FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended March 31, 2019 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 94-3155 ...

Socket Mobile, Inc. (NASDAQ:SCKT) Q1 2019 Earnings Conference Call April 24, 2019 5:00 PM ET Company Participants David Dunlap - Chief Financial Officer Kevin Mills - President & Chief Executive Officer Conference Call Participants Brian Swift - Sutter Securities Operator Welcome to the First Quarter 2019 Management Conference Call. My name is Adrian, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. ...

Part I [Business](index=5&type=section&id=Item%201.%20Business) Socket Mobile provides cordless data capture devices like barcode scanners and RFID/NFC readers, supporting mobile applications through its SDK, with manufacturing outsourced and final assembly in Newark, California - The company's core business is providing cordless data capture devices (barcode scanners, RFID/NFC readers) for mobile applications across various industries like retail POS, logistics, and healthcare[14](index=14&type=chunk) - A key strategy is supporting software application developers with a Software Developer Kit (Capture SDK), which integrates Socket Mobile's hardware into the developers' applications, making the hardware an ingredient of the overall solution[14](index=14&type=chunk)[20](index=20&type=chunk)[29](index=29&type=chunk) - The company outsources component manufacturing to third parties in the US, Mexico, and Asia, but performs final product assembly, testing, and distribution from its facility in Newark, California[22](index=22&type=chunk)[27](index=27&type=chunk) - Primary product lines include the durable DuraScan® series, the standard SocketScan® series, the attachable SocketScan 800 series, and the D600 Contactless RFID/NFC Reader/Writer[16](index=16&type=chunk)[17](index=17&type=chunk)[18](index=18&type=chunk)[19](index=19&type=chunk) - As of December 31, 2018, the company had **56 employees**[44](index=44&type=chunk) [Risk Factors](index=12&type=section&id=Item%201A.%20Risk%20Factors) The company faces risks including profitability challenges, reliance on third-party developers and key distributors, intense competition, supply chain disruptions, and the need for continuous innovation - The company may not return to profitability and may require additional capital, which might not be available on reasonable terms[46](index=46&type=chunk)[47](index=47&type=chunk) - Sales are highly dependent on application developers successfully integrating, marketing, and selling applications that incorporate Socket Mobile's products[48](index=48&type=chunk) - A significant portion of revenue comes from a limited number of distributors; in 2018, Ingram Micro®, ScanSource®, and BlueStar represented approximately **63% of worldwide revenues**[63](index=63&type=chunk) - The company faces competition from similar hardware products, camera-based scanning applications (e.g., Scandit), and more rugged integrated devices from larger competitors like Honeywell and Zebra Technologies[37](index=37&type=chunk)[65](index=65&type=chunk) - Dependence on a limited number of suppliers for certain components exposes the company to risks of shortages or delays[59](index=59&type=chunk) - The market is characterized by rapidly changing technology and short product life cycles, requiring constant and successful new product development to remain competitive[61](index=61&type=chunk) [Unresolved Staff Comments](index=22&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the Securities and Exchange Commission - None[94](index=94&type=chunk) [Properties](index=22&type=section&id=Item%202.%20Properties) Socket Mobile leases a 37,100 square foot facility in Newark, California, which serves as its headquarters and manufacturing operations, with the lease expiring in June 2022 - The company leases a **37,100 square foot facility** in Newark, California under a lease expiring in **June 2022**[95](index=95&type=chunk) [Legal Proceedings](index=23&type=section&id=Item%203.%20Legal%20Proceedings) The company is not currently a party to any material legal proceedings - The company is not currently a party to any material legal proceedings[97](index=97&type=chunk) [Mine Safety Disclosures](index=23&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[98](index=98&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=24&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on NASDAQ under 'SCKT', with approximately 2,500 beneficial stockholders, and does not anticipate paying dividends, retaining earnings for business use - The company's common stock trades on the NASDAQ under the ticker symbol **"SCKT"**[101](index=101&type=chunk) - The company has a policy of retaining future earnings for business use and does not anticipate paying dividends[101](index=101&type=chunk) [Selected Financial Data](index=26&type=section&id=Item%206.%20Selected%20Financial%20Data) This section summarizes five years of financial performance, showing a revenue decline to **$16.5 million** in 2018, a net loss of **$571,000**, and decreased total assets Selected Financial Data (2014-2018) | (Amounts in thousands) | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Revenues** | $16,454 | $21,286 | $20,788 | $18,400 | $17,021 | | **Gross profit** | $8,456 | $11,390 | $10,434 | $8,935 | $7,413 | | **Net income (loss)** | $(571) | $(1,431) | $12,147 | $1,817 | $432 | | **Total assets** | $17,331 | $19,854 | $21,587 | $9,688 | $8,370 | | **Total stockholders' equity** | $12,405 | $17,230 | $16,170 | $3,343 | $1,029 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=27&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2018, revenue decreased **23%** to **$16.5 million** due to product transition delays, resulting in a net loss and reduced liquidity, with critical accounting policies and cash flow impacts detailed [Liquidity and Capital Resources](index=27&type=section&id=Liquidity%20and%20Capital%20Resources) In 2018, liquidity weakened with cash decreasing to **$1.1 million**, offset by **$1.3 million** in credit lines and a **$0.8 million** term loan, with future liquidity dependent on profitability Liquidity Position (Year-End) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Cash | $1.1 million | $3.4 million | | Bank Lines of Credit | $1.3 million | $0 | | Term Loan | $0.8 million | $0 | - Sources of liquidity include cash on hand, cash from operations, and a revolving credit facility with approximately **$0.2 million** of unused capacity at year-end 2018[108](index=108&type=chunk) [Critical Accounting Policies](index=27&type=section&id=Critical%20Accounting%20Policies) Key accounting policies include Revenue Recognition (ASC 606 adoption in 2017), Inventory Valuation, Stock-Based Compensation, and annual Goodwill impairment testing, all requiring significant estimates - On January 1, 2017, the company adopted ASC 606, which changed revenue recognition for distributor sales from a sell-through basis to recognizing revenue upon shipment, net of a reserve for estimated returns[114](index=114&type=chunk) - Inventory is valued by comparing stock on hand to a nine-month forecast, with reserves created for any surplus[119](index=119&type=chunk) - Goodwill is tested for impairment annually on September 30th; the test as of September 30, 2018, indicated no impairment[122](index=122&type=chunk)[124](index=124&type=chunk) [Results of Operations](index=29&type=section&id=Results%20of%20Operations) In 2018, revenue decreased **23%** to **$16.5 million** due to product transition delays, gross margin declined to **51.4%**, R&D increased **5%**, S&M remained flat, and G&A decreased **5%** Year-over-Year Financial Performance | Metric | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Revenue | $16.5 million | $21.3 million | -23% | | Gross Margin | 51.4% | 53.5% | -2.1 p.p. | | R&D Expense | $3.6 million | $3.5 million | +5% | | S&M Expense | $3.0 million | $3.0 million | 0% | | G&A Expense | $2.4 million | $2.5 million | -5% | - The 2018 revenue decline was caused by a longer than expected transition to new SocketScan products, which were released four months behind schedule[125](index=125&type=chunk) - Geographically, 2018 revenue from the Americas decreased by **24%** and from Europe by **29%**, while Asia Pacific revenue increased by **25%**[126](index=126&type=chunk) [Quarterly Results of Operations](index=31&type=section&id=Quarterly%20Results%20of%20Operations) Unaudited quarterly data for 2017-2018 shows a consistent decline in revenue from **$5.8 million** (Q2 2017) to approximately **$4.1 million** (2018), transitioning from net income to consistent net losses Quarterly Revenue (in thousands) | Quarter | 2018 | 2017 | | :--- | :--- | :--- | | Q1 | $3,981 | $5,622 | | Q2 | $4,192 | $5,806 | | Q3 | $4,137 | $5,475 | | Q4 | $4,144 | $4,383 | Quarterly Net Income (Loss) (in thousands) | Quarter | 2018 | 2017 | | :--- | :--- | :--- | | Q1 | $(225) | $386 | | Q2 | $(138) | $490 | | Q3 | $(45) | $414 | | Q4 | $(163) | $(2,721)* | - *Q4 2017 net loss was primarily driven by a one-time **$2.6 million** deferred tax revaluation expense due to the Tax Cuts and Jobs Act of 2017[137](index=137&type=chunk)[140](index=140&type=chunk) [Cash Flows and Contractual Obligations](index=32&type=section&id=Cash%20Flows%20and%20Contractual%20Obligations) In 2018, operating cash flow decreased to **$0.75 million**, investing activities used **$0.4 million**, and financing activities used **$2.6 million** due to a **$5.0 million** stock repurchase, with total contractual obligations of **$7.6 million** Cash Flow Summary (in millions) | Activity | 2018 | 2017 | | :--- | :--- | :--- | | Net Cash from Operations | $0.75 | $2.38 | | Net Cash used in Investing | $(0.4) | $(0.4) | | Net Cash from (used in) Financing | $(2.6) | $0.3 | - The primary use of cash in financing activities in 2018 was a **$5.0 million** repurchase of company stock[146](index=146&type=chunk) Contractual Obligations at Dec 31, 2018 | Contractual Obligations | Total | Due in 1 year | | :--- | :--- | :--- | | Unconditional purchase obligations | $5,922,000 | $5,922,000 | | Operating leases | $1,690,000 | $460,000 | | Capital leases | $24,000 | $16,000 | | **Total** | **$7,636,000** | **$6,398,000** | [Quantitative and Qualitative Disclosures about Market Risk](index=34&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company faces market risks from variable interest rates on its bank loans and foreign currency fluctuations from European sales, with Euro receivables partially hedged - Interest rate risk exists due to variable interest rates on the bank term loan and credit lines, which are tied to the lender's prime rate[152](index=152&type=chunk) - Foreign currency risk is present as European sales are transacted in Euros and British pounds; the company hedges a significant portion of its Euro receivables[153](index=153&type=chunk) [Financial Statements and Supplementary Data](index=34&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements for 2018 and 2017, including the Independent Auditor's Report, Balance Sheets, Statements of Operations, Stockholders' Equity, Cash Flows, and detailed Notes to Financial Statements Key Financial Statement Data (2018 vs 2017) | (Amounts in thousands) | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | **Balance Sheet** | | | | Total Current Assets | $6,197 | $8,855 | | Total Assets | $17,331 | $19,854 | | Total Current Liabilities | $4,356 | $2,323 | | Total Liabilities | $4,927 | $2,624 | | Total Stockholders' Equity | $12,404 | $17,230 | | **Income Statement** | | | | Revenues | $16,454 | $21,286 | | Gross Profit | $8,456 | $11,390 | | Operating Income (Loss) | $(586) | $2,418 | | Net Loss | $(571) | $(1,431) | [NOTE 1 — Organization and Summary of Significant Accounting Policies](index=41&type=section&id=NOTE%201%20%E2%80%94%20Organization%20and%20Summary%20of%20Significant%20Accounting%20Policies) This note details the company's business, basis of presentation, and key accounting policies, including ASC 606 revenue recognition, inventory valuation, goodwill impairment, foreign currency, and concentrations of credit risk with major distributors Revenue by Geographic Area (in thousands) | Region | 2018 | 2017 | | :--- | :--- | :--- | | United States | $12,562 | $16,621 | | Europe | $2,526 | $3,572 | | Asia and rest of world | $1,366 | $1,093 | | **Total** | **$16,454** | **$21,286** | Major Customer Revenue Concentration | Customer | 2018 | 2017 | | :--- | :--- | :--- | | Ingram Micro Inc. | 32% | 37% | | BlueStar, Inc. | 21% | 17% | | ScanSource, Inc. | 10% | 16% | [NOTE 3 — Bank Financing Arrangements](index=49&type=section&id=NOTE%203%20%E2%80%94%20Bank%20Financing%20Arrangements) In January 2018, the company secured a **$2.5 million** revolving credit line and a **$4.0 million** term loan, subsequently breaching financial covenants which were later waived after loan modification and partial paydown, with **$833,333** term loan and **$1,316,778** credit lines outstanding at year-end 2018 - Entered into a financing agreement for a **$2.5 million** revolving credit line and a **$4.0 million** term loan in January 2018[225](index=225&type=chunk) - The company breached two financial covenants for the quarter ended March 31, 2018; the bank agreed to forbear and later permanently waived the defaults after the loan agreement was modified and the term loan was paid down to **$1.0 million**[231](index=231&type=chunk)[234](index=234&type=chunk) Outstanding Debt at Dec 31, 2018 | Debt Instrument | Amount Outstanding | | :--- | :--- | | Term Loan | $833,333 | | Lines of Credit | $1,316,778 | [NOTE 4 — Commitments and Contingencies](index=53&type=section&id=NOTE%204%20%E2%80%94%20Commitments%20and%20Contingencies) The company has future commitments including an operating lease for its Newark, CA facility totaling approximately **$1.7 million** through June 2022, and non-cancelable inventory purchase commitments of approximately **$5.9 million** due in 2019 - Future minimum lease payments under the operating lease for its headquarters total **$1,689,777** through June 2022[240](index=240&type=chunk) - As of December 31, 2018, the company had non-cancelable inventory purchase commitments of approximately **$5,922,000** for 2019[244](index=244&type=chunk) [NOTE 5 — Stock-Based Compensation Plan](index=54&type=section&id=NOTE%205%20%E2%80%94%20Stock-Based%20Compensation%20Plan) The company's 2004 Equity Incentive Plan resulted in **$487,806** in stock-based compensation expense in 2018, with **2,374,124** options outstanding at a weighted average exercise price of **$2.54**, and **$906,605** in remaining unamortized expense Stock-Based Compensation Expense | Year | Total Expense | | :--- | :--- | | 2018 | $487,806 | | 2017 | $426,950 | - As of December 31, 2018, there were **2,374,124** stock options outstanding and **1,894,933** options exercisable[249](index=249&type=chunk) - Total remaining unamortized stock-based compensation expense was **$906,605** as of year-end 2018[253](index=253&type=chunk) [NOTE 8 — Income Taxes](index=57&type=section&id=NOTE%208%20%E2%80%94%20Income%20Taxes) The company recorded a **$143,000** income tax benefit in 2018, contrasting with a **$3.77 million** expense in 2017, significantly impacted by a **$2.6 million** deferred tax asset write-down from the Tax Cuts and Jobs Act, and holds **$21.6 million** in federal NOL carryforwards - The Tax Cuts and Jobs Act of 2017 resulted in a one-time tax expense of **$2.6 million** in 2017 from the re-measurement of deferred tax assets[258](index=258&type=chunk) Net Deferred Tax Assets | Date | Amount | | :--- | :--- | | Dec 31, 2018 | $5,781,000 | | Dec 31, 2017 | $5,637,000 | - As of December 31, 2018, the company had federal net operating loss carryforwards of approximately **$21.6 million** and California NOLs of **$12.0 million**[262](index=262&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=60&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) This item is not applicable, indicating no changes in or disagreements with the company's accountants - Not Applicable[269](index=269&type=chunk) [Controls and Procedures](index=60&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures, and internal control over financial reporting (based on COSO framework), were effective as of December 31, 2018, with no material changes reported - Management concluded that disclosure controls and procedures were effective as of December 31, 2018[270](index=270&type=chunk) - Management assessed internal control over financial reporting based on the COSO framework and concluded it was effective as of December 31, 2018[272](index=272&type=chunk)[273](index=273&type=chunk) [Other Information](index=61&type=section&id=Item%209B.%20Other%20Information) The company reports no other information under this item - None[278](index=278&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=62&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's Proxy Statement for the May 22, 2019 annual stockholders' meeting - Information is incorporated by reference from the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 22, 2019[8](index=8&type=chunk)[281](index=281&type=chunk) [Executive Compensation](index=62&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the company's Proxy Statement for the May 22, 2019 annual stockholders' meeting - Information is incorporated by reference from the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 22, 2019[8](index=8&type=chunk)[282](index=282&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=62&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Security ownership information is incorporated by reference from the Proxy Statement, detailing **2,374,124** securities to be issued upon option exercise and **116,703** available for future issuance under equity compensation plans as of December 31, 2018 Equity Compensation Plan Information as of Dec 31, 2018 | Plan Category | Securities to be issued upon exercise of outstanding options | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 2,374,124 | $2.54 | 116,703 | [Certain Relationships and Related Transactions, and Director Independence](index=62&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information concerning related party transactions and director independence is incorporated by reference from the company's Proxy Statement for the May 22, 2019 annual stockholders' meeting - Information is incorporated by reference from the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 22, 2019[8](index=8&type=chunk)[286](index=286&type=chunk) [Principal Accounting Fees and Services](index=63&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information regarding principal accounting fees and services is incorporated by reference from the company's Proxy Statement for the May 22, 2019 annual stockholders' meeting - Information is incorporated by reference from the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 22, 2019[8](index=8&type=chunk)[288](index=288&type=chunk) Part IV [Exhibits, Financial Statement Schedules](index=63&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section provides an index to the financial statements and all exhibits filed with or incorporated by reference into the Form 10-K report, noting the omission of financial statement schedules as not applicable - This section contains the index to the financial statements and a list of all exhibits filed with the report[290](index=290&type=chunk)[291](index=291&type=chunk)[292](index=292&type=chunk)

Financial Data and Key Metrics Changes - Revenue for 2018 was $16.5 million, a decrease of 23% from 2017's revenue of $21.3 million [5][24] - The company reported a loss of $571,000 or $0.09 per share in 2018, compared to a loss of $1.6 million or $0.23 per share in 2017 [5][25] - Operating expenses were held flat for the year, with a slight increase in R&D from $3.5 million to $3.6 million [33][25] Business Line Data and Key Metrics Changes - The transition from legacy products to the new SocketScan family significantly impacted sales revenue, causing confusion and loss of sales momentum [6][8] - Sales of cordless barcode scanning were down 21% in 2018, with overall sales down 23% [24] - The new Capture SDK transition went reasonably well, with many customers already transitioned [11] Market Data and Key Metrics Changes - The point-of-sale market is expected to grow due to government initiatives encouraging small merchants to switch to computerized systems [13] - In Japan, incentives and sales tax changes are anticipated to drive small merchants to adopt new point-of-sale systems [14] - In France, new anti-fraud laws will require small merchants to upgrade to compliant systems, which the company is well-positioned to benefit from [15] Company Strategy and Development Direction - The company aims to leverage new markets such as cannabis and government-driven initiatives to expand revenue [13][15] - The introduction of the iPhone DuraCase solution is expected to significantly contribute to revenue in 2019 [17] - The company is focused on maintaining a high level of R&D investment to stay current with mobile computing advancements [32][34] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism for 2019, expecting stronger performance due to the completion of product transitions and new market opportunities [20][25] - The company anticipates benefiting from a more stable point-of-sale business and increased demand in specific regions [20] - Management noted that the transition challenges faced in 2018 are now behind them, allowing for a focus on growth [39] Other Important Information - The company has over 1,100 registered developer companies, indicating a healthy developer community [19] - Positive EBITDA results and free cash flow were achieved for the year, with a current balance sheet ratio of 1.42 [25] Q&A Session Summary Question: What are the plans to reduce R&D costs in 2019? - Management stated there is no plan to reduce R&D spending, as it is necessary to stay current with mobile technology [32][34] Question: Are there any new products in development for 2019? - Management confirmed ongoing development of the D600 token exchange product and other variations, with plans to ship new products by mid to late 2019 [36][37] Question: What strategies are being implemented to drive revenue growth in 2019? - The company has modified its organizational structure and increased outreach to smaller point-of-sale businesses to drive revenue [38][39]