PROSPECTUS
SUMMARY
This
summary highlights important features of this offering and the information included or incorporated by reference in this prospectus.
This summary does not contain all of the information that you should consider before investing in our Common Stock. You should
read the entire prospectus carefully, especially the risks of investing in our Common Stock discussed under “Risk Factors.”
The
Company
We
are a leading producer of data capture products for mobile applications used in mobile point of sale (mPOS), enterprise mobility,
asset tracking, control systems, logistics, event management, medical and education. Our primary products are cordless data capture
devices that connect over Bluetooth and work with applications running on smartphones, tablets and mobile computers using operating
systems from Apple® (iOS), Google™ (Android™) and Microsoft® (Windows®). We focus on serving the needs
of software application developers, as our barcode scanner sales are primarily driven by the deployment of barcode enabled mobile
applications.
We
design our own products and subcontract the manufacturing of product components to independent third-party contract manufacturers
who are located in the U.S., Mexico, Singapore, China, and Taiwan and who have the equipment, know-how and capacity to manufacture
products to our specifications. Final products are assembled, tested, packaged, and distributed at and from our Newark, California
facility. We offer our products worldwide through two-tier distribution, enabling customers to purchase from a large number of
on-line resellers around the world including some application developers. The geographic regions served by the Company include
the Americas, Europe, Asia Pacific and Africa.
We
believe growth in mobile applications and the mobile workforce are resulting from technical advances in mobile technologies, cost
reductions in mobile devices and the growing adoption by businesses of mobile applications running on smartphones and tablets,
building a growing demand for products like ours. Our data capture products address the growing 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.
We
offer barcode scanning products for both 1D (imager and laser) and 2D barcode scanning in standard and durable cases. Our 7 Series
standard barcode scanners are lightweight and ergonomically designed for easy handling as stand-alone cordless barcode scanners.
The 7 Series scanners come in six vivid colors, blue, gray, green, red, white and yellow. Our DuraScan® line of durable barcode
scanners come in three models: linear imager (D700), laser (D730) and 2D imager (D750). Using the same ergonomic form factor as
our 7 Series, these barcode scanners have an IP54 durability rating and improved usability features and come in industrial colors:
Construction Orange, Safety Green and Utility Gray. Our SocketScan™ 800 Series cordless barcode scanners come in linear
imaging (S800) and 2D models (S850) and are designed to be attachable, with an easily detachable clip, to smartphones and other
mobile devices for more integrated barcode scanning. The 800 Series scanners can also be used in simple handheld mode. Our 800
series sleeve solution, “DuraCase®”, is designed to keep an iPod or smartphone and a barcode scanner together,
enabling both devices to be used and charged simultaneously and easily operated with a single hand.
Our
Software Developer Kit (“SDK”) supports all of our data capture devices (both barcode reader and Smartcard Reader
Writer) with a single installation, making it easy for a developer to integrate our data capture capabilities into their application
centric solutions, while giving the customer the ability to select the products that work best for them. Our SDK enables the developers
to modify, control the placement of the captured data in their application, and control feedback to the user that the transaction
and transmission was successfully completed. Socket Mobile’s SDK also enables the built-in camera in a customer’s
smartphone or tablet to be used for occasional or lower volume data collection requirements.
We
expect to deliver our D600 Contactless Reader Writer in Q3 2017. The D600 is our first handheld device capable of reading data
from RFID tags or from smartphones leveraging near-field communication capabilities. RFID tags are used in many applications,
like digital wallet applications for loyalty cards, identification cards, payment cards, coupons, event tickets and others that
leverage the exchange of electronic “tokens”. These tokens can be exchanged via NFC enabled devices. We are also incorporating
the RFID reader/writer technology into the base of a retail accessory stand that enables customers to scan barcoded documents.
We had early engagement from our developer community as we finalized the D600, and we continue working with our registered developers
to explore the data capture opportunities around RFID/NFC.
Extended
warranty programs are available for all of our data capture products.
Cordless barcode scanning represented 86 percent of our revenue in 2016, and 98 percent of our revenue in the first half
of 2017. Service revenue represented 2 percent of our revenue in 2016 and 1 percent of our revenue in the first half of 2017.
Handheld computer and legacy product revenue represented 12 percent of our revenue in 2016. In 2016, we discontinued sales
of our handheld mobile computer products as customers shifted to the use of smartphones and tablets. Total employee headcount
at August 18, 2017 was 51.
Subordinated
Convertible Notes
On
September 4, 2013, we issued subordinated convertible notes (“Notes”) to certain of our officers and directors totaling
$380,696 to replace $350,000 of notes plus accrued interest previously issued to these persons on August 1, 2012 and that matured
on August 1, 2014 (“Old Notes”). The Notes are four-year notes maturing on September 4, 2017.
The
principal amount of the Notes plus accrued interest are convertible into our Common Stock at the option of the holder at $1.25
per share. The Notes have an interest rate of 8% that compounds at the end of each quarter and have a holder call provision that
became effective on September 4, 2014. The Notes are secured by all of our assets, but are subordinated to amounts outstanding
under our working capital bank lines of credit.
On
September 4, 2013, the Company also issued a subordinated convertible note (“Replacement Note”) to a director of the
Company totaling $371,929 to replace $350,000 of notes plus accrued interest issued to that person at various dates in November
and December 2012 and that [all?] matured on August 1, 2014. The Replacement Note is a four-year note maturing on September 4,
2017. The principal amount of the Replacement Note plus accrued interest is convertible into our Common Stock at the option of
the holder at $1.25 per share, has no holder call provision, and has an interest rate of 12% that compounds at the end of each
quarter. The Replacement Note is secured by all of our assets, is subordinated to amounts outstanding under our working capital
bank lines of credit and is pari passu with the Notes.
Both
the Notes and Replacement Note were initially convertible at $2.44 per share and the Replacement Note had an initial interest
rate of 18%. These terms changed to the terms described in the two preceding paragraphs following the full exercise on March 30,
2016 of warrants issued to Hudson Bay Master Fund pursuant to a financing transaction in 2010.
We
issued these notes (together, “Subordinated Convertible Notes) in reliance on an exemption from registration pursuant to
Section 4(2) of the Securities Act of 1933 (the “Securities Act”), as amended, and Rule 506 of Regulation D promulgated
thereunder. As of the filing date for this registration statement, no principal or accrued interest under the Subordinated Convertible
Notes has been converted into Common Stock by the holders. We are now registering for resale under this prospectus the maximum
number of shares of Common Stock issuable to the investors upon conversion of the principal and accrued interest under the Subordinated
Convertible Notes through their maturity date of September 4, 2017.
RISK
FACTORS
An
investment in the Common Stock offered by this prospectus involves a high degree of risk. You should carefully consider the risks
described below, as well as the risks described in our annual and quarterly reports filed with the Securities and Exchange Commission,
before deciding to purchase shares of our Common Stock. The risks described below are not the only ones that we face. Additional
risks that generally apply to publicly traded companies, that are not yet identified or that we currently think are immaterial,
may also adversely affect our company.
If
any of the events, contingencies, circumstances or conditions described in the following risks actually occur, our business, financial
condition or results of operations could be seriously harmed. The trading price of our Common Stock could, in turn, decline and
you could lose all or part of your investment.
We
may not maintain ongoing profitability.
To
maintain ongoing profitability, we must accomplish numerous objectives, including continued growth in our business, ongoing support
to registered developers whose applications support the use of our data capture products, and the development of successful new
products. We cannot foresee with any certainty whether we will be able to achieve these objectives in the future. Accordingly,
we may not generate sufficient net revenue or manage our expenses sufficiently to maintain ongoing profitability. If we cannot
maintain ongoing profitability, we will not be able to support our operations from positive cash flows, and we would use our existing
cash to support operating losses. If we are unable to secure the necessary capital to replace that cash, we may need to suspend
some or all of our current operations.
We
may require additional capital in the future, but that capital may not be available on reasonable terms, if at all, or on terms
that would not cause substantial dilution to investors’ stock holdings.
We
may need to raise capital to fund our growth or operating losses in future periods. Our forecasts are highly dependent on factors
beyond our control, including market acceptance of our products and delays in deployments by businesses of applications that use
our data capture products. Even if we maintain profitable operating levels, we may need to raise capital to provide sufficient
working capital to fund our growth. If capital requirements vary materially from those currently planned, we may require additional
capital sooner than expected. There can be no assurance that such capital will be available in sufficient amounts or on terms
acceptable to us, if at all.
If
application developers are not successful in their efforts to develop, market and sell their applications into which our software
and products are incorporated, we may not achieve our sales projections.
We
are dependent upon application developers to integrate our scanning and software products into their applications designed for
mobile workers using smartphones, tablets and mobile computers, and to successfully market and sell those application products
and solutions into the marketplace. We focus on serving the needs of application developers as sales of our data capture products
are application driven. However, these developers may take considerable time to complete development of their applications, may
experience delays in their development timelines, may develop competing applications, may be unsuccessful in marketing and selling
their application products and solutions to customers, or may experience delays in customer deployments and implementations, which
would adversely affect our ability to achieve our revenue projections.
Global
economic conditions may have a negative impact on our business and financial condition in ways that we currently cannot predict,
and may further limit our ability to raise additional funds.
Global
economic conditions may have an impact on our business and our financial condition. We may face significant challenges if global
economic growth slows down and conditions in the financial markets worsen. In particular, should these conditions cause our revenues
to be materially less than forecast, we may find it necessary to initiate reductions in our expenses and defer product development
program. In addition, our ability to access the capital markets and raise funds required for our operations may be severely restricted
at a time when we would like, or need, to do so, which could have an adverse effect on our ability to meet our current and future
funding requirements and on our flexibility to react to changing economic and business conditions.
Our
quarterly operating results may fluctuate in future periods, which could cause our stock price to decline.
We
expect to experience quarterly fluctuations in operating results in the future. We generally ship orders as received, and as a
result we may have little backlog. Quarterly revenues and operating results therefore depend on the volume and timing of orders
received during the quarter, which are difficult to forecast. Historically, we have often recognized a substantial portion of
our revenue in the last month of the quarter. This subjects us to the risk that even modest delays in orders or in the manufacture
of products relating to orders received, may adversely affect our quarterly operating results. Our operating results may also
fluctuate due to factors such as:
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the
demand for our products;
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the
size and timing of customer orders;
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unanticipated
delays or problems in our introduction of new products and product enhancements;
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the
introduction of new products and product enhancements by our competitors;
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the
timing of the introduction and deployments of new applications that work with our products;
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changes
in the revenues attributable to royalties and engineering development services;
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timing
of software enhancements;
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changes
in the level of operating expenses;
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competitive
conditions in the industry including competitive pressures resulting in lower average
selling prices;
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timing
of distributors’ shipments to their customers;
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delays
in supplies of key components used in the manufacturing of our products; and
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general
economic conditions and conditions specific to our customers’ industries.
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Because
we base our staffing and other operating expenses on anticipated revenues, unanticipated declines or delays in the receipt of
orders can cause significant variations in operating results from quarter to quarter. As a result of any of the foregoing factors,
or a combination, our results of operations in any given quarter may be below the expectations of public market analysts or investors,
in which case the market price of our common stock would be adversely affected.
In
order to maintain the availability of our bank lines of credit we must remain in compliance with the covenants as specified under
the terms of the credit agreements and the bank may exercise discretion in making advances to us.
Our
credit agreements with our bank requires us to maintain cash and qualified receivables that are at least 1.75 times amounts borrowed
and outstanding under the credit agreements. The agreements contain customary representations, warranties, covenants and events
of default that limit our ability to incur additional liens or indebtedness, make distributions to our stockholders and make investments.
The events of default entitle our bank to accelerate our obligations and require repayment of our outstanding indebtedness thereunder.
These events of default include a breach of our payment obligations or covenants, a material impairment in our financial condition
or ability to repay any indebtedness to our bank and the commencement of dissolution or insolvency proceedings. The agreement
may be terminated by us or by our bank at any time. Upon such termination, our bank would no longer make advances under the credit
agreement and outstanding advances would be repaid as receivables are collected. All advances are at our bank’s discretion
and our bank is not obligated to make advances. Our bank has been granted a first priority security interest in all of our assets,
including our intellectual property.
Deferred
tax assets comprise a significant portion of our assets and are dependent upon future tax profitability to realize the benefits.
We
have recorded deferred tax assets on our balance sheet because we believe that it is more likely than not that we will generate
sufficient tax profitability in the future to realize the tax savings our deferred tax assets represent. If we do not achieve
and maintain sufficient profitability, the tax savings represented by our deferred tax assets may never be realized and we would
need to recognize a loss for those deferred tax assets.
Goodwill
comprises a significant portion of our assets and may be subject to impairment write-downs in future periods which would substantially
increase our losses, make it more difficult to achieve profitability, and could cause our stock price to decline.
We
review our goodwill for impairment at least annually as of September 30th, and more often if factors suggest potential impairment.
Many factors are considered in evaluating goodwill including our market capitalization, comparable companies within our industry,
our estimates of our future performance, and discounted cash flow analysis. Many of these factors are highly subjective and may
be negatively impacted by our financial results and market conditions in the future. We may incur goodwill impairment charges
in the future and any future write-downs of our goodwill would adversely affect our operating results, make it more difficult
to maintain profitability, and as a result the market price of our common stock could be adversely affected.
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:
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invest significant resources in research and development, sales and marketing, and customer support;
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identify
emerging trends, demands and standards in the field of mobile computing products;
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enhance
our products by adding additional features;
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maintain
superior or competitive performance in our products; and
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anticipate
our end users’ needs and technological trends accurately.
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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.
A
significant portion of our revenue currently comes from a limited number of distributors, and any decrease in revenue from these
distributors could harm our business.
A
significant portion of our revenue comes from a limited number of distributors. In the first half year of 2017 and 2016, Ingram
Micro Inc., ScanSource
,
Inc., and BlueStar, Inc. together represented approximately 75% and 62%, respectively, of our worldwide
revenues. We expect that a significant portion of our revenue will continue to depend on sales to a limited number of distributors.
We do not have long-term commitments from our distributors to carry our products, and any of our distributors may from quarter
to quarter comprise a significant concentration of our revenues. Any could choose to stop selling some or all of our products
at any time, and each of these companies also carries our competitors’ products. If we lose our relationship with any of
our significant distributors, we would experience disruption and delays in marketing our products.
We
may not be able to collect receivables from customers who experience financial difficulties.
Our
accounts receivable are derived primarily from distributors. We perform ongoing credit evaluations of our customers’ financial
conditions but generally require no collateral from our customers. Reserves are maintained for potential credit losses, and such
losses have historically been within such reserves. However, many of our customers may be thinly capitalized and may be prone
to failure in adverse market conditions. Although our collection history has been good, from time to time a customer may not pay
us because of financial difficulty, bankruptcy or liquidation. If global financial conditions have an impact on our customers’
ability to pay us in a timely manner, and consequently, we may experience increased difficulty in collecting our accounts receivable,
and we may have to increase our reserves in anticipation of increased uncollectible accounts.
We
could face increased competition in the future, which would adversely affect our financial performance.
The
market in which we operate is very competitive. Our future financial performance is contingent on a number of unpredictable factors,
including that:
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some
of our competitors have greater financial, marketing, and technical resources than we
do;
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we
periodically face intense price competition, particularly when our competitors have excess
inventories and discount their prices to clear their inventories; and
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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.
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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 would have to rapidly increase production at our third-party manufacturers. We depend
on suppliers to provide additional volumes of components, and suppliers might not be able to increase production rapidly enough
to meet unexpected demand. Even if we were able to procure enough components, our third-party manufacturers might not be able
to produce enough of our devices to meet our customer demand. In addition, rapid increases in production levels to meet unanticipated
demand could result in higher costs for manufacturing and supply of components and other expenses. These higher costs could lower
our profit margins. Further, if production is increased rapidly, manufacturing yields could decline, which may also lower operating
results.
We
rely primarily on distributors to sell our products, and our sales would suffer if any of these distributors stops selling our
products effectively.
Because
we sell our products primarily through distributors, we are subject to risks associated with channel distribution, such as risks
related to their inventory levels and support for our products. Our distribution channels may build up inventories in anticipation
of growth in their sales. If such growth in their sales does not occur as anticipated, the inventory build-up could contribute
to higher levels of product returns. The lack of sales by any one significant participant in our distribution channels could result
in excess inventories and adversely affect our operating results and working capital liquidity.
Our
agreements with distributors are generally nonexclusive and may be terminated on short notice by them without cause. Our distributors
are not within our control, are not obligated to purchase products from us, and may offer competitive lines of products simultaneously.
Sales growth is contingent in part on our ability to enter into additional distribution relationships and expand our sales channels.
We cannot predict whether we will be successful in establishing new distribution relationships, expanding our sales channels or
maintaining our existing relationships. A failure to enter into new distribution relationships or to expand our sales channels
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 to our technology would make
it easier for our competitors to offer similar products. In connection with our participation in the development of various industry
standards, we may be required to license certain of our patents to other parties, including our competitors that develop products
based upon the adopted standards.
We
also generally enter into confidentiality agreements with our employees, distributors, and strategic partners, and generally control
access to our documentation and other proprietary information. Despite these precautions, it may be possible for a third-party
to copy or otherwise obtain and use our products, services, or technology without authorization, develop similar technology independently,
or design around our patents.
Effective
copyright, trademark, and trade secret protection may be unavailable or limited in certain foreign countries.
We
may become subject to claims of intellectual property rights infringement, which could result in substantial liability.
In
the course of operating our business, we may receive claims of intellectual property infringement or otherwise become aware of
potentially relevant patents or other intellectual property rights held by other parties. Many of our competitors have large intellectual
property portfolios, including patents that may cover technologies that are relevant to our business. In addition, many smaller
companies, universities, and individuals have obtained or applied for patents in areas of technology that may relate to our business.
The industry is moving towards aggressive assertion, licensing, and litigation of patents and other intellectual property rights.
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 options will continue to reduce our operating results such that we may find it necessary to change our business practices
to attract and retain employees.
Historically,
we have used stock options as a key component of our employee compensation packages. We believe that stock options 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 adversely affects our net income and earnings per share, will continue
to adversely affect future quarters, and will make profitability harder to achieve. In addition, we may decide in response to
the effects of expensing stock options on our operating results to reduce the number of stock options granted to employees or
to grant options to fewer employees. This could adversely affect our ability to retain existing employees and attract qualified
candidates, and also could increase the cash compensation we would have to pay to them.
If
we are unable to attract and retain highly skilled sales and marketing and product development personnel, our ability to develop
and market new products and product enhancements will be adversely affected.
We
believe our ability to achieve increased revenues and to develop successful new products and product enhancements will depend
in part upon our ability to attract and retain highly skilled sales and marketing and product development personnel. Our products
involve a number of new and evolving technologies, and we frequently need to apply these technologies to the unique requirements
of mobile products. Our personnel must be familiar with both the technologies we support and the unique requirements of the products
to which our products connect. Competition for such personnel is intense, and we may not be able to attract and retain such key
personnel. In addition, our ability to hire and retain such key personnel will depend upon our ability to raise capital or achieve
increased revenue levels to fund the costs associated with such key personnel. Failure to attract and retain such key personnel
will adversely affect our ability to develop and market new products and product enhancements.
Our
operating results could be harmed by economic, political, regulatory and other risks associated with export sales.
Our
operating results are subject to the risks inherent in export sales, including:
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unexpected
changes in regulatory requirements, import and export restrictions and tariffs;
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difficulties
in managing foreign operations;
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the
burdens of complying with a variety of foreign laws;
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greater
difficulty or delay in accounts receivable collection;
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potentially
adverse tax consequences; and
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political
and economic instability.
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Our
export sales are primarily denominated in Euros for our sales to European distributors. Accordingly, an increase in the value
of the United States dollar relative to Euros could make our products more expensive and therefore potentially less competitive
in European market. Declines in the value of the Euro relative to the United States dollar may result in foreign currency losses
relating to collection of Euro denominated receivables if left unhedged.
Our
operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, and other events beyond
our control.
Our
corporate headquarters is located near an earthquake fault. The potential impact of a major earthquake on our facilities, infrastructure,
and overall business is unknown. Additionally, we may experience electrical power blackouts or natural disasters that could interrupt
our business. Should a disaster be widespread, such as a major earthquake, or result in the loss of key personnel, we may not
be able to implement our disaster recovery plan in a timely manner. Any losses or damages incurred by us as a result of these
events could have a material adverse effect on our business.
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, 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.
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 August
18, 2017, we had 6,001,705 shares of Common Stock outstanding. Substantially all of these
shares are freely tradable in the public market, either without restriction or subject, in some cases, only to S-3 prospectus
delivery requirements and, in other cases, only to manner of sale, volume, and notice requirements of Rule 144 under the Securities
Act.
As
of August 18, 2017, we had 2,255,365 shares of Common Stock subject to outstanding options under our stock option plans, and 113,537
shares of Common Stock were available for future issuance under the plans. We have registered the shares of Common Stock subject
to outstanding options and reserved for issuance under our stock option plans. Accordingly, the shar
es
of Common Stock underlying vested options will be eligible for resale in the public market as soon as the options are exercised.
As
of August 18, 2017, we had $752,625 in subordinated convertible notes payable from four-year notes maturing on September 4, 2017.
Up to 972,884 shares of Common Stock could be issued for conversion of the notes plus all accrued interest as of the maturity
date.
Volatility
in the trading price of our Common Stock could negatively impact the price of our Common Stock. During the period from January
1, 2016 through August 18, 2017, our Common Stock price fluctuated between a high of $4.90 and a low of $1.82. 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.
INFORMATION
CONTAINED IN THIS PROSPECTUS
You
should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information
different from that contained in this prospectus. The selling stockholders listed in this prospectus are offering to sell, and
seeking offers to buy, shares of our Common Stock only in jurisdictions where offers and sales are permitted. The information
contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus
or of any sale of our Common Stock.