Socket Mobile(SCKT) - 2021 Q3 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements (Unaudited) Presents unaudited condensed financial statements, including operations, balance sheets, equity, and cash flows, highlighting a turnaround to net income Condensed Statements of Operations | Metric | Three Months Ended Sep 30, 2021 (USD) | Three Months Ended Sep 30, 2020 (USD) | Nine Months Ended Sep 30, 2021 (USD) | Nine Months Ended Sep 30, 2020 (USD) | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenues | $6,319,044 | $4,108,738 | $17,084,913 | $11,044,448 | | Gross profit | $3,422,721 | $2,273,405 | $9,251,907 | $5,858,646 | | Operating income (loss) | $953,773 | $(3,978,122) | $2,010,118 | $(4,878,831) | | Net income (loss) | $643,626 | $(4,002,786) | $3,473,635 | $(4,861,136) | | Basic Net income (loss) per share | $0.08 | $(0.62) | $0.46 | $(0.76) | | Diluted Net income (loss) per share| $0.07 | $(0.62) | $0.37 | $(0.76) | - Revenues increased by 54% for the three months and 55% for the nine months ended September 30, 2021, compared to the prior year periods[9] - The company achieved a significant turnaround from an operating loss of $(3,978,122) to an operating income of $953,773 for the three months ended September 30, 2021, and from $(4,878,831) to $2,010,118 for the nine months ended September 30, 2021[9] Condensed Balance Sheets | Asset/Liability/Equity | September 30, 2021 (Unaudited, USD) | December 31, 2020 (USD) | | :--------------------------------- | :----------------------------- | :---------------- | | Cash and cash equivalents | $5,352,738 | $2,121,763 | | Accounts receivable, net | $2,703,127 | $2,112,514 | | Inventories, net | $4,434,536 | $3,195,842 | | Total current assets | $13,244,455 | $7,935,521 | | Intangible assets, net | $1,845,785 | $0 | | Deferred tax assets | $7,116,934 | $5,506,934 | | Total assets | $23,622,640 | $15,058,488 | | Total current liabilities | $5,076,359 | $4,149,336 | | Total liabilities | $5,344,056 | $4,436,227 | | Total stockholders' equity | $18,278,584 | $10,622,261 | - Total assets increased by approximately 56.8% from $15.06 million at December 31, 2020, to $23.62 million at September 30, 2021[11] - Cash and cash equivalents more than doubled, from $2.12 million to $5.35 million, indicating improved liquidity[11] Condensed Statements of Stockholders' Equity | Item | Balance at Dec 31, 2020 (USD) | Balance at Sep 30, 2021 (USD) | | :-------------------------- | :---------------------- | :---------------------- | | Total Stockholders' Equity | $10,622,261 | $18,278,584 | | Common Stock Shares | 6,102,630 | 7,174,363 | | Additional Paid-In Capital | $61,733,522 | $65,915,139 | | Accumulated Deficit | $(51,117,364) | $(47,643,729) | - Total stockholders' equity increased by approximately 72% from $10.62 million at December 31, 2020, to $18.28 million at September 30, 2021[15][16] - Key contributors to the increase in equity include net income, exercise of stock options, issuance of common stock for intangible assets, and conversion of convertible notes[15] Condensed Statements of Cash Flows | Activity | Nine Months Ended Sep 30, 2021 (USD) | Nine Months Ended Sep 30, 2020 (USD) | | :--------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $3,473,635 | $(4,861,136) | | Net cash provided by operating activities | $1,183,013 | $386,745 | | Net cash used in investing activities | $(562,910) | $(374,538) | | Net cash provided by financing activities | $2,610,872 | $803,778 | | Net increase in cash and cash equivalents | $3,230,975 | $815,985 | | Cash and cash equivalents at end of period | $5,352,738 | $1,774,845 | - Net cash provided by operating activities significantly increased to $1.18 million in the first nine months of 2021, up from $0.39 million in the comparable period of 2020[18] - Financing activities provided $2.61 million in cash, primarily from stock option exercises and the CalCap Loan, contributing to a substantial increase in cash and cash equivalents[18][111] Notes to Condensed Financial Statements NOTE 1 — Basis of Presentation - The unaudited condensed financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions, not including all disclosures required for complete financial statements[21] - The company continues to monitor the COVID-19 pandemic, acknowledging its uncertain impact on business, operating results, cash flows, liquidity, and financial condition due to factors beyond its control[22] NOTE 2 — Summary of Significant Accounting Policies - Revenue from sales to distributors is recognized upon product shipment and title transfer, net of estimated returns, while SocketCare extended warranty revenue is recognized ratably over the contract life[27][28] - The company performs an annual goodwill impairment test as of September 30th, with the entire goodwill of $4.4 million written off as of September 30, 2020[34] - The company adopted ASU 2016-02 (Leases) effective January 1, 2019, recognizing right-of-use assets and lease liabilities for operating leases[30] NOTE 3 — Acquisition of Intangible Assets - On February 26, 2021, Socket Mobile acquired an irrevocable, perpetual, non-exclusive, transferable, worldwide, unlimited, unrestricted, royalty-free, fully paid-up right and license to SpringCard SAS's Contactless Technology Package for its D600 and S550 products[36][37] - The consideration for the acquisition included 184,332 shares of the Company's common stock and a 10-year warrant to purchase up to 50,000 shares[37] Estimated Future Amortization (USD) | Fiscal Year | Estimated Future Amortization | | :------------------------------------ | :---------------------------- | | 2021 (Oct 1 - Dec 31) | $31,824 | | 2022 | $127,296 | | 2023 | $127,296 | | 2024 | $127,296 | | 2025 | $127,296 | | Thereafter | $1,304,777 | | Total | $1,845,785 | NOTE 4 — Inventories Inventory Components (USD) | Inventory Component | September 30, 2021 | December 31, 2020 | | :-------------------------- | :----------------- | :---------------- | | Raw materials and sub-assemblies | $4,880,494 | $3,642,377 | | Finished goods | $359,985 | $281,104 | | Inventory reserves | $805,943 | $727,639 | | Inventory, net | $4,434,536 | $3,195,842 | - Net inventories increased by approximately 38.7% from $3.20 million at December 31, 2020, to $4.43 million at September 30, 2021, primarily due to an increase in raw materials and sub-assemblies[41] NOTE 5 — Bank Financing Arrangements - On January 29, 2021, the company amended its financing agreement with Western Alliance Bank, increasing its Domestic Line of Credit to $3.0 million, comprising a $2.0 million revolving facility and a $1.0 million nonformula CalCap Loan[46] - The maturity date for both the Domestic Line of Credit and EXIM Line of Credit was extended to January 31, 2023[46] CalCap Loan Components (USD) | CalCap Loan Component | September 30, 2021 | | :---------------------------- | :----------------- | | Current portion | $500,000 | | Long-term portion | $250,000 | | Total CalCap Loan | $750,000 | NOTE 6 — Secured Subordinated Convertible Notes Payable - On August 31, 2020, the company completed a $1.53 million secured subordinated convertible note financing, with $1.35 million from related parties[50] - The notes have a three-year term, accrue interest at 10% per annum, mature on August 30, 2023, and are convertible into common stock at $1.46 per share[51] - During the nine months ended September 30, 2021, $130,000 of note principal was converted into common stock[55] NOTE 7 — Segment Information and Concentrations Revenues by Geographic Area (USD) | Geographic Area | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Americas | $4,641,767 | $3,290,992 | $12,958,256 | $8,676,626 | | Europe | $967,752 | $567,977 | $2,621,278 | $1,383,518 | | Asia Pacific | $709,525 | $249,769 | $1,505,379 | $984,304 | | Total revenues| $6,319,044 | $4,108,738 | $17,084,913 | $11,044,448 | Revenues by Major Customer (Percentage) | Major Customer | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Ingram Micro Inc.| 33% | 30% | 29% | 32% | | BlueStar, Inc. | 15% | 29% | 25% | 23% | | ScanSource, Inc. | 14% | –* | 11% | –* | - The top three suppliers accounted for 56% of inventory purchases for the three months ended September 30, 2021, indicating a concentration of supplier risk[61] NOTE 8 — Stock-Based Compensation - Total stock-based compensation expense for the nine months ended September 30, 2021, was $504,676, an increase from $392,985 in the prior year period[66] - The company granted 182,000 stock options and awarded 306,425 shares of restricted stock during the nine months ended September 30, 2021[64][65] NOTE 9 — Net Income (Loss) Per Share Net Income (Loss) Per Share (USD) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic EPS | $0.08 | $(0.62) | $0.46 | $(0.76) | | Diluted EPS | $0.07 | $(0.62) | $0.37 | $(0.76) | | Basic Weighted Average Shares | 7,162,924 (Shares) | 6,037,559 (Shares) | 6,927,837 (Shares) | 6,020,363 (Shares) | | Diluted Weighted Average Shares | 8,939,384 (Shares) | 6,037,559 (Shares) | 8,932,395 (Shares) | 6,020,363 (Shares) | - Diluted net income per share for the nine months ended September 30, 2021, was $0.37, a significant improvement from a diluted net loss per share of $(0.76) in the prior year, which included goodwill impairment charges[68] NOTE 10 — Income Taxes - The company recorded a net income tax benefit of approximately $1.61 million for the first nine months of 2021, primarily due to a tax deduction from the disqualified disposition of incentive stock options[71] - As of September 30, 2021, the deferred tax asset, representing future income tax savings from net operating loss carryforwards, was valued at $7.1 million[105] NOTE 11 — Commitments and Contingencies - The company leases office space in Newark, California, under a non-cancelable operating lease expiring on June 30, 2022[73] Annual Minimum Payments (USD) | Annual Minimum Payments | Amount | | :---------------------------- | :----- | | 2021 (Oct 1 - Dec 31) | $131,395 | | 2022 (through June 30) | $262,789 | | Total minimum payments | $394,184 | - As of September 30, 2021, the company had non-cancelable purchase commitments for inventory totaling approximately $9.7 million[78] NOTE 12 — Subsequent Events - Subsequent to September 30, 2021, the company granted 5,687 shares of restricted stock and issued 4,692 shares of common stock upon the exercise of stock options[82][83] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, condition, and results, highlighting revenue growth, expense changes, liquidity, and critical accounting estimates The Company and its Products - Socket Mobile is a leading innovator in data capture and delivery solutions, primarily offering cordless barcode scanning and RFID/NFC devices for mobile applications in various sectors like POS, field services, and logistics[87] - The product portfolio includes Companion SocketScan, DuraScan, Attachable (DuraSled, SocketScan 800 Series), and Contactless RFID/NFC reader/writer (D600, S550) families, all supported by a comprehensive Software Developer Kit (Capture SDK)[88][89][90][91][92][93] - The company distributes its products worldwide through a two-tier distribution model, leveraging application developers and resellers, and anticipates continued demand growth due to advancements in mobile technologies and business adoption of mobile applications[95] Results of Operations - Total revenues increased by 54% for the three months and 55% for the nine months ended September 30, 2021, driven by the distribution channel and large customer deployments, particularly in retail as the economy re-opened[96] - Gross profit margins were 54.2% for both the three and nine months ended September 30, 2021, with the three-month margin decrease due to higher component and shipping costs, and the nine-month improvement attributed to higher revenues and fixed manufacturing overhead absorption[97] - Research and development expenses increased by 49% (three months) and 21% (nine months) due to higher personnel expenses, incentive-based compensation, amortization of newly acquired intangible assets, and increased contractor fees[98][100] - Sales and marketing expenses rose by 20% (three months) and 2% (nine months), primarily due to the development of a new Return Merchandise Authorization portal, additional employee hires, and increased fees for website development and upgrades[101] - General and administrative expenses increased by 37% (three months) and 23% (nine months) due to the cessation of short-term cost reduction initiatives from 2020, higher employee incentive-based compensation, increased professional fees for a shelf registration statement, and higher proxy distribution and insurance costs[102] - Interest expense, net, increased to approximately $50,000 (three months) and $150,000 (nine months) in 2021, primarily related to secured subordinated convertible notes payable and the CalCap Loan[103] - The company recorded a $1.6 million income tax benefit for the nine months ended September 30, 2021, mainly from a tax deduction related to the disqualified disposition of incentive stock options[105] Liquidity and Capital Resources - Net cash provided by operating activities increased to approximately $1.18 million in the first nine months of 2021, compared to $387,000 in the prior year, driven by net income and non-cash adjustments[107] - Changes in operating assets and liabilities resulted in a net cash use of approximately $1.7 million in 2021, primarily due to increased inventory levels to manage supply chain disruptions, higher accounts receivable from increased shipments, and increased prepaid expenses[108] - Net cash provided by financing activities was approximately $2.6 million in the first nine months of 2021, mainly from $1.86 million in proceeds from employee stock option exercises and a net borrowing of $750,000 on the CalCap Loan[111] Critical Accounting Estimates - Critical accounting policies requiring significant estimates and judgments include Revenue Recognition and Accounts Receivable Reserves, Inventory Valuation, Stock-Based Compensation, Income Taxes, and Valuation of Goodwill[112] Contractual Obligations Contractual Obligations (USD) | 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 | $9,697,000 | $9,619,000 | $78,000 | $0 | $0 | | Operating lease | $394,000 | $394,000 | $0 | $0 | $0 | | Total contractual obligations | $10,091,000| $10,013,000 | $78,000 | $0 | $0 | Off-Balance Sheet Arrangements - As of September 30, 2021, the company had no off-balance sheet arrangements as defined in Item 303 of Regulation S-K[115] Item 3. Quantitative and Qualitative Disclosures about Market Risk Details the company's exposure to market risks, specifically interest rate risk on bank loans and foreign currency risk on European receivables Interest Rate Risk - The company's exposure to interest rate risk primarily relates to its bank term loan and credit line facilities, which have variable interest rates based on the lender's prime rate[117] - Increases in interest rates could lead to higher interest expense on outstanding term loan and credit line balances[117] Foreign Currency Risk - The company hedges a significant portion of its European receivables denominated in Euros to reduce foreign currency risk[118] - A 10% adverse change in exchange rates would have resulted in an approximate $49,000 decrease in net income for the third quarter of 2021 if left unprotected[118] - The total net adjustment for foreign currency effects on cash balances, collections, payables, and derivatives was approximately $(15,000) for the third quarter of 2021[118] Item 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures as of September 30, 2021, with no material changes in internal control over financial reporting Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures - Management, with the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[120] - These controls ensure that required information is recorded, processed, summarized, and reported within specified time periods and communicated to management for timely disclosure decisions[120] Changes in Internal Control Over Financial Reporting - There were no changes in internal control over financial reporting during the quarter ended September 30, 2021, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[121] Part II. Other Information Item 1A. Risk Factors Outlines various risks and uncertainties, including COVID-19 impacts, operational challenges, profitability, capital needs, supply chain, competition, and intellectual property COVID-19 Pandemic and Economic Conditions - The ongoing COVID-19 pandemic, including new variants, poses significant uncertainty regarding its extent and duration, potentially causing reductions or volatility in product demand, disruptions in manufacturing, and failures of third-party partners[125][126] - A deterioration in global economic conditions could negatively impact the business and financial condition, limiting the ability to raise additional funds and affecting results of operations, financial position, and cash flows[127] Profitability and Capital Needs - The company may not maintain ongoing profitability due to challenges in achieving continued business growth, supporting registered developers, and developing successful new products[128] - Additional capital may be required in the future to fund growth or operating losses, but such capital may not be available on reasonable terms or without substantial dilution to investors' stock holdings[129] Dependency on Application Developers - The company's sales projections are dependent on application developers successfully integrating, marketing, and selling their applications that incorporate Socket Mobile's products[130] - Delays in application development, competing applications, or unsuccessful marketing by developers could adversely affect revenue[130] Internal Controls and Security - Failure to maintain effective internal controls could materially harm the business, operating results, and stock price, potentially leading to unreliable financial reports or fraud[131] - Despite security protections, business records and information could be vulnerable to unauthorized access or hacking, which could bypass existing controls and procedures[132] Operational and Market Fluctuations - Quarterly operating results are expected to fluctuate due to factors such as demand for products, timing of customer orders, delays in new product introductions, competitive pressures, and general economic conditions[133][134][139] - Unanticipated declines or delays in orders can cause significant variations in operating results, potentially leading to a decline in the common stock price[136] Compliance with Bank Covenants and Deferred Tax Assets - Maintaining bank lines of credit requires compliance with specified covenants, and the bank retains discretion in making advances, with potential for immediate repayment upon an event of default[137] - The realization of deferred tax assets, which comprise a significant portion of assets, is dependent on future tax profitability; failure to achieve this could result in recognizing a loss for these assets[138] Supply Chain and Product Development - Dependency on a limited number of qualified suppliers for component parts creates a risk of shortages or delays, which could disrupt manufacturing and materially affect financial results[140] - Failure to rapidly and successfully develop and introduce new products that incorporate the latest technologies and conform to evolving industry standards would hinder competitive effectiveness and revenue generation[141][142] Customer Receivables and Competition - The company faces risks in collecting receivables from customers, primarily distributors, who may experience financial difficulties, potentially leading to increased uncollectible accounts[143] - Increased competition, including from competitors with greater resources and products with built-in functions, could result in price reductions, fewer orders, reduced margins, and loss of market share[144][147] - Inaccurate forecasting of product demand could lead to excess inventory and write-offs if demand is lower, or higher costs and declining yields if production must rapidly increase to meet unexpected demand[145][146] Distribution Channels and Strategic Alliances - Reliance on distributors for product distribution exposes the company to risks such as inventory build-up, product returns, and price protection, which can adversely affect operating results and working capital[148][150] - The company's sales growth is contingent on maintaining existing and establishing new distribution relationships, as current agreements are generally nonexclusive and terminable on short notice[149] - Disruptions in strategic alliances with third parties, particularly those providing operating systems for mobile devices (Apple, Google, Microsoft), could hinder product development and sales, as these collaborations are not guaranteed[151][152] Intellectual Property and Industry Standards - The company's competitive position relies on intellectual property protection (patents, copyrights, trademarks, trade secrets), but these measures may not provide meaningful protection against unauthorized use or independent development by competitors[153][154][155] - The company may face claims of intellectual property infringement, which could result in substantial liability, costly litigation, and disruption to business operations[156][158] - New industry standards may necessitate product redesigns, requiring significant time and resources, and failure to comply could render products incompatible and affect sales opportunities[160] Personnel and Export Sales Risks - The loss of senior personnel could harm existing business operations, as the company's future success depends on their continued service and the ability to attract and retain highly skilled sales, marketing, and product development personnel[162][165] - The expensing of stock options and restricted stocks adversely affects net income and EPS, potentially requiring changes in compensation practices to attract and retain employees[164] - Export sales are subject to various risks, including longer payment cycles, unexpected regulatory changes, difficulties in managing foreign operations, adverse tax consequences, and political/economic instability[166] External Events and Stock Volatility - Facilities and operations could be adversely affected by events outside the company's control, such as natural disasters (e.g., earthquakes in Northern California) or health epidemics[167] - The sale of a substantial number of common stock shares, including those from outstanding options and restricted stock, could cause the market price of the common stock to decline[168][169][170] - The trading price of the common stock is subject to wide fluctuations due to general economic conditions, investor outlook, and low trading volumes, which can be unrelated to operating performance[171] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports no unregistered sales of equity securities or use of proceeds for the period - No unregistered sales of equity securities or use of proceeds were reported[172] Item 6. Exhibits Lists exhibits filed with the Quarterly Report on Form 10-Q, including CEO and CFO certifications and the XBRL Document Exhibits Filed | Exhibit Number | Exhibit 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 | | 101 | XBRL Document | Signatures Contains duly authorized signatures of Socket Mobile, Inc.'s CEO and CFO, certifying the report filing on November 12, 2021 - The report was signed on November 12, 2021, by Kevin J. Mills, President and Chief Executive Officer, and Lynn Zhao, Vice President of Finance and Administration and Chief Financial Officer[177]