Socket Mobile(SCKT) - 2022 Q2 - Quarterly Report

Part I. Financial Information This section presents the company's unaudited financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements (Unaudited) This section presents the company's unaudited condensed financial statements, including statements of operations, balance sheets, stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, financial instruments, revenue recognition, leases, financing, and other critical financial information for the periods ended June 30, 2022 and 2021 Condensed Statements of Operations This statement provides a summary of the company's revenues, net income, and earnings per share for the three and six months ended June 30, 2022 and 2021 Three Months Ended June 30 | Metric | 2022 (USD) | 2021 (USD) | | :------------------------- | :--------------- | :--------------- | | Revenues | $6.05 million | $5.95 million | | Net Income | $0.10 million | $2.63 million | | Basic Net Income Per Share | $0.01 | $0.34 | | Diluted Net Income Per Share | $0.01 | $0.27 | Six Months Ended June 30 | Metric | 2022 (USD) | 2021 (USD) | | :------------------------- | :--------------- | :--------------- | | Revenues | $12.34 million | $10.77 million | | Net Income | $0.45 million | $2.83 million | | Basic Net Income Per Share | $0.06 | $0.38 | | Diluted Net Income Per Share | $0.05 | $0.31 | Condensed Balance Sheets This statement presents the company's financial position, including assets, liabilities, and stockholders' equity, as of June 30, 2022, and December 31, 2021 Balance Sheet Summary | Metric | June 30, 2022 (Unaudited, USD) | December 31, 2021 (USD) | | :-------------------------- | :----------------------------- | :---------------------- | | Total Assets | $30.89 million | $25.58 million | | Total Liabilities | $10.34 million | $5.53 million | | Total Stockholders' Equity | $20.56 million | $20.05 million | | Cash and Cash Equivalents | $5.59 million | $6.10 million | Condensed Statements of Stockholders' Equity This statement details changes in stockholders' equity, including net income and treasury share transactions, for the periods presented Stockholders' Equity Summary | Metric | June 30, 2022 (USD) | December 31, 2021 (USD) | | :-------------------------- | :------------------ | :-------------------- | | Total Stockholders' Equity | $20.56 million | $20.05 million | | Net Income (3 months ended) | $0.10 million | $2.63 million | | Treasury shares purchased | $(0.38) million | $0 | Condensed Statements of Cash Flows This statement outlines the cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2022 and 2021 Cash Flow Activities (Six Months Ended June 30) | Cash Flow Activity | 2022 (USD) | 2021 (USD) | | :-------------------------------------- | :--------------- | :--------------- | | Net cash provided by operating activities | $0.60 million | $0.45 million | | Net cash used in investing activities | $(0.56) million | $(0.30) million | | Net cash (used in) provided by financing activities | $(0.55) million | $2.65 million | | Net (decrease) increase in cash and cash equivalents | $(0.51) million | $2.80 million | | Cash and cash equivalents at end of period | $5.59 million | $4.92 million | Notes to Condensed Financial Statements This section provides detailed explanations and disclosures regarding the accounting policies, estimates, and specific financial statement line items NOTE 1 — Basis of Presentation This note describes the accounting principles and preparation methods used for the unaudited interim financial statements - The unaudited condensed financial statements are prepared in accordance with GAAP for interim information and Form 10-Q instructions, including all necessary normal recurring accruals for fair presentation[21] - Interim results are not necessarily indicative of operating results for the full fiscal year or any future period[21] NOTE 2 — Summary of Significant Accounting Policies This note outlines the critical accounting policies and estimates applied in preparing the financial statements, including revenue recognition and cash equivalents - Financial statements rely on management's estimates and assumptions, which may materially differ from actual results[22] - Cash equivalents are highly liquid investments purchased with a maturity of 90 days or less; cash balances may exceed federally insured limits[23] - Revenue from distributor sales is recognized upon product shipment and title transfer, net of estimated returns. SocketCare extended warranty revenue is recognized ratably over the contract life[25][27] - The company adopted ASU 2016-02 (Leases, Topic 842) effective January 1, 2019, requiring recognition of right-of-use assets and lease liabilities for operating leases[29] NOTE 3 — Acquisition of Intangible Assets This note details the acquisition of an intangible asset, including its consideration, amortization policy, and estimated future amortization schedule - On February 26, 2021, the company acquired an irrevocable, perpetual, non-exclusive, transferable, worldwide, unlimited, unrestricted, royalty-free, fully paid-up right and license to SpringCard's Contactless Technology Package[31][32] - Consideration for the acquisition included 184,332 shares of common stock and a 10-year warrant to purchase up to 50,000 shares[32] - Intangible assets are amortized over an estimated useful life of fifteen years on a straight-line basis, commencing April 1, 2021[33] Estimated Future Amortization of Intangible Assets (as of June 30, 2022) | Fiscal Year | Amount (USD) | | :---------- | :------------- | | 2022 (July 1 - Dec 31) | $63.65 thousand | | 2023 | $127.30 thousand | | 2024 | $127.30 thousand | | 2025 | $127.30 thousand | | 2026 | $127.30 thousand | | Thereafter | $1.18 million | | Total | $1.75 million | NOTE 4 — Inventories This note details the company's inventory valuation policy and provides a breakdown of inventory components, net of reserves - Inventories, primarily raw materials and sub-assemblies, are stated at the lower of cost (first-in, first-out) or market[34] Inventories, Net | Category | June 30, 2022 (USD) | December 31, 2021 (USD) | | :------------------------ | :------------------ | :-------------------- | | Raw materials and sub-assemblies | $6.59 million | $5.76 million | | Finished goods | $179.65 thousand | $277.60 thousand | | Inventory reserves | $(880.94) thousand | $(880.94) thousand | | Inventory, net | $5.89 million | $5.15 million | NOTE 5 — Bank Financing Arrangements This note describes the company's bank financing agreements, including credit lines, loan terms, and related interest expenses - The Amended and Restated Business Financing Agreement (January 29, 2021) increased the Domestic Line of Credit to $3.0 million, including a $2.0 million revolving facility and a $1.0 million nonformula loan (CalCap Loan)[37] - The First Business Financing Modification Agreement (February 9, 2022) consented to a share repurchase program of up to $1.8 million and increased the business credit card limit to $250,000[38] CalCap Loan Outstanding (June 30, 2022) | Category | Amount (USD) | | :------------------------ | :------------- | | Current portion of CalCap Loan | $375 thousand | | Long-term portion of CalCap Loan | $0 | | CalCap Loan | $375 thousand | Interest Expense on CalCap Loan | Period | 2022 (USD) | 2021 (USD) | | :------------------------ | :------------- | :------------- | | Three Months Ended June 30 | $5.30 thousand | $11.58 thousand | | Six Months Ended June 30 | $11.96 thousand | $17.55 thousand | NOTE 6 — Secured Subordinated Convertible Notes Payable This note details the terms of the company's secured subordinated convertible notes, including interest rates, maturity, conversion options, and debt discount amortization - On August 31, 2020, the company completed a $1.53 million secured subordinated convertible note financing, with $1.35 million from officers, directors, and their family members[41] - 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[42] - Amortization of debt discount for the six months ended June 30, 2022, was $16,546, with a remaining debt discount of $38,606 to be amortized through August 31, 2023[43] Interest Expense on Convertible Notes | Period | 2022 (USD) | 2021 (USD) | | :------------------------ | :------------- | :------------- | | Three Months Ended June 30 | $43.18 thousand | $43.18 thousand | | Six Months Ended June 30 | $84.46 thousand | $87.72 thousand | NOTE 7 — Segment Information and Concentrations This note provides information on the company's operating segment, geographic revenue distribution, and concentrations of revenue and accounts receivable from major customers and suppliers - The company operates in the mobile barcode scanning and RFID/NFC data capture market, distributing products globally through distributors and resellers[45] Revenues by Geographic Area (Six Months Ended June 30) | Region | 2022 (USD) | 2021 (USD) | | :----------- | :--------------- | :--------------- | | Americas | $9.36 million | $8.32 million | | Europe | $1.65 million | $1.65 million | | Asia Pacific | $1.32 million | $0.80 million | | Total | $12.34 million | $10.77 million | Major Customer Revenue Concentration (Six Months Ended June 30) | Customer | 2022 (%) | 2021 (%) | | :--------------- | :------- | :------- | | Ingram Micro Inc. | 30% | 26% | | BlueStar, Inc. | 20% | 31% | | ScanSource, Inc. | 14% | 10% | Major Customer Accounts Receivable Concentration (June 30) | Customer | 2022 (%) | 2021 (%) | | :--------------- | :------- | :------- | | Ingram Micro Inc. | 34% | 28% | | BlueStar, Inc. | 17% | 21% | | ScanSource, Inc. | 13% | 24% | - The top three suppliers accounted for 55% of inventory purchases for the three months ended June 30, 2022 and 2021[50] NOTE 8 — Stock-Based Compensation This note outlines the company's accounting policy for stock-based compensation and provides details on stock options granted, restricted stock awarded, and total compensation expenses - Compensation cost for stock-based awards is recognized on a straight-line basis over the vesting period[51] Stock Options Granted (Six Months Ended June 30) | Year | Stock Options Granted | | :--- | :-------------------- | | 2022 | 40,000 | | 2021 | 182,000 | Restricted Stock Awarded (Six Months Ended June 30) | Year | Shares Awarded | | :--- | :------------- | | 2022 | 323,800 | | 2021 | 302,425 | Total Stock-Based Compensation Expenses (Six Months Ended June 30) | Year | Expenses (USD) | | :--- | :--------------- | | 2022 | $475.0 thousand | | 2021 | $320.8 thousand | NOTE 9 — Net Income Per Share This note presents the basic and diluted net income per share calculations and the weighted average shares outstanding for the periods presented Net Income Per Share (Six Months Ended June 30) | Metric | 2022 (USD) | 2021 (USD) | | :------------------------- | :--------- | :--------- | | Basic Net Income Per Share | $0.06 | $0.38 | | Diluted Net Income Per Share | $0.05 | $0.31 | Weighted Average Shares Outstanding (Six Months Ended June 30) | Metric | 2022 (Shares) | 2021 (Shares) | | :-------------------------------- | :------------ | :------------ | | Basic | 7,225,641 | 6,808,339 | | Diluted | 7,687,980 | 8,593,630 | - 903,369 stock options and 50,000 warrants were excluded from the diluted net income per share calculation for the six months ended June 30, 2022, as their effect would have been anti-dilutive[56] NOTE 10 — Income Taxes This note details the income tax benefit or expense, the valuation of deferred tax assets, and the primary drivers of tax changes Income Tax (Benefit) Expense (Six Months Ended June 30) | Year | Amount (USD) | | :--- | :--------------- | | 2022 | $116.49 thousand | | 2021 | $(1.86) million | - The deferred tax asset was valued at $7.84 million on June 30, 2022, primarily representing future income tax savings from net operating loss carryforwards[93] - The income tax benefit in 2021 was primarily attributed to a $7.97 million tax deduction from the disqualified disposition of incentive stock options[93] NOTE 11 — Commitments and Contingencies This note outlines the company's operating lease commitments for its corporate headquarters and non-cancelable purchase commitments for inventory - The company commenced a new operating lease agreement for its corporate headquarters in Fremont, CA, on May 1, 2022, with the lease term expiring on July 31, 2029[59][60] Operating Lease Balances (June 30, 2022) | Metric | Amount (USD) | | :-------------------------- | :--------------- | | Right-of-use assets | $3.78 million | | Operating lease liabilities | $3.88 million | Operating Lease Expense (Six Months Ended June 30) | Year | Amount (USD) | | :--- | :--------------- | | 2022 | $322.60 thousand | | 2021 | $214.44 thousand | - As of June 30, 2022, the company has non-cancelable purchase commitments for inventory totaling approximately $12.07 million[66] Future Minimum Lease Payments (as of June 30, 2022) | Period | Amount (USD) | | :----------------------------------- | :--------------- | | 2022 (July 1 - Dec 31) | $251.39 thousand | | 2023 | $615.41 thousand | | 2024 | $633.87 thousand | | 2025 | $652.88 thousand | | 2026 | $672.47 thousand | | Thereafter | $1.83 million | | Total minimum payments | $4.66 million | | Less: Present value factor | $(774.38) thousand | | Total operating lease liabilities| $3.88 million | NOTE 12 — Subsequent Events This note discloses significant events that occurred after the balance sheet date, including share repurchases, stock option exercises, and new stock grants - 89,274 shares of common stock were repurchased from the market at an average price of $3.02[69] - 24,800 shares of common stock were issued upon the exercise of stock options[70] - 6,900 shares of restricted stock and 9,000 stock options were granted from the 2004 Equity Incentive Plan[71] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition, detailing product offerings, revenue trends, cost structures, liquidity, and capital resources. It highlights key drivers of financial changes and outlines critical accounting estimates The Company and its Products This section describes Socket Mobile's core business as a provider of data capture solutions, highlighting its product compatibility and recent new product introductions - Socket Mobile is a leading provider of data capture and delivery solutions, including barcode scanning and RFID/NFC technologies, for workforce mobilization across various industries[75] - Products are compatible with applications on Apple (iOS), Google (Android), and Microsoft (Windows) operating systems, supported by an easy-to-use Software Developer Kit (CaptureSDK)[75][82] - New product introductions in Q2 2022 include the SocketScan S720 (1D/2D barcode scanner) and the S370 (barcode scanning and NFC reading/writing, including Mobile Driver's License standard)[76][80] - In Q1 2022, the company launched SocketCam C820, a software-based barcode scanner offering a free data capture solution for App partners, turning mobile devices into high-performance scanners[83] Results of Operations This section analyzes the company's revenue, gross profit margins, operating expenses, interest expense, and income tax for the reported periods Revenue Performance | Period | 2022 Revenue (USD) | 2021 Revenue (USD) | YoY Change (%) | | :------------------------- | :----------------- | :----------------- | :------------- | | Three Months Ended June 30 | $6.05 million | $5.95 million | +2% | | Six Months Ended June 30 | $12.3 million | $10.8 million | +15% | - The revenue increase was primarily driven by the deployment of business applications, particularly in retail, following the easing of COVID-19 restrictions[85] Gross Profit Margins | Period | 2022 Margin (%) | 2021 Margin (%) | Change (pp) | | :------------------------- | :-------------- | :-------------- | :---------- | | Three Months Ended June 30 | 50.2% | 54.7% | -4.5% | | Six Months Ended June 30 | 50.0% | 54.1% | -4.1% | - Margin decreases were primarily due to rising component costs and higher freight costs[87] Operating Expenses (Six Months Ended June 30) | Expense Category | 2022 Amount (USD) | 2021 Amount (USD) | YoY Change (%) | | :----------------------- | :---------------- | :---------------- | :------------- | | Research and Development | $2.18 million | $1.90 million | +14.3% | | Sales and Marketing | $1.86 million | $1.40 million | +33.7% | | General and Administrative | $1.47 million | $1.48 million | -0.3% | - R&D expense increase was mainly due to hiring for new product offerings and customer support. Sales and marketing increase was due to higher headcount and increased consulting. G&A saw a slight decrease overall, but a quarterly increase due to non-cash straight-line rent expense for new office space[88][89][90] Interest Expense, Net (Six Months Ended June 30) | Year | Amount (USD) | | :--- | :------------- | | 2022 | $91 thousand | | 2021 | $100 thousand | Income Tax (Benefit) Expense (Six Months Ended June 30) | Year | Amount (USD) | | :--- | :--------------- | | 2022 | $116.49 thousand | | 2021 | $(1.86) million | Liquidity and Capital Resources This section discusses the company's cash flow from operating, investing, and financing activities, highlighting key drivers of changes in liquidity Net Cash Provided by Operating Activities (Six Months Ended June 30) | Year | Amount (USD) | | :--- | :------------- | | 2022 | $599 thousand | | 2021 | $450 thousand | - Net cash used in operating activities in H1 2022 was approximately $1.17 million, primarily due to increased inventory levels (coping with supply issues and longer lead times), higher accounts receivable, and increased prepaid expenses/security deposit for the new lease agreement[96] Net Cash Used in Investing Activities (Six Months Ended June 30) | Year | Amount (USD) | | :--- | :--------------- | | 2022 | $(560) thousand | | 2021 | $(305) thousand | - Net cash used in financing activities was approximately $546,000 in H1 2022, mainly from $378,000 in treasury stock repurchases and $250,000 in term loan repayments, partially offset by $81,531 from employee stock options exercised[99] - In H1 2021, net cash provided by financing activities was approximately $2.65 million, primarily from $1.78 million in employee stock option proceeds and $875,000 borrowed on the CalCap loan[99] Critical Accounting Estimates This section identifies the key accounting policies that require significant management estimates and judgments, such as revenue recognition and inventory valuation - Key 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[100] Contractual Obligations This section presents a table summarizing the company's contractual cash obligations, including purchase commitments and operating lease payments, over various periods Contractual Cash Obligations (June 30, 2022) | 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 | $12.07 million | $11.54 million | $526 thousand | $0 | $0 | | Operating lease | $4.66 million | $556 thousand | $1.27 million | $1.35 million | $1.49 million | | Total | $16.73 million | $12.10 million | $1.79 million | $1.35 million | $1.49 million | Off-Balance Sheet Arrangements This section confirms that the company has no off-balance sheet arrangements as defined by Regulation S-K - As of June 30, 2022, the company had no off-balance sheet arrangements as defined in Item 303 of Regulation S-K[103] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, specifically interest rate fluctuations on its bank loans and credit lines, and foreign currency exchange rate risks, along with its hedging strategies Interest Rate Risk This section discusses the company's exposure to interest rate fluctuations on its variable-rate bank loans and credit lines - The company's exposure to market risk from interest rate changes primarily relates to its bank term loan and credit line facilities, which have variable interest rates based on the lender's prime rate[104] - Increases in interest rates could lead to higher interest expense on outstanding term loan and credit line balances[104] Foreign Currency Risk This section addresses the company's exposure to foreign currency exchange rate risks, particularly for Euro-denominated transactions, and its hedging strategies - A substantial majority of the company's revenue, expense, and purchasing activities are transacted in U.S. dollars, but European distributors purchase in Euros, and European employee expenses are paid in Euros and British pounds[105] - The company hedges a significant portion of its European receivables denominated in Euros to mitigate foreign currency risk[105] - A 10% adverse change in exchange rates would have resulted in an approximate $38,000 decrease in net income for Q2 2022 if left unprotected[105] - The total net adjustment for foreign currency effects in Q2 2022 was approximately $15,900[105] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the quarter Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures This section confirms management's conclusion that the company's disclosure controls and procedures were effective as of the reporting date - Management, with the participation of the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[107] Changes in Internal Control Over Financial Reporting This section reports that there were no material changes in internal control over financial reporting during the quarter - There were no changes in internal control over financial reporting during the quarter ended June 30, 2022, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[108] Part II. Other Information This section provides additional information beyond the financial statements, including risk factors, equity sales, and exhibits Item 1A. Risk Factors This section details various risks and uncertainties that could materially and adversely affect the company's business, financial condition, and results of operations, including global economic conditions, operational dependencies, market competition, intellectual property, and personnel-related challenges Impact of COVID-19 Pandemic This section outlines the risks posed by the COVID-19 pandemic, including demand volatility, manufacturing disruptions, and supply chain failures - The ongoing COVID-19 pandemic poses risks including reductions or volatility in product demand, inability to meet customer needs due to manufacturing disruptions, and potential failures of third-party suppliers, manufacturers, and distributors[112][113] - The ultimate impact of the pandemic and potential future variants on liquidity, financial position, results of operations, and cash flows remains highly uncertain[112] Deterioration in Global Economic Conditions This section highlights the adverse effects of global economic downturns and geopolitical events on the company's business and funding capabilities - A deterioration in global economic conditions, including impacts from COVID-19 and geopolitical events, may adversely affect the business and financial condition, potentially limiting the ability to raise additional funds[114] Inability to Maintain Ongoing Profitability This section discusses the challenges in sustaining profitability, requiring continuous business growth, App provider support, and successful new product development - Maintaining profitability requires continued business growth, ongoing support to App providers, and successful new product development; failure to achieve these objectives could lead to operating losses or suspension of operations[115] Need for Additional Capital This section addresses the potential need for additional capital to fund growth or cover operating losses, with no guarantee of availability or favorable terms - The company may require additional capital to fund growth or operating losses, but there is no assurance such capital will be available on reasonable terms or without substantial dilution to investors[116] Dependence on Application Providers This section highlights the company's reliance on App providers for product integration, marketing, and sales, and the potential revenue impact of their delays or failures - Sales projections are highly dependent on App providers successfully integrating, marketing, and selling their applications that use the company's data capture products; delays or failures by these providers could adversely affect revenue[117] Failure to Maintain Effective Internal Controls This section warns that inadequate internal controls could negatively impact financial reporting, fraud prevention, business operations, and stock price - Failure to maintain adequate internal controls could materially adversely affect business, operating results, and stock price by hindering reliable financial reporting and fraud prevention[118] Security Risks This section addresses the risk of unauthorized access to business records and information despite existing security measures - Despite security protections, business records and information could be hacked by unauthorized personnel, potentially bypassing existing controls and procedures[119] Fluctuating Quarterly Operating Results This section explains that quarterly operating results are subject to fluctuations due to various factors, including demand, order timing, and competitive conditions - Quarterly operating results are expected to fluctuate due to factors such as demand, timing of orders, new product introductions, competitive conditions, and general economic conditions[120][121] - Unanticipated declines or delays in orders can cause significant variations in operating results, potentially leading to a decline in stock price[122] Compliance with Bank Covenants This section emphasizes the necessity of complying with bank credit agreement covenants to maintain lines of credit, noting the bank's discretion in making advances - The company must remain in compliance with bank credit agreement covenants to maintain lines of credit, and the bank retains discretion in making advances[123] Dependence on Deferred Tax Assets This section highlights that deferred tax assets are a significant portion of assets, and their realization depends on future tax profitability - Deferred tax assets are a significant portion of assets and depend on future tax profitability for realization; failure to achieve sufficient profitability could result in a loss for these assets[124] Reliance on Limited Suppliers This section addresses the risks associated with relying on a limited number of suppliers for component parts, which could lead to manufacturing disruptions - The company relies on a limited number of suppliers for component parts, and shortages or delays could disrupt manufacturing and materially adversely affect financial results[126] Failure to Develop New Products Rapidly This section discusses the risk of failing to rapidly develop and introduce new products in a fast-changing technology market, which could harm competitiveness - The market for products is characterized by rapidly changing technology and short product life cycles; failure to develop and introduce new products successfully and on a timely basis would harm competitiveness and revenue generation[127][128] Accounts Receivable Collection Risk This section addresses the risk of uncollectible receivables from customers, particularly distributors, potentially requiring increased reserves - There is a risk of not collecting receivables from customers, particularly distributors, who may experience financial difficulties, potentially requiring increased reserves for uncollectible accounts[129] Increased Competition This section highlights the highly competitive market, intense price competition, and the presence of larger competitors, which could lead to reduced margins and market share loss - The market is highly competitive, with larger competitors, intense price competition, and products with built-in competing functions, which could lead to price reductions, fewer orders, reduced margins, and loss of market share[130][133] Inaccurate Demand Forecasting This section explains how inaccurate demand forecasting can lead to excess inventory, write-downs, reduced cash, or increased costs and lower profit margins - Inaccurate demand forecasting can lead to excess inventory, write-downs, and reduced cash if demand is lower than expected, or increased costs and lower profit margins if demand exceeds forecasts and strains production[131][132] Reliance on Distributors This section discusses the risks associated with relying on distributors for product distribution, including inventory build-up, product returns, and potential agreement terminations - The company relies primarily on distributors for product distribution, exposing it to risks such as inventory build-up, product returns, and the potential termination of nonexclusive agreements on short notice[134][135][136] Dependence on Alliances and Third-Party Relationships This section highlights the company's dependence on strategic alliances and relationships with mobile application market participants, and the risks of disruptions or terminations - The company depends on strategic alliances and business relationships with mobile application market participants; disruptions in these relationships could hinder product development and sales[137] - Collaborations with major operating system providers (Apple, Google, Microsoft) are not guaranteed and can be terminated, impacting product compatibility and market opportunities[138] Intellectual Property Protection This section addresses the risks related to the sufficiency of intellectual property protection and the potential for infringement claims - The company's intellectual property and proprietary rights may be insufficient to protect its competitive position, as competitors could copy technology, develop similar solutions independently, or design around patents[139][140] - The company faces risks of intellectual property infringement claims, which can be complex, costly, protracted, and disruptive to business operations[142][144] New Industry Standards This section discusses how evolving industry standards may necessitate costly product redesigns and could render existing products incompatible - Evolving industry standards may require product redesigns, leading to significant investments in time and resources, and potentially rendering products incompatible if not compliant[146] Product Flaws and Defects This section addresses the adverse impact of undetected product flaws and defects on sales, requiring remedial action and potentially causing negative publicity - Undetected flaws and defects in products may disrupt sales, require expensive and time-consuming remedial action, and cause unfavorable publicity, adversely affecting business and operating results[147] Loss of Senior Personnel This section highlights the company's dependence on key officers and senior managers, and the potential adverse impact of their loss on competitiveness - The company's future success depends on the continued service of key officers and senior managers; the loss of such personnel could adversely affect its ability to compete[148] Expensing of Options and Restricted Stocks This section explains that expensing stock options and restricted stocks reduces net income and earnings per share, potentially impacting profitability and employee attraction - The expensing of stock options and restricted stocks reduces net income and earnings per share, making profitability harder to achieve and potentially impacting the ability to attract and retain employees[150] Attracting and Retaining Skilled Personnel This section emphasizes the challenge of attracting and retaining highly skilled sales, marketing, and product development personnel in a competitive market - The ability to achieve increased revenues and develop new products depends on attracting and retaining highly skilled sales, marketing, and product development personnel, for whom competition is intense[151] Risks of Export Sales This section details the risks associated with export sales, including longer payment cycles, regulatory changes, foreign operation management, and currency fluctuations - Export sales are subject to risks including longer payment cycles, unexpected changes in regulatory requirements, difficulties in managing foreign operations, and political/economic instability[152] - An increase in the U.S. dollar's value relative to the Euro or British pound could make products less competitive in European markets and result in foreign currency losses[152] External Events Affecting Facilities/Operations This section addresses the potential for major disasters, health epidemics, or geopolitical instability to damage facilities, disrupt production, and incur expenses - Major disasters (e.g., earthquakes in Northern California), health epidemics (e.g., COVID-19), or geopolitical instability (e.g., Russia's military action against Ukraine) could seriously damage facilities, disrupt production, and incur expenses[153] Stock Price Volatility This section discusses the potential for stock price fluctuations due to factors such as substantial share sales, general economic conditions, and market sentiment - The sale of a substantial number of common shares, including those underlying outstanding options and restricted stock, could cause the market price of the common stock to decline[154][156] - The trading price of common stock is subject to wide fluctuations due to factors beyond the company's control, including general economic conditions and market sentiment for high-technology stocks[157] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report during the period - No unregistered sales of equity securities or use of proceeds were reported[159] Item 6. Exhibits This section lists the exhibits filed or furnished with the Form 10-Q, including various certifications and the XBRL document - Exhibits include certifications from the CEO and CFO (31.1*, 31.2*, 32.1**) and the XBRL Document (101)[159] Signatures This section contains the official signatures of the company's President and Chief Executive Officer, and the Vice President of Finance and Administration and Chief Financial Officer, certifying the report - The report was signed by Kevin J. Mills (President and CEO) and Lynn Zhao (VP of Finance and Administration and CFO) on August 15, 2022[165]