10-K 1 k10-2020.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, 2020

( ) 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	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.001 Par Value per Share	SCKT	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, 2020, the aggregate market value of the registrant’s Common Stock ($0.001 par value) held by non-affiliates of the registrant was $7,360,553 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 19, 2021: 6,941,384 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 13, 2021. 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	18
	Item 2.	Properties	18
	Item 3.	Legal Proceedings	18
	Item 4.	Mine Safety Disclosures	18

PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
	Item 6.	Selected Financial Data	21
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	29
	Item 8.	Financial Statements and Supplementary Data	33
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	56
	Item 9A.	Controls and Procedures	56
	Item 9B.	Other Information	57

PART III
	Item 10.	Directors, Executive Officers and Corporate Governance	58
	Item 11.	Executive Compensation	58
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	58
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	58
	Item 14.	Principal Accounting Fees and Services	59

PART IV
	Item 15.	Exhibits, Financial Statement Schedules	59

SIGNATURES			60

Index to Exhibits			61

	Years Ended December 31,
(Amounts in thousands except per share)	2016		2017			2018			2019			2020
Income Statement Data:
Revenues	$	20,788	$	21,286		$	16,454		$	19,253		$	15,700
Gross profit	$	10,434	$	11,390		$	8,456		$	10,101		$	8,335
Operating expenses	$	7,871	$	8,972		$	9,042		$	9,494		$	12,686	*
Net income (loss) before income taxes	$	2,432	$	2,338		$	(715	)	$	506		$	(3,330	)
Income tax benefit (expense)	$	9,715	$	(3,769	)	$	144		$	(219	)	$	51
Net income (loss)	$	12,147	$	(1,431	)	$	(571	)	$	287		$	(3,279	)
Net income (loss) per share: Basic	$	2.10	$	(0.23	)	$	(0.09	)	$	0.05		$	(0.51	)
Diluted	$	1.80	$	(0.23	)	$	(0.09	)	$	0.05		$	(0.51	)
Weighted average shares outstanding:
Basic		5,793		6,293			6,095			5,984			6,036
Diluted		6,820		6,293			6,095			6,208			6,036

		At December 31,
		2016		2017			2018			2019			2020
Balance Sheet Data:
Cash and cash equivalents	$	1,319	$	3,380		$	1,085		$	959		$	2,122
Total assets	$	21,587	$	19,854		$	18,597		$	19,458		$	15,059

Bank line of credit	$	—	$	—		$	1,317		$	1,413		$	—
Term loan	$	—	$	—		$	833		$	333		$	—
Related party convertible notes payable	$	753	$	—		$	—		$	—		$	1,272
Convertible notes payable	$	—	$	—		$	—		$	—		$	170
Capital leases and deferred rent - long term portion	$	327	$	271		$	—		$	—		$	—
Operating lease	$	—	$	—		$	1,511		$	1,134		$	741

Total stockholders’ equity	$	16,170	$	17,230		$	12,405		$	13,234		$	10,623

	Quarter Ended (unaudited)
(amounts in thousands, except per share amounts)	Mar 31, 2019			Jun 30, 2019			Sep 30, 2019			Dec 31, 2019			Mar 31, 2020			Jun 30, 2020			Sep 30, 2020			Dec 31, 2020
Summary Quarterly Data:
Revenue	$	4,629		$	5,060		$	4,980		$	4,584		$	4,221		$	2,715		$	4,109		$	4,655
Cost of revenue		2,229			2,430			2,344			2,149			1,997			1,354			1,835			2,179
Gross profit		2,400			2,630			2,636			2,435			2,224			1,361			2,274			2,476
Operating expenses:
Research and development		894			998			1,015			987			881			859			681			719
Sales and marketing		756			771			785			703			768			722			658			700
General and administrative		703			643			707			533			666			590			486			529
Goodwill impairment charges		—			—			—			—			—			—			4,427			—
Total operating expenses		2,353			2,412			2,507			2,223			2,315			2,171			6,252			1,948
Extinguishment of debt income and other income		—			—			—			—			—			50			—			1,049
Interest income (expense) and other, net		(28	)		(29	)		(25	)		(17	)		1			(8	)		(24	)		(46	)
Income tax (expense) benefit		(7	)		(69	)		(10	)		(134	)		—			—			(1	)		52
Net income (loss)	$	12		$	120		$	94		$	61		$	(90	)	$	(768	)	$	(4,003	)	$	1,583
Basic net income (loss) per share	$	0.00		$	0.02		$	0.02		$	0.01		$	(0.01	)	$	(0.13	)	$	(0.62	)	$	0.24
Fully diluted net income (loss) per share	$	0.00		$	0.02		$	0.01		$	0.01		$	(0.01	)	$	(0.13	)	$	(0.62	)	$	0.22

	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	$	6,256,000	$	6,256,000	$	—	$	—	$	—
Operating leases		779,000		516,000		263,000		—		—
Total contractual obligations	$	7,035,000	$	6,772,000	$	263,000	$	—	$	—

SOCKET MOBILE, INC.
BALANCE SHEETS
	December 31,
	2020			2019
ASSETS
Current assets:
Cash and cash equivalents	$	2,121,763		$	958,860
Accounts receivable, net		2,112,514			2,837,006
Inventories, net		3,195,842			3,178,908
Prepaid expenses and other current assets		335,386			312,127
Deferred cost on shipments to distributors		170,016			233,823
Total current assets		7,935,521			7,520,724

Property and equipment:
Machinery and office equipment		2,286,268			2,195,405
Computer equipment		1,412,030			1,336,445
		3,698,298			3,531,850
Accumulated depreciation		(2,850,635	)		(2,667,340	)
Property and equipment, net		847,663			864,510

Goodwill		—			4,427,000
Other long-term assets		159,039			202,611
Deferred tax assets		5,506,934			5,506,934
Operating lease right-of-use asset		609,331			936,708
Total assets	$	15,058,488		$	19,458,487


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable and accrued expenses	$	1,372,701		$	2,084,848
Accrued payroll and related expenses		375,511			566,350
Deferred revenue on shipments to distributors		450,591			611,029
Short term portion of deferred service revenue		25,522			32,900
Bank lines of credit		—			1,412,449
Notes payable – current portion		—			333,333
Subordinated convertible notes payable, net of discount		169,619			—
Subordinated convertible notes payable, net of discount-related party		1,272,138			—
Operating lease – current portion		483,254			419,288
Finance lease – current portion		—			8,291
Total current liabilities		4,149,336			5,468,488

Long term portion of operating lease		258,097			715,062
Long-term portion of deferred service revenue		28,794			40,711
Total liabilities		4,436,227			6,224,261

Commitments and contingencies		—			—
Stockholders’ equity:
Common stock, $0.001 par value: Authorized – 20,000,000 shares,
Issued and outstanding – 6,102,630 shares at December 31, 2020 and 6,017,674 shares at December 31, 2019		6,103			6,018
Additional paid-in capital		61,733,522			61,066,971
Accumulated deficit		(51,117,364	)		(47,838,763	)
Total stockholders’ equity		10,622,261			13,234,226
Total liabilities and stockholders’ equity	$	15,058,488		$	19,458,487

SOCKET MOBILE, INC.
STATEMENTS OF OPERATIONS


	Years Ended December 31,
	2020			2019

Revenues	$	15,700,036		$	19,253,105

Cost of revenues		7,365,135			9,152,462

Gross profit		8,334,901			10,100,643

Operating expenses:
Research and development		3,140,104			3,893,563
Sales and marketing		2,848,549			3,015,431
General and administrative		2,269,819			2,585,279
Goodwill impairment charges		4,427,000			—
Total operating expenses		12,685,472			9,494,273

Operating income (loss)		(4,350,571	)		606,370

Interest expense, net		(97,488	)		(100,656	)
Other income		60,000			—
Extinguishment of debt		1,058,700			—

Net income (loss) before income taxes		(3,329,359	)		505,714
Income tax benefit (expense)		50,758			(219,128	)
Net income (loss)	$	(3,278,601	)	$	286,586

Net income (loss) per share:
Basic	$	(0.51	)	$	0.05
Fully diluted	$	(0.51	)	$	0.05

Weighted average shares outstanding:
Basic		6,036,310			5,984,381
Fully diluted		6,036,310			6,207,731

SOCKET MOBILE, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY


							Additional						Total
	Common Stock						Paid-In			Accumulated			Stockholders’
	Shares			Amount			Capital			Deficit			Equity
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			285,586
Balance at December 31, 2019		6,017,674		$	6,018		$	61,066,971		$	(47,838,763	)	$	13,234,226
Repurchase of common stock		(5,538	)		(5	)		(8,475	)		—			(8,480	)
Cancellation of restricted stock		(9,745	)		(10	)		10			—			—
Exercise of stock options		100,239			100			167,965			—			168,065
Stock-based compensation		—			—			507,051			—			507,051
Net loss		—			—			—			(3,278,601	)		(3,278,601	)
Balance at December 31, 2020		6,102,630		$	6,103		$	61,733,522		$	(51,117,364	)	$	10,622,261

SOCKET MOBILE, INC.
STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2020			2019
Operating activities
Net income (loss)	$	(3,278,601	)	$	286,586
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Stock-based compensation		507,051			519,891
Depreciation and amortization		596,900			462,930
Deferred tax expenses (benefits)		—			274,004
Forgiveness of PPP loan		(1,058,700	)		—
Amortization of debt discount		11,030			—
Goodwill impairment charges		4,427,000			—

Changes in operating assets and liabilities:
Accounts receivable		724,492			(469,829	)
Inventories		(16,934	)		(906,580	)
Prepaid expenses and other current assets		(23,259	)		(4,295	)
Other long-term assets		—			(1,320	)
Accounts payable and accrued expenses		(712,147	)		551,392
Accrued payroll and related expenses		(190,839	)		54,043
Net deferred revenue on shipments to distributors		(96,631	)		145,256
Deferred service revenue		(19,295	)		8,676
Net change in operating lease		(65,622	)		(47,220	)
Net cash provided by operating activities		804,445			873,534
Investing activities
Purchase of equipment		(536,481	)		(595,154	)
Capitalized software costs		—			(7,800	)
Net cash used in investing activities		(536,481	)		(602,954	)
Financing activities
Payments on operating leases		(8,291	)		(15,696	)
Common stock repurchase and related expenses		(8,480	)		—
Proceeds from borrowings under bank line of credit agreement		5,630,000			17,423,000
Repayments of borrowings under bank line of credit agreement		(7,042,449	)		(17,327,329	)
Repayments of bank term loan		(333,333	)		(500,000	)
Proceeds from notes payable		1,208,700			—
Repayments of notes payable		(150,000	)		—
Proceeds from subordinated convertible notes payable, net of discount		168,321			—
Proceeds from subordinated convertible notes payable, net of discount-related party		1,262,406			—
Proceeds from stock options exercised		168,065			23,314
Net cash provided by (used in) financing activities		894,939			(396,711	)
Net increase (decrease) in cash and cash equivalents		1,162,903			(126,131	)
Cash and cash equivalents at beginning of year		958,860			1,084,991
Cash and cash equivalents at end of year	$	2,121,763		$	958,860
Supplemental cash flow information
Cash paid for interest	$	94,417		$	100,048
Cash paid for income taxes	$	4,918		$	800

Year		Balance at Beginning of Year		Charged to Costs and Expenses		Amounts Written Off			Balance at End of Year

	2020	$	40,651	$	—	$	—		$	40,651
	2019	$	89,058	$	—	$	(48,407	)	$	40,651

Year		Balance at Beginning of Year		Additional Warranty Reserves		Amounts Charged to Reserves			Balance at End of Year

	2020	$	78,871	$	73,734	$	(73,734	)	$	78,871
	2019	$	78,871	$	89,702	$	(89,702	)	$	78,871

	Years Ended December 31,
Revenues: (in thousands)	2020		2019
United States	$	12,137	$	14,558
Europe		2,209		2,431
Asia and rest of world		1,354		2,264
	$	15,700	$	19,253

Annual minimum payments:	Amount
2021		515,822
2022		262,789
Total minimum payments		778,611
Less: Present value factor		(37,260	)
Total operating lease liabilities		741,351
Less: Current portion of operating lease		(483,254	)
Long-term portion of operating lease	$	258,097

	Years Ended December 31,
Income Statement Classification	2020		2019
Cost of revenues	$	86,649	$	94,803
Research and development		137,537		151,121
Sales and marketing		121,802		121,633
General and administrative		161,063		152,334
	$	507,051	$	519,891

	Outstanding Options
	Number of Shares			Weighted Average Price Per Share	Remaining Contractual Term (in years)		Intrinsic Value
Balance at December 31, 2018	2,374,124		$	2.54
Granted	551,256		$	2.20
Exercised	(24,494	)	$	0.95
Canceled	(508,100	)	$	2.92
Balance at December 31, 2019	2,392,786		$	2.40
Granted	37,000		$	1.08
Exercised	(100,239	)	$	1.68
Canceled	(334,741	)	$	2.84
Balance at December 31, 2019	1,994,806		$	2.42	5.50	$	690,769
Exercisable	1,602,695		$	2.34	4.75	$	603,382
Unvested	392,111		$	2.31	8.33	$	87,387

	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	352,081	3.25	$	1.06	325,873	$	1.06
$1.50 - $1.82	99,540	1.00	$	1.74	99,540	$	1.74
$1.89 - $2.27	456,891	5.17	$	2.07	368,771	$	2.11
$2.32 - $2.49	407,826	7.58	$	2.34	200,125	$	2.35
$2.50 - $2.75	241,188	5.33	$	2.71	241,188	$	2.71
$2.82 - $2.93	195,355	7.17	$	2.93	141,206	$	2.93
$3.10 - $3.88	73,400	6.00	$	3.69	71,600	$	3.70
$4.22 - $4.49	168,525	6.42	$	4.25	154,392	$	4.24
$0.95 - $4.49	1,994,806	5.50	$	2.42	1,602,695	$	2.34

	Number of Restricted Stocks	Weighted Average Price Per Share
Unvested as of December 31, 2018	—	—
Granted	127,871	$ 1.94
Vested	—	—
Forfeited	(17,800)	$ 1.90
Unvested as of December 31, 2019	110,071	$ 1.94
Granted	392,680	$ 1.50
Vested	(17,306)	$ 1.94
Forfeited	(43,245)	$ 1.65
Unvested as December 31, 2020	442,200	$ 1.58

	December 31,
Deferred tax assets:	2020			2019
Net operating loss carryforwards	$	4,330,000		$	4,546,000
Credits		948,000			1,014,000
Capitalized research and development costs		—			—
Other acquired intangibles		37,000			—
Accruals not currently deductible		597,000			685,000
Depreciation		140,000			58,000
Total deferred tax assets		6,052,000			6,303,000
Valuation allowance for deferred tax assets		(545,000	)		(626,000	)
Net deferred tax assets		5,507,000			5,677,000
Deferred tax liability:
Acquired intangibles		—			(170,000	)
Net deferred tax assets	$	5,507,000		$	5,507,000

	Amount
Beginning balance at January 1, 2020	$	1,019,000
Decreases in UTBs in prior years		(32,000	)
Increases in UTBs in current years		77,000
Ending balance at December 31, 2020	$	1,064,000

INDEX TO FINANCIAL STATEMENTS		PAGE

Report of Sadler Gibb, Independent Registered Public Accounting Firm		30
Balance Sheets		33
Statements of Income		34
Statements of Stockholders' Equity		35
Statements of Cash Flows		36
Notes to Financial Statements		37

			SOCKET MOBILE, INC.
			Registrant

Date: March 23, 2021			/s/ Kevin J. Mills
			Kevin J. Mills
			President and Chief Executive Officer

/s/ Kevin J. Mills Kevin J. Mills	President and Chief Executive Officer (Principal Executive Officer) and Director	March 23, 2021
/s/ Charlie Bass Charlie Bass	Chairman of the Board	March 23, 2021
/s/ Lynn Zhao Lynn Zhao	Vice President of Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) and Director	March 23, 2021
/s/ Bill Parnell Bill Parnell	Director	March 23, 2021
/s/ Brenton E. MacDonald. Brenton E. MacDonald	Director	March 23, 2021
/s/ David W. Dunlap David W. Dunlap	Director	March 23, 2021
/s/ Ivan Lazarev Ivan Lazarev	Director	March 23, 2021

SEC Form 10-K filed by Socket Mobile, Inc.