UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended September 30, 2020

 

OR 

 

( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the transition period ___________________ to _____________________.

 

Commission file number 1-13810

 

 

 

 

SOCKET MOBILE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   94-3155066
(State of incorporation)   (IRS Employer Identification No.)

 

39700 Eureka Drive, Newark, CA 94560

(Address of principal executive offices including zip code)

 

(510) 933-3000

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common stock, $0.001 Par Value per Share SCKT NASDAQ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ]

 

 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [ X ] NO [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ]

Smaller reporting company [X] Emerging growth company [ ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]

 

The number of shares of Common Stock ($0.001 par value) outstanding as of November 11, 2020 was 6,080,145 shares.

 

 

 

 

 

 

 

 

 

 

 

 

INDEX

 

 

      PAGE NO.  
Part I.  Financial Information        
         
Item 1.  Financial Statements:        
         
     Condensed Statements of Operations - Three Months and Nine Months Ended September 30, 2020 and 2019 (Unaudited)     1  
         
     Condensed Balance Sheets - September 30, 2020 (Unaudited) and December 31, 2019     2  
         
     Condensed Statements of Stockholders’ Equity - Three Months and Nine Months Ended September 30, 2020 and 2019 (Unaudited)     3  
         
     Condensed Statements of Cash Flows - Nine Months Ended September 30, 2020 and 2019 (Unaudited)     4  
         
     Notes to Condensed Financial Statements (Unaudited)     5  
         
Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
    15  
         
Item 3. Quantitative and Qualitative Disclosures about Market Risk     21  
         
Item 4. Controls and Procedures     22  
         
         
Part II. Other Information        
         
Item 1A. Risk Factors     23  
         
Item 6. Exhibits     33  
         
Signatures     34  
         
Index to Exhibits     35  

 

 

 

 

 

 

PART I

 

Item 1. Financial Statements

 

SOCKET MOBILE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
 
   

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

    2020   2019   2020   2019
                 
Revenues   $ 4,108,738     $ 4,980,060     $ 11,044,448     $ 14,668,757  
                                 
Cost of revenues     1,835,333       2,343,758       5,185,802       7,002,971  
                                 
Gross profit     2,273,405       2,636,302       5,858,646       7,665,786  
                                 
Operating expenses:                                
   Research and development     680,797       1,015,051       2,420,945       2,906,271  
   Sales and marketing     658,265       785,295       2,148,221       2,312,305  
   General and administrative     485,465       706,485       1,741,311       2,052,882  
   Goodwill impairment charges     4,427,000       —         4,427,000       —    
      Total operating expenses     6,251,527       2,506,831       10,737,477       7,271,458  
                                 
Operating income (loss)     (3,978,122 )     129,471       (4,878,831 )     394,328  
                                 
Interest expense, net     (23,864 )     (25,562 )     (51,505 )     (83,371 )
Other income     —         —         70,000       —    
                                 
Net income (loss) before income taxes     (4,001,986 )     103,909       (4,860,336 )     310,957  
                                 
Income tax expense     (800 )     (9,611 )     (800 )     (85,030 )
                                 
Net income (loss)   $ (4,002,786 )   $ 94,298   $ (4,861,136 )   $ 225,927
                                 
Net income (loss) per share:                                
                                 
   Basic   $ (0.62 )   $ 0.02   $ (0.76 )   $ 0.04
   Diluted   $ (0.62 )   $ 0.01   $ (0.76 )   $ 0.04
                                 
Weighted average shares outstanding:                                
                                 
   Basic     6,037,559     5,999,487     6,020,363     5,979,715
   Diluted     6,037,559     6,317,270     6,020,363     6,236,673

 

  

 

See accompanying notes to condensed financial statements.

  1  

 

 

SOCKET MOBILE, INC.

CONDENSED BALANCE SHEETS

   

September 30,
2020

(Unaudited)

  December 31, 2019
ASSETS
Current assets:                
   Cash and cash equivalents   $ 1,774,845     $ 958,860  
   Accounts receivable, net     2,359,415       2,837,006  
   Inventories, net     3,362,314       3,178,908  
   Prepaid expenses and other current assets     317,043       312,127  
   Deferred cost on shipments to distributors     178,631       233,823  
      Total current assets     7,992,248       7,520,724  
                 
Property and equipment:                
   Machinery and office equipment     2,330,311       2,195,405  
   Computer equipment     1,339,065       1,336,445  
      3,669,376       3,531,850  
   Accumulated depreciation     (2,834,619 )     (2,667,340 )
      Property and equipment, net     834,757       864,510  
                 
Goodwill     —         4,427,000  
Other long-term assets     169,932       202,611  
Deferred tax assets     5,506,934       5,506,934  
Operating lease right-of-use assets     704,416       936,708  
      Total assets   $ 15,208,287   $ 19,458,487
                 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:                
   Accounts payable and accrued expenses   $ 2,014,944     $ 2,084,848  
   Accrued payroll and related expenses     402,192       566,350  
   Deferred revenue on shipments to distributors     556,854       611,029  
   Short term portion of deferred service revenue     25,991       32,900  
   Bank lines of credit     —         1,412,449  
   Notes payable – current portion     682,850       333,333  
   Subordinated convertible notes payable, net of discount     168,645       —    
   Subordinated convertible notes payable, net of discount-related party     1,264,840       —    
   Operating lease – current portion     471,006       419,288  
   Finance lease – current portion     —         8,291  
      Total current liabilities     5,587,322       5,468,488  
                 
Long-term portion of operating lease     384,180       715,062  
Long-term portion of deferred service revenue     29,194       40,711  
Long-term portion of notes payable     375,850       —    
   Total liabilities     6,376,546       6,224,261  
                 

Commitments and contingencies 

    —         —    
Stockholders’ equity:                
   Common stock, $0.001 par value: Authorized – 20,000,000 shares,                
      Issued and outstanding – 6,050,655 shares at September 30, 2020 and 6,017,674 shares at December 31, 2019     6,051       6,018  
   Additional paid-in capital     61,525,589       61,066,971  
   Accumulated deficit     (52,699,899 )     (47,838,763 )
      Total stockholders’ equity     8,831,741       13,234,226  
         Total liabilities and stockholders’ equity   $ 15,208,287   $ 19,458,487

 

 

 

See accompanying notes to condensed financial statements.

  2  

 

 

  

 

SOCKET MOBILE, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

                 
                 
        Additional       Total
    Common Stock   Paid-In   Accumulated   Stockholders’
    Shares   Amount   Capital   Deficit   Equity
Balance at December 31, 2019     6,017,674     $ 6,018     $ 61,066,971     $ (47,838,763 )   $ 13,234,226  
Repurchase of common stock     (4,967 )     (5 )     (8,491 )     —         (8,496 )
Cancellation of restricted stock     (3,200 )     (3 )     3       —         —    
Stock-based compensation     —         —         132,065       —         132,065  
Net loss     —         —         —         (90,327 )     (90,327 )
Balance at March 31, 2020     6,009,507     $ 6,010     $ 61,190,548     $ (47,929,090 )   $ 13,267,468  
Repurchase of common stock     (398 )     (1 )     472       —         471  
Stock-based compensation     —         —         131,369       —         131,369  
Net loss     —         —         —         (768,023 )     (768,023 )
Balance at June 30, 2020     6,009,109     $ 6,009     $ 61,322,389     $ (48,697,113 )   $ 12,631,285  
Stock options exercised     41,546       42       73,649       —         73,691  
Stock-based compensation     —         —         129,551       —         129,551  
Net loss     —         —         —         (4,002,786 )     (4,002,786 )
Balance at September 30, 2020     6,050,655     $ 6,051     $ 61,525,589     $ (52,699,899 )   $ 8,831,741  

 

 

 

 

SOCKET MOBILE, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

                                         
                                         
        Additional       Total
    Common Stock   Paid-In   Accumulated   Stockholders’
    Shares   Amount   Capital   Deficit   Equity
Balance at December 31, 2018     5,883,109     $ 5,883     $ 60,523,901     $ (48,125,349 )   $ 12,404,435  
Restricted stock grants     116,050       116       (116 )     —         —    
Stock-based compensation     —         —         121,965       —         121,965  
Net income     —         —         —         11,839       11,839  
Balance at March 31, 2019     5,999,159     $ 5,999     $ 60,645,750     $ (48,113,510 )   $ 12,538,239  
Stock-based compensation     —         —         137,035       —         137,035  
Net income     —         —         —         119,790       119,790  
Balance at June 30, 2019     5,999,159     $ 5,999     $ 60,782,785     $ (47,993,720 )   $ 12,795,064  
Stock options exercised     494       1       513       —         514  
Stock-based compensation     —         —         133,008       —         133,008  
Net income     —         —         —         94,298       94,298  
Balance at September 30, 2019     5,999,653     $ 6,000     $ 60,916,306     $ (47,899,422 )   $ 13,022,884  

 

 

 

See accompanying notes to condensed financial statements.

  3  

 

 

 

SOCKET MOBILE, INC.

CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
         
    Nine Months Ended September 30,
    2020   2019
Operating activities                
  Net income (loss)   $ (4,861,136 )   $ 225,927  
  Adjustments to reconcile net income (loss) to net cash provided by operating activities:                
      Stock-based compensation     392,985       392,008  
      Depreciation and amortization     436,970       333,451  
      Deferred tax expenses (benefits)     —         112,068  
      Goodwill impairment charges     4,427,000       —    
                 
  Changes in operating assets and liabilities:                
      Accounts receivable     477,591       (695,032 )
      Inventories     (183,406 )     (255,910 )
      Prepaid expenses and other current assets     (4,916 )     (98,477 )
      Accounts payable and accrued expenses     (69,904 )     256,535  
      Accrued payroll and related expenses     (164,158 )     122,151  
      Net deferred revenue on shipments to distributors     1,017       132,797  
      Deferred service revenue     (18,426 )     14,807  
      Net change in operating lease     (46,872 )     (33,160 )
         Net cash provided by operating activities     386,745       507,165  
                 
Investing activities                
  Purchases of equipment     (374,538 )     (437,083 )
       Net cash used in investing activities     (374,538 )     (437,083 )
                 
Financing activities                
  Payments on finance leases     (8,291 )     (11,655 )
  Common stock repurchase and related expenses     (8,025 )     —    
  Proceeds from borrowings under bank line of credit agreement     5,630,000       13,038,000  
  Repayments of borrowings under bank line of credit agreement     (7,042,449 )     (12,925,817 )
  Repayments of bank term loan     (333,333 )     (375,000 )
  Proceeds from notes payable     1,208,700       —    
  Repayments of notes payable     (150,000 )     —    
  Proceeds from subordinated convertible notes payable, net of discount     168,645       —    
  Proceeds from subordinated convertible notes payable, net of discount-related party     1,264,840       —    
  Stock options exercised     73,691       514  
       Net cash (used in) provided by financing activities     803,778       (273,958 )
                 
Net increase (decrease) in cash and cash equivalents     815,985       (203,876 )
                 
Cash and cash equivalents at beginning of period     958,860       1,084,991  
Cash and cash equivalents at end of period   $ 1,774,845   $ 881,115
                 
Supplemental disclosure of cash flow information                
  Cash paid for interest   $ 42,403     $ 81,060  

 

 

 

See accompanying notes to condensed financial statements.

  4  

 

 

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

September 30, 2020

 

NOTE 1 Basis of Presentation

 

The accompanying unaudited condensed financial statements of Socket Mobile, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals considered necessary for fair presentation have been included. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future period. These financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

While the COVID-19 pandemic has impacted the Company’s reported results for the quarter and nine months ended September 30, 2020, the long-term impact that the pandemic may have on the Company’s business, results of operations, financial position or cash flows remain uncertain. The Company may experience constrained supply or slowed customer demand that could materially adversely impact the Company’s business, results of operations and overall financial performance in future periods. Furthermore, the impacts of a potential worsening of the economic conditions and the continued volatility in the financial markets remain unknown. See “Item 1A. Risk Factors” for further discussion of the possible impact of the COVID-19 pandemic on the Company’s business. The Company evaluates and addresses the impacts of the COVID-19 pandemic frequently. 

 

NOTE 2 — Summary of Significant Accounting Policies

 

The Company’s accounting policies are set forth in “Note 1. Organization and Summary of Significant Accounting Policies” of the Company’s Notes to Financial Statements included in the 2019 Annual Report on Form 10-K. Included herein are certain updates to those policies. 

 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates, and such differences may be material to the financial statements.

 

Cash Equivalents and Fair Value of Financial Instruments

The Company considers all highly liquid investments purchased with a maturity date of 90 days or less at date of purchase to be cash equivalents. At September 30, 2020 and December 31, 2019, all of the Company’s cash and cash equivalents consisted of amounts held in demand deposit accounts in banks. The aggregate cash balance on deposit in these accounts are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company’s cash balance on deposit in these accounts may, at times, exceed the federally insured limits. The Company has never experienced any losses in such accounts.

 

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

 

Revenue Recognition and Deferred Revenue

On January 1, 2017, the Company adopted ASC 606 “Revenue from Contracts with Customers” and implemented a new revenue recognition policy. Instead of deferring 100% of revenue and cost of revenue until products are sold by distributors, the new policy recognizes revenue on sales to distributors when shipping of product is completed and title transfers to the distributor, less a reserve for estimated product returns (sales and cost of sales). The reserves are based on estimates of future returns calculated from actual return history, primarily from stock rotations, plus knowledge of pending returns outside of the norm. At September 30, 2020, the deferred revenue and deferred cost on shipments to distributors were $479,299 and $178,631, respectively, compared to $611,029 and $233,823, respectively, at December 31, 2019.

 

  5  

 

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

September 30, 2020

 

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires a lessee to recognize a liability representing future lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For operating leases, a lessee is required to recognize at inception a right-of-use asset and a lease liability equal to the net present value of the lease payments, with lease expense recognized over the lease term on a straight-line basis. For leases with a term of twelve months or less, ASU 2016-02 allows a reporting entity to make an accounting policy election to not recognize a right-of-use asset and a lease liability, and to recognize lease expense on a straight-line basis. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company adopted ASU 2016-02 effective January 1, 2019, which had no impact on the Company’s Statements of Operations. The most significant impact was the recognition of operating lease right-of-use assets and liabilities for the office space lease.

 

Goodwill Review 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU) 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this update eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable.

 

The Company tests its goodwill for impairment annually as of September 30th or more frequently when events or circumstances indicate that the carrying value of the Company’s single reporting unit more likely than not exceeds its fair value.

 

As of September 30, 2020, the Company experienced a triggering event due to a drop in its stock price, which had been negatively impacted by the economic downturn caused by COVID-19 pandemic and performed a quantitative analysis for potential impairment of its goodwill. The Company's fair value measurement approach combines the income approach, which estimates fair value based upon projections of future revenues, expenses, and cash flows discounted to its present value, and market valuation technique. The income valuation technique uses estimates and assumptions including the projected future cash flows, discount rate reflecting the risk attributable to the Company, perpetual growth rate, and projected future economic and market conditions. Under the market approach, the principal assumption included an estimate for a control premium. As a result of the analysis, the Company determined the carrying value exceeded its fair value and recorded a non-cash goodwill impairment charge of $4,427,000 at September 30, 2020. No income tax benefit related to this goodwill impairment charge is recorded at September 30, 2020.

 

  6  

 

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

September 30, 2020

 

Recently Issued Financial Accounting Standards

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

 

NOTE 3 — Inventories

 

Inventories consist principally of raw materials and sub-assemblies, which are stated at the lower of cost (first-in, first-out) or market. Inventories at September 30, 2020 and December 31, 2019 were as follows:

 

    September 30,   December 31,
    2020   2019
Raw materials and sub-assemblies   $ 3,661,671     $ 3,767,588  
Finished goods     398,282       241,681  
Inventory reserves     (697,639 )     (830,361 )
Inventory, net   $ 3,362,314   $ 3,178,908

 

 

 

NOTE 4 — Bank Financing Arrangements

 

Sixth Financing Agreement

On June 14, 2019, the Company entered into the Sixth Amended and Restated Business Financing Agreement with the Bank. The Bank waived the default which occurred for the month ended April 30, 2019 when the Company’s Asset Coverage Ratio was 1.13 to 1.00, instead of the required 1.25 to 1.00. The Bank also increased the Eligible Receivable threshold for Ingram Micro from 50% to 60% of domestic receivables, and from 35% to 50% of all receivables (including both domestic and foreign receivables).

 

Seventh Financing Agreement

On January 8, 2020, the Company entered into the Seventh Amended and Restated Business Financing Agreement with the Bank which extends the maturity date of the Company’s revolving line of credit to January 31, 2022.

 

  7  

 

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

September 30, 2020

 

Eighth Financing Agreement

On August 28, 2020, the Company entered into the Eighth Amended and Restated Business Financing Agreement with the Bank. The Bank consented to the issuance of subordinated debt in the amount less than $2,000,000, at the annual interest rate less than 10% and maturing no sooner than 3 years.

 

The Asset Coverage Ratio was 1.63 to 1.0 on September 30, 2020. During the nine months ended September 30, 2020, total repayments of the term loan was $333,333. Total amount borrowed under the domestic and international lines was $5,630,000 and the total repayments was $7,042,449. At September 30, 2020, the available borrowing capacity was approximately $1,643,000. There were no amounts outstanding under the term loan and bank credit facilities at September 30, 2020.

 

Interest expense on the term loan for three and nine months ended September 30, 2020 was $229 and $6,152, respectively. Interest expense on the amounts drawn under the Company’s bank credit lines during the three and nine months ended September 30, 2020 was $1,077 and $20,461. Accrued interest payable related to the amounts outstanding under the bank credit facilities at September 30, 2020 was $373.

 

NOTE 5 — Term loans

 

PPP Loan 

On April 20, 2020, the Company received $1,058,700 of loan proceeds under the Paycheck Protection Program (“PPP”) which was established as part of the Coronavirus Aid, Relief, and Economic Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account the current business activity and the ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on its future adherence to the forgiveness criteria. The loan has a fixed interest rate of 1% and matures in two years. Payments of principal and interest are deferred for a period of six months from the date on which the PPP loan is distributed. As of September 30, 2020, pursuant to the existing loan agreement, all of the payments expected between July 1, 2020 and June 30, 2021, or $682,850, are classified as the current portion of the note payable and the remaining balance $375,850 is classified as the long-term note payable.

 

The PPP loan was primarily used to cover payroll costs, rent, and utility costs during the covered period. Pursuant to the CARES Act and implementing rules and regulations, the Company has applied to its bank, Western Alliance for the PPP loan to be forgiven. The Company has used the proceeds of the PPP loan for purposes consistent with the PPP. While the Company currently believes that its use of the loan proceeds will meet the conditions for forgiveness of the loan, the Company cannot assure that it will be eligible for forgiveness of the loan. Any PPP loan balance remaining following forgiveness by the SBA will be fully re-amortized over the remaining term of the loan.

 

  8  

 

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

September 30, 2020

 

Economic Injury Disaster Loan (EIDL) 

On June 26, 2020, the Company executed the standard loan documents required for a securing loan of $150,000 offered by the U.S. Small Business Administration under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business. Proceeds of the EIDL are being used for working capital purposes. Interest accrues at the rate of 3.75% per annum and will accrue from the date of inception. Installment payments, including principal and interest, are due monthly beginning June 26, 2021 (twelve months from the date of the EIDL) in the amount of $731. The balance of principal and interest is payable 30 years from the date of the EIDL. The EIDL is secured by a security interest on all of the Company’s assets. An immaterial amount of interest expense related to the loan during the nine months ended September 30, 2020 was recognized.

 

On June 23, 2020, the Company received $10,000 from US Small Business Administration as part of Economic Injury Disaster Loan (“EIDL”). This was a grant and does not need to be repaid. The Company recorded it as other income in Q2.

 

On August 28, 2020, the Company paid off the Economic Injury Disaster Loan in full.

 

NOTE 6 — Secured Subordinated Convertible Notes Payable

 

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

 

The funds raised are used to increase the Company’s working capital balances. The notes have a three-year term that accrue interest at 10% per annum and mature on August 30, 2023. The interest on the notes is payable quarterly in cash. The holder of each note may require the Company to repay the principal amount of the note plus accrued interest at any time after August 31, 2021. The principal amount of each note is convertible at any time, at the option of the holder, into shares of the Company’s common stock at a conversion price of $1.46 per share, which was the market closing price of the common stock on Friday, August 28, 2020, the closing date of the financing. The notes did not contain a beneficial conversion feature because the conversion price is lower than the market closing price on the date of the notes payable. The notes are secured by the assets of the Company and are subordinated to amounts outstanding under the Company’s working capital bank line of credit with Western Alliance Bank.

 

Total issuance costs associated with the financing is $96,515, and the costs are presented in the balance sheet as a direct deduction from the notes payable balance of $1,530.000 as a contra-liability. The issuance costs are amortized over three years, the term of the notes payable, and the amortization expense is reported as interest expense.

 

Accrued interest expense at September 30, 2020 was $12,575. 

 

NOTE 7 — Segment Information and Concentrations

 

Segment Information

The Company operates in the mobile barcode scanning and RFID/NFC data capture market. Mobile scanning typically consists of mobile devices such as smartphones or tablets, with mobile scanning or NFC peripherals for data collection, and third-party vertical applications software. The Company distributes its products in the United States and foreign countries primarily through distributors, resellers, and online. The Company markets its products primarily through application developers whose applications are designed to work with Company’s products.

 

  9  

 

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

September 30, 2020

 

Revenues for the geographic areas for three months ended September 30, 2020 and 2019 were as follows:

  

    Three Months Ended
September 30,
  Nine Months Ended
September 30,
    2020   2019   2020   2019
Revenues:                
   Americas   $ 3,290,992     $ 3,283,745     $ 8,676,626     $ 10,937,316  
   Europe     567,977       817,420       1,383,518       1,915,343  
   Asia Pacific     249,769       878,895       984,304       1,816,098  
      Total revenues   $ 4,108,738   $ 4,980,060   $ 11,044,448   $ 14,668,757

 

 

Export revenues are attributable to countries based on the location of the Company’s customers. The Company does not hold long-lived assets in foreign locations.

 

Major Customers

Customers who accounted for at least 10% of the Company’s total revenues for the three and nine months ended September 30, 2020 and 2019 were as follows:

 

    Three Months Ended
September 30,
  Nine Months Ended
September 30,
    2020   2019   2020   2019
Ingram Micro Inc.     30 %     34 %     32 %     39 %
BlueStar, Inc.     29 %     16 %     23 %     18 %
Nippon Primex, Inc.       *       12 %       *         *  
Ingram Micro Pan Europe GmBH       *       10 %       *         *  

 

 

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk include cash, cash equivalents and accounts receivable. The Company invests its cash in demand deposit accounts in banks. To date, the Company has not experienced losses on the investments. The Company’s trade accounts receivables are primarily with distributors. The Company performs ongoing credit evaluations of its customers’ financial condition but generally requires no collateral. Reserves are maintained for potential credit losses, and such losses have been within management’s expectations. Customers who accounted for at least 10% of the Company’s accounts receivable balances at September 30, 2020 and December 31, 2019 were as follows:

 

    September 30,   December 31,
    2020   2019
Ingram Micro Inc.     35 %     45 %
BlueStar, Inc.     33 %     32 %
ScanSource, Inc.     11 %     *  
Ingram Micro Pan Europe GmbH     10 %     *  
                 
*Customer accounted for less than 10% of the Company’s accounts receivable balances

 

  10  

 

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

September 30, 2020

 

Concentration of Suppliers

Several of the Company’s component parts are produced by a sole or limited number of suppliers. Shortages could occur in these essential materials due to increased demand, or to an interruption of supply. Suppliers may choose to restrict credit terms or require advance payments causing delays in the procurement of essential materials. If the Company were unable to procure certain of such materials, it could have a material adverse effect upon its results. At September 30, 2020, 38% of the Company’s accounts payable balances was concentrated in the top three suppliers. For the three months ended September 30, 2020, the top three suppliers accounted for 64% of the inventory purchases.

 

 

 

NOTE 8 — Stock-Based Compensation

 

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

 

The fair values of stock options are generally determined using a binomial lattice valuation model which incorporates assumptions about expected volatility, risk-free interest rate, dividend yield, and expected life. There were 37,000 stock options at the price of $1.08 granted for the nine months ended September 30, 2020, compared to 213,400 shares at the weighted average price of $2.04 granted for the nine months ended September 30, 2019.

 

The restricted stocks are issued to employees and consultants and are held in escrow by the Company until the shares vest on the schedule of 15% after year one, 20% after year two, 25% after year three and 40% after year four, subject to the employees and consultants being a continuing service provider on the vesting dates. If the service or employment is terminated, unvested shares revert to the Company. Shares are registered at grant, so share owners may vote at the annual stockholder meeting. Restricted stocks are granted at zero cost basis. Compensation cost of the restricted stocks is recognized on a straight-line basis over the 4-year vesting period. For the nine months ended September 30, 2020 and 2019, the Company awarded 389,680 and 124,285 shares of restricted stock, respectively, leaving a balance of 301,631 available shares as of September 30, 2020. Due to the existence of restrictions on sale or transfer until the stocks vest, the Company does not count the restricted stocks as issued and outstanding shares until they vest.

 

Total stock-based compensation expense for the three and nine months ended September 30, 2020 was $129,551 and $392,985, respectively.

 

  11  

 

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

September 30, 2020

 

NOTE 9 — Net Income (Loss) Per Share Applicable to Common Stockholders

 

The following table sets forth the reconciliation of basic shares to diluted shares and the computation of basic and diluted net income (loss) per share:  

 

       

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

          2020*       2019       2020*       2019  
Numerator:                                    
Net income (loss)       $ (4,002,786 )*   $ 94,298   $ (4,861,136 )*   $ 225,927
Net income (loss) allocated to restricted stock award         264,275       —         263,128       —    
Net income (loss) available to common stockholders       $ (3,738,511 )*   $ 94,298   $ (4,598,008 )*   $ 225,927
                                     
Denominator:                                    

Weighted average shares outstanding used in computing net income (loss) per share:

                                   
Basic         6,037,559       5,999,487       6,020,363       5,979,715  
Effect of dilutive stock options         —         317,783       —         256,958  
Diluted         6,037,559       6,317,270       6,020,363       6,236,673  
                                     
Net income (loss) per share applicable to common stockholders:                                    
Basic       $ (0.62 )*   $ 0.02     $ (0.76 )*   $ 0.04  
Diluted       $ (0.62 )*   $ 0.01     $ (0.76 )*   $ 0.04  

*Amounts for 2020 include goodwill impairment charges of $4.43 million recorded as of September 30, 2020. Additional information regarding goodwill impairment is contained in "Note 2 - Summary of Significant Accounting Policies."

 

 

For the three and nine months ended September 30, 2020, the shares used in computing diluted net loss per share do not include 2,599,187 dilutive stock options and shares of restricted stock, nor 1,047,945 dilutive conversion shares as the effect is anti-dilutive given the Company’s loss. In the three and nine months ended September 30, 2019, 2,128,547 and 2,189,372, respectively, stock options were excluded in the calculation of diluted net income per share.

 

NOTE 10 — Taxes

 

The Company recorded no deferred tax benefit for the losses in the three and nine months ended September 30, 2020. In the three and nine months ended September 30, 2019, the Company recorded deferred tax expenses of $9,611 and $85,030, respectively. During the three months ended September 30, 2019, the Company also recorded a tax refund of $27,838 resulted of AMT paid in the prior years.

 

  12  

 

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

September 30, 2020

 

NOTE 11 — Commitments and Contingencies

 

Operating Leases

The Company adopted ASU 2016-02, Leases (Topic 842) effective January 1, 2019 and restated its reported results in January 2018, including the recognition of additional operating lease right-of-use assets and liabilities. On January 1, 2018, the Company recognized operating lease right-of-use assets and operating lease liabilities in the amount of approximately $1.57 million and $1.85 million, respectively, which represented the presented the present value of future lease payments using a discount rate of 6.25% per annum.

 

The Company leases office space under a non-cancelable operating lease that provides the Company approximately 37,100 square feet in Newark, California. The lease agreement expires on June 30, 2022. Monthly base rent increases four percent per year annually on July 1st of each year. We recognize operating lease expense on a straight-line basis over the lease term. The operating lease expense was $103,208 and $309,626 for the three and nine-month periods ended September 30, 2020 and 2019, respectively.

 

In June 2020, the Company also signed a new two-year equipment operating lease agreement. The Company will pay $1,519 in monthly installments starting in September of 2020 through June 2022.

 

On September 30, 2020, the balances of right-of-use assets and liabilities for the operating leases were approximately $0.70 million and $0.86 million, respectively, compared to approximately $0.94 million, and $1.13 million, respectively, at December 31, 2019.

 

Cash payments included in the measurement of our operating lease liabilities were $356,513 and $342,785 for the nine-month periods ended September 30, 2020 and 2019, respectively.

 

Future minimum lease payments under the operating leases of the office and copier at September 30, 2020 are shown below:

 

Annual minimum payments:   Amount
2020 (October 1, 2020 to December 31, 2020)   $ 126,516  
2021     515,822  
2022     262,789  
Total minimum payments     905,127  
Less: Amount attributable to interest     (49,941 )
Total operating lease liabilities     855,186  
Less: Current portion of operating lease     (471,006 )
Long-term portion of operating lease   $ 384,180

 

 

Finance Leases

The new standard, ASU 2016-02 classifies lessee leases into two types, operating and finance. The Company leases certain of its equipment under finance leases. The leases are collateralized by the underlying assets. At September 30, 2020, the Company has no equipment subject to financing arrangement, compared to equipment with a cost of $100,584 at December 31, 2019. The accumulated depreciation of the assets associated with the finance leases as of September 30, 2020 and December 31, 2019, amounted to zero and $92,571 respectively.

 

  13  

 

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

September 30, 2020

 

Purchase Commitments

As of September 30, 2020, the Company has non-cancelable purchase commitments for inventory to be used in the ordinary course of business of approximately $3,252,000.

 

 

Legal Matters

The Company is subject to disputes, claims, requests for indemnification and lawsuits arising in the ordinary course of business. Under the indemnification provisions of the Company’s customer agreements, the Company routinely agrees to indemnify and defend its customers against infringement of any patent, trademark, copyright, trade secrets, or other intellectual property rights arising from customers’ legal use of the Company’s products or services. The exposure to the Company under these indemnification provisions is generally limited to the total amount paid for the indemnified products. However, certain indemnification provisions potentially expose the Company to losses in excess of the aggregate amount received from the customer. To date, there have been no claims against the Company by its customers pertaining to such indemnification provisions, and no amounts have been recorded. The Company is currently not a party to any material legal proceedings.

 

NOTE 12 — Subsequent Events

 

On November 5, 2020, the Company filed a shelf registration statement No. 333-249873 on Form S-3 to register securities through the Securities and Exchange Commission. The statement consists of a maximum of 1,047,942 shares of Common Stock at the conversion price of $1.46 per share that are issuable by the registrant upon the conversion of subordinated convertible notes issued on August 31, 2020 and maturing on August 30, 2023.

 

On November 12, 2020, the Company filed the Amendment No. 1 to its Registration Statement on Form S-3 (File No. 333-249873) to amend the Information Incorporated by Reference section by listing additional current reports on Form 8-K that were filed with the SEC on January 14, 2020 and February 12, 2020. There are no changes to the prospectus.

 

As of November 12, 2020, the Company has issued 29,663 shares of common stock for the exercise of stock options.

 

As of November 12, 2020, the Company repurchased and retired 173 shares of restricted stocks covering employee’s tax withholding obligation for the shares vested. 

 

 

 

 

 

  14  

 

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, management’s beliefs, and assumptions made by management. These forward-looking statements are no guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; 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; 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; or other factors described in this Form 10-Q including “Item 1A. Risk Factors” and recent Form 8-K and Form 10-K reports 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 in form 10-K, and other information contained in other reports and documents filed from time to time with the Securities and Exchange Commission.

 

 

 

  15  

 

Business overview

 

We are a leading innovator 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 (Capture SDK) to application developers, which enables them to provide their users with our advanced barcode scanning and RFID/NFC features. Our products are integrated in their application solutions and are marketed by the application developers or the resellers of their applications. The number of our registered developers for data capture applications continues to grow.

 

Standard companion cordless barcode scanners. Our SocketScan® 700 Series include 1D linear imaging (S700), 1D laser (S730) and 2D (S740) barcode scanners, available in five vivid colors: blue, green, red, white and yellow. S740 reads all common 1D, stacked, 2D and postal codes.

 

Durable companion cordless barcode scanners. Our DuraScan® 700 Series Linear Barcode Scanner (D700), Laser Barcode Scanner (D730) and Universal Barcode Scanner (D740, D750, D760), are designed to be durable barcode scanners with IP54-rated outer casing to withstand tougher environments. Universal Barcode Scanners (D740, D750, D760) read all common 1D, stacked, 2D and postal codes. D740 is priced competitively with a 1D barcode scanner, making D740 the affordable 2D option available in the market. D760 includes MRZ (machine-readable zone) support, making it capable of scanning passports, visas, and other travel documents. In July, we announced a new medical-grade, universal scanner, the D755, which was designed and built for healthcare environment.

 

DuraSled and Attachable cordless barcode scanners. Our SocketScan 800 Series cordless barcode scanners, 1D linear imaging (S800) and 2D (S840, S860) are attachable to smartphones, tablets and other mobile devices with an easily detachable clip or DuraCase, creating a one-handed solution. DuraCase models support iPhone 6/7/8, iPhone 6/7/8 Plus, iPod touch, Samsung J3/J5 and Samsung S7. New DuraCase models are introduced from time to time as new mobile phones are released. S860 includes MRZ (machine-readable zone) support, making it capable of scanning passports, visas, and other travel documents in addition to barcodes. SocketScan 800 Series scanners may be used stand-alone as well.

 

In 2019, we expanded our product line with a new family of products; DuraSled for the iPhone models 6,7,8, X and 11. The DuraSled combines the iPhone and a scanner to make a single-handed solution. The DuraSled both protects the phones from impact damage and provides a robust charging solution for all environments. The DuraSled is easy-to-use and ideal for delivery services, stock counting, ticketing and other application-driven, mobile solutions. In July 2020, we announced DuraSled compatibility for the Samsung XCover Pro. There are two versions of the XCover Pro DuraSled: the DS800 XCover Pro for 1D barcode scanning and the DS840 XCover Pro for 1D and 2D barcode scanning, respectively.

 

Contactless RFID/NFC reader writer. Our contactless product line includes the D600 Contactless Reader/Writer and the S550 Contactless Membership Card Reader/Writer. The D600, an ergonomically handheld model with IP54-rated outer casing, can read and write many different types of electronic SmartTags or transfer data with near field communication. The S550 enables us to expand our business into the emerging market for tap-and-go solutions that have traditionally been limited to payment solutions, such as Apple Pay, but can now be used for ticketing, access and identification applications. S550 is currently available for the developers.

 

  16  

 

Software Developer Kit (Capture SDK). Our Software Developer Kit (Capture SDK) supports all our data capture devices with a single installation, making it easy for a developer to integrate our data capture capabilities into their application. With the installation of our data capture software, the developers’ customers can choose any of our products that work best for them. Our Capture SDK enables the developer to modify captured data, control the placement of the barcoded or RFID data in their application, and control the feedback to the user that the transaction and transmission was successfully completed. Our Capture SDK 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 Capture SDK uses tools integrated with software build environments such as CocoaPods, Maven and NuGet, adds support for high level frameworks such as Xamarin, Cordova and Java, and adds other features to make it easier for developers to integrate our data capture software into their applications.

 

We design our own products and are responsible for all associated test equipment. We use third party contract manufacturers to make many components. We perform final product assembly, test, package and distribute our products at and from our Newark, California facility. We offer our products worldwide through two-tier distribution enabling customers to purchase from large numbers of on-line resellers around the world including application developers who resell their own solutions along with our data capture products. 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 for smartphones and tablets, building 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.

 

As of September 30, 2020, we experienced a triggering event due to a drop in our stock price, which had been negatively impacted by the economic downturn caused by COVID-19 pandemic. We performed a quantitative analysis for potential impairment of our goodwill. Our fair value measurement approach combines the income approach, which estimates fair value based upon projections of future revenues, expenses, and cash flows discounted to its present value, and market valuation technique. The income valuation technique uses estimates and assumptions including the projected future cash flows, discount rate reflecting the risk attributable to the Company, perpetual growth rate, and projected future economic and market conditions. Under the market approach, the principal assumption included an estimate for a control premium. As a result of the analysis, we determined the carrying value exceeded our fair value and recorded a non-cash goodwill impairment charge of $4,427,000 at September 30, 2020. No income tax benefit related to this goodwill impairment charge is recorded at September 30, 2020.

 

As we continue to closely monitor the COVID-19 pandemic, our top priority remains the health and safety of our employees. While essential operations continue, we have adapted to a world where many in our workforce are remote and those coming on-site are following new safety measures. We remain committed to protecting our employees and supporting our customers. 

 

Results of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 

 

Revenues

 

Total revenues for the three and nine months ended September 30, 2020 were approximately $4.1 million and $11 million, respectively, a decrease of 17.5% and 24.7%, respectively, from revenues of $5.0 million and $14.7 million, respectively, in the comparable periods one year ago.  The revenue shortfalls for the three and nine months ended September 30, 2020 were primarily due to the COVID-19 pandemic.

 

Cost of Sales and Gross Margins

 

 Cost of sales primarily consists of the costs to manufacture our products, including the costs of materials, contract manufacturing, shipping costs, personnel and related expenses including stock-based compensation, equipment and facility expenses, warranty costs and inventory excess and obsolete provisions.

 

  17  

 

The factors that impact our gross margins are the cost of materials, the mix of products and the extent to which we are able to efficiently utilize our manufacturing capacity. Our gross margins on sales for the three and nine-month periods ended September 30, 2020 were 55.3% and 53%, respectively, compared to gross margins of 52.9% and 52.3%, respectively, for the corresponding periods a year ago. The improvement in Q3 margins was primarily attributed to the reduction in manufacturing overhead, a cost-saving initiative implemented in Q3.

 

Research and Development Expense

 

Research and development expenses consist of the personnel and related expenses including stock-based compensation of our research and development teams, and materials and supplies, consulting services, third party testing services and equipment and facility expenses related to our research and development activities. All research and development costs are expensed as incurred. 

 

Research and development expense in the three and nine months ended September 30, 2020 were approximately $681,000 and $2,421,000, a decrease of approximately 33% and 17% compared to expenses of approximately $1,015,000 and $2,906,000 in the corresponding periods a year ago. Decreases in the level of research and development expense was primarily due to a reduction in employee compensation, a short-term cost saving initiative implemented by the Company to cope with COVID-19 impacts.

 

Sales and Marketing Expense

 

Sales and marketing expenses consist primarily of salaries and stock-based compensation for our sales and marketing personnel, fees for sales consultants, fees for professional services, marketing programs, advertising costs and travel expenses.

 

Sales and marketing expense in the three and nine months ended September 30, 2020 were approximately $658,000 and $2,148,000, a decrease of approximately 16% and 7% compared to the expense of approximately $785,000 and $2,312,000 in the corresponding periods a year ago.  The decrease was primarily due to a reduction in employee compensation, a short-term cost saving initiative implemented by the Company to cope with COVID-19 impacts.

 

General and Administrative Expense

General and administrative expenses consist primarily of general corporate costs, including personnel expenses, financial reporting, corporate governance and compliance and outside legal, audit and tax fees.

 

General and administrative expense in the three and nine months ended September 30, 2020 were approximately $485,000 and $1,741,000, a decrease of approximately 31% and 15% compared to the expense of approximately $706,000 and $2,053,000 in the corresponding periods a year ago. The decrease was primarily due to a reduction in employee compensation, a short-term cost saving initiative implemented by the Company to cope with COVID-19 impacts.

 

  18  

  

 

Interest Expense, Net of Interest Income

 

Interest expense, net of interest income, in the three and nine months ended September 30, 2020 was approximately $23,900 and $51,500, respectively, compared to approximately $25,600 and $83,400, respectively, in the same periods one year ago. Interest expense in 2020 was primarily related to interest on bank term loan and credit line facilities (see “NOTE 4 — Bank Financing Arrangements” for more information). Average outstanding balance of bank term loan and credit lines during Q3 2020 was approximately $98,350. Interest expense in 2019 was also primarily related to interest on bank term loan and credit line facilities. Average outstanding balance of bank term loan and credit lines during the Q3 2019 was $1.58 million.

 

Interest income reflects interest earned on cash balances. Interest income was nominal in each of the comparable first quarters, reflecting low average cash balances combined with low average rates of return.

 

Income Taxes

 

The Tax Cuts and Jobs Act of 2017, effective on January 1, 2018, eliminates alternative minimum taxes and lowers the U.S. federal corporate income tax rate from 34% to 21%. California corporate net income tax rate is 6.98% after allowing for federal deductibility.

 

We didn’t record deferred tax benefit for the loss in the three and nine months ended September 30, 2020. Our deferred tax asset, primarily representing future income tax savings from the application of net operating loss carry forwards, was valued at approximately $5,506,000 at September 30, 2020.

 

In the first nine months of 2019, our stock-based compensation of approximately $392,000 is the primary permanent difference between financial and tax expense which increased our taxable income. We estimated our federal and state effective tax rate to be 36% in 2019. In the three and nine months ended September 30, 2019, we recorded a deferred tax expense of approximately $9,611 and $85,000, respectively, with the expectation of a return to profitable operating results and full utilization of our net operating loss carryforwards

 

 We have determined that utilization of existing net operating losses against future taxable income is not limited by Section 382 of the Internal Revenue Code. Future ownership changes, however, may limit our ability to fully utilize the existing net operating loss carryforwards against any future taxable income. We will continue to monitor the likelihood to realize the value of deferred tax assets in the future.

 

Liquidity and Capital Resources

 

As reflected in our Statements of Cash Flows, net cash provided by operating activities was approximately $387,000 in the first nine months of 2020, compared to net cash provided by operating activities of approximately $507,000 in the comparable period a year ago. We calculate net cash provided by operating activities by decreasing our net loss (approximately $4.86 million, including goodwill impairment charges of $4.43 million, in the first nine months of 2020) or increasing our net income (approximately $226,000 in the first nine months of 2019) by the expenses, such as goodwill impairment charges, stock-based compensation expense, depreciation, and deferred tax expense, that did not require the use of cash. These amounts totaled approximately $5.26 million and $838,000 in the first nine months of 2020 and 2019, 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.

 

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In the first nine months of 2020, changes in operating assets and liabilities resulted in net cash used in operating activities of approximately $9,000. A decrease in accounts receivable due to lower overall shipments to our customers resulted in a source of cash of approximately $478,000. The source of cash was partially offset by higher inventory level which was driven by the combination of purchase commitments and unexpected reductions in sales due to the pandemic. The cash source was also offset by a reduction in accrued payroll and related expenses due to the company-wide mandatory vacation taken in Q3. In the first nine months of 2019, changes in operating assets and liabilities resulted in a net use of cash of approximately $556,000 which was primarily due to increases in accounts receivable driven by the higher shipments in the second half of Q3 2019, the buildup of inventories to accommodate rising sales, and prepayments for insurance policies and inventories.

 

In the first nine months of 2020 and 2019, we invested approximately $375,000 and $437,000, respectively, in manufacturing tooling costs and computer software development costs.

 

Net cash provided by financing activities was approximately $804,000 in the first nine months of 2020, compared to net cash used in financing activities of approximately $274,000 in the comparable period a year ago. Financing activities in the first nine months of 2020 consisted of proceeds of a loan of $1.06 million under the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and a loan of $150,000 from the SBA under its Economic Injury Disaster (“EIDL”) assistance program, offset by approximately $1.41 million net payment of borrowings under our bank lines of credit, by approximately $333,000 repayment on our term loan and $150,000 repayment on the SBA loan. The subordinated convertible note financing has added approximately $1,433,000 to net cash. Financing activities in the first nine months of 2019 consisted primarily of $375,000 repayment on our term loan, offset by approximately $112,000 borrowed on our bank lines of credit.

 

Contractual Obligations

 

Our contractual cash obligations at September 30, 2020 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   $ 3,252,000     $ 3,252,000     $ —       $ —       $ —    
  Operating leases     907,000       511,000       396,000       —         —    
  Total contractual obligations   $ 4,159,000   $ 3,763,000   $ 396,000   $ —     $ —  

 

 

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Off-Balance Sheet Arrangements

As of September 30, 2020, we have 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 relates primarily to our bank term loan and credit line facilities. Amounts outstanding under the term loan bear interest at lender's prime rate (minimum of 4.25%) plus 1.75%. Our bank credit line facilities of up to $2.5 million have variable interest rates based upon the lender's prime rate (minimum of 4.25%) plus 0.75%, for both the domestic line (up to $2.0 million) and the international line (up to $0.5 million). Accordingly, interest rate increases could increase our interest expense on outstanding term loan and credit line balances. Based on a sensitivity analysis during the three months ended September 30, 2020, an increase of 1% in the interest rate would have increased our third quarter borrowing costs by an immaterial amount.

 

 

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 Euros and British pounds. We may enter into selected future purchase commitments with foreign suppliers that may be paid in the local currency of the supplier. We hedge a significant portion of our European receivables balance denominated in Euros to reduce the foreign currency risk associated with these assets, and we have not been subject to significant losses from material foreign currency fluctuations. Based on a sensitivity analysis of our net foreign currency denominated assets at the end of the quarter ended September 30, 2020, an adverse change of 10% in exchange rates would have resulted in a decrease in our net income for the third quarter of 2020 of approximately $26,000 if left unprotected. For the third quarter of 2020, the total net adjustment for the effects of changes in foreign currency on cash balances, collections, payables, and derivatives used to hedge foreign currency risks, was a net loss of $5,911. We will continue to monitor, assess, and mitigate through hedging activities, our risks related to foreign currency fluctuations.

 

 

 

 

 

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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 period covered by the last fiscal quarter ended September 30, 2020 and this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

 

 

 

 

 

 

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PART II

 

Item 1A. Risk Factors

 

The risks described in this Quarterly Report on Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and operating results.

 

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. The current COVID-19 pandemic has reduced our sales due to worldwide curtailment of business activities to slow down the spread of the coronavirus. The future developments and the impact of COVID-19 on our business are highly uncertain and cannot be predicted. If the overall economy is impacted for an extended period, our results of operations, financial position and cash flows may be materially adversely affected. We are not able to estimate the duration of the pandemic and potential impact on the business if disruptions or delays in business developments and shipments of product occur. In addition, a severe prolonged economic downturn could result in a variety of risks to the business, including weakened our ability to develop potential businesses and a decreased ability to raise additional capital when needed on acceptable terms, if at all. As the situation continues to evolve, we will continue to closely monitor market conditions and respond accordingly.

 

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 revenue or control our expenses 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.

 

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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.

 

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.

 

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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:

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 deployments of new applications that work with our products;
changes in the revenues attributable to royalties and engineering development services;
product mix;
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.

 

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 compliance with an asset coverage ratio of no less than 1.25 to 1.0, measured monthly. The agreement contains 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 agreement also contains 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 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.

 

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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.

 

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.

 

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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.

 

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 nine months of 2020 and 2019, Ingram Micro® and BlueStar together represented approximately 55% and 57%, 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 of our distributors 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 receivables 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.

 

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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 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, to expand our sales channels, or to maintain our existing relationships could adversely impact our ability to grow our sales.

 

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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.

 

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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.

 

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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 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 a key component 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 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 and attract qualified candidates, and also could increase the cash compensation we would have to pay to them.

 

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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:

longer payment cycles;
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.

 

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 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 collection of receivables denominated if left unhedged. 

 

Our facilities or operations could be adversely affected by events outside out 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 the current health epidemic, COVID-19 if such an epidemic persists for an extended period of time. 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.

 

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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 10, 2020, we had 6,080,145 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 November 10, 2020, we had 2,092,398 shares of common stock subject to outstanding options under our stock option plans, and 298,804 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 shares of common stock underlying vested options will be eligible for resale in the public market as soon as the options are exercised.

 

Volatility in the trading price of our Common Stock could negatively impact the price of our Common Stock.

 

During the period from January 1, 2019 through November10, 2020, our common stock price fluctuated between a high of $4.50 and a low of $0.76. 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 6. Exhibits

 

Exhibits

 

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.

 

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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 16, 2020  /s/ Kevin J. Mills
  Kevin J. Mills
  President and Chief Executive Officer
  (Duly Authorized Officer and Principal Executive Officer)

 

 
 Date: November 16, 2020  /s/ Lynn Zhao
  Lynn Zhao
  Vice President of Finance and Administration and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)

 

 

  34  

 

Index to Exhibits

 

Exhibit Number 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.

 

 

 

 

 

 

  35  

 

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