| NOTE 12 — Subsequent Events | NOTE 12 — Subsequent Events On October 30, 2024, the Company entered into the
Fifth Business Financing Modification Agreement with the Bank. This agreement amended the minimum quarterly adjusted EBITDA covenants
to negative $600,000 for Q3 2024 and negative $200,000 for Q4 2024. 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 SocketCam family DuraScan® Family 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. SocketScan family DuraSled Family 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 D NFC & RFID Contactless Reader/Writer.
Software Developer Kit (CaptureSDK) 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 quarter ended September 30,
2024, were approximately $3.9 million, an increase of 21% compared to the same period in 2023, which reported $3.2 million. For the nine-month
period, revenue increased by 10.3% to approximately $13.9 million from $12.6 million in the prior year. Revenue growth over the past three
and nine months was primarily driven by increases in run-rate business during 2024 compared to the same periods in 2023. Gross Margins For the quarter ended September 30, 2024, our gross
profit margin was 49%, compared to 44.2% in the prior year. For the nine-month period, the margin was 50.1%, up from 48.6% in 2023. The
improvement in the gross margin is primarily attributed to allocation of manufacturing overhead costs across higher shipments during 2024
compared to the same periods in 2023. Research and Development Expense Research and development expense in the three
and nine months ended September 30, 2024, were approximately $1.2 million and $3.6 million, respectively, representing a decrease of
4% and 1% compared to expenses of approximately $1.2 million and $3.6 million in the corresponding periods a year ago. The reduction
in Q3 2024 is primarily due to a decrease in headcount, leading to lower payroll and related costs. The reduction in nine months of
2024 is primarily due to savings on external consulting services that were required during the development of new product in 2023.
We anticipate a modest increase for the remainder of the year. Sales and Marketing Expense Sales and marketing expenses in the three and
nine months ended September 30, 2024, were approximately $1.1 million and $3.3 million, respectively, representing an increase of 12%
and 10% compared to expense of approximately $1.0 million and $3.0 million in the corresponding periods a year ago. The increase is
primarily attributed to new hires and the cost-of-living adjustments implemented in Q2 2024. We anticipate a modest increase for the
remainder of the year. General and Administrative Expense General and administrative expense in the three
and nine months ended September 30, 2024 were approximately $644,000 and $2.1 million, respectively, representing an increase of 6%
and a decrease of 0.12% compared to expense of approximately $608,000 and $2.1 million in the corresponding periods a year ago. The
increase is primarily attributed to the cost-of-living adjustments implemented in Q2 2024. We anticipate a slight increase in the
general and administrative expenses for the remaining of the year. Interest Expense, Net of Interest Income Interest expense, net of interest income, in the three
and nine months ended September 30, 2024 was approximately $84,000 and $229,000, respectively, compared to approximately $76,000 and $170,000,
respectively, in the same periods one year ago. Interest expense in the three and nine months ended September 30, 2024, 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). Our credit lines had no outstanding balances during the three
and nine months ended September 30, 2024. Interest expense in the three and nine months ended September 30, 2023, 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. The increase in interest expense is due
to the new convertible notes issued in August 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 In the three and nine months ended September 30,
2024, we did not record any income tax expense. As of September 30, 2024, our deferred tax asset, primarily representing future
income tax savings from the application of net operating loss carry forwards, was valued at approximately $10.1 million. In the three
and nine months ended September 30, 2023, we recorded an income tax benefit of $150,000 and an income tax expense of $16,000. As of
December 31, 2023, our deferred tax asset was valued at approximately $10.1 million. Liquidity and Capital Resources As reflected in our Statements of Cash Flows,
net cash used in operating activities was approximately $434,000 in the first nine months of 2024, compared to net cash used in
operating activities of approximately $523,000 in the first nine months of 2023. We calculate net cash used in operating activities
by adjusting our net loss (approximately a net loss of approximately $2.3 million and $2.8 million in the first nine months of 2024
and 2023, 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 $2.0 million and $2.0 million in the first nine months of 2024 and 2023,
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 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 2023, changes in operating
assets and liabilities resulted in net cash provided by operating activities of approximately $365,000, primarily stemming from reduced
levels of accounts receivable. The increased cash flow was partially offset by the paydown of accounts payable and accrued expenses, along
with operating lease payment. In the first nine months of 2024 and 2023, we invested
approximately $564,000 and $1.5 million, 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 $1.0 million in the first nine months of 2024, compared to net cash provided
of approximately $1.5 million in the comparable period a year ago. In 2024, financing activities 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. In contrast, financing activities in 2023 consisted primarily of the completion of secured subordinated note
financing of approximately $1.6 million, and the proceeds of employee stock options in the amount of $212,815. These were partially
offset by the repurchase of treasury stock amounting to approximately $208,000 and the final repayment of our term loan, which was
$125,000. 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, 2023 filed with the Securities
and Exchange Commission. Contractual
Obligations Our
contractual cash obligations on September 30, 2024 are outlined in the table below:
Payments Due by Period
Contractual Obligations Total Less than 1 to 3 4 to 5 More than
Unconditional purchase obligations with contract manufacturers $ 4,864,000 $ 4,777,000 $ 87,000 $ — $ —
Operating lease 3,326,000 652,000 1,360,000 1,314,000 —
Total contractual obligations $ 8,190,000 $ 5,429,000 $ 1,447,000 $ 1,314,000 $ — Off-Balance Sheet Arrangements As of September 30, 2024, we had no off-balance sheet
arrangements as defined in Item 303 of Regulation S-K. Interest Rate Risk Our exposure to market risk for changes in interest
rates primarily pertains to our revolving credit line facilities. These facilities provide us with up to $2.5 million with variable interest
rates based upon the lender's prime rate (with a minimum of 4.25%) plus 0.75%. This applies to both the domestic line of credit (up to
$2.0 million) and the EXIM line of credit (up to $0.5 million). As a result, any interest rate increases could raise our interest expense
on outstanding credit line balances. Foreign Currency Risk A substantial majority of our revenue, expense and
purchasing activities are transacted in U.S. dollars. However, we require our European distributors to purchase our products in Euros,
and we pay the expenses of our European employees in Swiss Franc and British pounds. Additionally, we may enter into selected future purchase
commitments with foreign suppliers that will be paid in the local currency of the supplier. Based on a sensitivity analysis of our net
foreign currency-denominated assets at the end of the quarter ended September 30, 2024, an adverse change of 10% in exchange rates would
have resulted in an increase of our net loss of approximately $34,400 for the third quarter of 2024. The actual net adjustment for the
effects of changes in foreign currency on cash balances, collections, and payables was a gain of approximately $3,400 for the third quarter
of 2024. We will continue to monitor and assess our risks related to foreign currency fluctuations to mitigate any potential impacts on
our financial performance. Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Our management evaluated, with the participation of
our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end
of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and forms, and (ii) accumulated and communicated to our management,
including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial
reporting that occurred during the quarter ended September 30, 2024, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. Ownership of the Company’s securities involves
a number of risks and uncertainties. Potential investors should carefully consider the risks and uncertainties described below and the
other information in this Annual Report on Form 10-K and our other public filings with the Securities and Exchange Commission before deciding
whether to invest in the Company’s securities. The Company’s business, financial condition or results of operations could
be materially adversely affected by any of these risks. The risks described below are not the only ones facing the Company. Additional
risks that are currently unknown to the Company or that the Company currently considers immaterial may also impair its business or adversely
affect its financial condition or results of operations. We may not return to profitability. To return to profitability, we must accomplish numerous
objectives, including achieving continued growth in our business, providing ongoing support to registered App providers whose applications
support the use of our data capture products, and developing successful new products. We cannot foresee with any certainty whether we
will be able to achieve these objectives in the future. Accordingly, we may not generate sufficient revenue or control our expenses enough
to maintain ongoing profitability. If we cannot return to profitability, we will not be able to support our operations from positive cash
flows, and we would be required to use our existing cash to support operating losses. If we are unable to secure the necessary capital
to replace that cash, we may need to suspend some or all of our current operations. We may require additional capital in the future, but that capital may
not be available on reasonable terms, if at all, or on terms that would not cause substantial dilution to investors’ stock holdings. We may need to raise capital to fund our growth or
operating losses in future periods. Our forecasts are highly dependent on factors beyond our control, including market acceptance of our
products and delays in deployments by businesses of applications that use our data capture products. Even if we maintain profitable operating
levels, we may need to raise capital to provide sufficient working capital to fund our growth. If capital requirements vary materially
from those currently planned, we may require additional capital sooner than expected. There can be no assurance that such capital will
be available in sufficient amounts or on terms acceptable to us, if at all. In order to maintain the availability of our bank lines of credit we
must remain in compliance with the covenants as specified under the terms of the credit agreements and the bank may exercise discretion
in making advances to us. Our credit agreements with our bank require us to
remain in compliance with the covenants specified under the terms of the agreement. The agreements also contain customary affirmative
and negative covenants, including covenants that limit or restrict our ability to, among other things, grant liens, make investments,
incur indebtedness, merge or consolidate, dispose of assets, make acquisitions, pay dividends or make distributions, repurchase stock,
enter into transactions with affiliates and enter into restrictive agreements, in each case subject to customary exceptions for a credit
facility of this size and type. The agreements also contain customary events of default including, among others, payment defaults, breaches
of covenants, bankruptcy and insolvency events, cross defaults with certain material indebtedness, judgment defaults, and breaches of
representations and warranties. Upon an event of default, our bank may declare all or a portion of our outstanding obligations payable
to be immediately due and payable and exercise other rights and remedies provided for under the agreement. During the existence of an
event of default, interest on the obligations could be increased. The agreements may be terminated by us or by our bank at any time. Upon
such termination, our bank would no longer make advances under the credit agreement and outstanding advances would be repaid as receivables
are collected. All advances are at our bank’s discretion and our bank is not obligated to make advances. If application providers are not successful in their efforts to develop,
market and sell the applications into which our software and products are incorporated, we may not achieve our sales projections. We are dependent upon App providers to integrate our
scanning and software products into their applications designed for mobile workers using smartphones, tablets and mobile computers, and
to successfully market and sell those application products and solutions into the marketplace. We focus on serving the needs of App providers
as sales of our data capture products are application driven. However, these providers may take considerable time to complete the development
of their applications, may experience delays in their development timelines, may develop competing applications, may be unsuccessful in
marketing and selling their application products and solutions to customers, or may experience delays in customer deployments and implementations,
which would adversely affect our ability to achieve our revenue projections. A deterioration in global economic conditions may have adverse impacts
on our business and financial condition in ways that we currently cannot predict and may limit our ability to raise additional funds. If global economic conditions deteriorate, it may
impact our business and our financial condition. We may face significant challenges if conditions in the financial markets worsen. The
impact of such future developments on our business, including the ongoing military action in Ukraine by Russia, is highly uncertain and
cannot be predicted. If the overall economy continues to decline for an extended period, our results of operations, financial position
and cash flows may be materially adversely affected. In addition, a severe prolonged economic downturn could result in a variety of risks
to the business, including impairing our ability to pursue potential opportunities and limiting our ability to raise additional capital
when needed on acceptable terms, if at all. Failure to maintain effective internal controls could have a material
adverse effect on our business, operating results, and stock price. We have evaluated and will continue to evaluate our
internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires an annual management
assessment of the design and effectiveness of our internal control over financial reporting. If we fail to maintain the adequacy of our
internal controls, as such standards are modified, supplemented, or amended from time to time, we may not be able to ensure that we can
conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley
Act. Moreover, effective internal controls, particularly those related to revenue recognition and access to assets, are necessary for
us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial
reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial
information, and the trading price of our stock could drop significantly. Despite security protections, our business records and information could
be hacked by unauthorized personnel. We protect our business records and information from
access by unauthorized personnel and are not aware of any instances where such data has been compromised. We maintain adequate segregation
of duties in safeguarding our assets and related records and monitor our systems to detect any attempts to bypass our controls and procedures
which we evaluate and update from time to time. We are aware that unauthorized efforts to access our business records and information
with sophisticated tools could bypass our controls and procedures and we remain alert to that possibility. Deferred tax assets comprise a significant portion of our assets and
are dependent upon future tax profitability to realize the benefits. We have recorded deferred tax assets on our balance
sheet because we believe that it is more likely than not that we will generate sufficient tax profitability in the future to realize the
tax savings that our deferred tax assets represent. If we do not achieve and maintain sufficient profitability, the tax savings represented
by our deferred tax assets may never be realized and we would need to recognize a loss for those deferred tax assets. We may be unable to manufacture our products because we are dependent
on a limited number of qualified suppliers for our components. Several of our component parts are produced by one
or a limited number of suppliers. Shortages or delays could occur in these essential components due to an interruption of supply or increased
demand in the industry. Suppliers may choose to restrict credit terms or require advance payment causing delays in the procurement of
essential materials. If we are unable to procure certain component parts, we could be required to reduce our operations while we seek
alternative sources for these components, which could have a material adverse effect on our financial results. To the extent that we acquire
extra inventory stocks to protect against possible shortages, we would be exposed to additional risks associated with holding inventory,
such as obsolescence, excess quantities, or loss. If we fail to develop and introduce new products rapidly and successfully,
we will not be able to compete effectively, and our ability to generate sufficient revenues will be negatively affected. The market for our products is prone to rapidly changing
technology, evolving industry standards and short product life cycles. If we are unsuccessful at developing and introducing new products
and services on a timely basis that include the latest technologies, conform to the newest standards, and that are appealing to end users,
we will not be able to compete effectively, and our ability to generate significant revenues will be seriously harmed. The development of new products and services can be
very difficult and requires high levels of innovation. The development process is also lengthy and costly. Short product life cycles for
smartphones and tablets expose our products to the risk of obsolescence and require frequent new product upgrades and introductions. We
will be unable to introduce new products and services into the market on a timely basis and compete successfully if we fail to:
· invest significant resources in research and development, sales and marketing, and customer support;
· identify emerging trends, demands and standards in the field of mobile computing products;
· enhance our products by adding additional features;
· maintain superior or competitive performance in our products; and
· anticipate our end users’ needs and technological trends accurately. We cannot be sure that we will have sufficient resources
to make adequate investments in research and development or that we will be able to identify trends or make the technological advances
necessary to be competitive. We may not be able to collect receivables from customers who experience
financial difficulties Our accounts receivable is derived primarily from
distributors. We perform ongoing credit evaluations of our customers’ financial conditions but generally require no collateral from
our customers. Reserves are maintained for potential credit losses, and such losses have historically been within such reserves. However,
many of our customers may be thinly capitalized and may be prone to failure in adverse market conditions. Although our collection history
has been good, from time to time a customer may not pay us because of financial difficulty, bankruptcy or liquidation. If global financial
conditions have an impact on our customer’s ability to pay us in a timely manner, consequently, we may experience increased difficulty
in collecting our accounts receivable, and we may have to increase our reserves in anticipation of increased uncollectible accounts. We could face increased competition in the future, which would adversely
affect our financial performance. The market in which we operate is very competitive.
Our future financial performance is contingent on a number of unpredictable factors, including that:
· some of our competitors have greater financial, marketing, and technical resources than we do;
· we periodically face intense price competition, particularly when our competitors have excess inventories and discount their prices
to clear their inventories; and
· certain manufacturers of tablets and mobile phones offer products with built-in functions, such as Bluetooth wireless technology or
barcode scanning, that compete with our products. Increased competition could result in price reductions,
fewer customer orders, reduced margins, and loss of market share. Our failure to compete successfully against current or future competitors
could harm our business, operating results, and financial condition. If we do not correctly anticipate demand for our products, our operating
results will suffer. The demand for our products depends on many factors
and is difficult to forecast as we introduce and support more products, and as competition in the markets for our products intensifies.
If demand is lower than forecasted levels, we could have excess production resulting in higher inventories of finished products and components,
which could lead to write-downs or write-offs of some or all of the |
