Socket Mobile(SCKT) - 2023 Q3 - Quarterly Report

Part I. Financial Information Financial Statements (Unaudited) The company reported decreased revenue and increased net loss for Q3 and first nine months of 2023, with declining assets and equity, and negative operating cash flow offset by financing activities Condensed Statements of Operations Revenues decreased by 14% in Q3 and 21% in the first nine months of 2023, resulting in wider net losses for both periods Condensed Statements of Operations Highlights (Unaudited) | Metric | Three Months Ended Sep 30, 2023 ($) | Three Months Ended Sep 30, 2022 ($) | Nine Months Ended Sep 30, 2023 ($) | Nine Months Ended Sep 30, 2022 ($) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $3,205,893 | $3,727,871 | $12,635,228 | $16,066,855 | | Gross Profit | $1,418,197 | $1,654,859 | $6,142,247 | $7,818,203 | | Operating Loss | $(1,398,555) | $(947,427) | $(2,645,522) | $(294,439) | | Net Loss | $(1,324,995) | $(874,034) | $(2,831,231) | $(428,142) | | Diluted Net Loss Per Share | $(0.16) | $(0.11) | $(0.34) | $(0.05) | Condensed Balance Sheets As of September 30, 2023, total assets decreased to $27.3 million, liabilities increased to $8.9 million, and stockholders' equity declined to $18.4 million Condensed Balance Sheet Highlights (Unaudited) | Metric | September 30, 2023 ($) | December 31, 2022 ($) | | :--- | :--- | :--- | | Total Current Assets | $11,046,357 | $12,768,536 | | Total Assets | $27,306,391 | $28,597,988 | | Total Current Liabilities | $5,985,462 | $4,972,429 | | Total Liabilities | $8,930,967 | $8,276,231 | | Total Stockholders' Equity | $18,375,424 | $20,321,757 | Condensed Statements of Cash Flows Net cash used in operations significantly increased to $(522,529) for the first nine months of 2023, with financing activities providing $1.46 million Cash Flow Summary (Nine Months Ended September 30) | Activity | 2023 ($) | 2022 ($) | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(522,529) | $(30,182) | | Net Cash Used in Investing Activities | $(1,469,227) | $(910,603) | | Net Cash (Used in) Provided by Financing Activities | $1,461,842 | $(917,759) | | Net Decrease in Cash | $(529,914) | $(1,858,544) | | Cash at End of Period | $3,093,555 | $4,237,342 | Notes to Condensed Financial Statements Notes highlight $1.6 million convertible note financing, bank covenant waivers, significant customer concentrations, and substantial inventory purchase commitments - The company obtained waivers from its bank for failing to meet minimum adjusted EBITDA requirements in Q1 and Q3 2023[42][43] - In May 2023, the company completed a secured subordinated convertible note financing of $1.6 million, maturing in May 2026 and convertible at $1.34 per share[48] Revenue Concentration by Major Customer (Nine Months Ended Sep 30) | Customer | 2023 (%) | 2022 (%) | | :--- | :--- | :--- | | BlueStar, Inc. | 23% | 22% | | Ingram Micro Inc. | 22% | 27% | | ScanSource, Inc. | * | 13% | - As of September 30, 2023, the company has non-cancelable purchase commitments for inventory amounting to approximately $7.16 million[74] Management's Discussion and Analysis (MD&A) Management attributes the 21% year-to-date revenue decline to inventory reductions, with stable gross margins, increased operating expenses, and new working capital from a $1.6 million convertible note The Company and its Products Socket Mobile offers Bluetooth-connected data capture solutions, including barcode scanners and RFID/NFC readers, with product families like SocketScan and a comprehensive SDK - The company's primary products are cordless data capture devices (barcode scanning, RFID/NFC) that connect to mobile devices via Bluetooth[81] - Product families include SocketScan, DuraScan®, DuraSled, the new industrial-grade XtremeScan, and the software-based SocketCam[82][83][84] - The company provides a Software Developer Kit (CaptureSDK) to application providers to integrate data capture capabilities into their mobile applications[88] Results of Operations Revenue for the first nine months of 2023 fell 21% to $12.6 million due to inventory reductions, while gross margin remained stable and operating expenses increased - The revenue decline for Q3 and the first nine months of 2023 (14% and 21% respectively) was primarily attributed to distribution partners reducing inventories due to market uncertainty and high interest rates[92] Operating Expense Changes (Nine Months Ended Sep 30, 2023 vs 2022) | Expense Category | 2023 ($) | 2022 ($) | Change | | :--- | :--- | :--- | :--- | | Research and development | $3,644,000 | $3,271,000 | +11% | | Sales and marketing | $3,014,000 | $2,729,000 | +10% | | General and administrative | $2,131,000 | $2,113,000 | +1% | Liquidity and Capital Resources Net cash used in operations was $(523,000) for the first nine months of 2023, offset by $1.46 million from financing activities, with significant contractual obligations - Net cash used in operating activities was approximately $523,000 in the first nine months of 2023, compared to $30,000 in the same period of 2022[101] - Financing activities in the first nine months of 2023 provided $1.46 million, mainly from a $1.58 million note financing, offset by $208,000 in stock repurchases and a $125,000 loan repayment[105] Contractual Cash Obligations as of September 30, 2023 | Contractual Obligations | Total ($) | Less than 1 year ($) | | :--- | :--- | :--- | | Unconditional purchase obligations | $7,162,000 | $6,701,000 | | Operating lease | $3,952,000 | $634,000 | | Total | $11,114,000 | $7,335,000 | Quantitative and Qualitative Disclosures about Market Risk Primary market risks include interest rate fluctuations on unused variable-rate credit facilities and foreign currency exchange rates, with a 10% adverse change impacting Q3 2023 net loss by $27,000 - Interest rate risk is tied to the company's revolving credit lines, which have variable rates based on the lender's prime rate, with no outstanding balances[110] - Foreign currency risk exists as European sales are denominated in Euros and British pounds; a 10% adverse change would have increased the Q3 2023 net loss by about $27,000[111] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures are effective[113] - No material changes in internal control over financial reporting occurred during the quarter[114] Part II. Other Information Risk Factors The company faces significant risks including profitability challenges, reliance on limited suppliers and distributors, bank covenant compliance, dependence on application providers, intense competition, and potential dilution - The company may not return to profitability and may require additional capital in the future, which may not be available on reasonable terms[119][121] - The company must remain in compliance with bank covenants to maintain its lines of credit and has received waivers for past non-compliance[122] - Sales are highly dependent on a few key distributors (Ingram Micro and BlueStar represented ~45% of sales in the first nine months of 2023) and on third-party application providers integrating Socket Mobile's products[123][136] - The business is exposed to supply chain risk, as several component parts are produced by a limited number of suppliers[127] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[163] Exhibits Filed exhibits include CEO and CFO certifications as required by Sarbanes-Oxley Act, along with the XBRL Interactive Data File - Filed exhibits include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act, and the XBRL document[163]