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, management's beliefs, and assumptions made by management. These forward-looking statements are not 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, including the impact of the COVID-19 pandemic; 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; 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 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 in Form 10-K, and other information
contained in other reports and documents filed from time to time with the
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The Company and its products
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 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 (Capture SDK) to application developers, which enables them to provide their users with our advanced barcode scanning features. Our products are integrated in their application solutions and are marketed by the application developers or the resellers of their applications. The number of our registered developers for data capture applications continues to grow. Companion SocketScan family. Our Companion SocketScan family consists of the ergonomic and independent S700 series, including 1D Linear Imaging (S700), 1D Laser (S730), and 1D/2D Universal Barcode (S740), available in multiple vivid colors: blue, green, red, white, yellow and black. Companion DuraScan Family. Our DuraScan® 700 Series Linear Barcode Scanner (D700), Laser Barcode Scanner (D730) and Universal Barcode Scanner (D740, D745, D750, D755, 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. D745 and D755 are medical-grade, universal scanners. Attachable Family. Our attachable scanners include DuraSled and SocketScan 800 Series scanners. DuraSled 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 application-driven mobile solutions. The DuraSled series are compatible with Apple, Samsung and Windows devices. 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. 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. Contactless RFID/NFC reader writer. Our contactless product line includes D600 and S550. 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. It combines the latest 13.56 MHz contactless technology with
Bluetooth LE connectivity. 16 Index 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 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 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 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 and packaging at, and distribute our products from ourNewark, 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. Results of Operations Revenues
Total revenue for the first quarter of 2021 was approximately$4.8 million , an increase of 14% compared to the revenue of approximately$4.2 million for the same quarter a year ago. The key driver of our Q1 2021 revenue was the deployment of business applications, particularly in retail as the economy re-opens following the easing of COVID-19 restrictions. Gross Margins
Our gross profit margin increased slightly to 53.5% for the first quarter of 2021 compared to 52.7% for the same period a year ago. The improvement in margins was primarily attributed to the reduction in manufacturing overhead.
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Research and Development Expense
Research and development expense in the first quarter of 2021 and 2020 was approximately$931,000 and approximately$881,000 , respectively. We believe a continued commitment to research and development activities is essential to maintain or achieve a leadership position for our existing products, to provide innovative new product offerings, and to provide engineering support for key customers. In addition, we consider our ability to accelerate time to market for new products to be critical to our revenue growth. Therefore, we expect to continue to make significant research and development investments as the revenue grows.
Sales and Marketing Expense
Sales and marketing expense in the first quarter of 2021 was approximately$660,000 , a decrease of 14% compared to expense of approximately$768,000 in the same quarter a year ago. The decrease was due to a temporary reduction in headcount in Q1 2021. We expect that sales and marketing expenses will increase for the rest of the year as we increase investments in improving our website and improving customers' online shopping experience in our online stores.
General and Administrative Expense
General and administrative expense in the first quarter of 2021 was approximately$741,000 , an increase of 11% compared to expense of approximately$666,000 in the first quarter of 2020. The increase was due to fluctuations in our compensation plan and higher professional fees associated with the shelf registration.
Interest Expense, Net of Interest Income
Interest expense and other, net of interest income and other, was approximately$49,000 in the first quarter of 2021 compared to$19,000 in the first quarter of 2020. Interest expense in the first quarter of 2021 was primarily related to interest on secured subordinated convertible notes payable (see "NOTE 6 - Secured Subordinated Convertible Notes Payable" for more information). There were no outstanding balances of our bank term loan and credit lines during the first three months of 2021. Interest expense in 2020 was primarily related to interest on bank term loan and credit line facilities. 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 did not record deferred tax expense or benefit for the first quarter of 2021 or 2020. Our deferred tax asset, primarily representing future income tax savings from the application of net operating loss carry forwards, was valued at$5,506,934 atMarch 31, 2021 . 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. 18 Index
Liquidity and Capital Resources
As reflected in our Condensed Statements of Cash Flows, net cash provided by operating activities was$291,236 in the first quarter 2021, compared to net cash used of$50,790 in the comparable period a year ago. We calculate net cash provided by (used in) operating activities by increasing our net income ($202,902 in the first quarter of 2021) or reducing our net loss ($90,327 in the first quarter of 2020) by those expenses that did not require the use of cash. These items consist of stock-based compensation expense, depreciation and amortization, amortization of debt discount, and deferred tax expenses and benefits. These amounts totaled$321,062 and$279,344 in the first quarters of 2021 and 2020, 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 quarter of 2021, changes in operating assets and liabilities resulted in a net use of cash of$232,728 and were primarily from increased inventory level with which we cope with supply issues and component longer lead time, and increased accounts receivables. The uses of cash were partially offset by increases in accounts payable, driven primarily by increased inventory purchases. In the first quarter of 2020 changes in operating assets and liabilities resulted in a net use of cash of$239,807 and were primarily from increases in inventory levels and decreases in accounts payable.
In the first quarters of 2021 and 2020, we invested
Net cash provided by financing activities for the three months endedMarch 31, 2021 was$2,711,658 , compared to net cash provided by financing activities of$389,436 in the comparable period a year ago. Financing activities in 2021 consisted primarily of$1,711,658 of proceeds of employee stock options exercised and of$1,000,000 borrowed on the CalCap loan. Financing activities in 2020 consisted primarily of$527,000 borrowed on our bank lines of credit, partially offset by$125,000 repayment of our term loan. Contractual Obligations Our contractual cash obligations atMarch 31, 2021 are outlined in the table below: Payments Due by Period Less than 1 to 3 4 to 5 More than Contractual Obligations Total 1 year years years 5 years Unconditional purchase obligations with contract manufacturers$ 8,689,000 $ 8,421,000 $ 268,000 $ - $ - Operating lease 652,000 521,000 131,000 - - Total contractual obligations$ 9,341,000 $ 8,942,000 $ 399,000 $ - $ - 19 Index
Off-Balance Sheet Arrangements
As of
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