Company’s Form DEF 14A filed on March 16, 2011.

| (6) | Incorporated by reference to exhibits filed with the Company’s Form 10-Q filed on November 13, 2006.

| (7) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on August 30, 2010.

| (8) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on January 4, 2013.

| (9) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on November 19, 2010.

| (10) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on March 7, 2014.

| (11) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on May 4, 2017.

| (12) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on March 3, 2016.

| (13) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on March 21, 2017.

| (14) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on February 2, 2018.

| (15) | Incorporated by reference to the Company’s Schedule TO filed on February 2, 2018.

| (16) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on June 8, 2018.

| (17) | Incorporated by reference to exhibits filed with the Company’s Form 8-K filed on January 14, 2020.

| (18) | Incorporated by reference to exhibits filed with the Company’s Form 10-K filed on March 10, 2006.

| 61 |

Table of Contents