UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| ( | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period ___________________ to _____________________.
Commission
file number
(Exact name of registrant as specified in its charter)
| (State of incorporation) | (IRS Employer Identification No.) |
(Address of principal executive offices including zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] NO [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). [ X ] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [ ] Accelerated filer [ ]
Smaller
reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ]
The number of shares of Common Stock ($0.001 par value) outstanding as of November 8, 2021 was shares.
INDEX
PART I
Item 1. Financial Statements
SOCKET MOBILE, INC. CONDENSED STATEMENTS OF OPERATIONS | ||||||||||||||||
| (Unaudited) | ||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Goodwill impairment charges | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income | ||||||||||||||||
| Net income (loss) before income taxes | ( | ) | ( | ) | ||||||||||||
| Current income tax expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Deferred income tax benefit | ( | ) | ||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Net income (loss) per share: | ||||||||||||||||
| Basic | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Diluted | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to condensed financial statements.
| 1 |
SOCKET MOBILE, INC. CONDENSED BALANCE SHEETS |
September 30, (Unaudited) | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Deferred cost on shipments to distributors | ||||||||
| Total current assets | ||||||||
| Property and equipment: | ||||||||
| Machinery and office equipment | ||||||||
| Computer equipment | ||||||||
| Property and equipment, gross | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Other long-term assets | ||||||||
| Deferred tax assets | ||||||||
| Operating lease right-of-use asset | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accrued payroll and related expenses | ||||||||
| Deferred revenue on shipments to distributors | ||||||||
| Short term portion of deferred service revenue | ||||||||
| Note Payable – current portion | ||||||||
| Subordinated convertible notes payable, net of discount | ||||||||
| Subordinated convertible notes payable, net of discount-related party | ||||||||
| Operating lease – current portion | ||||||||
| Total current liabilities | ||||||||
| Long-term portion of deferred service revenue | ||||||||
| Long-term portion of note payable | ||||||||
| Long-term portion of operating lease | ||||||||
| Total liabilities | ||||||||
Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, par value: Authorized – shares, Issued and outstanding – shares at September 30, 2021 and shares at December 31, 2020 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to condensed financial statements.
| 2 |
SOCKET MOBILE, INC. | |||||||||||||||||||
CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) | |||||||||||||||||||
| Additional | Total | ||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Stockholders’ | ||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | |||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | ) | $ | |||||||||||||
| Vesting of restricted stock | ( | ) | |||||||||||||||||
| Cancellation of restricted stock | ( | ) | ( | ) | |||||||||||||||
| Exercise of stock options | |||||||||||||||||||
| Issuance of common stock for intangible assets | |||||||||||||||||||
| Conversion of convertible note | |||||||||||||||||||
| Stock-based compensation | — | ||||||||||||||||||
| Net income | — | ||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | ( | ) | $ | |||||||||||||
| Vesting of restricted stock | ( | ) | |||||||||||||||||
| Repurchase and retirement of common stock | — | ( | ) | ( | ) | ||||||||||||||
| Cancellation of restricted stock | ( | ) | ( | ) | |||||||||||||||
| Exercise of stock options | |||||||||||||||||||
| Stock-based compensation | — | ||||||||||||||||||
| Net income | — | ||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | ) | $ | |||||||||||||
| Cancellation of restricted stock | ( | ) | ( | ) | |||||||||||||||
| Exercise of stock options | |||||||||||||||||||
| Stock-based compensation | — | ||||||||||||||||||
| Net income | — | ||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | ) | $ | |||||||||||||
|
|
|||||||||||||||||||
| Additional | Total | ||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Stockholders’ | ||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | |||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ( | ) | $ | |||||||||||||
| Repurchase of common stock | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
| Cancellation of restricted stock | ( | ) | ( | ) | |||||||||||||||
| Stock-based compensation | — | ||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | ( | ) | $ | |||||||||||||
| Cancellation of restricted stock | ( | ) | ( | ) | |||||||||||||||
| Stock-based compensation | — | ||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ( | ) | $ | |||||||||||||
| Stock options exercised | |||||||||||||||||||
| Stock-based compensation | — | ||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | ) | $ | |||||||||||||
See accompanying notes to condensed financial statements.
| 3 |
SOCKET MOBILE, INC. CONDENSED STATEMENTS OF CASH FLOWS | |||||||
| (Unaudited) | |||||||
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Operating activities | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Stock-based compensation | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Deferred tax benefits | ( | ) | ||||||
| Goodwill impairment charges | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Accrued payroll and related expenses | ( | ) | ||||||
| Net deferred revenue on shipments to distributors | ( | ) | ||||||
| Deferred service revenue | ( | ) | ( | ) | ||||
| Net change in operating lease | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| Investing activities | ||||||||
| Purchases of equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Payments on finance leases | ( | ) | ||||||
| Repurchase and retirement of common stock | ( | ) | ( | ) | ||||
| Proceeds from borrowings under bank line of credit agreement | ||||||||
| Repayments of borrowings under bank line of credit agreement | ( | ) | ||||||
| Proceeds from note payable | ||||||||
| Repayments of note payable | ( | ) | ( | ) | ||||
| Repayments of bank term loan | ( | ) | ||||||
| Proceeds from subordinated convertible notes payable, net of discount | ||||||||
| Proceeds from subordinated convertible notes payable, net of discount-related party | ||||||||
| Stock options exercised | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Non-cash investing and financing activities | ||||||||
| Conversion of note payable | $ | $ | ||||||
| Acquisition of intangible assets | $ | $ | ||||||
See accompanying notes to condensed financial statements.
| 4 |
SOCKET MOBILE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
NOTE 1 — Basis of Presentation
The accompanying unaudited condensed financial statements of Socket Mobile, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals considered necessary for fair presentation have been included. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future period. These financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
We continue to monitor developments of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic to our business, operating results, cash flows, liquidity and financial condition will be primarily driven by the severity and duration of the pandemic, the impact of new strains and variants of the coronavirus, the pandemic’s impact on the global economy and the administration and effectiveness of vaccines. Those primary drivers are beyond our knowledge and control, and as a result, it is difficult to predict the cumulative impact that the pandemic will have on our future sales, operating results, cash flows and financial condition. Furthermore, the impact to our business, operating results, cash flows, liquidity and financial condition may be further adversely impacted if the COVID-19 global pandemic continues to exist or worsens for a prolonged period of time.
NOTE 2 — Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates, and such differences may be material to the financial statements.
Cash Equivalents and Fair Value of Financial Instruments
The Company considers all highly liquid investments purchased with a maturity date of 90 days or less at date of purchase to be cash equivalents. At September 30, 2021 and December 31, 2020, all of the Company’s cash and cash equivalents consisted of amounts held in demand deposit accounts in banks. The aggregate cash balance on deposit in these accounts are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company’s cash balance on deposit in these accounts may, at times, exceed the federally insured limits. The Company has never experienced any losses in such accounts.
The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, debt and foreign exchange contracts approximate fair value due to the relatively short period of time to maturity.
| 5 |
SOCKET MOBILE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
Revenue Recognition and Deferred Revenue
With
the adoption of ASC 606 “Revenue from Contracts with Customers” in January 2017, the Company recognizes revenue on sales
to distributors when shipping of product is completed and title transfers to distributor, less a reserve for estimated product returns
(sales and cost of sales). The reserves are based on estimates of future returns calculated from actual return history, primarily from
stock rotations, plus knowledge of pending returns outside of the norm. At September 30, 2021, the deferred revenue and deferred cost
on shipments to distributors were $
The
Company also earns revenue from its SocketCare extended warranty program, which provides extended warranty and accidental breakage coverage
for selected products. For the quarters ended September 30, 2021 and 2020, SocketCare revenue was approximately $
Cost of Sales and Gross Margins
Cost of sales primarily consists of the costs to manufacture our products, including the costs of materials, contract manufacturing, shipping costs, personnel and related expenses including stock-based compensation, equipment and facility expenses, warranty costs and inventory excess and obsolete provisions. The factors that impact our gross margins are the cost of materials, the mix of products and the extent to which we are able to efficiently utilize our manufacturing capacity.
Leases
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02,
Leases (Topic 842), which requires a lessee to recognize a liability representing future lease payments and a right-of-use asset representing
its right to use the underlying asset for the lease term. For operating leases, a lessee is required to recognize at inception a right-of-use
asset and a lease liability equal to the net present value of the lease payments, with lease expense recognized over the lease term on
a straight-line basis. For leases with a term of twelve months or less, ASU 2016-02 allows a reporting entity to make an accounting policy
election to not recognize a right-of-use asset and a lease liability, and to recognize lease expense on a straight-line basis. The Company
adopted ASU 2016-02 effective January 1, 2019. At September 30, 2021, the balances of right-of-use assets and liabilities for the operating
lease were $
| 6 |
SOCKET MOBILE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
Goodwill
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this update eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable.
The
Company tests its goodwill for impairment annually as of September 30th or more frequently when events or circumstances indicate that
the carrying value of the Company’s single reporting unit more likely than not exceeds its fair value. The Company wrote off its
entire goodwill of $
Recently Issued Financial Accounting Standards
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position, results of operations or cash flows upon adoption.
NOTE 3 — Acquisition of Intangible Assets
On
Under
the 2021 Technology Transfer Agreement, 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 for use in the Company’s
Contactless Reader/Writer products, D600 and S550. SpringCard received shares of the Company’s common stock, subject to
a collar, and a 10-year warrant to purchase up to an aggregate of
The
Unaudited Condensed Balance Sheets include the intangible assets of the acquired technology at the carrying amount, net of amortization
of $
| 7 |
SOCKET MOBILE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
The SpringCard intangible assets will be amortized over their estimated useful lives of fifteen years on a straight-line basis, which commenced on April 1, 2021. The estimated future amortization of intangible assets is as follows:
| Fiscal Year | Amount | |||
| 2021 (October 1, 2021 to December 31, 2021) | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total | $ | |||
NOTE 4 — Inventories
Inventories consist principally of raw materials and sub-assemblies, which are stated at the lower of cost (first-in, first-out) or market. Inventories at September 30, 2021 and December 31, 2020 were as follows:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Raw materials and sub-assemblies | $ | $ | ||||||
| Finished goods | ||||||||
| Inventory reserves | ||||||||
| Inventory, net | $ | $ | ||||||
NOTE 5 — Bank Financing Arrangements
The Company initially entered into a Business Financing Agreement with Western Alliance Bank (the “Bank”), an Arizona corporation, on February 27, 2014, and this agreement has been amended and extended through the years.
Seventh Financing Agreement
On January 8, 2020, the Company entered into the Seventh Business Financing Modification Agreement with the Bank which extended the maturity date of the Company’s revolving line of credit to January 31, 2022.
Eighth Financing Agreement
On August 28, 2020, the Company entered into the Eighth Business Financing Modification Agreement and Consent with the Bank. The Bank consented to the issuance of subordinated debt in the amount less than $2,000,000, at an annual interest rate of less than 10%, such debt maturing in no sooner than 3 years.
| 8 |
SOCKET MOBILE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
Amended and Restated Business Financing Agreement
On
Amounts outstanding under the CalCap Loan as of September 30, 2021 are as follows:
| September 30, 2021 | ||||
| Current portion of CalCap Loan | $ | |||
| Long-term portion of CalCap Loan | ||||
| CalCap Loan | $ | |||
Interest
expense on the CalCap Loan for the three and nine months ended September 30, 2021 was $
During
the nine months ended September 30, 2020, total repayment of the term loan, initiated in March 2018 (the “Term Loan”), was
$
Interest
expense on the Term Loan for the three and nine months ended September 30, 2020 was $
NOTE 6 — Secured Subordinated Convertible Notes Payable
On
August 31, 2020, the Company completed a secured subordinated convertible note financing of $
The
funds raised are used to increase the Company’s working capital balances. The secured subordinated convertible notes (the “Notes”)
have a three-year term that accrue interest at
| 9 |
SOCKET MOBILE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
Total
issuance costs associated with the financing are $
During
the nine months ended September 30, 2021, two noteholders elected to convert Note principal of $
Total
interest expense recognized related to the Notes for the three and nine months ended September 30, 2021 was $
NOTE 7 — Segment Information and Concentrations
Segment Information
The Company operates in the mobile barcode scanning and RFID/NFC data capture market. Mobile scanning typically consists of mobile devices such as smartphones or tablets, with mobile scanning or NFC peripherals for data collection, and third-party vertical applications software. The Company distributes its products in the United States and foreign countries primarily through distributors and resellers. The Company markets its products primarily through application developers whose applications are designed to work with the Company’s products.
Revenues by geographic areas for the three and nine months ended September 30, 2021 and 2020 were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues: | ||||||||||||||||
| Americas | $ | $ | $ | $ | ||||||||||||
| Europe | ||||||||||||||||
| Asia Pacific | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
Export revenues are attributable to countries based on the location of the Company’s customers. The Company does not hold long-lived assets in foreign locations.
| 10 |
SOCKET MOBILE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
Major Customers
Customers who accounted for at least 10% of the Company’s total revenues for the three and nine months ended September 30, 2021 and 2020 were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Ingram Micro Inc. | % | % | % | % | ||||||||||||
| BlueStar, Inc. | % | % | % | % | ||||||||||||
| ScanSource, Inc. | % | * | % | * | ||||||||||||
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk include cash, cash equivalents and accounts receivable. The Company invests its cash in demand deposit accounts in banks and the Company has not experienced losses on the investments. The Company’s trade accounts receivables are primarily with distributors. The Company performs ongoing credit evaluations of its customers’ financial condition, but the Company generally requires no collateral. Reserves are maintained for potential credit losses, and such losses have been within management’s expectations. Customers who accounted for at least 10% of the Company’s accounts receivable balances at September 30, 2021 and December 31, 2020 were as follows:
| September 30, | December 31, | ||||||||
| 2021 | 2020 | ||||||||
| Ingram Micro, Inc. | % | % | |||||||
| ScanSource, Inc. | % | % | |||||||
| BlueStar, Inc. | % | % | |||||||
| Bluestar Europe Distribution BV | * | % | |||||||
| * | |||||||||
Concentration of Suppliers
Several
of the Company’s component parts are produced by a sole or limited number of suppliers. Shortages could occur in these essential
materials due to increased demand, or due to an interruption of supply. Suppliers may choose to restrict credit terms or require advance
payments causing delays in the procurement of essential materials. The Company’s inability to procure certain materials could have
a material adverse effect on the Company’s results. For the three months ended September 30, 2021 and 2020, the top three suppliers
accounted for
| 11 |
SOCKET MOBILE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
The Company recognizes the compensation cost in the financial statements for all stock-based awards to employees, including grants of stock options and restricted stock, based on the fair value of the awards as of the date that the awards are issued. Compensation cost for stock-based awards is recognized on a straight-line basis over the vesting period.
The fair values of stock options are generally determined using a binomial lattice valuation model which incorporates assumptions about expected volatility, risk-free interest rate, dividend yield, and expected life. There were stock options granted during the nine months ended September 30, 2021, compared to stock options for the nine months ended September 30, 2020.
The shares of restricted stock are issued to employees and consultants and are held in escrow by the Company until the shares vest on the schedule of 15% after year one, 20% after year two, 25% after year three and 40% after year four, subject to the employees and consultants being a continuing service provider on each of the vesting dates. If the service or employment is terminated, unvested shares revert to the Company. Shares are registered at grant, so share owners may vote at the annual stockholder meeting. Shares of restricted stock are granted at zero cost basis. Compensation cost of the restricted stock is recognized on a straight-line basis over the 4-year vesting period. For the nine months ended September 30, 2021 and 2020, the Company awarded and shares of restricted stock, respectively. As of September 30, 2021, there were shares of restricted stock outstanding. Due to the existence of restrictions on sale or transfer until the shares vest, the Company does not count the shares of restricted stock as issued and outstanding shares until they vest.
Total stock-based compensation expense for the three and nine months ended September 30, 2021 was $ and $, respectively, compared to expense of $ and $ in the corresponding periods a year ago.
The following table sets forth the reconciliation of basic shares to diluted shares and the computation of basic and diluted net income (loss) per share:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income (loss) | $ | $ | ( | )* | $ | $ | ( | )* | ||||||||
| Net income (loss) allocated to restricted stock award | ( | ) | ( | ) | ||||||||||||
| Adjusted net income (loss) for basic earnings per share | $ | $ | ( | )* | $ | $ | ( | )* | ||||||||
| Convertible note interest | ||||||||||||||||
| Adjusted net income (loss) before interest for diluted earnings per share | $ | $ | ( | )* | $ | $ | ( | )* | ||||||||
| Denominator: Weighted average shares outstanding used in computing net income (loss) per share: | ||||||||||||||||
| Basic | ||||||||||||||||
| Effect of dilutive stock options | ||||||||||||||||
| Effect of convertible note shares | ||||||||||||||||
| Diluted | ||||||||||||||||
| Net income (loss) per share applicable to common stockholders: | ||||||||||||||||
| Basic | $ | $ | ( | )* | $ | $ | ( | )* | ||||||||
| Diluted | $ | $ | ( | )* | $ | $ | ( | )* | ||||||||
*Amounts for 2020 include goodwill impairment charges of $4.43 million recorded as of September 30, 2020. Additional information regarding goodwill impairment is contained in “Note 2 - Summary of Significant Accounting Policies.”
| 12 |
SOCKET MOBILE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
In the three and nine months ended September 30, 2021, stock options and warrants were excluded in the calculation of diluted net income per share as their effect would have been anti-dilutive.
For the three and nine months ended September 30, 2020, the shares used in computing diluted net loss per share do not include dilutive stock options and shares of restricted stock, nor do they include dilutive conversion shares as the effect is anti-dilutive given the Company’s loss.
NOTE 10 — Income Taxes
In
the first nine months of 2021, the differences between the financial income and taxable income included a tax deduction of $
The Company recorded no deferred tax benefit for the losses in the nine months ended September 30, 2020.
NOTE 11 — Commitments and Contingencies
Operating Lease Obligations
The Company leases office space under a non-cancelable operating lease that provides the Company approximately 37,100 square feet in Newark, California. The lease agreement expires on June 30, 2022. Monthly base rent increases four percent per year on July 1st of each year. In June 2020, the Company also signed a two-year equipment operating lease agreement.
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SOCKET MOBILE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
In
January 2019, the Company adopted ASU 2016-02, Leases (Topic 842) and recognized a right-to-use asset and a lease liability using a discount
rate of 6.25% per annum. On September 30, 2021, the balances of right-of-use assets and liabilities for the operating lease were approximately
$
The
Newark office space lease expense was $
Cash
payments included in the measurement of the Company’s operating lease liabilities were $
Future minimum lease payments under the operating lease at September 30, 2021 are shown below:
| Annual minimum payments: | Amount | |||
| 2021 (October 1 to December 31, 2021) | ||||
| 2022 (through June 30, 2022) | ||||
| Total minimum payments | ||||
| Less: Present value factor | ( | ) | ||
| Total operating lease liabilities | ||||
| Less: Current portion of operating lease | ( | ) | ||
| Long-term portion of operating lease | ||||
Purchase Commitments
As
of September 30, 2021, the Company has non-cancelable purchase commitments for inventory to be used in the ordinary course of business
of approximately $
Legal Matters
The Company is subject to disputes, claims, requests for indemnification and lawsuits arising in the ordinary course of business. Under the indemnification provisions of the Company’s customer agreements, the Company routinely agrees to indemnify and defend its customers against infringement of any patent, trademark, copyright, trade secrets, or other intellectual property rights arising from customers’ legal use of the Company’s products or services. The exposure to the Company under these indemnification provisions is generally limited to the total amount paid for the indemnified products. However, certain indemnification provisions potentially expose the Company to losses in excess of the aggregate amount received from the customer. To date, there have been no claims against the Company by its customers pertaining to such indemnification provisions, and no amounts have been recorded. The Company is currently not a party to any material legal proceedings.
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SOCKET MOBILE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
NOTE 12 — Subsequent Events
The Company evaluated subsequent events and transactions that occurred between October 1, 2021 through the date of this report, the date that the unaudited condensed financial statements were issued. Other than described below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the unaudited condensed financial statements.
shares of restricted stock were granted from the 2004 Equity Incentive Plan.
The
Company issued
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements forecasting our future financial condition and results, our future operating activities, market acceptance of our products, expectations for general market growth of mobile computing devices, growth in demand for our data capture products, expansion of the markets that we serve, expansion of the distribution channels for our products, and the timing of the introduction and availability of new products, as well as other forecasts discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Words such as “may,” “will,” “predicts,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words, and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements are based on current expectations, estimates and projections about our industry, and management’s beliefs and assumptions. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties; therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements. Factors that could cause actual results and outcomes to differ materially include,1 but are not limited to: volatility in the world economy generally and in the markets we serve in particular, including the impact of the COVID-19 pandemic; the risk of delays in the availability of our products due to technological, market or financial factors including the availability of product components and necessary working capital; our ability to successfully develop, introduce and market future products; our ability to effectively manage and contain our operating costs; the availability of third-party hardware and software that our products are intended to work with; product delays associated with new model introductions and product changeovers by the makers of products that our products are intended to work with; continued growth in demand for barcode scanners; market acceptance of emerging standards such as RFID/Near Field Communications and of our related data capture products; the ability of our strategic relationships to benefit our business as expected; our ability to enter into additional distribution relationships; and other factors described in this Form 10-Q including under “Risk Factors” and those discussed in other documents we filed with the Securities and Exchange Commission. We assume no obligation to update such forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.
You should read the following discussion in conjunction with the interim condensed financial statements and notes included elsewhere in this report, the Company’s annual financial statements included in its Annual Report on Form 10-K, and other information contained in other reports and documents filed from time to time with the Securities and Exchange Commission.
The Company and its Products
We are a leading innovator of data capture and delivery solutions for enhanced productivity in workforce mobilization. Our products are incorporated into mobile applications used in point of sale (POS), commercial services (field workers), asset tracking, manufacturing process and quality control, transportation and logistics (goods tracking and movement), event management (ticketing, entry, access control, and identification), medical and education. Our primary products are cordless data capture devices incorporating barcode scanning or RFID/Near Field Communications (NFC) technologies that connect over Bluetooth. All products work with applications running on smartphones, mobile computers and tablets using operating systems from Apple® (iOS), Google™ (Android™) and Microsoft® (Windows®). We offer an easy-to-use software developer kit (Capture SDK) to application developers, which enables them to provide their users with our advanced barcode scanning features. Our products are integrated in their application solutions and are marketed by the application developers or the resellers of their applications. The number of our registered developers for data capture applications continues to grow.
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Companion SocketScan family. Our Companion SocketScan family consists of the ergonomic and independent 700 series, including 1D Linear Imaging (S700), 1D Laser (S730), and 1D/2D Universal Barcode (S740), available in multiple vivid colors: blue, green, red, white, yellow and black.
Companion DuraScan Family. Our DuraScan® 700 Series Linear Barcode Scanner (D700), Laser Barcode Scanner (D730) and Universal Barcode Scanner (D740, D745, D750, D755, D760), are designed to be durable barcode scanners with IP54-rated outer casing to withstand tougher environments. Universal Barcode Scanners (D740, D745, D750, D755, D760) read all common 1D, stacked, 2D and postal codes. D740 is priced competitively with a 1D barcode scanner, making D740 the affordable 2D option available in the market. D760 includes MRZ (machine-readable zone) support, making it capable of scanning passports, visas and other travel documents. D745 and D755 are medical-grade, universal scanners.
Attachable Family. Our attachable scanners include DuraSled and SocketScan 800 Series scanners. DuraSled is a barcode scanning sled designed for durability. It combines a phone with a scanner to create a one-handed solution. DuraSled protects phones from impact damage and provides a robust charging solution for all environments. It is easy-to-use and ideal for delivery services, stock counting, ticketing and other application-driven mobile solutions. The DuraSled series are compatible with Apple, Samsung and Windows devices.
SocketScan 800 Series cordless barcode scanners, 1D linear imaging (S800) and 2D (S840, S860) are attachable to smartphones, tablets and other mobile devices with an easily detachable clip or DuraCase, creating a one-handed solution. S860 includes MRZ (machine-readable zone) support, making it capable of scanning passports, visas and other travel documents in addition to barcodes. SocketScan 800 Series scanners may be used stand-alone as well.
Contactless RFID/NFC reader writer. Our contactless product line includes D600 and S550. The D600, an ergonomically handheld model with IP54-rated outer casing, can read and write many different types of electronic SmartTags or transfer data with near field communication. The S550, a contactless membership card reader/writer, is designed to facilitate tap-and-go smart card and NFC applications. It combines the latest 13.56 MHz contactless technology with Bluetooth LE connectivity.
Software Developer Kit (Capture SDK). Our Software Developer Kit (Capture SDK) supports all our data capture devices with a single integration, making it easier for a developer to integrate our data capture capabilities into their application. With the installation of our data capture software, the developers’ customers can choose any of our products that work best for them. Our Capture SDK enables the developer to modify captured data, control the placement of the barcoded or RFID data in their application, and control the feedback to the user that the transaction and transmission was successfully completed. Our Capture SDK also supports the built-in camera in a customer’s smartphone or tablet to be used for occasional or lower volume data collection requirements. The Capture SDK uses tools integrated with software building environments such as CocoaPods, Maven and NuGet, adds support for high level frameworks such as Xamarin, Cordova and Java, and adds other features to make it easier for developers to integrate our data capture software into their applications.
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We design our own products and are responsible for all associated test equipment. We use third party contract manufacturers to make many components. We perform final product assembly, test and packaging at, and distribute our products from our Newark, California facility. We offer our products worldwide through two-tier distribution enabling customers to purchase from large numbers of on-line resellers around the world including application developers who resell their own solutions along with our data capture products. We believe growth in mobile applications and the mobile workforce are resulting from technical advances in mobile technologies, cost reductions in mobile devices and the growing adoption by businesses of mobile applications for smartphones and tablets, building a growing demand for our products. Our data capture products address the need for speed and accuracy by today’s mobile workers and by the systems supporting those workers, thereby enhancing their productivity and allowing them to exploit time sensitive opportunities and improve customer satisfaction.
Results of Operations
Revenues
Total revenues for the three and nine months ended September 30, 2021, were approximately $6.3 million and $17.1 million, respectively, an increase of 54% and 55%, respectively, from revenues of approximately $4.1 million and $11 million, respectively, in the comparable periods one year ago. The increases in revenues were from both the run rate business through the distribution channel and the large customers, driven by the deployment of business applications, particularly in retail as the economy re-opens.
Gross Margins
Our gross profit margins on sales for the three and nine months ended September 30, 2021 were both 54.2%, compared to gross margins of 55.3% and 53.0% for the corresponding periods a year ago. The margin decrease in three months ended September 30, 2021 compared with the same period last year was primarily due to higher component costs and higher shipping costs. The improvement in nine-month margins compared to the corresponding period from last year primarily attributed to higher revenues and the absorption of fixed manufacturing overhead.
Research and Development Expense
Research and development expense in the three and nine months ended September 30, 2021 were approximately $1.0 million and $2.9 million, respectively, an increase of 49% and 21% compared to expenses of approximately $0.7 million and $2.4 million in the corresponding periods a year ago.
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The increases were primarily attributable to an increase in personnel expenses, (as we had realized a benefit in 2020 from our short-term cost reduction initiatives in this area), higher employee incentive-based compensation expense associated with improved financial performance, the inclusion of amortization and depreciation expenses of newly acquired intangible assets and equipment, and increased fees paid for contractors and consultants assisting with product development. We believe a continued commitment to research and development activities is essential to maintain or achieve a leadership position for our existing products, provide innovative new product offerings, and provide engineering support for key customers. In addition, we consider our ability to accelerate time to market for new products to be critical to our revenue growth. Therefore, we expect to continue to make significant research and development investments as our revenue grows.
Sales and Marketing Expense
Sales and marketing expense in the three and nine months ended September 30, 2021 were approximately $788,000 and $2,182,000, respectively, an increase of 20% and 2% compared to expense of approximately $658,000 and $2,148,000 in the corresponding periods a year ago. The increase in expense quarter over quarter was primarily attributed to the development of a new Return Merchandise Authorization portal. The increase in expense quarter over quarter was primarily due to the hiring of additional employee and also due to the benefit realized in the third quarter of 2020 from our short-term cost reduction initiatives. The increase in expense during the first nine months of 2021 was primarily due to increased fees paid for contractors and consultants assisting with website development and upgrades. We expect that sales and marketing expenses will increase for the rest of the year as we continue improving our website and increasing brand and product awareness and customer base outside retail.
General and Administrative Expense
General and administrative expense in the three and nine months ended September 30, 2021 were approximately $667,000 and $2,142,000, respectively, an increase of 37% and 23% compared to expense of approximately $485,000 and $1,741,000 in the corresponding periods a year ago. The increase was due to the benefit realized in 2020 from our short-term cost reduction initiatives and higher employee incentive-based compensation expense associated with improved financial performance. The increase in expense during the first nine months of 2021 was also due to higher professional fees associated with the filing of a shelf registration statement, higher proxy distribution costs resulting from a greatly increased number of beneficial owners of the Company’s stock and increased insurance costs.
Interest Expense, Net of Interest Income
Interest expense, net of interest income, in the three and nine months ended September 30, 2021 was approximately $50,000 and $150,000, respectively, compared to approximately $23,900 and $51,500, respectively, in the same periods one year ago. Interest expense in the three and nine months ended September 30, 2021 was related to interest on the secured subordinated convertible notes payable (see “NOTE 6 — Secured Subordinated Convertible Notes Payable” of the notes to consolidated financial statements for more information) and on the CalCap Loan. Our credit lines had no outstanding balances during the three and nine months ended September 30, 2021. Interest expense in 2020 was primarily related to interest on credit line facilities, secured subordinated convertible notes payable and bank term loan.
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Interest income reflects interest earned on cash balances. Interest income was nominal in each of the comparable first quarters, reflecting low average rates of return.
Income Taxes
In the three months ended September 30, 2021, we recorded an income tax expense of $260,000. In the nine months ended September 30, 2021, we recorded an income tax benefit of $1.6 million primarily attributable to the tax deduction resulting from the disqualified disposition of incentive stock options. We recorded no deferred tax benefit for the loss in the three and nine months ended September 30, 2020. Our deferred tax asset, primarily representing future income tax savings from the application of net operating loss carry forwards, was valued at $7.1million as of September 30, 2021.
We have determined that utilization of existing net operating losses against future taxable income is not limited by Section 382 of the Internal Revenue Code. Future ownership changes, however, may limit our ability to fully utilize the existing net operating loss carryforwards against any future taxable income. We will continue to monitor the likelihood to realize the value of deferred tax assets in the future.
Liquidity and Capital Resources
As reflected in our Statements of Cash Flows, net cash provided by operating activities was approximately $1,179,000 in the first nine months of 2021, compared to net cash provided of approximately $387,000 in the comparable period a year ago. We calculate net cash used in or provided by operating activities by increasing our net income (approximately $3,474,000 in the nine months of 2021) or by decreasing our net loss (approximately $4,861,000 in the first nine months of 2020) by the expenses, such as stock-based compensation expense, depreciation, amortization, and deferred tax expense, that did not require the use of cash. These amounts totaled approximately ($554,000) and $5.26 million in the first nine months of 2021 and 2020, respectively. In addition, we report increases in assets and reductions in liabilities as uses of cash and decreases in assets and increases in liabilities as sources of cash, together referred to as changes in operating assets and liabilities.
In the first nine months of 2021, changes in operating assets and liabilities resulted in net cash used in operating activities of approximately $1.7 million which was primarily from increasing our inventory levels in order to cope with supply chain disruptions as demand increased with the reopening of the economy, increased accounts receivable driven by higher shipment levels in the third quarter of 2021 and increased prepaid expenses. The uses of cash were partially offset by increases in accrued payroll and related expenses, primarily employee incentive-based compensation associated with improved financial performance, and by increases in accounts payable driven primarily by increased inventory purchases. In the first nine months of 2020, changes in operating assets and liabilities resulted in net cash used in operating activities of approximately $9,000 which was primarily due to decreases in accounts receivable resulting from the lower shipments in the third quarter of 2020.
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In the first nine months of 2021 and 2020, we invested approximately $558,000 and $375,000, respectively, in manufacturing tooling costs and computer software development costs.
Net cash provided by financing activities was approximately $2.6 million in the first nine months of 2021, compared to net cash provided by financing activities of approximately $804,000 in the comparable period a year ago. Financing activities in 2021 consisted primarily of $1.86 million in proceeds from the exercise of employee stock options and of a net borrowing of $750,000 on the CalCap Loan. Financing activities in the first nine months of 2020 consisted of proceeds of a loan of $1.06 million under the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and a loan of $150,000 from the SBA under its Economic Injury Disaster (“EIDL”) assistance program, offset by an approximately $1.41 million net payment of borrowings under our bank lines of credit, an approximately $333,000 repayment on our term loan and a $150,000 repayment on the SBA loan. The subordinated convertible note financing added approximately $1,433,000 to net cash in the first nine months of 2020.
Critical Accounting Estimates
Our significant accounting policies are described in “Note 2 - Summary of Significant Accounting Policies” in the notes to condensed financial statements. The application of these policies requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on a combination of historical experience and reasonable judgment applied to other facts. Actual results may differ from these estimates, and such differences may be material to the financial statements. In addition, the use of different assumptions or judgments may result in different estimates. We believe our critical accounting policies that are subject to these estimates are: Revenue Recognition and Accounts Receivable Reserves, Inventory Valuation, Stock-Based Compensation, Income Taxes and Valuation of Goodwill.
A complete description of our critical accounting policies and estimates is contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the Securities and Exchange Commission.
Contractual Obligations
Our contractual cash obligations at September 30, 2021 are outlined in the table below:
| Payments Due by Period | |||||||||||||||||||
| 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 | $ | — | $ | — | |||||||||
| Operating lease | 394,000 | 394,000 | — | — | — | ||||||||||||||
| Total contractual obligations | $ | 10,091,000 | $ | 10,013,000 | $ | 78,000 | $ | — | $ | — | |||||||||
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Off-Balance Sheet Arrangements
As of September 30, 2021, we had no off-balance sheet arrangements as defined in Item 303 of Regulation S-K.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our bank term loan and credit line facilities. Amounts outstanding under the term loan bear interest at the lender's prime rate (minimum of 4.25%) plus 1.75%. Our bank credit line facilities of up to $3.5 million have variable interest rates based upon the lender's prime rate (minimum of 4.25%) plus 0.75%, for the $1.0 million nonformula loan, revolving facility (up to $2.0 million), and the EXIM Line of Credit (up to $0.5 million). Accordingly, interest rate increases could increase our interest expense on outstanding term loan and credit line balances.
Foreign Currency Risk
A substantial majority of our revenue, expense and purchasing activities are transacted in U.S. dollars. However, we require our European distributors to purchase our products in Euros and we pay the expenses of our European employees in Euros and British pounds. We may enter into selected future purchase commitments with foreign suppliers that may be paid in the local currency of the supplier. We hedge a significant portion of our European receivables balance denominated in Euros to reduce the foreign currency risk associated with these assets, and we have not been subject to significant losses from material foreign currency fluctuations. Based on a sensitivity analysis of our net foreign currency denominated assets at the end of the quarter ended September 30, 2021, an adverse change of 10% in exchange rates would have resulted in a decrease in our net income for the third quarter of 2021 of approximately $49,000 if left unprotected. For the third quarter of 2021, the total net adjustment for the effects of changes in foreign currency on cash balances, collections, payables, and derivatives used to hedge foreign currency risks, was approximately ($15,000). We will continue to monitor, assess, and mitigate through hedging activities, our risks related to foreign currency fluctuations.
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Item 4. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
Item 1A. Risk Factors.
Ownership of the Company’s securities involves a number of risks and uncertainties. Potential investors should carefully consider the risks and uncertainties described below and the other information in this Quarterly Report on Form 10-Q and our other public filings with the Securities and Exchange Commission before deciding whether to invest in the Company’s securities. The Company’s business, financial condition or results of operations could be materially adversely affected by any of these risks. The risks described below are not the only ones facing the Company. Additional risks that are currently unknown to the Company or that the Company currently considers immaterial may also impair its business or adversely affect its financial condition or results of operations.
We could be materially adversely affected by the ongoing COVID-19 pandemic for which we are unable to predict the ultimate impact as the extent and duration of the COVID-19 pandemic is uncertain.
The ongoing COVID-19 pandemic has resulted in widespread impacts on the global economy, and the unfavorable impacts we may experience include:
| • | Reductions or volatility in demand for one or more of our products which may be caused by the temporary inability of consumers to purchase our products due to illness, business closures, or financial hardship; and shifts in demand away from one or more of our higher-priced products to lower-priced products. If prolonged, such impacts can further increase the difficulty in planning our operations, which may adversely impact our results, liquidity and financial condition. |
| • | Inability to meet our customers’ needs due to disruptions in our manufacturing operations. |
| • | Failure of third parties on which we rely, including our suppliers, contract manufacturers, and distributors, to meet their obligations to the Company, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties, which may adversely impact our operations, liquidity and financial condition. |
Despite our efforts to manage and remedy these impacts to the Company, there is considerable uncertainty regarding the extent to which COVID-19 will spread and the extent and duration of measures to try to contain the virus. The ultimate impact of the COVID-19 pandemic depends on factors beyond our knowledge or control. Moreover, a new Delta variant of COVID-19, which appears to be the most transmissible variant to date, has spread across the globe. Additionally, other new variants of COVID-19 could emerge in the future. The impact of the Delta variant, and the potential impact of possible future variants, cannot be predicted at this time, and we cannot predict with any certainty the degree to, or the time period over, which our liquidity, financial position, results of operations and cash flows will be affected by this pandemic.
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A deterioration in global economic conditions may have adverse impacts on our business and financial condition in ways that we currently cannot predict and may limit our ability to raise additional funds.
If global economic conditions deteriorate, it may have a negative impact on our business and our financial condition. We may face significant challenges if conditions in the financial markets worsen. The impact of such future developments on our business, including as a result of the COVID-19 pandemic, is highly uncertain and cannot be predicted. If the overall economy is negatively impacted for an extended period, our results of operations, financial position and cash flows may be materially adversely affected. In addition, a severe prolonged economic downturn could result in a variety of risks to the business, including weakening our ability to develop potential businesses and a decreased ability to raise additional capital when needed on acceptable terms, if at all.
We may not maintain ongoing profitability.
To maintain ongoing profitability, we must accomplish numerous objectives, including achieving continued growth in our business, providing ongoing support to registered developers whose applications support the use of our data capture products, and developing successful new products. We cannot foresee with any certainty whether we will be able to achieve these objectives in the future. Accordingly, we may not generate sufficient revenue or control our expenses enough to maintain ongoing profitability. If we cannot maintain ongoing profitability, we will not be able to support our operations from positive cash flows, and we would be required to use our existing cash to support operating losses. If we are unable to secure the necessary capital to replace that cash, we may need to suspend some or all of our current operations.
We may require additional capital in the future, but that capital may not be available on reasonable terms, if at all, or on terms that would not cause substantial dilution to investors’ stock holdings.
We may need to raise capital to fund our growth or operating losses in future periods. Our forecasts are highly dependent on factors beyond our control, including market acceptance of our products and delays in deployments by businesses of applications that use our data capture products. Even if we maintain profitable operating levels, we may need to raise capital to provide sufficient working capital to fund our growth. If capital requirements vary materially from those currently planned, we may require additional capital sooner than expected. There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to us, if at all.
If application developers are not successful in their efforts to develop, market and sell their applications into which our software and products are incorporated, we may not achieve our sales projections.
We are dependent upon application developers to integrate our scanning and software products into their applications designed for mobile workers using smartphones, tablets and mobile computers, and to successfully market and sell those application products and solutions into the marketplace. We focus on serving the needs of application developers as sales of our data capture products are application driven. However, these developers may take considerable time to complete development of their applications, may experience delays in their development timelines, may develop competing applications, may be unsuccessful in marketing and selling their application products and solutions to customers, or may experience delays in customer deployments and implementations, which would adversely affect our ability to achieve our revenue projections.
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Failure to maintain effective internal controls could have a material adverse effect on our business, operating results and stock price.
We have evaluated and will continue to evaluate our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires an annual management assessment of the design and effectiveness of our internal control over financial reporting. If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to revenue recognition and access to assets, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.
Despite security protections, our business records and information could be hacked by unauthorized personnel.
We protect our business records and information from access by unauthorized personnel and are not aware of any instances where such data has been compromised. We maintain adequate segregation of duties in safeguarding our assets and related records and monitor our systems to detect any attempts to bypass our controls and procedures which we evaluate and update from time to time. We are aware that unauthorized efforts to access our business records and information with sophisticated tools could bypass our controls and procedures and we remain alert to that possibility.
Our quarterly operating results may fluctuate in future periods, which could cause our stock price to decline.
We expect to experience quarterly fluctuations in operating results in the future. We generally ship orders as received, and as a result we may have little backlog. Quarterly revenues and operating results therefore depend on the volume and timing of orders received during the quarter, which are difficult to forecast. Historically, we have often recognized a substantial portion of our revenue in the last month of the quarter. This subjects us to the risk that even modest delays in orders or in the manufacture of products relating to orders received, may adversely affect our quarterly operating results. Our operating results may also fluctuate due to factors such as:
| • | the demand for our products; |
| • | the size and timing of customer orders; |
| • | unanticipated delays or problems in our introduction of new products and product enhancements; |
| • | the introduction of new products and product enhancements by our competitors; |
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| • | the timing of the introduction and deployments of new applications that work with our products; |
| • | changes in the revenues attributable to royalties and engineering development services; |
| • | product mix; |
| • | timing of software enhancements; |
| • | changes in the level of operating expenses; |
| • | competitive conditions in the industry including competitive pressures resulting in lower average selling prices; |
| • | timing of distributors’ shipments to their customers; |
| • | delays in supplies of key components used in the manufacturing of our products; and |
| • | general economic conditions and conditions specific to our customers’ industries. |
Because we base our staffing and other operating expenses on anticipated revenues, unanticipated declines or delays in the receipt of orders can cause significant variations in operating results from quarter to quarter. As a result of any of the foregoing factors, or a combination, our results of operations in any given quarter may be below the expectations of public market analysts or investors, in which case the market price of our common stock would be adversely affected.
In order to maintain the availability of our bank lines of credit we must remain in compliance with the covenants as specified under the terms of the credit agreements and the bank may exercise discretion in making advances to us.
Our credit agreements with our bank requires us to remain in compliance with the covenants specified under the terms of the agreement. The agreements also contain customary affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, grant liens, make investments, incur indebtedness, merge or consolidate, dispose of assets, make acquisitions, pay dividends or make distributions, repurchase stock, enter into transactions with affiliates and enter into restrictive agreements, in each case subject to customary exceptions for a credit facility of this size and type. The agreements also contain customary events of default including, among others, payment defaults, breaches of covenants, bankruptcy and insolvency events, cross defaults with certain material indebtedness, judgment defaults, and breaches of representations and warranties. Upon an event of default, our bank may declare all or a portion of our outstanding obligations payable to be immediately due and payable and exercise other rights and remedies provided for under the agreement. During the existence of an event of default, interest on the obligations could be increased. The agreements may be terminated by us or by our bank at any time. Upon such termination, our bank would no longer make advances under the credit agreement and outstanding advances would be repaid as receivables are collected. All advances are at our bank’s discretion and our bank is not obligated to make advances.
Deferred tax assets comprise a significant portion of our assets and are dependent upon future tax profitability to realize the benefits.
We have recorded deferred tax assets on our balance sheet because we believe that it is more likely than not that we will generate sufficient tax profitability in the future to realize the tax savings that our deferred tax assets represent. If we do not achieve and maintain sufficient profitability, the tax savings represented by our deferred tax assets may never be realized and we would need to recognize a loss for those deferred tax assets.
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We may be unable to manufacture our products because we are dependent on a limited number of qualified suppliers for our components.
Several of our component parts are produced by one or a limited number of suppliers. Shortages or delays could occur in these essential components due to an interruption of supply or increased demand in the industry. Suppliers may choose to restrict credit terms or require advance payment causing delays in the procurement of essential materials. If we are unable to procure certain component parts, we could be required to reduce our operations while we seek alternative sources for these components, which could have a material adverse effect on our financial results. To the extent that we acquire extra inventory stocks to protect against possible shortages, we would be exposed to additional risks associated with holding inventory, such as obsolescence, excess quantities, or loss.
If we fail to develop and introduce new products rapidly and successfully, we will not be able to compete effectively, and our ability to generate sufficient revenues will be negatively affected.
The market for our products is prone to rapidly changing technology, evolving industry standards and short product life cycles. If we are unsuccessful at developing and introducing new products and services on a timely basis that include the latest technologies, conform to the newest standards, and that are appealing to end users, we will not be able to compete effectively, and our ability to generate significant revenues will be seriously harmed.
The development of new products and services can be very difficult and requires high levels of innovation. The development process is also lengthy and costly. Short product life cycles for smartphones and tablets expose our products to the risk of obsolescence and require frequent new product upgrades and introductions. We will be unable to introduce new products and services into the market on a timely basis and compete successfully if we fail to:
| • | invest significant resources in research and development, sales and marketing, and customer support; |
| • | identify emerging trends, demands and standards in the field of mobile computing products; |
| • | enhance our products by adding additional features; |
| • | maintain superior or competitive performance in our products; and |
| • | anticipate our end users’ needs and technological trends accurately. |
We cannot be sure that we will have sufficient resources to make adequate investments in research and development or that we will be able to identify trends or make the technological advances necessary to be competitive.
We may not be able to collect receivables from customers who experience financial difficulties.
Our accounts receivables are derived primarily from distributors. We perform ongoing credit evaluations of our customers’ financial conditions but generally require no collateral from our customers. Reserves are maintained for potential credit losses, and such losses have historically been within such reserves. However, many of our customers may be thinly capitalized and may be prone to failure in adverse market conditions. Although our collection history has been good, from time to time a customer may not pay us because of financial difficulty, bankruptcy or liquidation. If global financial conditions have an impact on our customers’ ability to pay us in a timely manner, and consequently, we may experience increased difficulty in collecting our accounts receivable, and we may have to increase our reserves in anticipation of increased uncollectible accounts.
| 29 |
We could face increased competition in the future, which would adversely affect our financial performance.
The market in which we operate is very competitive. Our future financial performance is contingent on a number of unpredictable factors, including that:
| • | some of our competitors have greater financial, marketing, and technical resources than we do; |
| • | we periodically face intense price competition, particularly when our competitors have excess inventories and discount their prices to clear their inventories; and |
| • | certain manufacturers of tablets and mobile phones offer products with built-in functions, such as Bluetooth wireless technology or barcode scanning, that compete with our products. |
Increased competition could result in price reductions, fewer customer orders, reduced margins, and loss of market share. Our failure to compete successfully against current or future competitors could harm our business, operating results and financial condition.
If we do not correctly anticipate demand for our products, our operating results will suffer.
The demand for our products depends on many factors and is difficult to forecast as we introduce and support more products, and as competition in the markets for our products intensifies. If demand is lower than forecasted levels, we could have excess production resulting in higher inventories of finished products and components, which could lead to write-downs or write-offs of some or all of the excess inventories, and reductions in our cash balances. Lower than forecasted demand could also result in excess manufacturing capacity at our third-party manufacturers and in our failure to meet minimum purchase commitments, each of which may lower our operating results.
If demand increases beyond forecasted levels, we would have to rapidly increase production at our third-party manufacturers. We depend on suppliers to provide additional volumes of components, and suppliers might not be able to increase production rapidly enough to meet unexpected demand. Even if we were able to procure enough components, our third-party manufacturers might not be able to produce enough of our devices to meet our customer demand. In addition, rapid increases in production levels to meet unanticipated demand could result in higher costs for manufacturing and supply of components and other expenses. These higher costs could lower our profit margins. Further, if production is increased rapidly, manufacturing yields could decline, which may also lower operating results.
| 30 |
We rely primarily on distributors to distribute our products, and our sales would suffer if any of these distributors stops distributing our products effectively.
Because we distribute and fulfill resellers’ orders for our products primarily through distributors, we are subject to risks associated with channel distribution, such as risks related to their inventory levels and support for our products. Our distribution channels may build up inventories in anticipation of growth in their sales. If such growth in their sales does not occur as anticipated, the inventory build-up could contribute to higher levels of product returns. The lack of sales by any one significant participant in our distribution channels could result in excess inventories and adversely affect our operating results and working capital liquidity. During the nine months ended September 30, 2021 and 2020, Ingram Micro® and BlueStar together represented approximately 54% and 55%, respectively, of our worldwide sales. We expect that a significant portion of our sales will continue to depend on sales to a limited number of distributors.
Our agreements with distributors are generally nonexclusive and may be terminated on short notice by them without cause. Our distributors are not within our control, are not obligated to purchase products from us, and may offer competitive lines of products simultaneously. Sales growth is contingent in part on our ability to enter into additional distribution relationships and expand our sales channels. We cannot predict whether we will be successful in establishing new distribution relationships, expanding our sales channels or maintaining our existing relationships. A failure to enter into new distribution relationships, to expand our sales channels, or to maintain our existing relationships could adversely impact our ability to grow our sales.
We allow our distribution channels to return a portion of their inventory to us for full credit against other purchases. In addition, in the event we reduce our prices, we credit our distributors for the difference between the purchase price of products remaining in their inventory and our reduced price for such products. Actual returns and price protection may adversely affect future operating results and working capital liquidity by reducing our accounts receivable and increasing our inventory balances, particularly since we seek to continually introduce new and enhanced products and are likely to face increasing price competition.
We depend on alliances and other business relationships with third parties, and a disruption in these relationships would hinder our ability to develop and sell our products.
We depend on strategic alliances and business relationships with leading participants in various segments of the mobile applications market to help us develop and market our products. Our strategic partners may revoke their commitment to our products or services at any time in the future or may develop their own competitive products or services. Accordingly, our strategic relationships may not result in sustained business alliances, successful product or service offerings, or the generation of significant revenues. Failure of one or more of such alliances could result in delay or termination of product development projects, failure to win new customers, or loss of confidence by current or potential customers.
We have devoted significant research and development resources to design products to work with a number of operating systems used in mobile devices including Apple® (iOS), Google™ (Android™) and Microsoft® (Windows®). Such design activities have diverted financial and personnel resources from other development projects. These design activities are not undertaken pursuant to any agreement under which Apple, Google or Microsoft is obligated to collaborate or to support the products produced from such collaboration. Consequently, these organizations may terminate their collaborations with us for a variety of reasons, including our failure to meet agreed-upon standards or for reasons beyond our control, such as changing market conditions, increased competition, discontinued product lines, and product obsolescence.
| 31 |
Our intellectual property and proprietary rights may be insufficient to protect our competitive position.
Our business depends on our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark, trade secret laws, and other restrictions on disclosure to protect our proprietary technologies. We cannot be sure that these measures will provide meaningful protection for our proprietary technologies and processes. We cannot be sure that any patent issued to us will be sufficient to protect our technology. The failure of any patents to provide protection to our technology would make it easier for our competitors to offer similar products. In connection with our participation in the development of various industry standards, we may be required to license certain of our patents to other parties, including our competitors that develop products based upon the adopted standards.
We also generally enter into confidentiality agreements with our employees, distributors, and strategic partners, and generally control access to our documentation and other proprietary information. Despite these precautions, it may be possible for a third-party to copy or otherwise obtain and use our products, services, or technology without authorization, develop similar technology independently, or design around our patents.
Additionally, effective copyright, trademark, and trade secret protection may be unavailable or limited in certain foreign countries.
We may become subject to claims of intellectual property rights infringement, which could result in substantial liability.
In the course of operating our business, we may receive claims of intellectual property infringement or otherwise become aware of potentially relevant patents or other intellectual property rights held by other parties. Many of our competitors have large intellectual property portfolios, including patents that may cover technologies that are relevant to our business. In addition, many smaller companies, universities, and individuals have obtained or applied for patents in areas of technology that may relate to our business. The industry is moving towards aggressive assertion, licensing, and litigation of patents and other intellectual property rights.
If we are unable to obtain and maintain licenses on favorable terms for intellectual property rights required for the manufacture, sale, and use of our products, particularly those products which must comply with industry standard protocols and specifications to be commercially viable, our results of operations or financial condition could be adversely impacted.
In addition to disputes relating to the validity or alleged infringement of other parties’ rights, we may become involved in disputes relating to our assertion of our own intellectual property rights. Whether we are defending the assertion of intellectual property rights against us or asserting our intellectual property rights against others, intellectual property litigation can be complex, costly, protracted, and highly disruptive to business operations by diverting the attention and energies of management and key technical personnel. Plaintiffs in intellectual property cases often seek injunctive relief, and the measures of damages in intellectual property litigation are complex and often subjective or uncertain. Thus, any adverse determinations in this type of litigation could subject us to significant liabilities and costs.
| 32 |
New industry standards may require us to redesign our products, which could substantially increase our operating expenses.
Standards for the form and functionality of our products are established by standards committees. These independent committees establish standards, which evolve and change over time, for different categories of our products. We must continue to identify and ensure compliance with evolving industry standards so that our products are interoperable and we remain competitive. Unanticipated changes in industry standards could render our products incompatible with products developed by major hardware manufacturers and software developers. Should any major changes, even if anticipated, occur, we would be required to invest significant time and resources to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards for a significant period of time, we would miss opportunities to sell our products for use with new hardware components from mobile computer manufacturers and OEMs, thus affecting our business.
Undetected flaws and defects in our products may disrupt product sales and result in expensive and time-consuming remedial action.
Our hardware and software products may contain undetected flaws, which may not be discovered until customers have used the products. From time to time, we may temporarily suspend or delay shipments or divert development resources from other projects to correct a particular product deficiency. Efforts to identify and correct errors and make design changes may be expensive and time consuming. Failure to discover product deficiencies in the future could delay product introductions or shipments, require us to recall previously shipped products to make design modifications, or cause unfavorable publicity, any of which could adversely affect our business and operating results.
The loss of one or more of our senior personnel could harm our existing business.
A number of our officers and senior managers have been employed for more than twenty years by us, including our President, Chief Financial Officer, Vice President of Operations and Vice President of Engineering/Chief Technical Officer. Our future success will depend upon the continued service of key officers and senior managers. Competition for officers and senior managers is intense, and there can be no assurance that we will be able to retain our existing senior personnel. The loss of one or more of our officers or key senior managers could adversely affect our ability to compete.
| 33 |
The expensing of options and restricted stocks will continue to reduce our operating results such that we may find it necessary to change our business practices to attract and retain employees.
We have been using stock options and restricted stocks as a key component of our employee compensation packages. We believe that stock options and restricted stocks provide an incentive to our employees to maximize long-term stockholder value and, through the use of vesting, encourage valued employees to remain with us. The expensing of employee stock options and restricted stocks adversely affects our net income and earnings per share, will continue to adversely affect future quarters, and will make profitability harder to achieve. In addition, we may decide in response to the effects of expensing stock options on our operating results to reduce the number of stock options or restricted stocks granted to employees or to grant to fewer employees. This could adversely affect our ability to retain existing employees and attract qualified candidates, and also could increase the cash compensation we would have to pay to them.
If we are unable to attract and retain highly skilled sales and marketing and product development personnel, our ability to develop and market new products and product enhancements will be adversely affected.
We believe our ability to achieve increased revenues and to develop successful new products and product enhancements will depend in part upon our ability to attract and retain highly skilled sales and marketing and product development personnel. Our products involve a number of new and evolving technologies, and we frequently need to apply these technologies to the unique requirements of mobile products. Our personnel must be familiar with both the technologies we support and the unique requirements of the products to which our products connect. Competition for such personnel is intense, and we may not be able to attract and retain such key personnel. In addition, our ability to hire and retain such key personnel will depend upon our ability to raise capital or achieve increased revenue levels to fund the costs associated with such key personnel. Failure to attract and retain such key personnel will adversely affect our ability to develop and market new products and product enhancements.
Our operating results could be harmed by economic, political, regulatory and other risks associated with export sales.
Our operating results are subject to the risks inherent in export sales, including:
| • | longer payment cycles; |
| • | unexpected changes in regulatory requirements, import and export restrictions and tariffs; |
| • | difficulties in managing foreign operations; |
| • | the burdens of complying with a variety of foreign laws; |
| • | greater difficulty or delay in accounts receivable collection; |
| • | potentially adverse tax consequences; and |
| • | political and economic instability. |
Our export sales are primarily denominated in Euros for our sales to European distributors and in British pounds for our sales to UK distributors. Accordingly, an increase in the value of the United States dollar relative to Euro or British pound could make our products more expensive and therefore potentially less competitive in European markets. Declines in the value of the Euro or pound relative to the United States dollar may result in foreign currency losses relating to collection of receivables denominated if left unhedged.
| 34 |
Our facilities or operations could be adversely affected by events outside our control, such as natural disasters or health epidemics.
Our corporate headquarters is located in a seismically active region in Northern California. If major disasters such as earthquakes occur, or our information system or communications network breaks down or operates improperly, our headquarters and production facilities may be seriously damaged, or we may have to stop or delay production and shipment of our products. In addition, we may be affected by health epidemic or pandemics, such as the current COVID-19 pandemic. We may incur expenses or delays relating to such events outside of our control, which could have a material adverse impact on our business, operating results and financial condition.
The sale of a substantial number of shares of our common stock could cause the market price of our common stock to decline.
Sales of a substantial number of shares of our common stock in the public market could adversely affect the market price for our common stock. The market price of our common stock could also decline if one or more of our significant stockholders decided for any reason to sell substantial amounts of our common stock in the public market.
As of November 8, 2021, we had 7,179,227 shares of common stock outstanding. Substantially all of these shares are freely tradable in the public market, either without restriction or subject, in some cases, only to S-3 prospectus delivery requirements and, in other cases, only to manner of sale, volume, and notice requirements of Rule 144 under the Securities Act.
As of November 8, 2021, we had 1,388,122 shares of common stock subject to outstanding options under our stock option plans, 610,567 shares of restricted stock outstanding, and 189,528 shares of common stock available for future issuance under the plans. We have registered the shares of common stock subject to outstanding options and restricted stock and reserved for issuance under our stock option plans. Accordingly, the shares of common stock underlying vested options and unvested restricted stock will be eligible for resale in the public market as soon as the options are exercised or the restricted stock vests, as applicable.
Volatility in the trading price of our common stock could negatively impact the price of our common stock.
During the period from January 1, 2020 through the date of the report, our common stock price fluctuated between a high of $35.00 and a low of $0.76. We have experienced low trading volumes in our stock, and thus relatively small purchases and sales can have a significant effect on our stock price. The trading price of our common stock could be subject to wide fluctuations in response to many factors, some of which are beyond our control, including general economic conditions and the outlook of securities analysts and investors on our industry. In addition, the stock markets in general, and the markets for high technology stocks in particular, have experienced high volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.
| 35 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 6. Exhibits
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 |
* Filed herewith.
** Furnished herewith.
| 36 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SOCKET MOBILE, INC.
Registrant
| Date: November 12, 2021 | /s/ Kevin J. Mills |
| Kevin J. Mills | |
| President and Chief Executive Officer | |
| (Duly Authorized Officer and Principal Executive Officer) |
| Date: November 12, 2021 | /s/ Lynn Zhao |
| Lynn Zhao | |
| Vice President of Finance and Administration and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) |
| 37 |
Exhibit 31.1
CERTIFICATION
I, Kevin J. Mills, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Socket Mobile, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: | November 12, 2021 | By: | /s/ Kevin J. Mills | |
| Name: | Kevin J. Mills | |||
| Title: | President and Chief Executive Officer (Principal Executive Officer) | |||
Exhibit 31.2
CERTIFICATION
I, Lynn Zhao, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Socket Mobile, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: | November 12, 2021 | By: | /s/ Lynn Zhao | |
| Name: | Lynn Zhao | |||
| Title: | Vice
President of Finance and Administration and Chief Financial Officer (Principal Financial Officer) | |||
Exhibit 32.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Kevin J. Mills, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Socket Mobile, Inc. on Form 10-Q for the quarter ended September 30, 2021 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Socket Mobile, Inc.
| By: | /s/ Kevin J. Mills | ||||
| Name: | Kevin J. Mills | ||||
| Title: | President and Chief Executive Officer (Principal Executive Officer) | ||||
| Date: | November 12, 2021 | ||||
I, Lynn Zhao, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Socket Mobile, Inc. on Form 10-Q for the quarter ended September 30, 2021 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Socket Mobile, Inc.
| By: | /s/ Lynn Zhao | ||||
| Name: | Lynn Zhao | ||||
| Title: | Vice President of Finance and Administration and Chief Financial Officer (Principal Financial Officer) | ||||
| Date: | November 12, 2021 | ||||
Condensed Statements of Operations - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Income Statement [Abstract] | ||||
| Revenues | $ 6,319,044 | $ 4,108,738 | $ 17,084,913 | $ 11,044,448 |
| Cost of revenues | 2,896,323 | 1,835,333 | 7,833,006 | 5,185,802 |
| Gross profit | 3,422,721 | 2,273,405 | 9,251,907 | 5,858,646 |
| Operating expenses: | ||||
| Research and development | 1,014,175 | 680,797 | 2,917,501 | 2,420,945 |
| Sales and marketing | 787,889 | 658,265 | 2,182,377 | 2,148,221 |
| General and administrative | 666,884 | 485,465 | 2,141,911 | 1,741,311 |
| Goodwill impairment charges | 4,427,000 | 4,427,000 | ||
| Total operating expenses | 2,468,948 | 6,251,527 | 7,241,789 | 10,737,477 |
| Operating income (loss) | 953,773 | (3,978,122) | 2,010,118 | (4,878,831) |
| Interest expense, net | (50,147) | (23,864) | (150,276) | (51,505) |
| Other income | 10,082 | 70,000 | ||
| Net income (loss) before income taxes | 903,626 | (4,001,986) | 1,869,924 | (4,860,336) |
| Current income tax expense | (800) | (6,289) | (800) | |
| Deferred income tax benefit | (260,000) | 1,610,000 | ||
| Net income (loss) | $ 643,626 | $ (4,002,786) | $ 3,473,635 | $ (4,861,136) |
| Net income (loss) per share: | ||||
| Basic | $ 0.08 | $ (0.62) | $ 0.46 | $ (0.76) |
| Diluted | $ 0.07 | $ (0.62) | $ 0.37 | $ (0.76) |
| Weighted average shares outstanding: | ||||
| Basic | 7,162,924 | 6,037,559 | 6,927,837 | 6,020,363 |
| Diluted | 8,939,384 | 6,037,559 | 8,932,395 | 6,020,363 |
Condensed Balance Sheets (Parenthetical) |
Dec. 31, 2020
$ / shares
shares
|
|---|---|
| Statement of Financial Position [Abstract] | |
| Common Stock, Par or Stated Value Per Share | $ / shares | $ 0.001 |
| Common Stock, Shares Authorized | 20,000,000 |
| Common Stock, Shares, Outstanding | 6,102,630 |
NOTE 1 — Basis of Presentation |
9 Months Ended |
|---|---|
Sep. 30, 2021 | |
| Accounting Policies [Abstract] | |
| NOTE 1 — Basis of Presentation | NOTE 1 — Basis of Presentation
The accompanying unaudited condensed financial statements of Socket Mobile, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals considered necessary for fair presentation have been included. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future period. These financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
We continue to monitor developments of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic to our business, operating results, cash flows, liquidity and financial condition will be primarily driven by the severity and duration of the pandemic, the impact of new strains and variants of the coronavirus, the pandemic’s impact on the global economy and the administration and effectiveness of vaccines. Those primary drivers are beyond our knowledge and control, and as a result, it is difficult to predict the cumulative impact that the pandemic will have on our future sales, operating results, cash flows and financial condition. Furthermore, the impact to our business, operating results, cash flows, liquidity and financial condition may be further adversely impacted if the COVID-19 global pandemic continues to exist or worsens for a prolonged period of time. |
NOTE 2 — Summary of Significant Accounting Policies |
9 Months Ended |
|---|---|
Sep. 30, 2021 | |
| Accounting Policies [Abstract] | |
| NOTE 2 — Summary of Significant Accounting Policies | NOTE 2 — Summary of Significant Accounting Policies
Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates, and such differences may be material to the financial statements.
Cash Equivalents and Fair Value of Financial Instruments The Company considers all highly liquid investments purchased with a maturity date of 90 days or less at date of purchase to be cash equivalents. At September 30, 2021 and December 31, 2020, all of the Company’s cash and cash equivalents consisted of amounts held in demand deposit accounts in banks. The aggregate cash balance on deposit in these accounts are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company’s cash balance on deposit in these accounts may, at times, exceed the federally insured limits. The Company has never experienced any losses in such accounts.
The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, debt and foreign exchange contracts approximate fair value due to the relatively short period of time to maturity.
SOCKET MOBILE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) September 30, 2021
Revenue Recognition and Deferred Revenue With the adoption of ASC 606 “Revenue from Contracts with Customers” in January 2017, the Company recognizes revenue on sales to distributors when shipping of product is completed and title transfers to distributor, less a reserve for estimated product returns (sales and cost of sales). The reserves are based on estimates of future returns calculated from actual return history, primarily from stock rotations, plus knowledge of pending returns outside of the norm. At September 30, 2021, the deferred revenue and deferred cost on shipments to distributors were $390,930 and $152,625, respectively, compared to $450,591 and $170,016, respectively, at December 31, 2020.
The Company also earns revenue from its SocketCare extended warranty program, which provides extended warranty and accidental breakage coverage for selected products. For the quarters ended September 30, 2021 and 2020, SocketCare revenue was approximately $6,300 and $8,100, respectively. A SocketCare warranty purchased at the time of product purchase provides for coverage in either a three-year or a five-year term. The Company additionally offers comprehensive coverage and warranty term extensions. Revenues from SocketCare services are recognized ratably over the life of the extended warranty contract. The amount of unrecognized SocketCare service revenue is classified as deferred service revenue and presented on the Company’s balance sheet in its short- and long-term components. At September 30, 2021, the balance of unrecognized SocketCare service revenue was approximately $36,300.
Cost of Sales and Gross Margins Cost of sales primarily consists of the costs to manufacture our products, including the costs of materials, contract manufacturing, shipping costs, personnel and related expenses including stock-based compensation, equipment and facility expenses, warranty costs and inventory excess and obsolete provisions. The factors that impact our gross margins are the cost of materials, the mix of products and the extent to which we are able to efficiently utilize our manufacturing capacity.
Leases In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which requires a lessee to recognize a liability representing future lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For operating leases, a lessee is required to recognize at inception a right-of-use asset and a lease liability equal to the net present value of the lease payments, with lease expense recognized over the lease term on a straight-line basis. For leases with a term of twelve months or less, ASU 2016-02 allows a reporting entity to make an accounting policy election to not recognize a right-of-use asset and a lease liability, and to recognize lease expense on a straight-line basis. The Company adopted ASU 2016-02 effective January 1, 2019. At September 30, 2021, the balances of right-of-use assets and liabilities for the operating lease were $313,293 and $384,180, respectively, compared to $609,331 and $741,351, respectively, at December 31, 2020.
SOCKET MOBILE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) September 30, 2021
Goodwill In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this update eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable.
The Company tests its goodwill for impairment annually as of September 30th or more frequently when events or circumstances indicate that the carrying value of the Company’s single reporting unit more likely than not exceeds its fair value. The Company wrote off its entire goodwill of $4.4 million as measured on September 30, 2020.
Recently Issued Financial Accounting Standards From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position, results of operations or cash flows upon adoption.
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NOTE 3 — Acquisition of Intangible Assets |
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Sep. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Business Combination and Asset Acquisition [Abstract] | |||||||||||||||||||||||||||||||||||||||||
| NOTE 3 — Acquisition of Intangible Assets | NOTE 3 — Acquisition of Intangible Assets
On February 26, 2021, the Company entered into the 2021 Technology Transfer Agreement with SpringCard SAS (“SpringCard”). SpringCard is a market leader at the forefront of innovative electronic design and development. Its contactless and wireless solutions support a wide range of customers, from large international corporations to locally focused companies.
Under the 2021 Technology Transfer Agreement, 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 for use in the Company’s Contactless Reader/Writer products, D600 and S550. SpringCard received shares of the Company’s common stock, subject to a collar, and a 10-year warrant to purchase up to an aggregate of 50,000 shares of the Company’s common stock at the price of $ per share in four equal lots of 12,500 shares each, with each lot exercisable on or after January 1st of 2022, 2023, 2024 and 2025, respectively, until the expiration date of warrant. The common stock was issued on March 29, 2021. The fair value of intangible assets acquired is based on the closing stock price of $ on March 29, 2021. On April 20, 2021, the Company agreed to pay SpringCard the sum of $192,293 to resolve all issues that have arisen due to clerical issues in the implementation of the 2021 Technology Transfer Agreement. The Company and SpringCard both agreed that, with this payment, the Company shall have no further financial obligation to SpringCard under the 2021 Technology Transfer Agreement.
The Unaudited Condensed Balance Sheets include the intangible assets of the acquired technology at the carrying amount, net of amortization of $1,845,785 as of September 30, 2021.
SOCKET MOBILE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) September 30, 2021
The SpringCard intangible assets will be amortized over their estimated useful lives of fifteen years on a straight-line basis, which commenced on April 1, 2021. The estimated future amortization of intangible assets is as follows:
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NOTE 4 — Inventories |
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| Inventory Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NOTE 4 — Inventories | NOTE 4 — Inventories
Inventories consist principally of raw materials and sub-assemblies, which are stated at the lower of cost (first-in, first-out) or market. Inventories at September 30, 2021 and December 31, 2020 were as follows:
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NOTE 5 — Bank Financing Arrangements |
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| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||
| NOTE 5 — Bank Financing Arrangements | NOTE 5 — Bank Financing Arrangements
The Company initially entered into a Business Financing Agreement with Western Alliance Bank (the “Bank”), an Arizona corporation, on February 27, 2014, and this agreement has been amended and extended through the years.
Seventh Financing Agreement On January 8, 2020, the Company entered into the Seventh Business Financing Modification Agreement with the Bank which extended the maturity date of the Company’s revolving line of credit to January 31, 2022.
Eighth Financing Agreement On August 28, 2020, the Company entered into the Eighth Business Financing Modification Agreement and Consent with the Bank. The Bank consented to the issuance of subordinated debt in the amount less than $2,000,000, at an annual interest rate of less than 10%, such debt maturing in no sooner than 3 years.
SOCKET MOBILE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) September 30, 2021
Amended and Restated Business Financing Agreement On January 29, 2021, the Company entered into an Amended and Restated Business Financing Agreement (the “Financing Agreement”) with the Bank. The Financing Agreement increased the Company’s Domestic Line of Credit to $3.0 million, including a $2.0 million revolving facility and a $1.0 million nonformula loan. The $1.0 million nonformula loan was enrolled in the CalCap Collateral Support Program (the “CalCap Loan”) and advanced on February 16, 2021. The Company will make a principal reduction payment of $125,000, plus all accrued but unpaid interest on the 30th day of each of April, July, October and January. The Financing Agreement also extended the maturity date of both the Domestic Line of Credit and EXIM Line of Credit to January 31, 2023.
Amounts outstanding under the CalCap Loan as of September 30, 2021 are as follows:
Interest expense on the CalCap Loan for the three and nine months ended September 30, 2021 was $10,104 and $27,656, respectively. Accrued interest payable related to the amounts outstanding under the CalCap Loan at September 30, 2021 was $2,083.
During the nine months ended September 30, 2020, total repayment of the term loan, initiated in March 2018 (the “Term Loan”), was $333,333. The total amount borrowed under the domestic and international lines of credit was $5,630,000 and the total repayment was $7,042.449.
Interest expense on the Term Loan for the three and nine months ended September 30, 2020 was $229 and $6,152, respectively. Interest expense on the amounts drawn under the Company’s bank credit lines during the three and nine months ended September 30, 2020 was $1,077 and $20,461, respectively. Accrued interest payable related to the amounts outstanding under the bank credit facilities at September 30, 2020 was $373.
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NOTE 6 — Secured Subordinated Convertible Notes Payable |
9 Months Ended |
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Sep. 30, 2021 | |
| Debt Disclosure [Abstract] | |
| NOTE 6 — Secured Subordinated Convertible Notes Payable | NOTE 6 — Secured Subordinated Convertible Notes Payable
On August 31, 2020, the Company completed a secured subordinated convertible note financing of $1,530,000, including $1,350,000 from officers, directors, and their family members. Because the financing involved such parties related to the Company, a special committee of the Board comprising the Board’s disinterested directors approved the financing.
The funds raised are used to increase the Company’s working capital balances. The secured subordinated convertible notes (the “Notes”) have a three-year term that accrue interest at 10% per annum and mature on August 30, 2023. The interest on the Notes is payable quarterly in cash. The holder of each Note may require the Company to repay the principal amount of the Note plus accrued interest at any time after August 31, 2021. The principal amount of each note is convertible at any time, at the option of the holder, into shares of the Company’s common stock at a conversion price of $1.46 per share, which was the market closing price of the common stock on August 28, 2020. The Notes did not contain a beneficial conversion feature because the conversion price is higher than the market closing price on the date of issuance of the Notes . The Notes are secured by the assets of the Company and are subordinated to amounts outstanding under the Company’s working capital bank line of credit with Western Alliance Bank.
SOCKET MOBILE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) September 30, 2021
Total issuance costs associated with the financing are $96,515, and the costs are presented in the balance sheet as a direct deduction from the original notes payable balance of $1,530,000 as a contra-liability. The issuance costs are amortized over three years, the term of the Notes , and the amortization expense is reported as interest expense. The amortization of debt discount for nine months ended September 30, 2021 was $24,819. The remaining debt discount of $63,424 will be amortized through August 31, 2023.
During the nine months ended September 30, 2021, two noteholders elected to convert Note principal of $130,000 into shares of the Company’s common stock at the conversion price.
Total interest expense recognized related to the Notes for the three and nine months ended September 30, 2021 was $43,560 and $131,281, respectively.
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NOTE 7 — Segment Information and Concentrations |
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| Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NOTE 7 — Segment Information and Concentrations | NOTE 7 — Segment Information and Concentrations
Segment Information The Company operates in the mobile barcode scanning and RFID/NFC data capture market. Mobile scanning typically consists of mobile devices such as smartphones or tablets, with mobile scanning or NFC peripherals for data collection, and third-party vertical applications software. The Company distributes its products in the United States and foreign countries primarily through distributors and resellers. The Company markets its products primarily through application developers whose applications are designed to work with the Company’s products.
Revenues by geographic areas for the three and nine months ended September 30, 2021 and 2020 were as follows:
Export revenues are attributable to countries based on the location of the Company’s customers. The Company does not hold long-lived assets in foreign locations.
SOCKET MOBILE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) September 30, 2021
Major Customers Customers who accounted for at least 10% of the Company’s total revenues for the three and nine months ended September 30, 2021 and 2020 were as follows:
Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk include cash, cash equivalents and accounts receivable. The Company invests its cash in demand deposit accounts in banks and the Company has not experienced losses on the investments. The Company’s trade accounts receivables are primarily with distributors. The Company performs ongoing credit evaluations of its customers’ financial condition, but the Company generally requires no collateral. Reserves are maintained for potential credit losses, and such losses have been within management’s expectations. Customers who accounted for at least 10% of the Company’s accounts receivable balances at September 30, 2021 and December 31, 2020 were as follows:
Concentration of Suppliers Several of the Company’s component parts are produced by a sole or limited number of suppliers. Shortages could occur in these essential materials due to increased demand, or due to an interruption of supply. Suppliers may choose to restrict credit terms or require advance payments causing delays in the procurement of essential materials. The Company’s inability to procure certain materials could have a material adverse effect on the Company’s results. For the three months ended September 30, 2021 and 2020, the top three suppliers accounted for 56% and 64%, respectively, of inventory purchases. As of September 30, 2021 and December 31, 2020, 14% and 15%, respectively, of the Company’s accounts payable balances were concentrated with a single supplier.
SOCKET MOBILE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) September 30, 2021
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NOTE 8 — Stock-Based Compensation |
9 Months Ended |
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Sep. 30, 2021 | |
| Share-based Payment Arrangement [Abstract] | |
| NOTE 8 — Stock-Based Compensation |
The Company recognizes the compensation cost in the financial statements for all stock-based awards to employees, including grants of stock options and restricted stock, based on the fair value of the awards as of the date that the awards are issued. Compensation cost for stock-based awards is recognized on a straight-line basis over the vesting period.
The fair values of stock options are generally determined using a binomial lattice valuation model which incorporates assumptions about expected volatility, risk-free interest rate, dividend yield, and expected life. There were stock options granted during the nine months ended September 30, 2021, compared to stock options for the nine months ended September 30, 2020.
The shares of restricted stock are issued to employees and consultants and are held in escrow by the Company until the shares vest on the schedule of 15% after year one, 20% after year two, 25% after year three and 40% after year four, subject to the employees and consultants being a continuing service provider on each of the vesting dates. If the service or employment is terminated, unvested shares revert to the Company. Shares are registered at grant, so share owners may vote at the annual stockholder meeting. Shares of restricted stock are granted at zero cost basis. Compensation cost of the restricted stock is recognized on a straight-line basis over the 4-year vesting period. For the nine months ended September 30, 2021 and 2020, the Company awarded and shares of restricted stock, respectively. As of September 30, 2021, there were shares of restricted stock outstanding. Due to the existence of restrictions on sale or transfer until the shares vest, the Company does not count the shares of restricted stock as issued and outstanding shares until they vest.
Total stock-based compensation expense for the three and nine months ended September 30, 2021 was $ and $, respectively, compared to expense of $ and $ in the corresponding periods a year ago.
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NOTE 9 — Net Income (Loss) Per Share |
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NOTE 9 — Net Income (Loss) Per Share |
The following table sets forth the reconciliation of basic shares to diluted shares and the computation of basic and diluted net income (loss) per share:
*Amounts for 2020 include goodwill impairment charges of $4.43 million recorded as of September 30, 2020. Additional information regarding goodwill impairment is contained in “Note 2 - Summary of Significant Accounting Policies.”
SOCKET MOBILE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) September 30, 2021
In the three and nine months ended September 30, 2021, stock options and warrants were excluded in the calculation of diluted net income per share as their effect would have been anti-dilutive.
For the three and nine months ended September 30, 2020, the shares used in computing diluted net loss per share do not include dilutive stock options and shares of restricted stock, nor do they include dilutive conversion shares as the effect is anti-dilutive given the Company’s loss.
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NOTE 10 — Income Taxes |
9 Months Ended |
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Sep. 30, 2021 | |
| Income Tax Disclosure [Abstract] | |
| NOTE 10 — Income Taxes | NOTE 10 — Income Taxes
In the first nine months of 2021, the differences between the financial income and taxable income included a tax deduction of $8.13 million resulting from the disqualified disposition of incentive stock options and stock-based compensation of $ million, which resulted in a taxable loss of $5.76 million. The Company recorded a net income tax benefit of approximately $1.61 million for the first nine months of 2021 with the expectation of full utilization of its net operating loss carryforwards.
The Company recorded no deferred tax benefit for the losses in the nine months ended September 30, 2020.
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NOTE 11 — Commitments and Contingencies |
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| Commitments and Contingencies Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| NOTE 11 — Commitments and Contingencies | NOTE 11 — Commitments and Contingencies
Operating Lease Obligations The Company leases office space under a non-cancelable operating lease that provides the Company approximately 37,100 square feet in Newark, California. The lease agreement expires on June 30, 2022. Monthly base rent increases four percent per year on July 1st of each year. In June 2020, the Company also signed a two-year equipment operating lease agreement.
SOCKET MOBILE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) September 30, 2021
In January 2019, the Company adopted ASU 2016-02, Leases (Topic 842) and recognized a right-to-use asset and a lease liability using a discount rate of 6.25% per annum. On September 30, 2021, the balances of right-of-use assets and liabilities for the operating lease were approximately $0.31 million and $0.38 million, respectively, compared to approximately $0.61 million and $0.74 million, respectively, at December 31, 2020.
The Newark office space lease expense was $103,208 and $309,625 for the three and nine months ended September 30, 2021, respectively.
Cash payments included in the measurement of the Company’s operating lease liabilities were $131,395 and $384,427 for the three and nine months ended September 30, 2021, respectively, compared to $123,478 and $356,513, respectively, for the corresponding prior year periods.
Future minimum lease payments under the operating lease at September 30, 2021 are shown below:
Purchase Commitments As of September 30, 2021, the Company has non-cancelable purchase commitments for inventory to be used in the ordinary course of business of approximately $9,697,000.
Legal Matters The Company is subject to disputes, claims, requests for indemnification and lawsuits arising in the ordinary course of business. Under the indemnification provisions of the Company’s customer agreements, the Company routinely agrees to indemnify and defend its customers against infringement of any patent, trademark, copyright, trade secrets, or other intellectual property rights arising from customers’ legal use of the Company’s products or services. The exposure to the Company under these indemnification provisions is generally limited to the total amount paid for the indemnified products. However, certain indemnification provisions potentially expose the Company to losses in excess of the aggregate amount received from the customer. To date, there have been no claims against the Company by its customers pertaining to such indemnification provisions, and no amounts have been recorded. The Company is currently not a party to any material legal proceedings.
SOCKET MOBILE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) September 30, 2021
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NOTE 12 — Subsequent Events |
9 Months Ended |
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Sep. 30, 2021 | |
| Subsequent Events [Abstract] | |
| NOTE 12 — Subsequent Events | NOTE 12 — Subsequent Events
The Company evaluated subsequent events and transactions that occurred between October 1, 2021 through the date of this report, the date that the unaudited condensed financial statements were issued. Other than described below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the unaudited condensed financial statements.
shares of restricted stock were granted from the 2004 Equity Incentive Plan.
The Company issued 4,692 shares of common stock upon the exercise of stock options.
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NOTE 2 — Summary of Significant Accounting Policies (Policies) |
9 Months Ended |
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Sep. 30, 2021 | |
| Accounting Policies [Abstract] | |
| Use of Estimates | Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates, and such differences may be material to the financial statements. |
| Cash Equivalents and Fair Value of Financial Instruments | Cash Equivalents and Fair Value of Financial Instruments The Company considers all highly liquid investments purchased with a maturity date of 90 days or less at date of purchase to be cash equivalents. At September 30, 2021 and December 31, 2020, all of the Company’s cash and cash equivalents consisted of amounts held in demand deposit accounts in banks. The aggregate cash balance on deposit in these accounts are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company’s cash balance on deposit in these accounts may, at times, exceed the federally insured limits. The Company has never experienced any losses in such accounts.
The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, debt and foreign exchange contracts approximate fair value due to the relatively short period of time to maturity. |
| Revenue Recognition and Deferred Revenue | Revenue Recognition and Deferred Revenue With the adoption of ASC 606 “Revenue from Contracts with Customers” in January 2017, the Company recognizes revenue on sales to distributors when shipping of product is completed and title transfers to distributor, less a reserve for estimated product returns (sales and cost of sales). The reserves are based on estimates of future returns calculated from actual return history, primarily from stock rotations, plus knowledge of pending returns outside of the norm. At September 30, 2021, the deferred revenue and deferred cost on shipments to distributors were $390,930 and $152,625, respectively, compared to $450,591 and $170,016, respectively, at December 31, 2020.
The Company also earns revenue from its SocketCare extended warranty program, which provides extended warranty and accidental breakage coverage for selected products. For the quarters ended September 30, 2021 and 2020, SocketCare revenue was approximately $6,300 and $8,100, respectively. A SocketCare warranty purchased at the time of product purchase provides for coverage in either a three-year or a five-year term. The Company additionally offers comprehensive coverage and warranty term extensions. Revenues from SocketCare services are recognized ratably over the life of the extended warranty contract. The amount of unrecognized SocketCare service revenue is classified as deferred service revenue and presented on the Company’s balance sheet in its short- and long-term components. At September 30, 2021, the balance of unrecognized SocketCare service revenue was approximately $36,300. |
| Cost of Sales and Gross Margins | Cost of Sales and Gross Margins Cost of sales primarily consists of the costs to manufacture our products, including the costs of materials, contract manufacturing, shipping costs, personnel and related expenses including stock-based compensation, equipment and facility expenses, warranty costs and inventory excess and obsolete provisions. The factors that impact our gross margins are the cost of materials, the mix of products and the extent to which we are able to efficiently utilize our manufacturing capacity. |
| Leases | Leases In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which requires a lessee to recognize a liability representing future lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For operating leases, a lessee is required to recognize at inception a right-of-use asset and a lease liability equal to the net present value of the lease payments, with lease expense recognized over the lease term on a straight-line basis. For leases with a term of twelve months or less, ASU 2016-02 allows a reporting entity to make an accounting policy election to not recognize a right-of-use asset and a lease liability, and to recognize lease expense on a straight-line basis. The Company adopted ASU 2016-02 effective January 1, 2019. At September 30, 2021, the balances of right-of-use assets and liabilities for the operating lease were $313,293 and $384,180, respectively, compared to $609,331 and $741,351, respectively, at December 31, 2020. |
| Goodwill | Goodwill In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this update eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable.
The Company tests its goodwill for impairment annually as of September 30th or more frequently when events or circumstances indicate that the carrying value of the Company’s single reporting unit more likely than not exceeds its fair value. The Company wrote off its entire goodwill of $4.4 million as measured on September 30, 2020. |
| Recently Issued Financial Accounting Standards | Recently Issued Financial Accounting Standards From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position, results of operations or cash flows upon adoption. |
NOTE 3 — Acquisition of Intangible Assets (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Business Combination and Asset Acquisition [Abstract] | |||||||||||||||||||||||||||||||||||||||||
| Finite-Lived and Indefinite-Lived Intangible Assets Acquired as Part of Business Combination [Table Text Block] |
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NOTE 4 — Inventories (Tables) |
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Sep. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Inventory Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Inventory, Current [Table Text Block] |
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NOTE 5 — Bank Financing Arrangements (Tables) |
9 Months Ended | |||||||||||||||||||||||||
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Sep. 30, 2021 | ||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||
| Schedule of Debt [Table Text Block] |
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NOTE 7 — Segment Information and Concentrations (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenue from External Customers by Geographic Areas [Table Text Block] |
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| Schedule of Revenue by Major Customers by Reporting Segments [Table Text Block] |
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| Concentration of Credit Risk |
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NOTE 9 — Net Income (Loss) Per Share (Tables) |
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Earnings Per Share, Basic and Diluted [Table Text Block] |
*Amounts for 2020 include goodwill impairment charges of $4.43 million recorded as of September 30, 2020. Additional information regarding goodwill impairment is contained in “Note 2 - Summary of Significant Accounting Policies.” |
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NOTE 11 — Commitments and Contingencies (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Future Minimum Rental Payments for Operating Leases [Table Text Block] |
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NOTE 2 — Summary of Significant Accounting Policies (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | |||
|---|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
Dec. 31, 2020 |
|
| Product Information [Line Items] | |||||
| Deferred Revenue, Current | $ 390,930 | $ 390,930 | $ 450,591 | ||
| Deferred Costs and Other Assets | 152,625 | 152,625 | 170,016 | ||
| Revenues | 6,319,044 | $ 4,108,738 | 17,084,913 | $ 11,044,448 | |
| Operating Lease, Right-of-Use Asset | 313,293 | 313,293 | 609,331 | ||
| Operating Lease, Liability | 384,180 | 384,180 | $ 741,351 | ||
| Goodwill, Impairment Loss | 4,427,000 | $ 4,427,000 | |||
| Service [Member] | |||||
| Product Information [Line Items] | |||||
| Deferred Revenue | 36,300 | $ 36,300 | |||
| Service [Member] | |||||
| Product Information [Line Items] | |||||
| Revenues | $ 6,300 | $ 8,100 | |||
Amortization (Details) |
Sep. 30, 2021
USD ($)
|
|---|---|
| Business Combination and Asset Acquisition [Abstract] | |
| 2021 (October 1, 2021 to December 31, 2021) | $ 31,824 |
| 2022 | 127,296 |
| 2023 | 127,296 |
| 2024 | 127,296 |
| 2025 | 127,296 |
| Thereafter | 1,304,777 |
| Total | $ 1,845,785 |
NOTE 3 — Acquisition of Intangible Assets (Details Narrative) - USD ($) |
9 Months Ended | |||
|---|---|---|---|---|
Sep. 30, 2021 |
Mar. 29, 2021 |
Feb. 26, 2021 |
Dec. 31, 2020 |
|
| Business Combination and Asset Acquisition [Abstract] | ||||
| Business Acquisition, Date of Acquisition Agreement | Feb. 26, 2021 | |||
| Business Acquisition, Equity Interest Issued or Issuable, Number of Shares | 184,332 | |||
| Noncash or Part Noncash Acquisition, Noncash Financial or Equity Instrument Consideration, Warrants Issued | 50,000 | |||
| Business Acquisition, Share Price | $ 7.65 | $ 10.85 | ||
| Business Acquisition, Effective Date of Acquisition | Mar. 29, 2021 | |||
| Payments to Acquire Businesses, Gross | $ 192,293 | |||
| Intangible Assets, Net (Excluding Goodwill) | $ 1,845,785 |
Inventory (Details) - USD ($) |
Sep. 30, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Inventory Disclosure [Abstract] | ||
| 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 |
CalCap loan balance (Details) - USD ($) |
Sep. 30, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Debt Disclosure [Abstract] | ||
| Current portion of CalCap Loan | $ 500,000 | |
| Long-term portion of CalCap Loan | 250,000 | |
| CalCap Loan | $ 750,000 |
NOTE 5 — Bank Financing Arrangements (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | |||
|---|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
Jan. 29, 2021 |
|
| Line of Credit Facility [Line Items] | |||||
| Line of Credit Facility, Initiation Date | Jan. 29, 2021 | ||||
| Line of Credit Facility, Expiration Date | Jan. 31, 2023 | ||||
| Interest Expense | $ 50,147 | $ 23,864 | $ 150,276 | $ 51,505 | |
| Interest Payable | 373 | 373 | |||
| Repayments of Debt | 250,000 | 150,000 | |||
| Proceeds from Bank Debt | 5,630,000 | ||||
| Repayments of Bank Debt | 7,042,449 | ||||
| Domestic Revolving Facility [Member] | |||||
| Line of Credit Facility [Line Items] | |||||
| Line of Credit Facility, Maximum Borrowing Capacity | $ 2,000,000.0 | ||||
| Term Loan [Member] | |||||
| Line of Credit Facility [Line Items] | |||||
| Line of Credit Facility, Maximum Borrowing Capacity | $ 1,000,000.0 | ||||
| Interest Expense | 10,104 | 229 | 27,656 | 6,152 | |
| Interest Payable | $ 2,083 | $ 2,083 | |||
| Repayments of Debt | 333,333 | ||||
| Credit Line [Member] | |||||
| Line of Credit Facility [Line Items] | |||||
| Interest Expense | $ 1,077 | $ 20,461 | |||
NOTE 6 — Secured Subordinated Convertible Notes Payable (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | 36 Months Ended | ||||
|---|---|---|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
Aug. 30, 2023 |
Aug. 31, 2020 |
Aug. 28, 2020 |
|
| Short-term Debt [Line Items] | |||||||
| Convertible Subordinated Debt | $ 1,530,000 | ||||||
| Subordinated Borrowing, Interest Rate | 10.00% | ||||||
| Subordinated Borrowing, Due Date | Aug. 30, 2023 | ||||||
| Debt Instrument, Convertible, Conversion Price | $ 1.46 | ||||||
| Payments of Debt Issuance Costs | $ 96,515 | ||||||
| Amortization of Debt Discount (Premium) | $ 24,819 | ||||||
| Debt Instrument, Unamortized Discount (Premium), Net | $ 63,424 | 63,424 | |||||
| Conversion of Stock, Amount Converted | 130,000 | ||||||
| [custom:InterestOnConvertibleDebt] | $ 43,560 | $ 131,281 | |||||
| Related Party [Member] | |||||||
| Short-term Debt [Line Items] | |||||||
| Convertible Subordinated Debt | $ 1,350,000 | ||||||
Revenue By Geographic Areas (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
| Total revenues | $ 6,319,044 | $ 4,108,738 | $ 17,084,913 | $ 11,044,448 |
| Americas [Member] | ||||
| Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
| Total revenues | 4,641,767 | 3,290,992 | 12,958,256 | 8,676,626 |
| EMEA [Member] | ||||
| Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
| Total revenues | 967,752 | 567,977 | 2,621,278 | 1,383,518 |
| Asia Pacific [Member] | ||||
| Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
| Total revenues | $ 709,525 | $ 249,769 | $ 1,505,379 | $ 984,304 |
Major customers accounted for at least 10% of total revenues (Details) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Ingram Micro [Member] | ||||
| Revenue, Major Customer [Line Items] | ||||
| ScanSource, Inc. | 0.33 | 0.30 | 0.29 | 0.32 |
| Blue Star [Member] | ||||
| Revenue, Major Customer [Line Items] | ||||
| ScanSource, Inc. | 0.15 | 0.29 | 0.25 | 0.23 |
| Scan Source [Member] | ||||
| Revenue, Major Customer [Line Items] | ||||
| ScanSource, Inc. | 0.14 | 0.11 | ||
Concentration of Credit Risk (Details) |
Sep. 30, 2021 |
Dec. 31, 2020 |
|||
|---|---|---|---|---|---|
| Ingram Micro [Member] | |||||
| Revenue, Major Customer [Line Items] | |||||
| Bluestar Europe Distribution BV | 0.37 | 0.34 | |||
| Scan Source [Member] | |||||
| Revenue, Major Customer [Line Items] | |||||
| Bluestar Europe Distribution BV | 0.26 | 0.13 | |||
| Blue Star [Member] | |||||
| Revenue, Major Customer [Line Items] | |||||
| Bluestar Europe Distribution BV | 0.16 | 0.29 | |||
| Bluestar Europe [Member] | |||||
| Revenue, Major Customer [Line Items] | |||||
| Bluestar Europe Distribution BV | [1] | 0.11 | |||
| |||||
NOTE 7 — Segment Information and Concentrations (Details Narrative) - Supplier Concentration Risk [Member] |
3 Months Ended | ||
|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Dec. 31, 2020 |
|
| Revenue, Major Customer [Line Items] | |||
| Percentage of inventory purchases from top three suppliers | 56.00% | 64.00% | |
| Accounts payable balances with a single supplier | 14.00% | 15.00% | |
NOTE 8 — Stock-Based Compensation (Details Narrative) - USD ($) |
1 Months Ended | 3 Months Ended | 9 Months Ended | ||||||
|---|---|---|---|---|---|---|---|---|---|
Nov. 12, 2021 |
Sep. 30, 2021 |
Jun. 30, 2021 |
Mar. 31, 2021 |
Sep. 30, 2020 |
Jun. 30, 2020 |
Mar. 31, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Share-based Payment Arrangement [Abstract] | |||||||||
| Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Net of Forfeitures | 182,000 | 37,000 | |||||||
| Stock Issued During Period, Shares, Restricted Stock Award, Gross | 5,687 | 306,425 | 389,680 | ||||||
| Common Stock, Other Shares, Outstanding | 660,758 | 660,758 | |||||||
| Share-based Payment Arrangement, Noncash Expense | $ 183,896 | $ 172,008 | $ 148,772 | $ 129,551 | $ 131,369 | $ 132,065 | $ 504,676 | $ 392,985 | |
Net Income (Loss) Per Share (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||||||
|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 |
Jun. 30, 2021 |
Mar. 31, 2021 |
Sep. 30, 2020 |
Jun. 30, 2020 |
Mar. 31, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Numerator: | ||||||||
| Net income (loss) | $ 643,626 | $ 2,627,107 | $ 202,902 | $ (4,002,786) | $ (768,023) | $ (90,327) | $ 3,473,635 | $ (4,861,136) |
| Net income (loss) allocated to restricted stock award | (55,001) | 264,275 | (297,932) | 263,128 | ||||
| Adjusted net income (loss) for basic earnings per share | 588,625 | (3,738,511) | 3,175,703 | (4,598,008) | ||||
| Convertible note interest | 43,560 | 132,315 | ||||||
| Adjusted net income (loss) before interest for diluted earnings per share | $ 632,185 | $ (3,738,511) | $ 3,308,018 | $ (4,598,008) | ||||
| Denominator: Weighted average shares outstanding used in computing net income (loss) per share: | ||||||||
| Basic | 7,162,924 | 6,037,559 | 6,927,837 | 6,020,363 | ||||
| Effect of dilutive stock options | 817,556 | 1,045,654 | ||||||
| Effect of convertible note shares | 958,904 | 958,904 | ||||||
| Diluted | 8,939,384 | 6,037,559 | 8,932,395 | 6,020,363 | ||||
| Net income (loss) per share applicable to common stockholders: | ||||||||
| Basic | $ 0.08 | $ (0.62) | $ 0.46 | $ (0.76) | ||||
| Diluted | $ 0.07 | $ (0.62) | $ 0.37 | $ (0.76) | ||||
NOTE 9 — Net Income (Loss) Per Share (Details Narrative) - shares |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||||
| Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount | 50,000 | |||
| Restricted Stock [Member] | ||||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||||
| Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount | 1,047,945 | 45,000 | 1,047,945 | |
| Share-based Payment Arrangement, Option [Member] | ||||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||||
| Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount | 2,599,187 | 2,599,187 | ||
NOTE 10 — Income Taxes (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | ||||||
|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 |
Jun. 30, 2021 |
Mar. 31, 2021 |
Sep. 30, 2020 |
Jun. 30, 2020 |
Mar. 31, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Income Tax Disclosure [Abstract] | ||||||||
| Income Tax Effects Allocated Directly to Equity, Employee Stock Options | $ 8,130,000 | |||||||
| Share-based Payment Arrangement, Noncash Expense | $ 183,896 | $ 172,008 | $ 148,772 | $ 129,551 | $ 131,369 | $ 132,065 | 504,676 | $ 392,985 |
| Other Nonoperating Expense | $ 5,760,000 | |||||||
Future minimum lease payments (Details) - USD ($) |
Sep. 30, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Annual minimum payments: | ||
| 2021 (October 1 to December 31, 2021) | $ 131,395 | |
| 2022 (through June 30, 2022) | 262,789 | |
| Total minimum payments | 394,184 | |
| Less: Present value factor | (10,004) | |
| Total operating lease liabilities | 384,180 | $ 741,351 |
| Less: Current portion of operating lease | (384,180) | (483,254) |
| Long-term portion of operating lease | $ 258,097 |
NOTE 11 — Commitments and Contingencies (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | |||
|---|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
Dec. 31, 2020 |
|
| Commitments and Contingencies Disclosure [Abstract] | |||||
| Operating Lease, Right-of-Use Asset | $ 313,293 | $ 313,293 | $ 609,331 | ||
| Operating Lease, Liability | 384,180 | 384,180 | $ 741,351 | ||
| Operating Leases, Rent Expense | 103,208 | 309,625 | |||
| Operating Lease, Payments | 131,395 | $ 123,478 | 384,427 | $ 356,513 | |
| Purchase Obligation, to be Paid, Year One | $ 9,697,000 | $ 9,697,000 | |||
NOTE 12 — Subsequent Events (Details Narrative) - USD ($) |
1 Months Ended | 3 Months Ended | 9 Months Ended | ||||
|---|---|---|---|---|---|---|---|
Nov. 12, 2021 |
Sep. 30, 2021 |
Jun. 30, 2021 |
Mar. 31, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Subsequent Events [Abstract] | |||||||
| Stock Issued During Period, Shares, Restricted Stock Award, Gross | 5,687 | 306,425 | 389,680 | ||||
| Stock Issued During Period, Value, Stock Options Exercised | $ 4,692 | $ 83,501 | $ 66,889 | $ 1,711,658 | $ 73,691 | ||
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