SOCKET MOBILE INC

NOTE 1 —Basis of Presentation

The accompanying unaudited condensed financial statements of Socket Mobile, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals considered necessary for fair presentation have been included. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future period. These financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024.

NOTE 2 — Summary of Significant Accounting Policies

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.

Cash Equivalents and Fair Value of Financial Instruments

The Company considers all highly liquid investments purchased with a maturity date of 90 days or less at date of purchase to be cash equivalents. In response to financial market volatility in March 2023, the Company entered into an Insured Cash Sweep (“ICS”) Deposit Placement Agreement with IntraFi Network LLC, facilitated by its bank, Bridge Bank—a division of Western Alliance Bank. In December 2024, the Company exited the ICS program in light of improved market conditions and to achieve cost savings. As of March 31, 2025, and December 31, 2024, all of the Company’s cash and cash equivalents consisted of amounts held in demand deposit accounts in banks. The Company has never experienced any losses in such accounts.

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

Revenue Recognition and Deferred Revenue

With the adoption of ASC 606 “Revenue from Contracts with Customers” in 2017, the Company recognizes revenue on sales to distributors when shipping of product is completed and title transfers to distributor, less a reserve for estimated product returns (sales and cost of sales). The reserves are based on estimates of future returns calculated from actual return history, primarily from stock rotations, plus knowledge of pending returns outside of the norm. On March 31, 2025, the deferred revenue and deferred cost on shipments to distributors were$365,523 and$154,624, respectively, compared to$392,543 and$142,939, respectively, on December 31, 2024.

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The Company also earns revenue from its SocketCare extended warranty program, which provides extended warranty and accidental breakage coverage for selected products. Customers can purchase a SocketCare warranty at the time of product purchase, which provides coverage for a three-year or a five-year term. Revenues from SocketCare services are recognized ratably over the life of the extended warranty contract. For the quarters ended March 31, 2025 and 2024, SocketCare revenue was approximately$4,300 and$5,100, respectively. 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. On March 31, 2024, the balance of unrecognized SocketCare service revenue was$30,421, compared to$30,725 as of December 31, 2024.

Cost of Sales and Gross Margins

Cost of sales primarily consists of the costs to manufacture our products, including the costs of materials, contract manufacturing, shipping costs, personnel and related expenses including stock-based compensation, equipment and facility expenses, warranty costs and inventory excess and obsolete provisions. The factors that affect our gross margins are the cost of materials, the mix of products and the extent to which we are able to efficiently utilize our manufacturing capacity.

Leases

On May 1, 2022, the Company entered into a building lease agreement for its corporate headquarters located in Fremont, CA. On March 31, 2025, the balances of right-of-use assets and liabilities for the operating lease were$2,477,218 and$2,690,334, respectively, compared to$2,604,137 and$2,816,661, respectively, on December 31, 2024.

Recently Issued Financial Accounting Standards

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

NOTE 3 — Intangible Assets

In 2021, the Company entered into the Technology Transfer Agreement with SpringCard SAS. The Unaudited Condensed Balance Sheets include the intangible assets of the acquired technology at the carrying amount, net of amortization of$1,400,249 as of March 31, 2025.

The intangible assets are amortized on a straight-line basis over their estimated useful lives of fifteen years, beginning on April 1, 2021. As of March 31, 2025, the estimated future amortization of these intangible assets is as follows:

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The amortization expense was$31,824 for the three months ended March 31 in both 2025 and 2024.

NOTE 4 — Inventories

Inventories consist principally of raw materials and sub-assemblies, which are stated at the lower of cost (first-in, first-out) or market. Inventories on March 31, 2025 and December 31, 2024 were as follows:

NOTE 5 — Bank Financing Arrangements

The Company initially entered into a Business Financing Agreement with Western Alliance Bank (the “Bank”), an Arizona corporation, on February 27, 2014, and this agreement has been amended and extended through the years.

Fourth Business Financing Modification Agreement and Waiver of Defaults

On April 8, 2024, the Company entered into the Fourth Business Financing Modification Agreement and Waiver of Default with the Bank. Under the terms of the agreement, the Bank agreed to waive the default arising from the Company’s failure to meet the minimum adjusted EBITDA requirement in the quarter ended December 31, 2023. Additionally, the Bank amended the Agreement to include minimum quarterly adjusted EBITDA for 2024 and decreased the advanced rate to up to 75% in the case of both domestic eligible receivables and EXIM eligible receivables.

Fifth Business Financing Modification Agreement

On October 30, 2024, the Company entered into the Fifth Business Financing Modification Agreement with the Bank. This agreement amended the minimum quarterly adjusted EBITDA covenants to negative $600,000 for Q3 2024 and negative $200,000 for Q4 2024.

Sixth Business Financing Modification Agreement

On January 28, 2025, the Company entered into the Sixth Business Financing Modification Agreement with the Bank, extending the maturity date of both domestic and EXIM lines of credit to April 30, 2025.

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Seventh Business Financing Modification Agreement

On April 21, 2025, the Company entered into the Seventh Business Financing Modification Agreement and Waiver of Default with the Bank. Under the terms of the agreement, the Bank renewed the $3.0 million domestic credit line, raised the advance rate to up to 80% of eligible domestic receivables, increased the allowance for subordinated debt to $5.5 million, and increased the credit card limit to $350,000. The maturity date of the domestic credit line is April 30, 2026.

There were no amounts borrowed on the Company’s bank credit lines as of March 31, 2025 and December 31, 2024.

NOTE 6 — Secured Subordinated Convertible Notes Payable

On August 31, 2020, the Company completed a secured subordinated convertible note financing of$1,530,000, including$1,350,000 from officers, directors, and family members. Because the Financing involved such parties related to the Company, a special committee of the Board comprising the Board’s disinterested directors approved the Financing.

Proceeds from the financing were used to increase the Company’s working capital. The notes have a three-year term, accrue interest at an annual rate of 10%, and were initially scheduled to mature on August 30, 2023. Interest is payable quarterly in cash. Beginning August 31, 2021, each noteholder had the right to demand repayment of principal and accrued interest. The principal amount of each note is convertible, at the holder’s option, into shares of the Company’s common stock at a conversion price of$1.46 per share, which was the market closing price on August 28, 2020, the financing’s closing date. The notes did not include a beneficial conversion feature, as the conversion price exceeded the market price on the issuance date. The notes are secured by Company assets and subordinated to obligations under the Company’s working capital line of credit with Western Alliance Bank.

In 2021, two noteholders converted $130,000 of principal into shares of the Company’s common, resulting in a remaining outstanding note balance of $1,400,000.

On November 16, 2022, the Company and the requisite noteholders entered into a Secured Subordinated Convertible Note Extension Agreement, extending the maturity date to August 30, 2024. All other terms and conditions remained unchanged.

On May 1, 2024, the Company and the requisite noteholders executed a second extension agreement, further extending the maturity date to August 30, 2025. All other terms and conditions of the notes continue in full force and effect.

On May 26, 2023, the Company completed a secured subordinated convertible note financing of$1,600,000. The proceeds from the financing are used to increase the Company’s working capital balances. The secured subordinated convertible notes have a three-year term and mature on May 26, 2026. The interest rate on the Notes is 10% per year, payable quarterly in cash. The holder of each Note may require the Company to repay the principal amount of the Note plus accrued interest at any time after May 26, 2024. The Notes are secured by the assets of the Company and are subordinated to the Company’s debts with Western Alliance Bank, its senior lender. The principal amount of each Note is convertible at any time, at the option of the holder, into shares of the Company’s common stock at a conversion price of$1.34 per share. Failure to pay the principal payment or any interest payment (with 5 days delinquency) when due are events of default under the Notes. The Company filed and caused to be declared effective pursuant to the Securities Act of 1933, as amended, in June 2023 a Registration Statement to provide for resales of the shares of Common Stock issuable upon conversion of the Notes.

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On August 21, 2024, the Company completed a secured subordinated convertible note financing of$1,000,000. The proceeds of the Financing are used to increase the Company’s working capital balances. The secured subordinated convertible notes have a three-year term and mature on August 21, 2027. The interest rate on the Notes is 10% per year, payable quarterly in cash. The holder of each Note may require the Company to repay the principal amount of the Note plus accrued interest at any time after August 21, 2025. The Notes are secured by the assets of the Company and are subordinated to the Company’s debts with Western Alliance Bank, its senior lender. The principal amount of each Note is convertible at any time, at the option of the holder, into shares of the Company’s common stock at a conversion price of$0.9515 per share. Failure to pay the principal payment or any interest payment (with 5 days delinquency) when due are events of default under the Notes. The Company filed and caused it to be declared effective pursuant to the Securities Act of 1933, as amended, in November 2024 a Registration Statement to provide for resales of the shares of Common Stock issuable upon conversion of the Notes.

The amortization of debt discount was$3,646 and$1,462 for the quarter ended March 31, 2025 and 2024, respectively.

Total interest expense related to the convertible note was$102,276 and$76,257 for the three months ended March 31, 2025 and 2024, respectively.

NOTE 7 — Segment Information and Concentrations

Segment Information

The Company operates in the mobile barcode scanning and RFID/NFC data capture market. Mobile scanning typically consists of mobile devices such as smartphones or tablets, with mobile scanning or NFC 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 the Company’s products.

Revenues by geographic areas for the three months ended March 31, 2025 and 2024 were as follows:

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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 the Company’s total revenues for the three months ended March 31, 2025 and 2024 were as follows:

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 and 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 on March 31, 2025 and December 31, 2024 were as follows:

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 due to an interruption of supply. Suppliers may choose to restrict credit terms or require advance payments causing delays in the procurement of essential materials. The Company’s inability to procure certain materials could have a material adverse effect on the Company’s results. For the three months ended March 31, 2025 and 2024, the top two suppliers accounted for 42% and 40%, respectively, of inventory purchases. As of March 31, 2025 and December 31, 2024,26% and 26%, respectively, of the Company’s accounts payable balances were concentrated with top two suppliers.

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NOTE 8 — Stock-Based Compensation

The Company recognizes the compensation cost in the financial statements for all stock-based awards to employees, including grants of stock options and restricted stock, based on the fair value of the awards as of the date that the awards are issued. Compensation cost for stock-based awards is recognized on a straight-line basis over the vesting period.

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. There wereno stock options granted for the three months ended March 31, 2025 and 2024.

The shares of restricted stock are issued to employees and consultants and are held in escrow by the Company until the shares vest, subject to the employees and consultants being a continuing service provider on each of the vesting dates. If the service or employment is terminated, unvested shares revert to the Company. Shares are registered at grant, so share owners may vote at the annual stockholder meeting. Shares of restricted stock are granted on a zero cost basis. Compensation cost of the restricted stock is recognized on a straight-line basis over the life of vesting period. For the three months ended March 31, 2025 and 2024, the Company awarded 606,293 and 442,750 shares of restricted stock, respectively. As of March 31, 2025, there were 1,135,517 shares of restricted stock outstanding. Due to the existence of restrictions on sale or transfer until the shares vest, the Company does not count the shares of restricted stock as issued and outstanding shares until they vest. In Q1 2025,421,190 shares of restricted stock were issued to employees through vesting. Market value of the vested shares is subject to tax withholding.

Total stock-based compensation expenses for the three months ended March 31, 2025 and 2024, were$70,625 and$272,700, respectively.

NOTE 9 — Net 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 per share:

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In the three months ended March 31, 2025, the shares used in computing diluted net loss per share do not include 1,114,698 stock options,50,000 warrants and 3,203,906 shares related to convertible notes payable as their effect would be anti-dilutive.

In the three months ended March 31, 2024, the shares used in computing diluted net loss per share do not include 1,126,114 stock options,50,000 warrants and 2,152,934 shares related to convertible notes payable as their effect would be anti-dilutive.

NOTE 10 — Income Taxes

The Company did not record any income tax expense in Q1 2025 and Q1 2024.

NOTE 11 — Commitments and Contingencies

Operating Lease Obligations

In February 2022, the Company entered into a lease agreement for approximately 35,913 square feet at 40675 Encyclopedia Circle in Fremont, California. This location serves as the Company’s Corporate Headquarters, including office space and manufacturing. The current monthly rent is $53,340.

The Company accounted for the lease as an operating lease under ASC 842 using the bank loan interest rate in effect on May 1, 2022 at 5.0% to discount future lease payments. The lease term expires on July 31, 2029, with a one-time option to renew for a period of five years. The renewal period is not included in the measurement of the leases as the Company is not reasonably certain of exercising it.

In January 2024, the Company renewed its equipment operating lease agreement. The lease term expires on December 31, 2026. The Company accounted for the lease as an operating lease under ASC 842 using the bank loan interest rate in effect on January 1, 2024 at 9.25%.

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The operating lease expense under the existing agreement was allocated in cost of goods sold and operating costs based on department headcount and amounted to$161,682 and$161,682 for the three-month periods ended March 31, 2025 and 2024, respectively.

On March 31, 2025, the balances of right-of-use assets and liabilities for the operating lease were approximately$2.48 million and$2.69 million, respectively, compared to approximately$2.60 million and$2.82 million, respectively, on December 31, 2024.

Cash payments included in the measurement of the Company’s operating lease liabilities were$161,091 and$156,430 for the three months ended March 31, 2025 and 2024, respectively.

Future minimum lease payments under the operating lease on March 31, 2025 are shown below:

Purchase Commitments

As of March 31, 2025, the Company has non-cancelable purchase commitments for inventory to be used in the ordinary course of business of approximately$4,433,000.

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 12 — Subsequent Events

The Company did not identify any subsequent events that would have required adjustment or disclosure in the unaudited condensed financial statements.

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