Socket Mobile(US:SCKT)2020-08-12 17:06markdown Part I. Financial Information [Item 1. Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents Socket Mobile's unaudited condensed financial statements and detailed notes for Q2 2020 and 2019... [Condensed Statements of Operations](index=4&type=section&id=Condensed%20Statements%20of%20Operations) For the three and six months ended June 30, 2020, Socket Mobile, Inc. reported significant declines in revenue and a shift from net income to net loss compared to the prior year, primarily due to the impact of COVID-19 Condensed Statements of Operations | Metric | Three Months Ended June 30, 2020 (USD) | Three Months Ended June 30, 2019 (USD) | Six Months Ended June 30, 2020 (USD) | Six Months Ended June 30, 2019 (USD) | | :--------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Revenues | $2,715,024 | $5,060,105 | $6,935,710 | $9,688,696 | | Gross profit | $1,361,526 | $2,629,641 | $3,585,241 | $5,029,483 | | Operating income (loss) | $(809,874) | $217,846 | $(900,709) | $264,856 | | Net income (loss) | $(768,023) | $119,790 | $(858,350) | $131,629 | | Basic Net income (loss) per share | $(0.13) | $0.02 | $(0.14) | $0.02 | | Diluted Net income (loss) per share| $(0.13) | $0.02 | $(0.14) | $0.02 | [Condensed Balance Sheets](index=5&type=section&id=Condensed%20Balance%20Sheets) As of June 30, 2020, the company's total assets and liabilities decreased compared to December 31, 2019, with a notable reduction in current assets, particularly accounts receivable and bank lines of credit Condensed Balance Sheets | Metric | June 30, 2020 (Unaudited) (USD) | December 31, 2019 (USD) | | :--------------------------------- | :------------------------ | :------------------ | | Cash and cash equivalents | $926,983 | $958,860 | | Accounts receivable, net | $1,770,112 | $2,837,006 | | Inventories, net | $3,253,709 | $3,178,908 | | Total current assets | $6,359,936 | $7,520,724 | | Total assets | $18,121,411 | $19,458,487 | | Total current liabilities | $4,234,642 | $5,468,488 | | Bank lines of credit | $450,000 | $1,412,449 | | Total liabilities | $5,490,126 | $6,224,261 | | Total stockholders' equity | $12,631,285 | $13,234,226 | [Condensed Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Statements%20of%20Stockholders'%20Equity) Stockholders' equity decreased from **$13.23 million** at December 31, 2019, to **$12.63 million** at June 30, 2020, primarily due to a net loss of **$768,023** in Q2 2020, partially offset by stock-based compensation Condensed Statements of Stockholders' Equity | Metric | December 31, 2019 (USD) | June 30, 2020 (USD) | | :----------------------- | :---------------- | :-------------- | | Total Stockholders' Equity | $13,234,226 | $12,631,285 | | Net Loss (Q2 2020) | N/A | $(768,023) | | Stock-based compensation | N/A | $131,369 | [Condensed Statements of Cash Flows](index=8&type=section&id=Condensed%20Statements%20of%20Cash%20Flows) For the six months ended June 30, 2020, the company generated net cash from operating activities, a significant improvement from cash used in the prior year, largely due to decreases in accounts receivable Condensed Statements of Cash Flows | Activity | Six Months Ended June 30, 2020 (USD) | Six Months Ended June 30, 2019 (USD) | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by (used in) operating activities | $244,371 | $(137,341) | | Net cash used in investing activities | $(256,183) | $(187,458) | | Net cash (used in) provided by financing activities | $(20,065) | $255,516 | | Net decrease in cash and cash equivalents | $(31,877) | $(69,283) | | Cash and cash equivalents at end of period | $926,983 | $1,015,708 | - Net cash provided by operating activities in H1 2020 was primarily due to decreases in accounts receivable driven by lower shipments in Q2 2020[95](index=95&type=chunk) [Notes to Condensed Financial Statements (Unaudited)](index=9&type=section&id=Notes%20to%20Condensed%20Financial%20Statements%20(Unaudited)) The notes provide essential context to the financial statements, detailing the basis of presentation, accounting policies, inventory, financing, segment information, stock-based compensation, and commitments... [NOTE 1 — Basis of Presentation](index=9&type=section&id=NOTE%201%20%E2%80%94%20Basis%20of%20Presentation) - The unaudited condensed financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions, not including all footnotes required for complete financial statements[20](index=20&type=chunk) [NOTE 2 — Summary of Significant Accounting Policies](index=9&type=section&id=NOTE%202%20%E2%80%94%20Summary%20of%20Significant%20Accounting%20Policies) - The company recognizes revenue on sales to distributors upon product shipment and title transfer, less a reserve for estimated returns. Deferred revenue on shipments to distributors was **$432,506** at June 30, 2020, down from **$611,029** at December 31, 2019[24](index=24&type=chunk) - The company adopted ASU 2016-02 (Leases) effective January 1, 2019, recognizing right-of-use assets and lease liabilities for office space, with no impact on the Statements of Operations[26](index=26&type=chunk) - As a smaller reporting company (SRC), the implementation of ASU 2016-13 (Credit Losses) is not required until January 1, 2023[27](index=27&type=chunk) [NOTE 3 — Inventories](index=11&type=section&id=NOTE%203%20%E2%80%94%20Inventories) NOTE 3 — Inventories | Inventory Component | June 30, 2020 (USD) | December 31, 2019 (USD) | | :------------------------ | :------------ | :---------------- | | Raw materials and sub-assemblies | $3,545,065 | $3,767,588 | | Finished goods | $356,283 | $241,681 | | Inventory reserves | $(647,639) | $(830,361) | | Inventory, net | $3,253,709 | $3,178,908 | [NOTE 4 — Bank Financing Arrangements](index=11&type=section&id=NOTE%204%20%E2%80%94%20Bank%20Financing%20Arrangements) - The company entered into the Seventh Amended and Restated Business Financing Agreement on January 8, 2020, extending the revolving line of credit maturity to January 31, 2022[33](index=33&type=chunk) - As of June 30, 2020, the Asset Coverage Ratio was **1.5 to 1.0**, exceeding the required **1.25 to 1.0**[34](index=34&type=chunk) NOTE 4 — Bank Financing Arrangements | Debt Type | June 30, 2020 (USD) | | :---------------------- | :------------ | | Term loan | $83,333 | | Lines of credit - domestic line | $450,000 | | Total lines of credit | $450,000 | [NOTE 5 — Term loans](index=12&type=section&id=NOTE%205%20%E2%80%94%20Term%20loans) - On April 20, 2020, the company received a **$1,058,700** PPP loan under the CARES Act, with a **1%** interest rate and a two-year maturity, primarily used for payroll, rent, and utilities[37](index=37&type=chunk)[38](index=38&type=chunk) - On June 26, 2020, the company secured a **$150,000** EIDL loan at **3.75%** interest for working capital, with payments deferred for 12 months and a 30-year term[40](index=40&type=chunk) - The company also received a **$10,000** EIDL grant on June 23, 2020, which was recorded as other income in Q2[41](index=41&type=chunk) [NOTE 6 — Segment Information and Concentrations](index=13&type=section&id=NOTE%206%20%E2%80%94%20Segment%20Information%20and%20Concentrations) - The company operates in the mobile barcode scanning and RFID/NFC data capture market, distributing products globally through distributors, resellers, and online channels[42](index=42&type=chunk) NOTE 6 — Segment Information and Concentrations | Geographic Area | Three Months Ended June 30, 2020 (USD) | Three Months Ended June 30, 2019 (USD) | Six Months Ended June 30, 2020 (USD) | Six Months Ended June 30, 2019 (USD) | | :---------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Americas | $2,242,225 | $3,975,771 | $5,385,634 | $7,653,571 | | Europe | $200,012 | $604,931 | $815,541 | $1,097,923 | | Asia Pacific | $272,787 | $479,403 | $734,535 | $937,202 | | Total revenues | $2,715,024 | $5,060,105 | $6,935,710 | $9,688,696 | NOTE 6 — Segment Information and Concentrations | Customer | % of Total Revenues (3 Months Ended June 30, 2020) (%) | % of Total Revenues (3 Months Ended June 30, 2019) (%) | % of Total Revenues (6 Months Ended June 30, 2020) (%) | % of Total Revenues (6 Months Ended June 30, 2019) (%) | | :--------------- | :------------------------------------------------- | :------------------------------------------------- | :------------------------------------------------- | :------------------------------------------------- | | Ingram Micro Inc. | 29% | 41% | 33% | 42% | | BlueStar, Inc. | 25% | 18% | 20% | 19% | | ScanSource, Inc. | 14% | * | 10% | * | - At June 30, 2020, **38%** of accounts payable was concentrated in the top supplier, and the top two suppliers accounted for **54%** of inventory purchases for the three months ended June 30, 2020[47](index=47&type=chunk) [NOTE 7 — Stock-Based Compensation](index=15&type=section&id=NOTE%207%20%E2%80%94%20Stock-Based%20Compensation) - Total stock-based compensation expense for the three and six months ended June 30, 2020, was **$131,369** and **$263,434**, respectively[52](index=52&type=chunk) - **293,000 shares** of restricted stock were awarded for the six months ended June 30, 2020, compared to **116,050 shares** in the prior year, with **394,506 shares** outstanding as of June 30, 2020[51](index=51&type=chunk) [NOTE 8 — Net Income (Loss) Per Share Applicable to Common Stockholders](index=15&type=section&id=NOTE%208%20%E2%80%94%20Net%20Income%20(Loss)%20Per%20Share%20Applicable%20to%20Common%20Stockholders) NOTE 8 — Net Income (Loss) Per Share Applicable to Common Stockholders | Metric | Three Months Ended June 30, 2020 (USD) | Three Months Ended June 30, 2019 (USD) | Six Months Ended June 30, 2020 (USD) | Six Months Ended June 30, 2019 (USD) | | :--------------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net income (loss) | $(768,023) | $119,790 | $(858,350) | $131,629 | | Basic EPS | $(0.13) | $0.02 | $(0.14) | $0.02 | | Diluted EPS | $(0.13) | $0.02 | $(0.14) | $0.02 | | Basic Weighted average shares outstanding | 6,009,383 (Shares) | 5,999,159 (Shares) | 6,011,670 (Shares) | 5,969,666 (Shares) | | Diluted Weighted average shares outstanding | 6,009,383 (Shares) | 6,271,507 (Shares) | 6,011,670 (Shares) | 6,203,889 (Shares) | - **2,259,937** stock options and **394,506** restricted stocks were excluded from diluted net loss per share calculation for the three and six months ended June 30, 2020, due to their anti-dilutive effect[56](index=56&type=chunk) [NOTE 9 — Taxes](index=17&type=section&id=NOTE%209%20%E2%80%94%20Taxes) - No deferred tax benefit was recorded for losses in the three and six months ended June 30, 2020. In contrast, deferred tax expenses of **$68,749** and **$75,419** were recorded for the comparable periods in 2019[57](index=57&type=chunk) [NOTE 10 — Commitments and Contingencies](index=17&type=section&id=NOTE%2010%20%E2%80%94%20Commitments%20and%20Contingencies) - Operating lease expense for office space was **$103,208** and **$206,416** for the three and six-month periods ended June 30, 2020, respectively[59](index=59&type=chunk) - As of June 30, 2020, the company had non-cancelable purchase commitments for inventory totaling approximately **$3,651,000**[66](index=66&type=chunk) NOTE 10 — Commitments and Contingencies | Annual Minimum Payments | Amount (USD) | | :------------------------ | :----- | | 2020 (July 1 - Dec 31) | $249,994 | | 2021 | $515,822 | | 2022 | $262,789 | | Total minimum payments | $1,028,605 | | Total operating lease liabilities | $964,256 | | Current portion of operating lease | $(455,928) | | Long-term portion of operating lease | $508,328 | [NOTE 11 — Subsequent Events](index=18&type=section&id=NOTE%2011%20%E2%80%94%20Subsequent%20Events) - As of August 7, 2020, **5,000** restricted stocks at **$1.49** per share were granted from the 2004 Equity Incentive Plan subsequent to June 30, 2020[68](index=68&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=19&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial performance and condition, highlighting product offerings, revenue trends, cost of sales, operating expenses, and liquidity... [The Company and its products](index=19&type=section&id=The%20Company%20and%20its%20products) - Socket Mobile, Inc. is a leading innovator of data capture and delivery solutions, primarily offering cordless barcode scanners (SocketScan® 700 Series, DuraScan® 700 Series) and RFID/NFC reader/writers (D600, S550)[71](index=71&type=chunk)[72](index=72&type=chunk)[73](index=73&type=chunk)[76](index=76&type=chunk) - The company also provides DuraSled products that combine iPhones with scanners for single-handed solutions and a Software Developer Kit (Capture SDK) to integrate data capture capabilities into mobile applications[74](index=74&type=chunk)[75](index=75&type=chunk)[77](index=77&type=chunk) [Revenues](index=21&type=section&id=Revenues) - Total revenues for the three and six months ended June 30, 2020, decreased by **46%** and **28%** respectively, to **$2.7 million** and **$6.9 million**, primarily due to lower sales resulting from COVID-19[79](index=79&type=chunk) [Cost of Sales and Gross Margins](index=21&type=section&id=Cost%20of%20Sales%20and%20Gross%20Margins) - Gross margins on sales for the three and six-month periods ended June 30, 2020, were **50%** and **52%**, respectively, slightly down from **52%** in the corresponding periods a year ago[81](index=81&type=chunk) [Research and Development Expense](index=22&type=section&id=Research%20and%20Development%20Expense) - Research and development expenses decreased by **14%** and **8%** for the three and six months ended June 30, 2020, respectively, primarily due to a reduction in employee compensation as a COVID-19 cost-saving initiative[84](index=84&type=chunk) [Sales and Marketing Expense](index=22&type=section&id=Sales%20and%20Marketing%20Expense) - Sales and marketing expenses decreased by **6%** and **2%** for the three and six months ended June 30, 2020, respectively, mainly due to reduced employee compensation as a COVID-19 cost-saving measure[86](index=86&type=chunk) [General and Administrative Expense](index=22&type=section&id=General%20and%20Administrative%20Expense) - General and administrative expenses decreased by **8%** and **7%** for the three and six months ended June 30, 2020, respectively, primarily due to a reduction in employee compensation as a COVID-19 cost-saving initiative[88](index=88&type=chunk) [Interest Expense, Net of Interest Income](index=22&type=section&id=Interest%20Expense,%20Net%20of%20Interest%20Income) - Net interest expense decreased significantly to approximately **$8,100** and **$27,600** for the three and six months ended June 30, 2020, respectively, from **$29,300** and **$57,800** in the prior year, mainly due to a lower average outstanding balance of bank term loans and credit lines[89](index=89&type=chunk) [Income Taxes](index=23&type=section&id=Income%20Taxes) - The company did not record a deferred tax benefit for losses in the three and six months ended June 30, 2020, but recorded deferred tax expenses in the comparable 2019 periods[92](index=92&type=chunk)[93](index=93&type=chunk) - Deferred tax assets, primarily from net operating loss carryforwards, were valued at approximately **$5,506,000** at June 30, 2020[92](index=92&type=chunk) [Liquidity and Capital Resources](index=23&type=section&id=Liquidity%20and%20Capital%20Resources) - Net cash provided by operating activities was approximately **$244,000** in the first half of 2020, a significant improvement from net cash used of **$137,000** in the prior year, driven by decreases in accounts receivable[94](index=94&type=chunk)[95](index=95&type=chunk) - Net cash used in financing activities was approximately **$20,000** in the first half of 2020, compared to net cash provided of **$256,000** in the prior year, influenced by PPP and EIDL loan proceeds offset by bank line repayments[98](index=98&type=chunk) [Contractual Obligations](index=24&type=section&id=Contractual%20Obligations) Contractual Obligations | Contractual Obligations | Total (USD) | Less than 1 year (USD) | 1 to 3 years (USD) | 4 to 5 years (USD) | More than 5 years (USD) | | :------------------------ | :----------- | :--------------- | :----------- | :----------- | :---------------- | | Unconditional purchase obligations with contract manufacturers | $3,651,000 | $3,651,000 | $— | $— | $— | | Operating lease for office | $996,000 | $447,000 | $549,000 | $— | $— | | Operating lease for copier | $33,000 | $15,000 | $18,000 | $— | $— | | Total contractual obligations | $4,680,000 | $4,113,000 | $567,000 | $— | $— | [Off-Balance Sheet Arrangements](index=24&type=section&id=Off-Balance%20Sheet%20Arrangements) - As of June 30, 2020, the company had no off-balance sheet arrangements[100](index=100&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=25&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section outlines the company's exposure to market risks, specifically interest rate risk and foreign currency risk, and the strategies employed to mitigate them [Interest Rate Risk](index=25&type=section&id=Interest%20Rate%20Risk) - The company's bank term loan and credit line facilities have variable interest rates, making them susceptible to interest rate increases. A **1%** increase in interest rates would have increased Q2 2020 borrowing costs by approximately **$1,061**[102](index=102&type=chunk) [Foreign Currency Risk](index=25&type=section&id=Foreign%20Currency%20Risk) - The company hedges a significant portion of its European receivables denominated in Euros to reduce foreign currency risk. An adverse **10%** change in exchange rates would have resulted in a net income decrease of approximately **$9,000** for Q1 2020 if unhedged[103](index=103&type=chunk) - For Q2 2020, the net adjustment for foreign currency effects on cash, collections, payables, and derivatives resulted in a net loss of **$5,580**[103](index=103&type=chunk) [Item 4. Controls and Procedures](index=26&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, with no material changes in internal control over financial reporting during the quarter [Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures](index=26&type=section&id=Conclusion%20Regarding%20the%20Effectiveness%20of%20Disclosure%20Controls%20and%20Procedures) - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2020, ensuring timely and accurate reporting[105](index=105&type=chunk) [Changes in Internal Control Over Financial Reporting](index=26&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) - There were no material changes in internal control over financial reporting during the quarter ended June 30, 2020[106](index=106&type=chunk) Part II. Other Information [Item 1A. Risk Factors](index=27&type=section&id=Item%201A.%20Risk%20Factors) This section details various risks that could materially affect the company's business, financial condition, and operating results, including global economic conditions (especially COVID-19 impacts), ability to return to profitability, need for additional capital, dependence on application developers, internal control failures, cybersecurity threats, quarterly operating fluctuations, compliance with credit covenants, reliance on deferred tax assets and goodwill, supplier dependence, product development challenges, customer and distributor concentration, intellectual property protection, and personnel retention... - Global economic conditions, particularly the COVID-19 pandemic, have reduced sales and pose significant challenges, with future impacts highly uncertain[110](index=110&type=chunk) - The company may not return to profitability and may require additional capital, which might not be available on reasonable terms or without substantial dilution[111](index=111&type=chunk)[112](index=112&type=chunk) - Dependence on application developers for product integration and sales, and a limited number of distributors (Ingram Micro and BlueStar accounted for **53%** of H1 2020 revenues), poses significant business risks[113](index=113&type=chunk)[126](index=126&type=chunk) - Risks include quarterly operating result fluctuations due to order timing and product mix, potential failure to maintain effective internal controls, and dependence on a limited number of suppliers for component parts[117](index=117&type=chunk)[118](index=118&type=chunk)[119](index=119&type=chunk)[114](index=114&type=chunk)[122](index=122&type=chunk) - The company faces intense competition, the need to rapidly develop new products in a fast-changing technology market, and challenges in protecting its intellectual property[124](index=124&type=chunk)[125](index=125&type=chunk)[128](index=128&type=chunk)[137](index=137&type=chunk) [Item 6. Exhibits](index=38&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including certifications from the Chief Executive Officer and Chief Financial Officer as required by the Sarbanes-Oxley Act of 2002 - Exhibits include certifications from the CEO (31.1, 32.1) and CFO (31.2, 32.1) pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[157](index=157&type=chunk)[164](index=164&type=chunk) [Signatures](index=39&type=section&id=Signatures) The report is duly signed on behalf of Socket Mobile, Inc. by Kevin J. Mills, President and Chief Executive Officer, and Lynn Zhao, Vice President of Finance and Administration and Chief Financial Officer, on August 12, 2020 - The report was signed by Kevin J. Mills, President and CEO, and Lynn Zhao, VP of Finance and Administration and CFO, on August 12, 2020[161](index=161&type=chunk)