| NOTE 12 — Subsequent Events |
NOTE 12 — Subsequent Events
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.
Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
This Quarterly 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, and management’s beliefs
and assumptions. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties;
therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements.
Factors that could cause actual results and outcomes to differ materially include, but are not limited to: volatility in the world economy
generally and in the markets we serve in particular, including the impact of Russia’s military action against Ukraine; the risk
of delays in the availability of our products due to technological, market or financial factors including the availability of product
components and necessary working capital; our ability to successfully develop, introduce and market future products; our ability to effectively
manage and contain our operating costs; the availability of third-party hardware and software that our products are intended to work with;
product delays associated with new model introductions and product changeovers by the makers of products that our products are intended
to work with; continued growth in demand for barcode scanners; market acceptance of emerging standards such as RFID/Near Field Communications
and of our related data capture products; the ability of our strategic relationships to benefit our business as expected; our ability
to enter into additional distribution relationships; and other factors described in this Form 10-Q including under “Risk Factors”
and those discussed in other documents we 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 interim condensed financial statements and notes included elsewhere in this report, the Company’s annual financial statements
included in its Annual Report on Form 10-K, and other information contained in other reports and documents filed from time to time with
the Securities and Exchange Commission.
The Company and its Products
We are a leading provider 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 (CaptureSDK)
to application providers, 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 providers or the resellers of their applications. The number of our
registered application providers for data capture applications continues to grow.
XtremeScan family. In August 2023, the Company
made entry into the industrial barcode scanning market with the XtremeScan family. XtremeScan combines the versatility and user-friendliness
of iPhones with the ruggedness and top-of-the-line protection required for extreme, industrial work environments. XtremeScan Case XC100
offers ultimate iPhone protection with its rugged outer shell and fully enclosed, rubberized shielding for maximum durability. It's the
toughest iPhone case on the market, offering military-grade protection against drops, dirt, water, and even more unpredictable elements
found in harsh industrial environments. XtremeScan XS930 & XS940 are built upon the XtremeScan Case and provide the same rugged iPhone
protection, adding a high-performance Socket Mobile data reader. With both 1D (XS930) and powerful 1D/2D (XS940) options, these data readers
can scan through various types of packaging materials under different lighting conditions. They provide the perfect solution for users
who wish to utilize iPhones for data capture within rough, industrial settings. XtremeScan Grip XG930 & XG940 provides 1D or 1D/2D
barcode scanning capabilities and builds even further on the XS by providing an added pistol grip handle. The ergonomic grip enables an
easy point-and-shoot approach and comfort during extended scanning sessions.
SocketCam family. Our camera-based barcode
scanning software includes SocketCam C820 and C860 for both iOS and Android. The C820 is a free, easily integrated camera scanning solution.
The C860 offers a significant upgrade for users with advanced scanning needs. It stands out due to its swift and accurate reading of damaged
barcodes, coupled with exceptional performance in poor lighting conditions, setting it apart from others in the industry. The C820 and
C860 enable App providers to service a wide range of customers with various data capture requirements, from price-sensitive to performance-sensitive.
End-users whose data capture requirements exceed the capabilities of the free camera-based scanners will have the choice of upgrading
to an advanced camera-based scanner, C860, or purchase a Socket hardware scanner.
DuraScan® Family. Our DuraScan® family
consists of 700 Series (D700, D720, D730, D740, D745, D755, D760) companion scanners, 800 Series (D800, D820, D840, D860) attachable scanners
and Wearable (DW930, DW940), which are designed to be durable barcode scanners with IP54-rated outer casing to withstand tougher environments.
The D720 is priced competitively with a 1D barcode scanner, making it the affordable 2D option available in the market. The D820 provides
a basic and affordable option for those who wish to upgrade to 2D scanning. The D745 and D755 are medical-grade, universal scanners. The
D760 and D860 include MRZ (machine-readable zone) support, making it capable of scanning passports, visas, and other travel documents.
Additionally, the 800 Series scanners may be used as stand-alone devices as well.
DuraScan Wear DW930 & DW940 are the first wearable
additions to the DuraScan Product Family, introducing a new era of innovative scanning technologies for the Company. The DW930 offers
1D laser scanning technology, while the DW940 provides powerful 1D/2D barcode scanning functionality. Their glove-like, wearable design
allows workers to use both hands freely, enhancing speed and flexibility. This makes them perfect for scanning in industries such as warehousing,
manufacturing, and distribution.
SocketScan family. Our SocketScan family consists
of the 700 Series (S700, S720, S730, S740) companion scanners and 800 Series (S800, S820, S840, S860) attachable scanners. The 700 Series
are available in multiple vivid colors: blue, green, red, white, yellow and black. The S720 reads both 1D and 2D barcodes on paper and
screen, serving as a drop-in replacement for our previously popular S700 model while also adding QR code functionality. The 800 Series
comprises 1D linear imaging (S800) and 2D (S820, S840, S860), which can be easily clipped onto smartphones, tablets and other mobile devices
using an easily detachable clip or DuraCase, creating a one-handed solution. The S860 includes MRZ (machine-readable zone) support, allowing
it scan passports, visas, and other travel documents in addition to barcodes. Additionally, the 800 Series scanners may be used as stand-alone
devices as well.
DuraSled Family. Our DuraSled (DS800, DS820,
DS840, DS860) is a barcode scanning sled designed for durability. It combines a phone with a scanner to create a one-handed solution.
DuraSled protects phones from impact damage and provides a robust charging solution for all environments. It is easy-to-use
and ideal for delivery services, stock counting, ticketing and other App-driven mobile solutions. The DuraSled products are compatible
with Apple and Samsung devices. The DS820 provides a basic and affordable option for those who wish to upgrade to 2D scanning.
NFC & RFID Contactless Reader/Writer.
The product line consists of the D600, S550 and S370. The D600 is an ergonomically handheld model with an IP54-rated outer casing
that can read and write various types of electronic SmartTags or transfer data with near-field communication. The S550 is a contactless
membership card reader/writer designed for tap-and-go smart card and Near Field Communication (“NFC”) applications. The S370
supports both barcode scanning and NFC reading and writing technologies. It provides App providers the ability to read both QR code-based
and NFC-based credentials, enabling them to accept multiple formats with just one device. Additionally, the S370 can read credentials
following ISO 18013-5, the Mobile Driver’s License (mDL) standard being adopted in some states and countries.
Software Developer Kit (CaptureSDK). Our Software
Developer Kit (CaptureSDK) supports all our data capture devices with a single integration, making it easier for App providers to integrate
our data capture capabilities into their applications. With the installation of our data capture software, the App providers’ customers
can choose any of our products that work best for them. Our CaptureSDK enables the App providers to modify captured data, control the
placement of the barcoded or RFID data in their applications, and control the feedback to the user that the transaction and transmission
were successfully completed. Our CaptureSDK 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 CaptureSDK uses tools integrated with software building environments such
as Swift Package Manager, Maven and NuGet, adds support for high-level frameworks such as MAUI, ReactNative, Java, JavaScript, and Flutter
and adds other features to make it easier for App providers to integrate our data capture software into their applications.
We design our own products and are responsible for
all associated test equipment. We subcontract the manufacturing of all our product components to independent third-party contract manufacturers
located in the United States, Mexico, Taiwan, Singapore, Malaysia and China that have the equipment, know-how and capacity to manufacture
products to our specifications. We perform final product assembly, testing and packaging at, and distribute our products from, our Fremont,
California facility. We offer our products worldwide through two-tier distribution enabling customers to purchase from large numbers of
online resellers around the world including application providers who resell their own solutions along with our data capture products.
Our products are also available on our online stores.
We believe growth in mobile applications and the mobile
workforce 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, builds 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.
Results of Operations
Revenues
Total revenues for the quarter ended September 30,
2024, were approximately $3.9 million, an increase of 21% compared to the same period in 2023, which reported $3.2 million. For the nine-month
period, revenue increased by 10.3% to approximately $13.9 million from $12.6 million in the prior year. Revenue growth over the past three
and nine months was primarily driven by increases in run-rate business during 2024 compared to the same periods in 2023.
Gross Margins
For the quarter ended September 30, 2024, our gross
profit margin was 49%, compared to 44.2% in the prior year. For the nine-month period, the margin was 50.1%, up from 48.6% in 2023. The
improvement in the gross margin is primarily attributed to allocation of manufacturing overhead costs across higher shipments during 2024
compared to the same periods in 2023.
Research and Development Expense
Research and development expense in the three
and nine months ended September 30, 2024, were approximately $1.2 million and $3.6 million, respectively, representing a decrease of
4% and 1% compared to expenses of approximately $1.2 million and $3.6 million in the corresponding periods a year ago. The reduction
in Q3 2024 is primarily due to a decrease in headcount, leading to lower payroll and related costs. The reduction in nine months of
2024 is primarily due to savings on external consulting services that were required during the development of new product in 2023.
We anticipate a modest increase for the remainder of the year.
Sales and Marketing Expense
Sales and marketing expenses in the three and
nine months ended September 30, 2024, were approximately $1.1 million and $3.3 million, respectively, representing an increase of 12%
and 10% compared to expense of approximately $1.0 million and $3.0 million in the corresponding periods a year ago. The increase is
primarily attributed to new hires and the cost-of-living adjustments implemented in Q2 2024. We anticipate a modest increase for the
remainder of the year.
General and Administrative Expense
General and administrative expense in the three
and nine months ended September 30, 2024 were approximately $644,000 and $2.1 million, respectively, representing an increase of 6%
and a decrease of 0.12% compared to expense of approximately $608,000 and $2.1 million in the corresponding periods a year ago. The
increase is primarily attributed to the cost-of-living adjustments implemented in Q2 2024. We anticipate a slight increase in the
general and administrative expenses for the remaining of the year.
Interest Expense, Net of Interest Income
Interest expense, net of interest income, in the three
and nine months ended September 30, 2024 was approximately $84,000 and $229,000, respectively, compared to approximately $76,000 and $170,000,
respectively, in the same periods one year ago. Interest expense in the three and nine months ended September 30, 2024, was related to
interest on the secured subordinated convertible notes payable (see “NOTE 6 — Secured Subordinated Convertible Notes Payable”
of the notes to consolidated financial statements for more information). Our credit lines had no outstanding balances during the three
and nine months ended September 30, 2024. Interest expense in the three and nine months ended September 30, 2023, was related to interest
on the secured subordinated convertible notes payable (see “NOTE 6 — Secured Subordinated Convertible Notes Payable”
of the notes to consolidated financial statements for more information) and on the CalCap loan. The increase in interest expense is due
to the new convertible notes issued in August 2024.
Interest income reflects interest earned on cash balances.
Interest income was nominal in each of the comparable first quarters, reflecting low average rates of return.
Income Taxes
In the three and nine months ended September 30,
2024, we did not record any income tax expense. As of September 30, 2024, our deferred tax asset, primarily representing future
income tax savings from the application of net operating loss carry forwards, was valued at approximately $10.1 million. In the three
and nine months ended September 30, 2023, we recorded an income tax benefit of $150,000 and an income tax expense of $16,000. As of
December 31, 2023, our deferred tax asset was valued at approximately $10.1 million.
Liquidity and Capital Resources
As reflected in our Statements of Cash Flows,
net cash used in operating activities was approximately $434,000 in the first nine months of 2024, compared to net cash used in
operating activities of approximately $523,000 in the first nine months of 2023. We calculate net cash used in operating activities
by adjusting our net loss (approximately a net loss of approximately $2.3 million and $2.8 million in the first nine months of 2024
and 2023, respectively) with items that did not require the use of cash. Those items include stock-based compensation expense,
depreciation and amortization of equipment and intangible assets, amortization of debt discount and operating lease ROU assets, and
deferred tax benefits. These amounts totaled approximately $2.0 million and $2.0 million in the first nine months of 2024 and 2023,
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 the first nine months of 2024, changes in operating
assets and liabilities resulted in net cash used in operating activities of approximately $120,000, primarily due to operating lease payments.
This was partially offset by a release of cash from a reduced accounts receivable balance as of September 30, resulting from lower shipment
levels at the end of the quarter.
In the first nine months of 2023, changes in operating
assets and liabilities resulted in net cash provided by operating activities of approximately $365,000, primarily stemming from reduced
levels of accounts receivable. The increased cash flow was partially offset by the paydown of accounts payable and accrued expenses, along
with operating lease payment.
In the first nine months of 2024 and 2023, we invested
approximately $564,000 and $1.5 million, respectively, in manufacturing tooling, firmware development, website development, and leasehold
improvements. In 2024, these investing activities were offset by proceeds from a tenant improvements allowance amounting to $72,800.
Net
cash provided by financing activities was approximately $1.0 million in the first nine months of 2024, compared to net cash provided
of approximately $1.5 million in the comparable period a year ago. In 2024, financing activities consisted primarily of the
completion of secured subordinated note financing of approximately $989,000, and the proceeds of employee stock options in the
amount of $23,750. In contrast, financing activities in 2023 consisted primarily of the completion of secured subordinated note
financing of approximately $1.6 million, and the proceeds of employee stock options in the amount of $212,815. These were partially
offset by the repurchase of treasury stock amounting to approximately $208,000 and the final repayment of our term loan, which was
$125,000.
Critical Accounting Estimates
Our significant accounting policies are described
in “Note 2 - Summary of Significant Accounting Policies” in the notes to condensed financial statements. 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.
A complete description of our critical accounting
policies and estimates is contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the Securities
and Exchange Commission.
Contractual
Obligations
Our
contractual cash obligations on September 30, 2024 are outlined in the table below:
| | |
Payments Due by Period |
| Contractual Obligations | |
Total | |
Less than
1 year | |
1 to 3
years | |
4 to 5
years | |
More than
5 years |
| | |
| |
| |
| |
| |
|
| Unconditional purchase obligations with contract manufacturers | |
$ | 4,864,000 | | |
$ | 4,777,000 | | |
$ | 87,000 | | |
$ | — | | |
$ | — | |
| Operating lease | |
| 3,326,000 | | |
| 652,000 | | |
| 1,360,000 | | |
| 1,314,000 | | |
| — | |
| Total contractual obligations | |
$ | 8,190,000 | | |
$ | 5,429,000 | | |
$ | 1,447,000 | | |
$ | 1,314,000 | | |
$ | — | |
Off-Balance Sheet Arrangements
As of September 30, 2024, we had no off-balance sheet
arrangements as defined in Item 303 of Regulation S-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest
rates primarily pertains to our revolving credit line facilities. These facilities provide us with up to $2.5 million with variable interest
rates based upon the lender's prime rate (with a minimum of 4.25%) plus 0.75%. This applies to both the domestic line of credit (up to
$2.0 million) and the EXIM line of credit (up to $0.5 million). As a result, any interest rate increases could raise our interest expense
on outstanding credit line balances.
Foreign Currency Risk
A substantial majority of our revenue, expense and
purchasing activities are transacted in U.S. dollars. However, we require our European distributors to purchase our products in Euros,
and we pay the expenses of our European employees in Swiss Franc and British pounds. Additionally, we may enter into selected future purchase
commitments with foreign suppliers that will be paid in the local currency of the supplier. Based on a sensitivity analysis of our net
foreign currency-denominated assets at the end of the quarter ended September 30, 2024, an adverse change of 10% in exchange rates would
have resulted in an increase of our net loss of approximately $34,400 for the third quarter of 2024. The actual net adjustment for the
effects of changes in foreign currency on cash balances, collections, and payables was a gain of approximately $3,400 for the third quarter
of 2024. We will continue to monitor and assess our risks related to foreign currency fluctuations to mitigate any potential impacts on
our financial performance.
Item 4. 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 Quarterly Report on Form 10-Q. 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.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial
reporting that occurred during the quarter ended September 30, 2024, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II
Item 1A. Risk Factors.
Ownership of the Company’s securities involves
a number of risks and uncertainties. Potential investors should carefully consider the risks and uncertainties described below and the
other information in this Annual Report on Form 10-K and our other public filings with the Securities and Exchange Commission before deciding
whether to invest in the Company’s securities. The Company’s business, financial condition or results of operations could
be materially adversely affected by any of these risks. The risks described below are not the only ones facing the Company. Additional
risks that are currently unknown to the Company or that the Company currently considers immaterial may also impair its business or adversely
affect its financial condition or results of operations.
We may not return to profitability.
To return to profitability, we must accomplish numerous
objectives, including achieving continued growth in our business, providing ongoing support to registered App providers whose applications
support the use of our data capture products, and developing successful new products. We cannot foresee with any certainty whether we
will be able to achieve these objectives in the future. Accordingly, we may not generate sufficient revenue or control our expenses enough
to maintain ongoing profitability. If we cannot return to profitability, we will not be able to support our operations from positive cash
flows, and we would be required to use our existing cash to support operating losses. If we are unable to secure the necessary capital
to replace that cash, we may need to suspend some or all of our current operations.
We may require additional capital in the future, but that capital may
not be available on reasonable terms, if at all, or on terms that would not cause substantial dilution to investors’ stock holdings.
We may need to raise capital to fund our growth or
operating losses in future periods. Our forecasts are highly dependent on factors beyond our control, including market acceptance of our
products and delays in deployments by businesses of applications that use our data capture products. Even if we maintain profitable operating
levels, we may need to raise capital to provide sufficient working capital to fund our growth. If capital requirements vary materially
from those currently planned, we may require additional capital sooner than expected. There can be no assurance that such capital will
be available in sufficient amounts or on terms acceptable to us, if at all.
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 require us to
remain in compliance with the covenants specified under the terms of the agreement. The agreements also contain customary affirmative
and negative covenants, including covenants that limit or restrict our ability to, among other things, grant liens, make investments,
incur indebtedness, merge or consolidate, dispose of assets, make acquisitions, pay dividends or make distributions, repurchase stock,
enter into transactions with affiliates and enter into restrictive agreements, in each case subject to customary exceptions for a credit
facility of this size and type. The agreements also contain customary events of default including, among others, payment defaults, breaches
of covenants, bankruptcy and insolvency events, cross defaults with certain material indebtedness, judgment defaults, and breaches of
representations and warranties. Upon an event of default, our bank may declare all or a portion of our outstanding obligations payable
to be immediately due and payable and exercise other rights and remedies provided for under the agreement. During the existence of an
event of default, interest on the obligations could be increased. The agreements may be terminated by us or by our bank at any time. Upon
such termination, our bank would no longer make advances under the credit agreement and outstanding advances would be repaid as receivables
are collected. All advances are at our bank’s discretion and our bank is not obligated to make advances.
If application providers are not successful in their efforts to develop,
market and sell the applications into which our software and products are incorporated, we may not achieve our sales projections.
We are dependent upon App providers to integrate our
scanning and software products into their applications designed for mobile workers using smartphones, tablets and mobile computers, and
to successfully market and sell those application products and solutions into the marketplace. We focus on serving the needs of App providers
as sales of our data capture products are application driven. However, these providers may take considerable time to complete the 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.
A deterioration in global economic conditions may have adverse impacts
on our business and financial condition in ways that we currently cannot predict and may limit our ability to raise additional funds.
If global economic conditions deteriorate, it may
impact our business and our financial condition. We may face significant challenges if conditions in the financial markets worsen. The
impact of such future developments on our business, including the ongoing military action in Ukraine by Russia, is highly uncertain and
cannot be predicted. If the overall economy continues to decline for an extended period, our results of operations, financial position
and cash flows may be materially adversely affected. In addition, a severe prolonged economic downturn could result in a variety of risks
to the business, including impairing our ability to pursue potential opportunities and limiting our ability to raise additional capital
when needed on acceptable terms, if at all.
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.
Deferred tax assets comprise a significant portion of our assets and
are dependent upon future tax profitability to realize the benefits.
We have recorded deferred tax assets on our balance
sheet because we believe that it is more likely than not that we will generate sufficient tax profitability in the future to realize the
tax savings that our deferred tax assets represent. If we do not achieve and maintain sufficient profitability, the tax savings represented
by our deferred tax assets may never be realized and we would need to recognize a loss for those deferred tax assets.
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.
We may not be able to collect receivables from customers who experience
financial difficulties.
Our accounts receivable is 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 customer’s ability to pay us in a timely manner, consequently, we may experience increased difficulty
in collecting our accounts receivable, and we may have to increase our reserves in anticipation of increased uncollectible accounts.
We could face increased competition in the future, which would adversely
affect our financial performance.
The market in which we operate is very competitive.
Our future financial performance is contingent on a number of unpredictable factors, including that:
| · | some of our competitors have greater financial, marketing, and technical resources than we do; |
| · | we periodically face intense price competition, particularly when our competitors have excess inventories and discount their prices
to clear their inventories; and |
| · | certain manufacturers of tablets and mobile phones offer products with built-in functions, such as Bluetooth wireless technology or
barcode scanning, that compete with our products. |
Increased competition could result in price reductions,
fewer customer orders, reduced margins, and loss of market share. Our failure to compete successfully against current or future competitors
could harm our business, operating results, and financial condition.
If we do not correctly anticipate demand for our products, our operating
results will suffer.
The demand for our products depends on many factors
and is difficult to forecast as we introduce and support more products, and as competition in the markets for our products intensifies.
If demand is lower than forecasted levels, we could have excess production resulting in higher inventories of finished products and components,
which could lead to write-downs or write-offs of some or all of the excess inventories, and reductions in our cash balances. Lower than
forecasted demand could also result in excess manufacturing capacity at our third-party manufacturers and in our failure to meet minimum
purchase commitments, each of which may lower our operating results.
If demand increases beyond forecasted levels, we will
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 distribute our products, and our
sales would suffer if any of these distributors stopped distributing our products effectively.
Because we distribute and fulfill resellers’
orders for our products primarily through distributors, we are subject to risks associated with channel distribution, such as risks related
to their inventory levels and support for our products. Our distribution channels may build up inventories in anticipation of growth in
their sales. If such growth in their sales does not occur as anticipated, the inventory build-up could contribute to higher levels of
product returns. The lack of sales by any one significant participant in our distribution channels could result in excess inventories
and adversely affect our operating results and working capital liquidity. During the nine months ended September 30, 2024 and 2023, Ingram
Micro® and BlueStar together represented approximately 50% and 45%, respectively, of our worldwide sales. We expect that a significant
portion of our sales will continue to depend on sales to a limited number of distributors.
Our agreements with distributors are generally nonexclusive
and may be terminated on short notice by them without cause. Our distributors are not within our control, are not obligated to purchase
products from us, and may offer competitive lines of products simultaneously. Sales growth is contingent in part on our ability to enter
into additional distribution relationships and expand our sales channels. We cannot predict whether we will be successful in establishing
new distribution relationships, expanding our sales channels or maintaining our existing relationships. A failure to enter into new distribution
relationships, expand our sales channels, or maintain our existing relationships could adversely impact our ability to grow our sales.
We allow our distribution channels to return a portion
of their inventory to us for full credit against other purchases. In addition, in the event we reduce our prices, we credit our distributors
for the difference between the purchase price of products remaining in their inventory and our reduced price for such products. Actual
returns and price protection may adversely affect future operating results and working capital liquidity by reducing our accounts receivable
and increasing our inventory balances, particularly since we seek to continually introduce new and enhanced products and are likely to
face increasing price competition.
We depend on alliances and other business relationships with third parties,
and a disruption in these relationships would hinder our ability to develop and sell our products.
We depend on strategic alliances and business relationships
with leading participants in various segments of the mobile applications market to help us develop and market our products. Our strategic
partners may revoke their commitment to our products or services at any time in the future or may develop their own competitive products
or services. Accordingly, our strategic relationships may not result in sustained business alliances, successful product or service offerings,
or the generation of significant revenues. Failure of one or more of such alliances could result in delay or termination of product development
projects, failure to win new customers or loss of confidence by current or potential customers.
We have devoted significant research and development
resources to design products to work with a number of operating systems used in mobile devices including Apple® (iOS), Google™
(Android™) and Microsoft® (Windows®). Such design activities have diverted financial and personnel resources from other
development projects. These design activities are not undertaken pursuant to any agreement under which Apple, Google or Microsoft is obligated
to collaborate or to support the products produced from such collaboration. Consequently, these organizations may terminate their collaborations
with us for a variety of reasons, including our failure to meet agreed-upon standards or for reasons beyond our control, such as changing
market conditions, increased competition, discontinued product lines, and product obsolescence.
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 for our technology would make it easier for our competitors to offer similar products. In connection with our participation
in the development of various industry standards, we may be required to license certain of our patents to other parties, including our
competitors that develop products based upon the adopted standards.
We also generally enter into confidentiality agreements
with our employees, distributors, and strategic partners, and generally control access to our documentation and other proprietary information.
Despite these precautions, it may be possible for a third-party to copy or otherwise obtain and use our products, services, or technology
without authorization, develop similar technology independently, or design around our patents.
Additionally, effective copyright, trademark, and
trade secret protection may be unavailable or limited in certain foreign countries.
We may become subject to claims of intellectual property rights infringement,
which could result in substantial liability.
In the course of operating our business, we may receive
claims of intellectual property infringement or otherwise become aware of potentially relevant patents or other intellectual property
rights held by other parties. Many of our competitors have large intellectual property portfolios, including patents that may cover technologies
that are relevant to our business. In addition, many smaller companies, universities, and individuals have obtained or applied for patents
in areas of technology that may relate to our business. The industry is moving towards aggressive assertion, licensing, and litigation
of patents and other intellectual property rights.
If we are unable to obtain and maintain licenses on
favorable terms for intellectual property rights required for the manufacture, sale, and use of our products, particularly those products
which must comply with industry standard protocols and specifications to be commercially viable, our results of operations or financial
condition could be adversely impacted.
In addition to disputes relating to the validity or
alleged infringement of other parties’ rights, we may become involved in disputes relating to our assertion of our own intellectual
property rights. Whether we are defending the assertion of intellectual property rights against us or asserting our intellectual property
rights against others, intellectual property litigation can be complex, costly, protracted, and highly disruptive to business operations
by diverting the attention and energies of management and key technical personnel. Plaintiffs in intellectual property cases often seek
injunctive relief, and the measures of damages in intellectual property litigation are complex and often subjective or uncertain. Thus,
any adverse determinations in this type of litigation could subject us to significant liabilities and costs.
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.
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 stock 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 key components of our employee compensation packages. We believe that stock options and restricted stocks provide an incentive to our
employees to maximize long-term stockholder value and, through the use of vesting, encourage valued employees to remain with us. The expensing
of employee stock options and restricted stocks adversely affects our net income and earnings per share, will continue to adversely affect
future quarters, and will make profitability harder to achieve. In addition, we may decide in response to the effects of expensing stock
options and restricted stocks on our operating results to reduce the number of stock options or restricted stocks granted to employees
or to grant to fewer employees. This could adversely affect our ability to retain existing employees or attract qualified candidates,
and also could increase the cash compensation we would have to pay to them.
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:
| · | unexpected changes in regulatory requirements, import and export restrictions and tariffs; |
| · | difficulties in managing foreign operations; |
| · | the burdens of complying with a variety of foreign laws; |
| · | greater difficulty or delay in accounts receivable collection; |
| · | potentially adverse tax consequences; and |
| · | political and economic instability (such as Russia’s military action against Ukraine). |
Our export sales are primarily denominated in Euros
for our sales to European distributors and in British pounds for our sales to UK distributors. Accordingly, an increase in the value of
the United States dollar relative to the 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 the collection of receivables denominated if left unhedged.
Our facilities or operations could be adversely affected by events outside
our control, such as natural disasters or health epidemics.
Our corporate headquarters is located in a seismically
active region in Northern California. If major disasters such as earthquakes occur, or our information system or communications network
breaks down or operates improperly, our headquarters and production facilities may be seriously damaged, or we may have to stop or delay
production and shipment of our products. In addition, we may be affected by health epidemic or pandemics, such as the COVID-19 pandemic,
or geopolitical instability, such as Russia’s military action against Ukraine. We may incur expenses or delays relating to such
events outside of our control, which could have a material adverse impact on our business, operating results and financial condition.
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. Quarterly revenues and operating results depend on the volume and timing of orders received, which sometimes
are difficult to forecast. Historically, we have 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 deployment of new applications that work with our products; |
| · | changes in the revenues attributable to royalties and engineering development services; |
| · | timing of software enhancements; |
| · | changes in the level of operating expenses; |
| · | competitive conditions in the industry including competitive pressures resulting in lower average selling prices; |
| · | timing of distributors’ shipments to their customers; |
| · | delays in supplies of key components used in the manufacturing of our products; and |
| · | general economic conditions and conditions specific to our customers’ industries. |
Because we base our staffing and other operating expenses
on anticipated revenues, unanticipated declines or delays in the receipt of orders can cause significant variations in operating results
from quarter to quarter. As a result of any of the foregoing factors, or a combination, our results of operations in any given quarter
may be below the expectations of public market analysts or investors, in which case the market price of our common stock would be adversely
affected.
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 November 1, 2024, we had 7,605,270 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 Form S-3 prospectus delivery requirements and, in other cases, only to the manner of sale, volume, and notice requirements
of Rule 144 under the Securities Act.
As of November 1, 2024, we had 1,130,258 shares of
common stock subject to outstanding options under our stock option plans, 1,122,105 shares of restricted stock outstanding, and 374,196
shares of common stock available for future issuance under the plans. We have registered the shares of common stock subject to outstanding
options and restricted stock and reserved them for issuance under our stock option plans. Accordingly, the shares of common stock underlying
vested options and unvested restricted stock will be eligible for resale in the public market as soon as the options are exercised or
the restricted stock vests, as applicable.
Volatility in the trading price of our common stock could negatively
impact the price of our common stock.
During the period from January 1, 2023 through the
date of the report, our common stock price fluctuated between a high of $2.48 and a low of $0.90. We have experienced low trading volumes
in our stock, and thus relatively small purchases and sales can have a significant effect on our stock price. The trading price of our
common stock could be subject to wide fluctuations in response to many factors, some of which are beyond our control, including general
economic conditions and the outlook of securities analysts and investors on our industry. In addition, the stock markets in general,
and the markets for high technology stocks in particular, have experienced high volatility that has often been unrelated to the operating
performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 6. Exhibits
| |
|
|
Exhibit
Number |
|
Exhibit
Description |
| |
|
|
| 31.1 |
* |
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 |
* |
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 |
** |
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101 |
|
XBRL
Document |
* Filed herewith.
** Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SOCKET MOBILE, INC.
Registrant
| |
|
| Date: November 8, 2024 |
/s/ Kevin J.
Mills |
| |
Kevin J. Mills |
| |
President and Chief Executive Officer |
| |
(Duly Authorized Officer and Principal Executive Officer) |
| |
|
| Date: November 8, 2024 |
/s/ Lynn Zhao |
| |
Lynn Zhao |
| |
Vice President of Finance and Administration and Chief Financial Officer (Duly
Authorized Officer and Principal Financial and Accounting Officer) |
|
