Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

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, but are not limited to: volatility in the world economy generally and in the markets we serve in particular, including the impact of 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 application 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 providers or the resellers of their applications. The number of our registered application providers for data capture applications continues to grow.

XtremeScan Family. XtremeScan combines the versatility and user-friendliness of iPhones with the ruggedness and top-of-the-line protection required for extreme, industrial work environments. XtremeScan Case XC100 offers ultimate iPhone protection with its rugged outer shell and fully enclosed, rubberized shielding for maximum durability. It's the toughest iPhone case on the market, offering military-grade protection against drops, dirt, water, and even more unpredictable elements found in harsh industrial environments. XtremeScan XS930 & XS940 are built upon the XtremeScan Case and provide the same rugged iPhone protection, adding a high-performance Socket Mobile data reader. With both 1D (XS930) and powerful 1D/2D (XS940) options, these data readers can scan through various types of packaging materials under different lighting conditions. They provide the perfect solution for users who wish to utilize iPhones for data capture within rough, industrial settings. XtremeScan Grip XG930 & XG940 provides 1D or 1D/2D barcode scanning capabilities and builds even further on the XS by providing an added pistol grip handle. The ergonomic grip enables an easy point-and-shoot approach and comfort during extended scanning sessions. In March 2025, the Company released XtremeScan iXG and iXS Series, powered by iOS 18.3 and featuring a fully integrated iPhone 16e. These devices are designed to serve as full-featured handheld computers, combining high-performance long-range barcode scanning with the connectivity, app ecosystem, and user-friendly interface of the iOS platform.

SocketScan Family. Our SocketScan family consists of the 300 Series (S320), 700 Series (S700, S720, S730, S740) companion scanners, and 800 Series (S800, S820, S840, S860) attachable scanners. The S320 is a compact reader designed specifically for reading QR codes, making it ideal for applications such as access control, ticketing, and event check-in. The 700 Series are available in multiple vivid colors: blue, green, red, white, yellow, and black. The S720 reads both 1D and 2D barcodes on paper and screen, serving as a drop-in replacement for our previously popular S700 model while also adding QR code functionality. The 800 Series comprises 1D linear imaging (S800) and 2D (S820, S840, S860) scanners, which can be easily clipped onto smartphones, tablets, and other mobile devices using an easily detachable clip or DuraCase, creating a one-handed solution. The S860 includes MRZ (machine-readable zone) support, allowing it to scan passports, visas, and other travel documents in addition to barcodes. Additionally, the 800 Series scanners may be used as stand-alone devices as well.

DuraScan® Family. Our DuraScan® family comprises the 700 Series (D700, D720, D730, D740, D745, D755, D760, D762) companion scanners, the 800 Series (D800, D820, D840, D860) attachable scanners, and the Wearable Series (DW930, DW940), all designed with IP54-rated durable casings to withstand challenging environments. The D720 offers an affordable entry point into 2D scanning, while the D820 provides a basic and cost-effective upgrade to 2D capabilities. The D745 and D755 are medical-grade, universal scanners suitable for healthcare settings. The D760 and D860 include MRZ (machine-readable zone) support, enabling the scanning of passports, visas, and other travel documents. The newly introduced D762 enhances the lineup with an extended scanning range of up to 14 feet, making it ideal for logistics and warehouse operations where scanning from a distance is beneficial. Additionally, the 800 Series scanners can function as stand-alone devices, offering flexibility across various applications. DuraScan Wear DW930 & DW940 are the first wearable additions to the DuraScan Product Family, introducing a new era of innovative scanning technologies for the Company. The DW930 offers 1D laser scanning technology, while the DW940 provides powerful 1D/2D barcode scanning functionality. Their glove-like, wearable design allows workers to use both hands freely, enhancing speed and flexibility. This makes them perfect for scanning in industries such as warehousing, manufacturing, and distribution.

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 and Samsung devices. The DS820 provides a basic and affordable option for those who wish to upgrade to 2D scanning.

NFC & RFID Contactless Reader/Writer. The product line consists of the D600, S550 and S370. The D600 is an ergonomically handheld model with an IP54-rated outer casing that can read and write various types of electronic SmartTags or transfer data with near-field communication. The S550 is a contactless membership card reader/writer designed for tap-and-go smart card and Near Field Communication ("NFC") applications. The S370 supports both barcode scanning and NFC reading and writing technologies. It provides App providers the ability to read both QR code-based and NFC-based credentials, enabling them to accept multiple formats with just one device. Additionally, the S370 can read credentials following ISO 18013-5, the Mobile Driver's License (mDL) standard being adopted in some states and countries.

SocketCam Family. Our camera-based barcode scanning software includes SocketCam C820 and C860 for both iOS and Android. The C820 is a free, easily integrated camera scanning solution. The C860 offers a significant upgrade for users with advanced scanning needs. It stands out due to its swift and accurate reading of damaged barcodes, coupled with exceptional performance in poor lighting conditions, setting it apart from others in the industry. The C820 and C860 enable App providers to service a wide range of customers with various data capture requirements, from price-sensitive to performance-sensitive. End-users whose data capture requirements exceed the capabilities of the free camera-based scanners will have the choice of upgrading to an advanced camera-based scanner, C860, or purchase a Socket hardware scanner.

Software Developer Kit (CaptureSDK). Our Software Developer Kit (CaptureSDK) 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 CaptureSDK 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 were successfully completed. Our CaptureSDK 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 CaptureSDK uses tools integrated with software building environments such as Swift Package Manager, Maven and NuGet, adds support for high-level frameworks such as MAUI, ReactNative, Java, JavaScript, and Flutter 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 subcontract the manufacturing of all our product components to independent third-party contract manufacturers located in the United States, Mexico, Taiwan, Singapore, Malaysia and China that have the equipment, know-how and capacity to manufacture products to our specifications. We perform final product assembly, testing 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 online resellers around the world including application providers who resell their own solutions along with our data capture products. Our products are also available on our online stores.

We believe growth in mobile applications and the mobile workforce 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, builds 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 third quarter of 2025 were approximately $3.1 million, representing a 20% decline compared to $3.9 million in the same period last year. For the nine-month period, revenue decreased by 20.2% to approximately $11.1 million from $13.9 million in the prior year. The decrease primarily reflects slower distributor bookings and reduced channel inventory during the quarter. In addition, several deployment deals were delayed as customers remained cautious with spending and focused on cash preservation

Gross Margins

Our gross profit margin on sales reached 47.7% in Q3 2025, slightly lower from 49% in the same period last year. For the nine-month period, the margin was 49.5%, down from 50.1% in 2024. The decline primarily reflects the impact of fixed overhead costs spread over a lower revenue base.

Research and Development Expense

Research and development expense in the three and nine months ended September 30, 2025, were approximately $1.0 million and $3.3 million, respectively, representing decreases of 12% and 10% compared to $1.2 million and $3.6 million in the corresponding periods a year ago. The reduction in expenses primarily reflects management-implemented cost-saving measures which resulted in lower employee costs. We anticipate a slight increase in the general and administrative expenses for the remainder of the year.

Sales and Marketing Expense

Sales and marketing expenses in the three and nine months ended September 30, 2025, were approximately $0.9 million and $3.1 million, respectively, representing decreases of 17% and 7% compared to $1.1 million and $3.3 million in the corresponding periods a year ago. The reduction was primarily driven by cost-cutting initiatives, particularly lower employee-related costs. We anticipate a slight increase in the general and administrative expenses for the remainder of the year.

General and Administrative Expense

General and administrative expenses in the three and nine months ended September 30, 2025 were approximately $0.58 million and $1.8 million, respectively, representing a decrease of 10% and 15% compared to expenses of approximately $0.64 million and $2.1 million in the corresponding periods a year ago. The reduction was primarily driven by cost-cutting initiatives, including lower employee-related costs and reduced spending on outside professional services. We anticipate a slight decrease in the general and administrative expenses for the remainder of the year.

Interest Expense, Net of Interest Income

Interest expense, net of interest income, in the three and nine months ended September 30, 2025 was approximately $140,000 and $355,000, respectively, compared to approximately $84,000 and $229,000, respectively, in the same periods one year ago. Interest expense 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).

There were no outstanding balances of credit lines during the three and nine months ended September 30, 2025 and 2024.

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 did not record any income tax expense for the three and nine months ended September 30, 2025 and 2024. As of September 30, 2025 and December 31, 2024, our deferred tax assets, primarily representing future income tax savings from the application of net operating loss carry forwards, were valued at $10,663,419 and $10,663,419, respectively.

Liquidity and Capital Resources

As reflected in our Statements of Cash Flows, net cash used in operating activities was approximately $1,600,000 in the first nine months of 2025, compared to net cash used in operating activities of approximately $434,000 in the first nine months of 2024. We calculate net cash used in operating activities by adjusting our net loss (approximately a net loss of approximately $3.0 million and $2.3 million in the first nine months of 2025 and 2024, respectively) with items that did not require the use of cash. Those items include stock-based compensation expense, depreciation and amortization of equipment and intangible assets, amortization of debt discount and operating lease ROU assets, and deferred tax benefits. These amounts totaled approximately $1.9 million and $2.0 million in the first nine months of 2025 and 2024, 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 2025, changes in operating assets and liabilities resulted in net cash used in operating activities of approximately $513,000, primarily due to operating lease payments, a reduction in accrued payroll expenses, an increase in prepaid expenses, and a decrease in accounts payable. These uses of cash were partially offset by cash released from lower inventory balance as of September 30, 2025.

In the first nine months of 2024, changes in operating assets and liabilities resulted in net cash used in operating activities of approximately $120,000, primarily due to operating lease payments. This was partially offset by a release of cash from a reduced accounts receivable balance as of September 30, resulting from lower shipment levels at the end of the quarter.

In the first nine months of 2025 and 2024, we invested approximately $376,000 and $564,000, respectively, in manufacturing tooling, firmware development, website development, and leasehold improvements. In 2024, these investing activities were offset by proceeds from a tenant improvements allowance amounting to $72,800.

Net cash provided by financing activities was approximately $1.5 million in the first nine months of 2025, compared to net cash provided of approximately $1.0 million in the comparable period a year ago. In 2025, financing activities consisted of the completion of secured subordinated note financing of $1,500,000. In contrast, financing activities in 2024 consisted primarily of the completion of secured subordinated note financing of approximately $989,000, and the proceeds of employee stock options in the amount of $23,750.

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, 2024 filed with the Securities and Exchange Commission.

Contractual Obligations

Our contractual cash obligations on September 30, 2025 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		$	3,358,000			$	3,358,000			$	-			$	-			$	-
Operating lease			2,675,000				672,000				1,397,000				606,000				-
Total contractual obligations		$	6,033,000			$	4,030,000			$	1,397,000			$	606,000			$	-

Off-Balance Sheet Arrangements

As of September 30, 2025, we had no off-balance sheet arrangements as defined in Item 303 of Regulation S-K.