SOCKET MOBILE, INC. This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements forecasting our future financial condition and results, our future operating activities, market acceptance of our products, expectations for general market growth of mobile computing devices, growth in demand for our data capture products, expansion of the markets that we serve, expansion of the distribution channels for our products, and the timing of the introduction and availability of new products, as well as other forecasts discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations." Words such as "may," "will," "predicts," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," variations of such words, and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements are based on current expectations, estimates and projections about our industry, and management's beliefs and assumptions. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties; therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements. Factors that could cause actual results and outcomes to differ materially include, but are not limited to: volatility in the world economy generally and in the markets we serve in particular, including the impact of the COVID-19 pandemic andRussia's military action againstUkraine ; 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 asRFID/Near Field Communications and of our related data capture products; the ability of our strategic relationships to benefit our business as expected; our ability to enter into additional distribution relationships; and other factors described in this Form 10-Q including under "Risk Factors" and those discussed in other documents we filed with theSecurities and Exchange Commission . We assume no obligation to update such forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements. You should read the following discussion in conjunction with the interim condensed financial statements and notes included elsewhere in this report, the Company's annual financial statements included in its Annual Report on Form 10-K, and other information contained in other reports and documents filed from time to time with theSecurities and Exchange Commission . The Company and its Products We are a leading provider of data capture and delivery solutions for enhanced productivity in workforce mobilization. Our products are incorporated into mobile applications used in point of sale (POS), commercial services (field workers), asset tracking, manufacturing process and quality control, transportation and logistics (goods tracking and movement), event management (ticketing, entry, access control, and identification), medical and education. Our primary products are cordless data capture devices incorporating barcode scanning orRFID/Near Field Communications (NFC) technologies that connect over Bluetooth. All products work with applications running on smartphones, mobile computers and tablets using operating systems from Apple® (iOS), Google™ (Android™) and Microsoft® (Windows®). We offer an easy-to-use software developer kit (CaptureSDK) to App providers, which enables them to provide their users with our advanced barcode scanning features. Our products are integrated in App providers' application solutions and are marketed by the App providers or the resellers of their applications. The number of our registered App providers for data capture applications continues to grow. 16 Index
SocketScan family. Our SocketScan family consists of the 700 Series (S700, S730, S720, S740) companion scanners and 800 Series (S800, S820, S840, S860) attachable scanners. 700 Series are available in multiple vivid colors: blue, green, red, white, yellow and black. S720, a newly launched product, reads both 1D and 2D barcodes on paper and screen. It's a drop-in replacement for our most sold S700, while adding QR code functionality. 800 Series, 1D linear imaging (S800) and 2D (S820, S840, S860) are attachable to smartphones, tablets and other mobile devices with an easily detachable clip or DuraCase, creating a one-handed solution. 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. S820, which was launched recently, provides a basic and affordable option for those who wish to upgrade to 2D scanning. DuraScan® Family. Our DuraScan® family consists of 700 Series (D700, D730, D D740, D745, D750, D755, D760) companion scanners and 800 Series (D800, D820, D840, D860) attachable scanners, which are designed to be durable barcode scanners with IP54-rated outer casing to withstand tougher environments. D740 is priced competitively with a 1D barcode scanner, making it the affordable 2D option available in the market. D820, which was launched recently, provides a basic and affordable option for those who wish to upgrade to 2D scanning. D745 and D755 are medical-grade, universal scanners. D760 and D860 include MRZ (machine-readable zone) support, making it capable of scanning passports, visas and other travel documents. D820, which was launched recently, provides a basic and affordable option for those who wish to upgrade to 2D scanning. DuraSled Family. Our DuraSled (DS800, DS820, DS840, DS860) is a barcode scanning sled designed for durability. It combines a phone with a scanner to create a one-handed solution. DuraSled protects phones from impact damage and provides a robust charging solution for all environments. It is easy-to-use and ideal for delivery services, stock counting, ticketing and other App-driven mobile solutions. The DuraSled products are compatible with Apple, Samsung and Windows devices. DS820, which was launched recently, provides a basic and affordable option for those who wish to upgrade to 2D scanning. Contactless RFID/NFC reader writer. Our contactless product line includes D600, S550 and S370. 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, a contactless membership card reader/writer, is designed to facilitate tap-and-go smart card and NFC applications. S370 supports both barcode scanning and Near Field Communication (NFC) reading and writing technologies. It provides App providers the ability to read both QR code-based and NFC-based credentials, which allows App providers to accept multiple formats with one device. S370 can also read credentials following ISO 18013-5, the Mobile Driver's License (mDL) standard being adopted in many states and countries. 17 Index SocketCam family. In Q1 2022, we announced our SocketCam product, C820, a software-based barcode scanner, which offers a free, flexible, quick, and reliable data capture solution to our App partners who can include the C820 in their applications to provide free scanning to their end-users. The SocketCam C820 is the first member of the SocketCam family and turns any mobile device into a high-performance barcode scanner. App providers are challenged to service a wide range of customers with various data capture requirements, from the price-sensitive to the performance-sensitive, and even multiple data types. The addition of the C820 seamlessly enables these diverse requirements. End-users whose data capture requirements exceed the capabilities of the free camera-based scanners will have the choice of purchasing a Socket Scanner or using an advanced version of the camera-based scanner which is expected to be available late 2022 or early 2023. Software Developer Kit (Capture SDK). Our Software Developer Kit (Capture SDK) supports all our data capture devices with a single integration, making it easier for App providers to integrate our data capture capabilities into their applications. With the installation of our data capture software, the App providers' customers can choose any of our products that work best for them. Our Capture SDK enables the App providers to modify captured data, control the placement of the barcoded or RFID data in their applications, and control the feedback to the user that the transaction and transmission 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 building environments such as CocoaPods, Maven and NuGet, adds support for high level frameworks such asXamarin , Cordova and Java, and adds other features to make it easier for App providers to integrate our data capture software into their applications. We design our own products and are responsible for all associated test equipment. We use third party contract manufacturers to make many components. We perform final product assembly, test and packaging at, and distribute our products from ourFremont, 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 App providers 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. Results of Operations Revenues
Total revenues for the three and nine months endedSeptember 30, 2022 , were approximately$3.7 million and$16.1 million , respectively, a decrease of 41% and 6%, respectively, from revenues of approximately$6.3 million and$17.1 million , respectively, in the comparable periods one year ago. The weaker end user demand combined with the reduction of inventory in our distribution channel affected our reported revenue even though the sales from our distribution partners to end users were$4.8 million compared to our reported revenue of
$3.7 million . 18 Index Gross Margins Our gross profit margins on sales for the three and nine months endedSeptember 30, 2022 , were 44.4% and 48.7%, respectively, compared to gross margins of 54.2% for the corresponding periods a year ago. The decrease in gross margin was driven by persistent higher component and freight costs as well as the allocation of manufacturing overhead costs across lower production volumes.
Research and Development Expense
Research and development expense in the three and nine months endedSeptember 30, 2022 were approximately$1,096,000 and$3,271,000 , respectively, an increase of 8.1% and 12.1% compared to expenses of approximately$1,014,000 and$2,918,000 in the corresponding periods a year ago. The increases were mainly driven by hiring, as a continued commitment to research and development activities which are essential to provide innovative new product offerings, to provide engineering support for key customers, and to maintain our existing products. We expect Q4 R&D expenses to be at the similar level as Q3. Sales and Marketing Expense Sales and marketing expense in the three and nine months endedSeptember 30, 2022 were approximately$865,000 and$2,729,000 , respectively, an increase of 9.7% and 25.0% compared to expense of approximately$788,000 and$2,182,000 in the corresponding periods a year ago. The increase in expense was primarily attributed to higher headcount and increased consulting in the external professional services. We expect that sales and marketing expenses will stay at the similar level for Q4.
General and Administrative Expense
General and administrative expense in the three and nine months endedSeptember 30, 2022 were approximately$641,000 and$2,113,000 , respectively, a slight decrease of 3.9% and 1.4% compared to expense of approximately$667,000 and$2,142,000 in the corresponding periods a year ago. The decrease was primarily due to reduced management variable compensation related poor financial performance in Q3. We expect the general and administrative expenses will increase in Q4 due to the celebration of Company's 30th anniversary.
Interest Expense, Net of Interest Income
Interest expense, net of interest income, in the three and nine months endedSeptember 30, 2022 was approximately$43,000 and$134,000 , respectively, compared to approximately$50,000 and$150,000 , respectively, in the same periods one year ago. Interest expense in the three and nine months endedSeptember 30, 2022 , was related to interest on the secured subordinated convertible notes payable (see "NOTE 6 - Secured Subordinated Convertible Notes Payable" of the notes to consolidated financial statements for more information) and on the CalCap loan. Our credit lines had no outstanding balances during the three and nine months endedSeptember 30, 2022 . Interest expense in 2021 was primarily related to interest on the secured subordinated convertible notes payable and on the CalCap loan as well. 19 Index
Interest income reflects interest earned on cash balances. Interest income was nominal in each of the comparable first quarters, reflecting low average rates of return. Income Taxes We recorded an income tax benefit of$116,485 in Q3 and no income tax in the nine months endedSeptember 30, 2022 . Our deferred tax asset, primarily representing future income tax savings from the application of net operating loss carry forwards, was valued at$7,960,419 onSeptember 30, 2022 . In the three and nine months endedSeptember 30, 2021 , we recorded a net income tax expense of$260,000 and an income tax benefit of$1.6 million primarily attributed to the tax deduction resulting from the disqualified disposition
of incentive stock options. 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 (used in) provided by operating activities was approximately ($30,212 ) and$1,183,000 in the first nine months of 2022 and 2021, respectively. We calculate net cash provided by (used in) operating activities by adjusting our net income (loss) (approximately$428,000 of net loss and$3.47 million of net income in the first nine months of 2022 and 2021, respectively) with the items that did not require the use of cash. Those items include stock-based compensation expense, depreciation and amortization, amortization of debt discount, and deferred tax expenses (benefits), and non-cash straight-line rent expense. These amounts totaled approximately$1,735,000 and ($525,000 ) in the first nine months of 2022 and 2021, respectively. In addition, we report increases in assets and reductions in liabilities as uses of cash and decreases in assets and increases in liabilities as sources of cash, together referred to as changes in operating assets and liabilities. In the first nine months of 2022, changes in operating assets and liabilities resulted in net cash used in operating activities of approximately$1.3 million which were primarily from increasing our inventory levels to cope with supply issues and longer component lead times, decrease in accounts payable, operating lease payment, increase in prepaid expenses and security deposit for the new lease agreement. The use of cash was partially offset by decrease in accounts receivable because of the lower shipment level due to weaker demand. In the first nine months of 2021, changes in operating assets and liabilities resulted in net cash used in operating activities of approximately$1.7 million which was primarily from increasing our inventory levels to cope with supply chain disruptions as demand increased with the reopening of the economy, increased accounts receivable driven by higher shipment levels in the third quarter of 2021 and increased prepaid expenses. The uses of cash were partially offset by increases in accrued payroll and related expenses, primarily employee incentive-based compensation associated with improved financial performance, and by increases in accounts payable driven primarily by increased inventory purchases. 20 Index
In the first nine months of 2022 and 2021, we invested approximately
Net cash used in financing activities was approximately$918,000 in the first nine months of 2022, compared to net cash provided by financing activities was approximately$2.61 million in the comparable period a year ago. Financing activities in 2022 consisted primarily of approximately$654,000 repurchase of treasury stock,$375,000 repayment of our term loan, partially offset by the proceeds of employee stock options in the amount of$111,000 . Financing activities in the first nine months of 2021 consisted primarily of$1.86 million of proceeds of employee stock options exercised and of$750,000 borrowed on
the CalCap loan.
Critical Accounting Estimates
Our significant accounting policies are described in "Note 2 - Summary of Significant Accounting Policies" in the notes to condensed financial statements. The application of these policies requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on a combination of historical experience and reasonable judgment applied to other facts. Actual results may differ from these estimates, and such differences may be material to the financial statements. In addition, the use of different assumptions or judgments may result in different estimates. We believe our critical accounting policies that are subject to these estimates are: Revenue Recognition and Accounts Receivable Reserves, Inventory Valuation, Stock-Based Compensation, Income Taxes and Valuation ofGoodwill .
A complete description of our critical accounting policies and estimates is
contained in our Annual Report on Form 10-K for the fiscal year ended
Contractual Obligations Our contractual cash obligations onSeptember 30, 2022 are outlined in the table below: Payments Due by Period Less than 1 to 3 4 to 5 More than Contractual Obligations Total 1 year years
years 5 years
Unconditional purchase obligations with contract manufacturers$ 9,494,000 $ 9,012,000 $ 482,000 $ - $ - Operating lease 4,568,000 565,000 1,279,000 1,352,000 1,372,000 Total contractual obligations$ 14,062,000 $ 9,577,000 $ 1,761,000 $ 1,352,000 $ 1,372,000 21 Index
Off-Balance Sheet Arrangements
As of
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