Quarterly Report for Quarter Ending September 30, 2026 (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

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 consumers with our advanced barcode scanning features. Our products are integrated by the app providers and are marketed by the app providers or their resellers. The number of app providers supporting our data capture solutions continues to grow.

XtremeScan family. Our XtremeScan product line consists of two configurations: XtremeScan, and XtremeScan Meg. This product family marks a significant milestone in our commitment to delivering high-quality data capture solutions for customers in industrial, manufacturing, warehousing, oil and gas, and airports. XtremeScan enables iPhones to withstand harsh industrial conditions, offering robust scanning capabilities with military-grade durability. XtremeScan Meg devices cater to the growing number of workers using a single phone for both personal and business needs. The Bring Your Own Device (BYOD) market is a significant yet underserved segment where we see strong growth potential. XtremeScan is fully compatible with iPhone 17e, a durable, cost-effective device designed for industrial environments. With an extra-long battery life, enhanced drop resistance, and the trusted iOS platform, it is expected to become the go-to device for demanding industrial sectors. XtremeScan, combined with iPhone 17e, will empower industrial businesses with durable, adaptable, and future-ready data capture technology.

SocketScan Family. Our SocketScan family offers a range of versatile solutions designed for seamless integration into various business applications. It includes the 300 Series countertop readers (S320, S370), the 500 Series NFC Mobile Wallet Reader (S550), the 700 Series companion scanners (S720, S730, S740), the 700 Series Bluetooth Low Energy scanners (S721, S741), and the 800 Series attachable scanners (S800, S820, S840, S860). With an easy setup process and user-friendly design, SocketScan enhances efficiency by delivering fast, high-performance 1D/2D scanning while reducing human errors. Whether scanning barcodes, reading NFC data, or handling combo applications, SocketScan ensures accuracy and reliability across diverse industries.

DuraScan® Family. Our DuraScan® family includes the 600 Series NFC & RFID readers (D600), 700 Series companion scanners (D720, D730, D740, D745, D755, D760, D762, D764, D765), 800 Series attachable scanners (D800, D820, D840, D860), and the Wearable 900 Series (DW930, DW940). Designed for rugged work environments, DuraScan data readers offer exceptional durability, making them ideal for industries such as warehousing, manufacturing, and distribution.

DuraSled Family. Our DuraSled (DS800, DS820, DS840, DS860) integrates a smartphone with a high-performance, protective barcode sled scanner, creating a one-handed solution. Designed for efficiency, these sled scanners offer native support with select Apple and Samsung smartphones, enabling full application control of a one-handed data collection experience.

Software Developer Kit (CaptureSDK). Our CaptureSDK supports all Socket Mobile data capture devices through a single integration, simplifying the process for app developers to incorporate our data capture capabilities into their applications. By installing our SDK, developers enable their customers to select the most suitable Socket Mobile products for their needs. CaptureSDK allows developers to modify captured data, control the placement of barcode or RFID data within their applications, and manage user feedback to confirm successful transactions and data transmissions. Additionally, CaptureSDK includes SocketCam, a feature that enables the use of a device's built-in camera for occasional or lower-volume data collection requirements. CaptureSDK is compatible with development tools such as Swift Package Manager, Maven, and NuGet, and supports high-level frameworks including MAUI, React Native, Java, JavaScript, and Flutter, facilitating seamless integration of our data capture solutions into diverse applications.

SocketCam Family. Our camera-based barcode scanning software includes SocketCam C820 and C860, compatible with both iOS and Android. The C820 is a free, easily integrated camera scanning solution, while the C860 offers a significant upgrade for users with advanced scanning needs. The C860 stands out due to its swift and accurate reading of damaged barcodes and exceptional performance in poor lighting conditions, setting it apart in the industry. Both C820 and C860 enable App providers to serve a wide range of customers with diverse data capture requirements, from price-sensitive to performance-sensitive. End-users needing more than a free camera-based scanners can upgrade to advanced C860 or opt for a Socket hardware scanner.

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 app 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 2026 were approximately $3.4 million, a 9% increase from $3.1 million in the same period last year, reflecting signs of revenue stabilization during the quarter. For the nine months ended September 30, 2026, total revenues were approximately $10.1 million, compared with $11.1 million for the same period in 2025, a decrease of 9%, primarily due to lower revenues in the first half of 2026.

Gross Margins

Gross margin was 48.6% in the third quarter of 2026, compared with 47.7% in the same period last year, reflecting favorable product mix and improved cost management. For the nine months ended September 30, 2026, gross margin was 48.9%, compared with 49.5% for the same period in 2025, a decrease primarily attributable to lower sales volume and the resulting impact of manufacturing overhead on gross margin.

Research and Development Expense

Research and development expenses were approximately $930,000 in the third quarter of 2026, a 9% decrease from approximately $1.03 million in the same period last year. For the nine months ended September 30, 2026, research and development expenses were approximately $3.07 million, a 6% decrease from $3.26 million for the same period in 2025. The decrease was primarily attributable to lower employee-related costs resulting from the Company's ongoing cost management initiatives.

Sales and Marketing Expense

Sales and marketing expenses were approximately $600,000 in the third quarter of 2026, a 36% decrease from approximately $935,000 in the same period last year. For the nine months ended September 30, 2026, sales and marketing expenses were approximately $2.31 million, a 25% decrease from $3.07 million for the same period in 2025. The decrease primarily reflected the Company's cost reduction initiatives, including selective headcount reductions and other cost-saving measures, as well as lower travel and marketing-related expenses.

General and Administrative Expense

General and administrative expenses were approximately $761,000 in the third quarter of 2026, compared with approximately $577,000 in the same period last year, an increase of 32%. For the nine months ended September 30, 2026, general and administrative expenses were approximately $2.17 million, a 20% increase from $1.80 million for the same period in 2025. The increase was primarily due to higher legal and personnel-related costs, including severance and PTO expenses, changes in the allocation of executive compensation, and increased equity compensation expense.

Interest Expense, Net of Interest Income

Interest expense and other, net of interest income and other, was approximately $146,000 in the third quarter of 2026 compared to $140,000 in the third quarter of 2025. For the nine months ended September 30, 2026, interest expense, net was approximately $437,000, compared with $355,000 for the same period in 2025. Interest expenses in both 2026 and 2025 were related to interest on secured subordinated convertible notes payable (see "NOTE 6 - Secured Subordinated Convertible Notes Payable" for more information).

There were no outstanding balances of credit lines during the three and nine months ended September 30, 2026 and 2025.

Interest income reflects interest earned on cash balances. Interest income was nominal in each of the comparable periods, reflecting low average cash balances and low rates of return.

Income Taxes

No income tax expense was recorded for the three and nine months ended September 30, 2026 or 2025.

Liquidity and Capital Resources

As reflected in our Statements of Cash Flows, net cash used in operating activities was approximately $570,000 in the first nine months of 2026, compared to net cash used in operating activities of approximately $1,600,000 in the first nine months of 2025. We calculate net cash used in operating activities by adjusting our net loss (approximately a net loss of approximately $3.03 million and $3.0 million in the first nine months of 2026 and 2025, 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 $1.7 million and $1.9 million in the first nine months of 2026 and 2025, 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.

During the first nine months of 2026, changes in operating assets and liabilities provided approximately $756,000 in cash, primarily driven by reductions in inventory and accounts receivable, and increases in deferred revenue. These cash inflows were partially offset by payments of operating lease liabilities and a reduction in accrued payroll and related expenses.

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 2026 and 2025, we invested approximately $314,000 and $376,000, respectively, in manufacturing tooling, firmware development, website development, and leasehold improvements.

Net cash provided by financing activities was approximately $255,000 in the first nine months of 2026, compared to net cash provided of approximately $1.5 million in the comparable period a year ago. In 2026, financing activities consisted of the completion of secured subordinated note financing of $500,000, bridge financing totaling $425,000, proceeds of employee stock options exercised in the amount of $4,592, and offset by the repayments of subordinated notes payable totaling $675,000. In contrast, financing activities in 2025 consisted of the completion of secured subordinated note financing of $1,500,000.

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, 2025 filed with the Securities and Exchange Commission.

Contractual Obligations

Our contractual cash obligations on September 30, 2026 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		$	3,208,000			$	3,181,000			$	27,000			$	-			$	-
Operating lease			2,116,000				689,000				1,427,000				-				-
Total contractual obligations		$	5,324,000			$	3,870,000			$	1,454,000			$	-			$	-

Off-Balance Sheet Arrangements

As of September 30, 2026, we had no off-balance sheet arrangements as defined in Item 303 of Regulation S-K.