Socket Mobile(SCKT) - 2022 Q3 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements Unaudited statements show a significant revenue decline, a shift to net loss, and negative operating cash flow for the period Condensed Statements of Operations Revenues decreased 41% year-over-year in Q3 2022, leading to a net loss of $874,034 versus a prior-year profit Condensed Statements of Operations Highlights (Unaudited) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $3,727,871 | $6,319,044 | $16,066,855 | $17,084,913 | | Gross Profit | $1,654,859 | $3,422,721 | $7,818,203 | $9,251,907 | | Operating Income (Loss) | ($947,427) | $953,773 | ($294,439) | $2,010,118 | | Net Income (Loss) | ($874,034) | $643,626 | ($428,142) | $3,473,635 | | Diluted EPS | ($0.11) | $0.07 | ($0.05) | $0.37 | Condensed Balance Sheets Total assets and liabilities increased due to a new operating lease, while stockholders' equity slightly decreased Condensed Balance Sheet Data (Unaudited) | Metric | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $12,981,853 | $14,380,788 | | Total Assets | $28,197,023 | $25,575,101 | | Total Current Liabilities | $5,080,317 | $5,389,357 | | Total Liabilities | $8,501,268 | $5,528,638 | | Total Stockholders' Equity | $19,695,755 | $20,046,463 | Condensed Statements of Stockholders' Equity Stockholders' equity declined to $19.70 million, driven by a net loss and treasury stock repurchases - Key activities impacting stockholders' equity in the nine months ended September 30, 2022 include a net loss, stock-based compensation of $735,378, and the repurchase of treasury shares for $653,684[15][20] Condensed Statements of Cash Flows Cash from operations turned negative due to net loss and inventory growth, resulting in a $1.86 million cash decrease Cash Flow Summary (Nine Months Ended September 30) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($30,182) | $1,183,013 | | Net cash used in investing activities | ($910,603) | ($562,910) | | Net cash (used in) provided by financing activities | ($917,759) | $2,610,872 | | Net (decrease) increase in cash | ($1,858,544) | $3,230,975 | Notes to Condensed Financial Statements Notes detail a new headquarters lease, $9.5 million in purchase commitments, and high customer concentration - The company commenced a new lease for its corporate headquarters in Fremont, CA on May 1, 2022, with the lease term expiring on July 31, 2029, resulting in a right-of-use asset of $3,674,173 as of September 30, 2022[72][74] - As of September 30, 2022, the company had non-cancelable purchase commitments for inventory amounting to approximately $9,494,000[79] - A share repurchase program was authorized in January 2022, and the company repurchased 180,942 shares for $653,684 during the nine months ended September 30, 2022[60] Major Customer Revenue Concentration (Nine Months Ended Sep 30) | Customer | 2022 | 2021 | | :--- | :--- | :--- | | Ingram Micro Inc. | 27% | 29% | | BlueStar, Inc. | 22% | 25% | | ScanSource, Inc. | 13% | 11% | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Q3 revenue decline, lower gross margins, and the impact on liquidity and operating results - Q3 2022 revenue decreased 41% YoY to $3.7 million, attributed to weaker end-user demand and a reduction of inventory in the distribution channel[94] - Gross profit margins for Q3 2022 decreased to 44.4% from 54.2% in the prior year, driven by higher component and freight costs and lower production volumes[96] - Net cash used in operating activities was approximately $30,000 in the first nine months of 2022, a sharp contrast to the $1.18 million provided in the same period of 2021, primarily due to the net loss and increased inventory levels[105][106] Year-over-Year Operating Expense Changes (Three Months Ended Sep 30) | Expense Category | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Research and Development | $1,096,000 | $1,014,000 | +8.1% | | Sales and Marketing | $865,000 | $788,000 | +9.7% | | General and Administrative | $641,000 | $667,000 | -3.9% | Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from interest rate fluctuations and foreign currency exchange rates - Interest rate risk is tied to the company's bank term loan and credit line facilities, which have variable interest rates based on the lender's prime rate[114] - Foreign currency risk stems from sales denominated in Euros and British pounds, with a net adjustment of approximately $37,000 in Q3 2022[115] Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes in internal controls - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[117] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[118] Part II. Other Information Risk Factors The company faces macroeconomic headwinds, supplier and distributor dependency, and intense market competition - The ongoing COVID-19 pandemic and deteriorating global economic conditions pose risks of reduced product demand, manufacturing disruptions, and supply chain failures[122][124] - The company is dependent on a limited number of distributors; Ingram Micro and BlueStar represented approximately 49% of worldwide sales in the first nine months of 2022[145] - Several component parts are sourced from a limited number of suppliers, creating a risk of shortages or delays that could materially affect financial results[137] - The market is characterized by rapidly changing technology and short product life cycles, requiring successful and timely introduction of new products to compete effectively[138] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 180,942 shares, with approximately $1.15 million remaining under the buyback program Share Repurchase Activity (Nine Months Ended Sep 30, 2022) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Apr 11 - May 4, 2022 | 90,913 | $4.16 | | Jul 1 - Aug 10, 2022 | 90,029 | $3.06 | | Total | 180,942 | N/A | Exhibits This section lists filed exhibits, including required CEO and CFO certifications under the Sarbanes-Oxley Act - The report includes required certifications from the CEO and CFO pursuant to the Sarbanes-Oxley Act of 2002[170]