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Note 1 - Organization and Summary of Significant Accounting Policies | 12 Months Ended
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Dec. 31, 2019
Notes to Financial Statements |
Note 1 - Organization and Summary of Significant Accounting Policies | NOTE 1 — Organization and Summary of Significant Accounting Policies Organization and Business Socket Mobile, Inc. (the “Company”) is a leading manufacturer of data capture products for mobile applications used in Retail, Commercial Services, Industrial & Manufacturing, Transportation & Logistics, and Health Care. The Company produces a family of data capture products that connect over Bluetooth and work with applications running on smartphones, tablets and mobile computers using operating systems from Apple® (iOS), Google™ (Android™) and Microsoft® (Windows®). The Company focuses on serving the needs of software application developers as the scanner sales are primarily driven by the deployment of barcode and RFID/NFC enabled mobile applications. The Company designs its own products and subcontracts the manufacturing of product components to independent third-party contract manufacturers who are in the U.S., Mexico, Singapore, China, Malaysia and Taiwan and who have the equipment, know-how and capacity to manufacture products to the Company’s specifications. Final products are assembled, tested, packaged, and distributed at and from its Newark, California facility. The Company offers its products worldwide through two-tier distribution enabling customers to purchase from a large number of on-line resellers around the world including some application developers. The geographic regions served by the Company include the Americas, Europe, Asia Pacific and Africa. The Company was founded in March 1992 as Socket Communications, Inc. and reincorporated in Delaware in 1995 prior to the Company’s initial public offering in June 1995. The Company began doing business as Socket Mobile, Inc. in January 2007 to better reflect its market focus on the mobile business market, and changed its legal name to Socket Mobile, Inc. in April 2008. The Company’s common stock trades on the NASDAQ Marketplace under the symbol “SCKT.” The Company’s principal executive offices are located at 39700 Eureka Drive, Newark, CA 94560. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates, and such differences may be material to the financial statements. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with a maturity date of 90 days or less at date of purchase to be cash equivalents. For the years ended December 31, 2019 and 2018, all of the Company’s cash and cash equivalents consisted of amounts held in demand deposit accounts in banks. The aggregate cash balance on deposit in these accounts are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company’s cash balance on deposit in these accounts may, at times, exceed the federally insured limits. The Company has never experienced any losses in such accounts. Fair Value of Financial Instruments The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable and foreign exchange contracts approximate fair value due to the relatively short period of time to maturity. Derivative Financial Instruments The Company's primary objective for holding derivative financial instruments is to manage foreign currency risks. The Company's derivative financial instruments are recorded at fair value and are included in other current assets, other assets, other accrued liabilities or long-term debt depending on the contractual maturity and whether the Company has a gain or loss. The Company's accounting policies for these instruments are based on whether they meet the Company's criteria for designation as hedging transactions, either as cash flow or fair value hedges. A hedge of the exposure to variability in the cash flows of an asset or a liability, or of a forecasted transaction, is referred to as a cash flow hedge. A hedge of the exposure to changes in fair value of an asset or a liability, or of an unrecognized firm commitment, is referred to as a fair value hedge. The criteria for designating a derivative as a hedge include the instrument's effectiveness in risk reduction and, in most cases, a one-to-one matching of the derivative instrument to its underlying transaction. Gains and losses on derivatives that do not qualify for hedge accounting are recognized immediately in earnings. The Company regularly enters into forward foreign currency contracts to reduce exposures related to rate changes in certain foreign currencies. The Company records its forward foreign currency contracts at fair value. At December 31, 2019 and 2018, the Company had no open forward foreign currency contracts. Foreign Currency The functional currency for the Company is the U.S. dollar. However, the Company requires European distributors to purchase products in Euros and British pounds and pays the expenses of European employees in Euros and British pounds. The Company hedges a significant portion of the European receivables balance denominated in Euros to reduce the foreign currency risk associates with these assets. In 2019, the total net adjustment for the effects of changes in foreign currency on cash balances, collections, payables, and derivatives used to hedge foreign currency risks, was a net loss of $2,300 compared to a net loss of $20,000 in 2018. Accounts Receivable Allowances The Company estimates the amount of uncollectible accounts receivable at the end of each reporting period based on the aging of the receivable balance, current and historical customer trends, and communications with its customers. Amounts are written off only after considerable collection efforts have been made and the amounts are determined to be uncollectible. The following describes activity in the allowance for doubtful accounts for the years ended December 31, 2019 and 2018:
Year |  | Balance at 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 |
Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method, over the estimated useful lives of the assets ranging from one to five years. Assets under finance leases are amortized in a manner consistent with the Company’s normal depreciation policy for owned assets, or the remaining lease term as applicable. Depreciation expense in the years ended December 31, 2019 and 2018, was $419,856 and $397,392, respectively. Goodwill Goodwill is tested for impairment annually as of September 30th or more frequently when events or circumstances indicate that the carrying value of the Company's single reporting unit more likely than not exceeds its fair value. The Company performed its annual goodwill impairment analysis as of September 30, 2019. The Company used the two-step test as required to assess goodwill for impairment. The first step of the goodwill impairment test consisted of comparing the carrying value of the reporting unit to its fair value. Management estimated the fair value of the Company's reporting unit using various methods and compared the fair value to the carrying amount (net book value) to ascertain if potential goodwill impairment existed. The Company utilized methods that focused on its ability to produce income ("Income Approach") and the Company’s market capitalization ("Market Capitalization Approach"). Key assumptions utilized in the determination of fair value in step one of the test included the following: the Company's market capitalization; revenue and expense forecasts used in the evaluation were based on trends of historical performance and management's estimate of future performance; cash flows utilized in the discounted cash flow analysis were estimated using a weighted average cost of capital determined to be appropriate for the Company. No impairment of goodwill was recorded in the years ended December 31, 2019 and 2018. Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk include cash, cash equivalents and accounts receivable. The Company invests its cash in demand deposit accounts in banks. To date, the Company has not experienced losses on the investments. The Company’s trade accounts receivables are primarily with distributors. The Company performs ongoing credit evaluations of its customers’ financial condition, but the Company generally requires no collateral. Reserves are maintained for potential credit losses, and such losses have been within management’s expectations. Customers who accounted for at least 10% of the Company’s accounts receivable balances at December 31, 2019 and December 31, 2018 were as follows:
|  | December 31,
|  | 2019 |  | 2018
Ingram Micro Inc. |  |  | 45 | % |  |  | 41 | %
Bluestar, Inc. |  |  | 32 | % |  |  | 19 | %
Concentration of Suppliers Several of the Company’s component parts are produced by a sole or limited number of suppliers. Shortages could occur in these essential materials due to increased demand, or to an interruption of supply. Suppliers may choose to restrict credit terms or require advance payments causing delays in the procurement of essential materials. If the Company were unable to procure certain of such materials, it could have a material adverse effect upon its results. At December 31, 2019, 34% of the Company’s accounts payable balances were concentrated with top three suppliers. For the years ended December 31, 2019 and 2018, top three suppliers accounted for 55% of the inventory purchases in each of these years. Revenue Recognition and Deferred Revenue On January 1, 2017, the Company adopted ASC 606 “Revenue from Contracts with Customers” and implemented a new revenue recognition policy. Instead of deferring 100% of revenue and cost of revenue until products are sold by distributors, the new policy recognizes revenue on sales to distributors when shipping of product is completed and title transfers to the distributor, less a reserve for estimated product returns (sales and cost of sales). The reserves are based on estimates of future returns calculated from actual return history, primarily from stock rotations, plus knowledge of pending returns outside of the norm. In 2019, distribution revenue was $19.0 million, compared to $16.2 million in 2018 At December 31, 2019, the deferred revenue and deferred cost on shipments to distributors were approximately $611,000 and $234,000 respectively, compared to approximately $397,000 and $165,000, respectively, at December 31, 2018. The Company also earns revenue from its SocketCare services program which provides for extended warranty and accidental breakage coverage for selected products. For the year ended December 31, 2019 and 2018, the SocketCare revenue was $0.3 million and 0.2 million, respectively. Service purchased at the time of product purchase provides for coverage in three-year and five-year terms. The Company additionally offers comprehensive coverage and program term extensions. Revenues from the SocketCare services program are recognized ratably over the life of the extended warranty contract. The amount of unrecognized SocketCare service revenue is classified as deferred service revenue and presented on the Company’s balance sheet in its short- and long-term components. At December 31, 2019, the balance of unrecognized SocketCare service revenue was $73,611. Leases In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires a lessee to recognize a liability representing future lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For operating leases, a lessee is required to recognize at inception a right-of-use asset and a lease liability equal to the net present value of the lease payments, with lease expense recognized over the lease term on a straight-line basis. For leases with a term of twelve months or less, ASU 2016-02 allows a reporting entity to make an accounting policy election to not recognize a right-of-use asset and a lease liability, and to recognize lease expense on a straight-line basis. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company adopted ASU 2016-02 effective January 1, 2019, which had no impact on the Company’s Statements of Operations. The most significant impact was the recognition of right-of-use assets and liabilities for the operating lease. Adoption of the standard required the Company to restate the reported results in its earliest comparable period, January 1, 2018, including the recognition of additional operating lease right-of-use assets and liabilities. As a result, there was an increase in assets and corresponding liabilities of approximately $1.57 million on January 1, 2018. At December 31, 2019, the balances of right-of-use assets and liabilities for the operating lease are approximately $0.93 million and $1.13 million, respectively, compared to approximately $1.27 million and $1.51 million, respectively, at December 31, 2018. Warranty The Company’s products typically carry a one-year warranty. The Company reserves for estimated product warranty costs at the time revenue is recognized based upon the Company’s historical warranty experience, and additionally for any known product warranty issues. If actual costs differ from initial estimates, the Company records the difference in the period they are identified. Actual claims are charged against the warranty reserve. The following describes activity in the reserves for product warranty costs for the years ended December 31, 2019 and 2018:
Year |  | Balance at 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. 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 | )
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. 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.

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