See accompanying notes to condensed financial statements.

See accompanying notes to condensed financial statements.

See accompanying notes to condensed financial statements.

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2022

 See accompanying notes to condensed financial statements.

SOCKET MOBILE, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 See accompanying notes to condensed financial statements.

 See accompanying notes to condensed financial statements.

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

June 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, 2020.2021.

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 June 30, 2021On March 31, 2022, and December 31, 2020,2021, 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)

June 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 June 30, 2021,On March 31, 2022, the deferred revenue and deferred cost on shipments to distributors were $529,973370,768 and $179,267152,418, respectively, compared to $450,591407,235 and $170,016158,977, respectively, aton December 31, 2020.2021.

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2022

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 June 30,March 31, 2022 and 2021, and 2020, SocketCare revenue was approximately $6,7005,400 and $8,6007,400, 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 June 30, 2021,On March 31, 2022, the balance of unrecognized SocketCare service revenue was approximately $40,80042,000.

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 June 30, 2021,On March 31, 2022, the balances of right-of-use assets and liabilities for the operating lease were$were $413,810106,417 and $508,328130,047, respectively, compared to $609,331210,839 and $741,351258,097, respectively, aton December 31, 2020.2021.

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.

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2021

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.

NaN impairment of goodwill was recorded in the quarter ended June 30, 2021.

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 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.

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2022

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 184,332 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 $10.85 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 $7.65 on March 29, 2021. On April 20, 2021, the Company agreed to pay SpringCard the sum of $192,293$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 initial valuecarrying amount, net of amortization of $1,877,6091,782,137. as of March 31, 2022.

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

June 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:

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 June 30, 2021on March 31, 2022 and December 31, 20202021 were as follows:

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2022

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 Amended and Restated Business Financing Agreement with the Bank which extends 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 Amended and Restated 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 thean annual interest rate of less than 10% and, such debt maturing in no sooner than 3 years.

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

June 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 agreementFinancing Agreement increased the Company’s Domestic Line of Credit to $3,000,000,$3.0 million, including a $2,000,0002.0 million revolving facility and a $1,000,0001.0 million nonformula loan. The $1,000,000$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.

First Financing Agreement

On February 9, 2022, the Company entered into the First Business Financing Modification Agreement with the Bank. The Bank consented to the share repurchase program of up to $1.8 million. Future audit of accounts receivables will be performed once every twelve months. The Bank increased the credit limit for business credit cards to $250,000.

Amounts outstanding under the CalCap loan at June 30, 2021Loan as of March 31, 2022 are as follows:

During the six months ended June 30, 2020, total repayment of the term loan, initiated in March 2018, was $250,000. Total amount borrowed under the domestic and international lines was $4,630,000 and the total repayment was $5,592.449.

Interest expense on the CalCap loanLoan for the three and six months ended June 30,March 31, 2022 and 2021 was $11,5806,667 and $17,5525,972, respectively. Accrued interest payable related to the amounts outstanding under the CalCap loanLoan at June 30, 2021March 31, 2022 was $2,4311,493. Interest expense on the term loan for the three and six months ended June 30, 2020 was $1,896 and $5,922, respectively. Interest expense on the amounts drawn under the Company’s bank credit lines during the three and six months ended June 30, 2020 was $3,783 and $19,384, respectively.

NOTE 6 — Secured Subordinated Convertible Notes Payable

On August 31, 2020, the Company completed a secured subordinated convertible note financing of $1,530,000,$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.

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2022

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 notesNotes is payable quarterly in cash. The holder of each noteNote may require the Company to repay the principal amount of the noteNote 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 notesNotes 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 payable.Notes. The notesNotes 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)

June 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 payable,Notes, and the amortization expense is reported as interest expense. The amortization of debt discount for sixthree months ended June 30, 2021March 31, 2022 was $16,5468,273. The remaining debt discount of $71,69746,879 will be amortized through August 30,31, 2023.

During the six months ended June 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 convertible notesNotes for the three and six months ended June 30,March 31, 2022 and 2021 was $43,17742,793.29 and $87,72144,543.97, respectively.

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 six months ended June 30,March 31, 2022 and 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)

June 30, 2021March 31, 2022

Major Customers

Customers who accounted for at least 10% of the Company’s total revenues for the three and six months ended June 30,March 31, 2022 and 2021 and 2020 were as follows:

*Customer accounted for less than 10% of the Company’s total revenue

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 June 30, 2021on March 31, 2022 and December 31, 20202021 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 June 30,March 31, 2022 and 2021, and 2020, the top twothree suppliers accounted for 4653% and 54%, respectively, of inventory purchases. As of June 30, 2021March 31, 2022 and December 31, 2020,2021, 1927% and 1520%, respectively, of the Company’s accounts payable balances were concentrated with a single supplier.top two suppliers.

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.

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2022

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 182,000no stock options granted duringfor the sixthree months ended June 30, 2021, compared to 37,000 stock options for the six months ended June 30, 2020.March 31, 2022 and 2021.

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2021

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 sixthree months ended June 30,March 31, 2022 and 2021, and 2020, the Company awarded 302,425233,800 and 293,000285,950 shares of restricted stock, respectively. As of June 30, 2021,March 31, 2022, there were 742,131755,703 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. In Q1 2022, 109,222 shares of restricted stock were issued to employees through vesting. Market value of the vested shares is subject to tax withholding. To cover payroll taxes, 26,157 vested shares were retired, and market value of the retired shares, $115,215 was recorded as a tax liability and an adjustment to additional paid-in capital as of March 31, 2022.

Total stock-based compensation expense for the three and six months ended June 30,March 31, 2022 and 2021, was $172,008223,446 and $320,780148,772, respectively, compared to expense of $131,369 and $263,434 in the corresponding periods a year ago.respectively.

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:

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2021March 31, 2022

In the three and six months ended June 30, 2021,March 31, 2022, the shares used in computing diluted net loss per share do not include 45,000287,928 stock options, 50,000 warrants and 50,000958,904 warrants were excluded in the calculation of diluted net income per shareshares related to convertible notes payable as their effect would have beenbe anti-dilutive.

In the three and six months ended June 30, 2020,March 31, 2021, 2,259,93750,000 stock optionswarrants and 394,5061,007,081 shares of restricted stockrelated to convertible notes payable were excluded in the calculation of diluted net loss per share because their effect would have beenbe anti-dilutive.

NOTE 10 — Income Taxes

In the first half of 2021,Q1 2022, the differences between the financial income and taxable income included aexcess tax deductionbenefits of $7.97369,526 million resulting fromdue to the disqualified dispositiondifferences between restricted stock expenses recognized throughout the compensation period and actual tax benefit calculated based on the fair value of incentive stock optionsthe award when restricted stocks vested, and stock-based compensation of $320,780223,446, which resulted in a taxable lossincome of $6.69272,018 million.. The Company recorded a netan income tax benefitexpense of approximately $1.9 million for the first half of 2021 with the expectation of full utilization of its net operating loss carryforwards.$76,165 in Q1 2022 compared to $489 in Q1 2021.

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

The Company recorded no deferred tax benefit for the losses in the six months ended June 30, 2020.(Unaudited)

March 31, 2022

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 annually on JulyIn February 2022, the Company entered into an 87-month lease agreement in Fremont, CA effective May 1,^st of each year. 2022. The new space is approximately 35,913 square feet and will serve as the location for the Company’s new Corporate Headquarters, including office space and manufacturing. The Company will account for this lease as an operating lease under ASC 842.

In June 2020, the Company also signed a two-year equipment operating lease agreement. The Company will pay $1,519 in monthly installments starting in September of 2020 through June 2022.

The operating lease expense under existing agreement was allocated in cost of goods sold and operating costs based on department headcount and amounted to $In January 2019,107,218 and $107,765 for the Company adopted ASU 2016-02, Leases (Topic 842)three-month periods ended March 31, 2022 and recognized a right-to-use asset and a lease liability using a discount rate of 6.25% per annum. 2021, respectively.

On June 30, 2021,March 31, 2022, the balances of right-of-use assets and liabilities for the operating lease were approximately $0.11$413,810 million and $508,3280.13, million, respectively, compared to approximately $609,3310.21 million and $741,3510.26, million, respectively, aton December 31, 2020.

The Newark office space lease expense was $107,218 and $214,437 for the three and six months ended June 30, 2021, respectively.

SOCKET MOBILE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

June 30, 20212021.

Cash payments included in the measurement of the Company’s operating lease liabilities were $126,516132,010 and $253,032126,516 for the three and six months ended June 30,March 31, 2022 and 2021, respectively, compared to $117,268 and $234,537, respectively, for the corresponding prior year periods.respectively.

Future minimum lease payments under the operating lease at June 30, 2021on March 31, 2022 are shown below:

Purchase Commitments

As of June 30, 2021,March 31, 2022, the Company has non-cancelable purchase commitments for inventory to be used in the ordinary course of business of approximately $10,858,00013,137,000.

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)

March 31, 2022

NOTE 12 — Subsequent Events

The Company evaluated subsequent events and transactions that occurred between JulyApril 1, 20212022 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.

90,913 shares of common stock were repurchased from the market at the average price of $4.11.

The Company issued 17,500 shares of common stock upon the exercise of stock options.

4,00090,000 shares of restricted stock were granted from the 2004 Equity Incentive Plan.

The Company issued 35,129 shares of common stock upon the exercise of stock options.

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,1include, 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;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 productsProducts

We are a leading innovatorprovider 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)(CaptureSDK) to application developers,providers, 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 developersproviders or the resellers of their applications. The number of our registered developersapplication providers for data capture applications continues to grow.

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 developerapplication providers to integrate our data capture capabilities into their application. With the installation of our data capture software, the developers’application providers’ customers can choose any of our products that work best for them. Our Capture SDK enables the developerapplication providers 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.

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 application 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. Application developers 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 in the second half of 2022.

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 six months ended June 30, 2021, werefirst quarter of 2022, was approximately $6.0$6.3 million, and $10.8 million, respectively, an increase of 119% and 55%, respectively, from revenues31% compared to the revenue of approximately $2.7$4.8 million and $6.9 million, respectively, infor the comparable periods onesame quarter year ago. The key driver ofincreases in revenues were from both the revenue increase forrun rate business through the threedistribution channel and six months ended June 30, 2021, wasthe large customers, driven by the deployment of business applications, particularly in retail as the economy re-opens following the easing of COVID-19 restrictions.re-opens.

Gross Margins

Our gross profit margins on sales for the three and six months ended June 30, 2021 were 55% and 54%, respectively, compared to gross margins of 50% and 52% for the corresponding periods a year ago. The improvement in margins was primarily attributed to higher revenues and the absorption of fixed manufacturing overhead.

Gross Margins

Our gross profit margins on sales decreased slightly to 49.7% for the first quarter of 2022 compared to 53.5% for the same period a year ago. The margin decrease in the first quarter of 2022 compared with the same period last year was primarily due to rising component costs and higher freight costs.

Research and Development Expense

Research and development expenseEngineering expenses in the three and six months ended June 30, 2021first quarter of 2022 were approximately $972,000 and $1,903,000, respectively,$1,054,000, an increase of 13% and 9% compared to expensesexpense of approximately $860,000 and $1,741,000$931,000 in the corresponding periods a year ago.Q1 2021. The increase was primarily due to variable compensation related to improved overall company performance and the amortization and depreciation expenses of newly acquired intangible asset and equipment. We believeincreases were mainly driven by hiring, as a continued commitment to research and development activities iswhich are essential to maintain or achieve a leadership position for our existing products, provide innovative new product offerings, andto provide engineering support for key customers.customers, and to maintain our existing products. 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 expenseexpenses in the three and six months ended June 30, 2021first quarter of 2022 were approximately $734,000 and $1,395,000, respectively,$900,000, an increase of 2% and a decrease of 6%36% compared to expense of approximately $722,000 and $1,490,000$660,000 in the corresponding periodssame quarter a year ago. The increase in expense quarter over quarter was primarily attributeddue to the developmenthiring of a new RMA portal. The decrease of expense during the first half of 2021 was primarily due to lower personnel costs reflecting the department change of severaladditional employees. We expect that sales and marketing expenses will increasestay at the similar level for the rest of the year as we continue improving our website and increasing brand and product awareness and customer base outside retail.year.

General and Administrative Expense

General and administrative expense in the three and six months ended June 30, 2021 werefirst quarter of 2022 was approximately $734,000 and $1,475,000, respectively, an increase$710,000, a decrease of 25% and 18%4% compared to expense of approximately $590,000 and $1,256,000$741,000 in the corresponding periods a year ago.first quarter of 2021. The increasedecrease was primarily due to variablelower employee incentive-based compensation related to improved overall companyexpense associated with financial performance and higher professional fees associated with the filing of a shelf registration statement.temporary lower headcount.

Interest Expense, Net of Interest Income

Interest expense and other, net of interest income and other, was approximately $46,000 in the three and six months ended June 30, 2021 was approximately $51,000 and $100,000, respectively,first quarter of 2022 compared to approximately $8,100 and $27,600, respectively,$49,000 in the same periods one year ago.first quarter of 2021. Interest expense in the three and six months ended June 30, 2021first quarter of 2022 was primarily 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). There were no outstanding balances of our bank term loan and credit lines during the first three months of 2022. Interest expense in 2021 was primarily related to interest on secured subordinated convertible notes payable and on the CalCap loan.Loan. Our credit lines had no outstanding balances during the three and six months ended June 30, 2021. Interest expense in 2020 was primarily related to interest on bank term loan and credit line facilities.March 31, 2022.

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 and six months ended June 30, 2021, weWe recorded a net income tax benefitexpense of $1.86 million primarily attributed to the tax deduction of $7.97 million resulting from the disqualified disposition of incentive stock options as of June 30, 2021. We recorded no deferred tax benefit$76,165 and $489 for the loss in the threefirst quarter of 2022 and six months ended June 30, 2020.2021, respectively. Our deferred tax asset, primarily representing future income tax savings from the application of net operating loss carry forwards, was valued at $7.38 million as of June 30, 2021.$7,884,254 on March 31, 2022.

 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 Condensed Statements of Cash Flows, net cash provided byused in operating activities was approximately $450,000$452,413 in the first half of 2021,quarter 2022, compared to net cash provided by operating activities of approximately $244,000$291,236 in the comparable period a year ago. We calculate net cash used in or provided by (used in) operating activities by increasing our net income (approximately $2,830,000($341,933 and $202,902 in the first halfquarter of 2021) or2022 and 2021, respectively) by decreasing our net loss (approximately $858,000 in the first half of 2020) by thethose expenses such as stock-based compensation expense, depreciation, amortization and deferred tax expense, that did not require the use of cash. These items consist of stock-based compensation expense, depreciation and amortization, amortization of debt discount, and deferred tax expenses and benefits. These amounts totaled approximately ($1,180,000)$509,623 and $554,000$321,062 in the first halfquarters of 20212022 and 2020,2021, 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 halfquarter of 2022, changes in operating assets and liabilities resulted in a net use of cash of $1,303,969 and were primarily from increases in accounts receivables driven by higher shipment levels and from the security deposit for the lease of our new office building. In the first quarter of 2021, changes in operating assets and liabilities resulted in a net use of cash used in operating activities of approximately $1.2 million which$232,728 and were primarily from increasing ourincreased inventory levels in order tolevel with which we cope with supply issues and component longer component lead times for the remainder of 2021,time, and increased accounts receivable driven by higher shipment levels in the second quarter of 2021 and increased prepaid expenses.receivables. The uses of cash were partially offset by increases in accrued payroll and related expenses related to an improvement in overall profitability, and by increases in accounts payable, driven primarily by increased inventory purchases.

In the first halfquarters of 2020, changes in operating assets2022 and liabilities resulted in net cash provided by operating activities of approximately $549,000 which was primarily due to decreases in accounts receivable resulting from the lower shipments in the second quarter of 2020.