SOCKET MOBILE, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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, 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 and Russia's military action against Ukraine;
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 provider 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 (CaptureSDK) to App providers, which enables them to provide their users
with our advanced barcode scanning features. Our products are integrated in App
providers' application solutions and are marketed by the App providers or the
resellers of their applications. The number of our registered App providers for
data capture applications continues to grow.

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SocketScan family. Our SocketScan family consists of the 700 Series (S700, S730,
S720, S740) companion scanners and 800 Series (S800, S820, S840, S860)
attachable scanners. 700 Series are available in multiple vivid colors: blue,
green, red, white, yellow and black. S720, a newly launched product, reads both
1D and 2D barcodes on paper and screen. It's a drop-in replacement for our most
sold S700, while adding QR code functionality. 800 Series, 1D linear imaging
(S800) and 2D (S820, 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.
S820, which was launched recently, provides a basic and affordable option for
those who wish to upgrade to 2D scanning.



DuraScan® Family. Our DuraScan® family consists of 700 Series (D700, D730, D
D740, D745, D750, D755, D760) companion scanners and 800 Series (D800, D820,
D840, D860) attachable scanners, which are designed to be durable barcode
scanners with IP54-rated outer casing to withstand tougher environments. D740 is
priced competitively with a 1D barcode scanner, making it the affordable 2D
option available in the market. D820, which was launched recently, provides a
basic and affordable option for those who wish to upgrade to 2D scanning. D745
and D755 are medical-grade, universal scanners. D760 and D860 include MRZ
(machine-readable zone) support, making it capable of scanning passports, visas
and other travel documents. D820, which was launched recently, provides a basic
and affordable option for those who wish to upgrade to 2D scanning.





DuraSled Family. Our DuraSled (DS800, DS820, DS840, DS860) 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 App-driven mobile
solutions. The DuraSled products are compatible with Apple, Samsung and Windows
devices. DS820, which was launched recently, provides a basic and affordable
option for those who wish to upgrade to 2D scanning.



 Contactless RFID/NFC reader writer.  Our contactless product line includes
D600, S550 and S370. 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. S370 supports both barcode scanning and Near Field Communication
(NFC) reading and writing technologies. It provides App providers the ability to
read both QR code-based and NFC-based credentials, which allows App providers to
accept multiple formats with one device. S370 can also read credentials
following ISO 18013-5, the Mobile Driver's License (mDL) standard being adopted
in many states and countries.

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SocketCam family. In Q1 2022, we announced our SocketCam product, C820, a
software-based barcode scanner, which offers a free, flexible, quick, and
reliable data capture solution to our App partners who can include the C820 in
their applications to provide free scanning to their end-users. The SocketCam
C820 is the first member of the SocketCam family and turns any mobile device
into a high-performance barcode scanner. App providers are challenged to service
a wide range of customers with various data capture requirements, from the
price-sensitive to the performance-sensitive, and even multiple data types. The
addition of the C820 seamlessly enables these diverse requirements. End-users
whose data capture requirements exceed the capabilities of the free camera-based
scanners will have the choice of purchasing a Socket Scanner or using an
advanced version of the camera-based scanner which is expected to be available
late 2022 or early 2023.



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 App providers to integrate our data capture capabilities into their
applications. With the installation of our data capture software, the App
providers' customers can choose any of our products that work best for them. Our
Capture SDK enables the App providers to modify captured data, control the
placement of the barcoded or RFID data in their applications, 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 App providers to integrate our data capture software into their
applications.



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 Fremont, 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 App providers 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, 2022, were
approximately $3.7 million and $16.1 million, respectively, a decrease of 41%
and 6%, respectively, from revenues of approximately $6.3 million and $17.1
million, respectively, in the comparable periods one year ago. The weaker end
user demand combined with the reduction of inventory in our distribution channel
affected our reported revenue even though the sales from our distribution
partners to end users were $4.8 million compared to our reported revenue of
$3.7
million.

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Gross Margins



Our gross profit margins on sales for the three and nine months ended September
30, 2022, were 44.4% and 48.7%, respectively, compared to gross margins of 54.2%
for the corresponding periods a year ago. The decrease in gross margin was
driven by persistent higher component and freight costs as well as the
allocation of manufacturing overhead costs across lower production volumes.

Research and Development Costs



Research and development expense in the three and nine months ended September
30, 2022 were approximately $1,096,000 and $3,271,000, respectively, an increase
of 8.1% and 12.1% compared to expenses of approximately $1,014,000 and
$2,918,000 in the corresponding periods a year ago. The increases were mainly
driven by hiring, as a continued commitment to research and development
activities which are essential to provide innovative new product offerings, to
provide engineering support for key customers, and to maintain our existing
products. We expect Q4 R&D expenses to be at the similar level as Q3.



Sales and Marketing Expense



Sales and marketing expense in the three and nine months ended September 30,
2022 were approximately $865,000 and $2,729,000, respectively, an increase of
9.7% and 25.0% compared to expense of approximately $788,000 and $2,182,000 in
the corresponding periods a year ago. The increase in expense was primarily
attributed to higher headcount and increased consulting in the external
professional services. We expect that sales and marketing expenses will stay at
the similar level for Q4.


General and Administrative Expenses



General and administrative expense in the three and nine months ended September
30, 2022 were approximately $641,000 and $2,113,000, respectively, a slight
decrease of 3.9% and 1.4% compared to expense of approximately $667,000 and
$2,142,000 in the corresponding periods a year ago. The decrease was primarily
due to reduced management variable compensation related poor financial
performance in Q3. We expect the general and administrative expenses will
increase in Q4 due to the celebration of Company's 30th anniversary.



Interest Expense, Net Interest Income



Interest expense, net of interest income, in the three and nine months ended
September 30, 2022 was approximately $43,000 and $134,000, respectively,
compared to approximately $50,000 and $150,000, respectively, in the same
periods one year ago. Interest expense in the three and nine months ended
September 30, 2022, 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, 2022. Interest expense in 2021 was
primarily related to interest on the secured subordinated convertible notes
payable and on the CalCap loan as well.

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  Index


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



We recorded an income tax benefit of $116,485 in Q3 and no income tax in the
nine months ended September 30, 2022. Our deferred tax asset, primarily
representing future income tax savings from the application of net operating
loss carry forwards, was valued at $7,960,419 on September 30, 2022. In the
three and nine months ended September 30, 2021, we recorded a net income tax
expense of $260,000 and an income tax benefit of $1.6 million primarily
attributed to the tax deduction resulting from the disqualified disposition
of
incentive stock options.



 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 (used in) provided by
operating activities was approximately ($30,212) and $1,183,000 in the first
nine months of 2022 and 2021, respectively. We calculate net cash provided by
(used in) operating activities by adjusting our net income (loss) (approximately
$428,000 of net loss and $3.47 million of net income in the first nine months of
2022 and 2021, respectively) with the items that did not require the use of
cash. Those items include stock-based compensation expense, depreciation and
amortization, amortization of debt discount, and deferred tax expenses
(benefits), and non-cash straight-line rent expense. These amounts totaled
approximately $1,735,000 and ($525,000) in the first nine months of 2022 and
2021, 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 2022, changes in operating assets and liabilities
resulted in net cash used in operating activities of approximately $1.3 million
which were primarily from increasing our inventory levels to cope with supply
issues and longer component lead times, decrease in accounts payable, operating
lease payment, increase in prepaid expenses and security deposit for the new
lease agreement. The use of cash was partially offset by decrease in accounts
receivable because of the lower shipment level due to weaker demand. 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 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.

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In the first nine months of 2022 and 2021, we have invested approx $911,000
again $563,000respectively, in computer software development, website development, and productivity tools.



Net cash used in financing activities was approximately $918,000 in the first
nine months of 2022, compared to net cash provided by financing activities was
approximately $2.61 million in the comparable period a year ago. Financing
activities in 2022 consisted primarily of approximately $654,000 repurchase of
treasury stock, $375,000 repayment of our term loan, partially offset by the
proceeds of employee stock options in the amount of $111,000. Financing
activities in the first nine months of 2021 consisted primarily of $1.86 million
of proceeds of employee stock options exercised and of $750,000 borrowed on
the
CalCap loan.


Key Accounting Standards



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 measures is contained in our Annual Report on Form 10-K for the fiscal year ended. December 31, 2021 filled with Securities and Exchange Commission.


Contractual Obligations



Our contractual cash obligations on September 30, 2022 are outlined in the table
below:



                                                           Payments Due by Period
                                                  Less than        1 to 3          4 to 5         More than
  Contractual Obligations          Total           1 year           years   

5 years

 Unconditional purchase
obligations with contract
manufacturers                  $  9,494,000     $ 9,012,000     $   482,000     $        -      $        -
 Operating lease                  4,568,000         565,000       1,279,000       1,352,000       1,372,000
 Total contractual
obligations                    $ 14,062,000     $ 9,577,000     $ 1,761,000     $ 1,352,000     $ 1,372,000




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Off-Balance Sheet Arrangements

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Since September 30, 2022we had no plans for an off-balance sheet as defined in Article 303 of the SK Act.

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