Financial Performance - Revenues for Q1 2023 were $4,312,178, a decrease of 31.6% compared to $6,293,002 in Q1 2022[9] - Gross profit for Q1 2023 was $2,072,487, down 33.8% from $3,127,662 in Q1 2022[9] - Operating loss for Q1 2023 was $(955,412), compared to an operating income of $463,704 in Q1 2022[9] - Net loss for Q1 2023 was $(993,420), compared to a net income of $341,933 in Q1 2022, resulting in a net loss per share of $(0.12)[9] - Total revenues for Q1 2023 were approximately $4.3 million, a 31% decrease from $6.3 million in Q1 2022, primarily due to distribution inventory balancing activities[83] - Gross profit margins decreased to 48.1% in Q1 2023 from 49.7% in the same period last year, attributed to lower production volumes[84] - The company reported a net loss of $993,420 for Q1 2023, compared to a net income of $341,933 in Q1 2022[55] - Basic net loss per share for Q1 2023 was $(0.12), a decrease from a net income of $0.04 per share in Q1 2022[55] Assets and Liabilities - Total current assets decreased to $11,948,021 as of March 31, 2023, from $12,768,536 as of December 31, 2022[11] - Cash and cash equivalents at the end of Q1 2023 were $2,963,308, down from $3,623,469 at the beginning of the quarter[17] - Total liabilities increased to $8,478,108 as of March 31, 2023, compared to $8,276,231 as of December 31, 2022[12] - Stockholders' equity decreased to $19,449,450 as of March 31, 2023, from $20,321,757 as of December 31, 2022[12] - The balances of right-of-use assets and liabilities for operating leases were $3,443,826 and $3,630,508, respectively, as of March 31, 2023, compared to $3,559,658 and $3,736,564 on December 31, 2022[27] Cash Flow and Expenses - Operating cash flow for Q1 2023 was $105,665, compared to $(452,413) in Q1 2022[17] - The company incurred stock-based compensation of $295,833 in Q1 2023, up from $223,446 in Q1 2022[17] - Research and development expenses increased by 18% to approximately $1,247,000 in Q1 2023, compared to $1,054,000 in Q1 2022, driven by new product development and hiring[85] - Sales and marketing expenses rose by 12% to approximately $1,007,000 in Q1 2023, up from $900,000 in the same quarter last year, mainly due to additional hiring[86] - General and administrative expenses increased by 9% to approximately $774,000 in Q1 2023, compared to $710,000 in Q1 2022, primarily due to higher equity-based compensation[87] - Cash payments for operating lease liabilities were $153,181 in Q1 2023, up from $132,010 in Q1 2022[63] Revenue Sources and Customer Base - Major customers for the three months ended March 31, 2023 included Ingram Micro, Inc. at 23% and BlueStar, Inc. at 20% of total revenues[46] - SocketCare revenue for the quarters ended March 31, 2023 and 2022 was approximately $5,600 and $5,400, respectively, with unrecognized service revenue at approximately $34,000 as of March 31, 2023[25] - Company’s sales are significantly dependent on a limited number of distributors, with Ingram Micro® and BlueStar representing approximately 43% and 47% of worldwide sales in Q1 2023 and 2022, respectively[130] Strategic Risks and Market Conditions - Company faces risks from a limited number of qualified suppliers for essential components, which could adversely affect financial results[120] - Company must rapidly develop and introduce new products to remain competitive, as the market is prone to rapidly changing technology[123] - The expensing of employee stock options and restricted stocks will continue to adversely affect net income and earnings per share, making profitability harder to achieve[146] - The company’s ability to forecast demand accurately is crucial, as miscalculations could lead to excess inventory or production capacity issues[128] - Events outside the company's control, such as natural disasters or health epidemics, could materially impact business operations and financial condition[150] Stock and Shareholder Information - As of May 9, 2023, the company had 7,130,853 shares of common stock outstanding, with substantial shares freely tradable in the public market[155] - The company had 1,262,028 shares of common stock subject to outstanding options and 1,068,934 shares of restricted stock outstanding as of May 9, 2023[156] - The trading price of the company's common stock fluctuated between a high of $4.84 and a low of $1.47 from January 1, 2022, to the date of the report, indicating high volatility[158]

[PART I](index=4&type=section&id=PART%20I) This section covers the company's business operations, associated risks, and foundational corporate information [Business](index=5&type=section&id=Item%201.%20Business) Socket Mobile, Inc. provides cordless data capture solutions, including barcode scanners and RFID/NFC devices, for mobile applications globally - Socket Mobile, Inc. is a leading provider of data capture solutions for workforce mobilization, with its common stock trading on NASDAQ under 'SCKT'[14](index=14&type=chunk)[15](index=15&type=chunk) - Primary products include Bluetooth-connected cordless barcode scanners and RFID/NFC devices, compatible with major mobile OS, supported by a Software Developer Kit (CaptureSDK)[17](index=17&type=chunk)[24](index=24&type=chunk) - Product families encompass SocketScan, DuraScan (IP54-rated), DuraSled, and Contactless RFID/NFC reader/writers, with SocketCam C820 software scanner introduced in Q1 2022[18](index=18&type=chunk)[20](index=20&type=chunk)[21](index=21&type=chunk)[22](index=22&type=chunk)[23](index=23&type=chunk) - Manufacturing is subcontracted globally, with final assembly in Fremont, California, and worldwide distribution through a two-tier network including major distributors[25](index=25&type=chunk)[37](index=37&type=chunk) - The company's mission is to provide innovative, cost-effective data capture tools for mobile businesses, guided by core values of Accountability, Customer Focus, Excellence, Integrity, and Mutual Respect[28](index=28&type=chunk)[29](index=29&type=chunk)[30](index=30&type=chunk)[31](index=31&type=chunk) - The company differentiates in a competitive market through its CaptureSDK, software, and strong brand reputation for durable, dependable, and ergonomic products compatible with major mobile OS[39](index=39&type=chunk)[41](index=41&type=chunk) - As of December 31, 2022, the company had **56 employees** across sales, engineering, finance, and operations[49](index=49&type=chunk) [Risk Factors](index=11&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from global economic conditions, operational dependencies, intense competition, intellectual property challenges, and external geopolitical factors - Key risks include global economic deterioration, uncertainty of sustained profitability, and potential challenges in securing additional capital on favorable terms[52](index=52&type=chunk)[53](index=53&type=chunk)[54](index=54&type=chunk) - Operational risks stem from dependence on application provider success, reliance on limited component suppliers, and the need for continuous new product development in a rapidly evolving market[57](index=57&type=chunk)[62](index=62&type=chunk)[63](index=63&type=chunk) - Significant risks include intense competitive pressures, challenges in forecasting product demand, and reliance on major distributors, with Ingram Micro® and BlueStar accounting for approximately **50% of worldwide sales in 2022**[67](index=67&type=chunk)[68](index=68&type=chunk)[71](index=71&type=chunk) - Intellectual property protection is critical, facing risks of insufficient safeguards, potential infringement claims, and the necessity to redesign products due to evolving industry standards[77](index=77&type=chunk)[80](index=80&type=chunk)[84](index=84&type=chunk) - External risks encompass economic, political, and regulatory challenges in export sales, potential disruptions from natural disasters or health epidemics, and geopolitical instability[90](index=90&type=chunk)[91](index=91&type=chunk)[93](index=93&type=chunk) [Unresolved Staff Comments](index=18&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments - No unresolved staff comments[104](index=104&type=chunk) [Properties](index=18&type=section&id=Item%202.%20Properties) In February 2022, the company leased a **35,913 square-foot** facility in Fremont, California, for office and manufacturing operations - In February 2022, the company entered an operating lease for a **35,913 square-foot** facility in Fremont, California, for office and manufacturing[105](index=105&type=chunk) - The lease commenced May 1, 2022, for **87 months** at a monthly rent of **$50,278**, with **3% annual increases**[105](index=105&type=chunk) [Legal Proceedings](index=18&type=section&id=Item%203.%20Legal%20Proceedings) The company is not currently involved in any material legal proceedings - The company is not currently a party to any material legal proceedings[106](index=106&type=chunk) [Mine Safety Disclosures](index=18&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Mine Safety Disclosures are not applicable to the company - Mine Safety Disclosures are not applicable[107](index=107&type=chunk) [PART II](index=19&type=section&id=PART%20II) This section details the company's market for common equity, selected financial data, management's discussion and analysis, and financial statements [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=19&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on NASDAQ under 'SCKT', with **7.12 million shares outstanding** as of March 24, 2023, and no dividends paid - The company's common stock trades on NASDAQ under 'SCKT', with **7,123,999 shares outstanding** as of March 24, 2023[5](index=5&type=chunk)[110](index=110&type=chunk) - The company has not paid dividends on its common stock, intending to retain future earnings for business reinvestment[110](index=110&type=chunk) Shares Repurchased in 2022 | Periods | Total Number of Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 11, 2022 to May 4, 2022 | 90,913 | $4.16 | | July 1, 2022 to August 10, 2022 | 90,029 | $3.06 | | October 1, 2022 to December 30, 2022 | 85,349 | $2.06 | | **Total** | **266,291** | **$829,563 (Approximate Dollar Value)** | - The common stock experienced significant volatility in 2022, with prices ranging from a high of **$35.00** to a low of **$0.76**[102](index=102&type=chunk) [Selected Financial Data](index=21&type=section&id=Item%206.%20Selected%20Financial%20Data) This section provides a five-year summary of key financial data, including income statement and balance sheet figures, from 2018 to 2022 Selected Income Statement Data (Years Ended December 31, in thousands) | Indicator | 2018 | 2019 | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $16,454 | $19,253 | $15,700 | $23,199 | $21,238 | | Gross profit | $8,456 | $10,101 | $8,335 | $12,436 | $10,366 | | Operating expenses | $9,042 | $9,494 | $12,686 | $9,739 | $10,812 | | Net income (loss) before income taxes | $(715) | $506 | $(3,330) | $2,564 | $(621) | | Income tax benefit (expense) | $144 | $(219) | $51 | $1,903 | $708 | | Net income (loss) | $(571) | $287 | $(3,279) | $4,466 | $87 | | Basic EPS | $(0.09) | $0.05 | $(0.51) | $0.58 | $0.01 | | Diluted EPS | $(0.09) | $0.05 | $(0.51) | $0.48 | $0.01 | Selected Balance Sheet Data (As of December 31, in thousands) | Indicator | 2018 | 2019 | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $1,085 | $959 | $2,122 | $6,096 | $3,624 | | Total assets | $19,148 | $20,009 | $15,609 | $25,575 | $28,598 | | Total stockholders' equity | $12,956 | $13,785 | $11,173 | $20,046 | $20,322 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section analyzes the company's financial condition and operational results for 2022 and 2021, covering liquidity, capital resources, and detailed performance metrics - Net cash used in operating activities was **$0.11 million** in 2022, a decrease from **$2.1 million** provided in 2021, while net cash used in financing activities was **$1.2 million** in 2022, down from **$2.5 million** provided in 2021, mainly due to stock repurchases and loan repayments[118](index=118&type=chunk)[119](index=119&type=chunk) - The company maintains a **$2.5 million** revolving credit facility maturing January 31, 2025, with no outstanding drawings as of December 31, 2022[120](index=120&type=chunk) Revenue and Gross Margin Performance (2021 vs 2022) | Metric | 2022 | 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Total Revenue | $21.2 million | $23.2 million | -8% | | SocketScan Revenue (% of total) | 80% | N/A | -4% | | DuraScan Revenue (% of total) | 14% | N/A | -22% | | Gross Margin | 48.8% | 53.6% | -4.8 percentage points | Operating Expenses (2021 vs 2022, in thousands) | Expense Category | 2022 | 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Research and Development | $4,362 | $3,965 | +10% | | Sales and Marketing | $3,638 | $3,003 | +21% | | General and Administrative | $2,812 | $2,772 | +1% | | Total Operating Expenses | $10,812 | $9,739 | +11% | - The company recorded an income tax benefit of **$708,000** in 2022 (effective tax rate of **114.1%**) versus **$1.9 million** in 2021 (effective tax rate of **-45.6%**), influenced by R&D capitalization and amortization[148](index=148&type=chunk) Contractual Obligations as of December 31, 2022 (in thousands) | Contractual Obligations | Total | 1 year | 2 to 3 years | 4 to 5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Unconditional purchase obligations | $8,674 | $8,409 | $265 | $— | $— | | Operating leases | $4,415 | $621 | $1,290 | $1,365 | $1,139 | | **Total** | **$13,089** | **$9,030** | **$1,555** | **$1,365** | **$1,139** | [Quantitative and Qualitative Disclosures about Market Risk](index=31&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company's primary market risks are interest rate risk from variable-rate loans and foreign currency risk, mainly from Euro and British pound transactions - Market risk exposure to interest rate changes primarily stems from variable-rate bank term loans and credit lines, based on the lender's prime rate plus **0.75%**[158](index=158&type=chunk) - Foreign currency risk originates from Euro and British pound transactions; a **10% adverse exchange rate change** would have decreased Q4 2022 net income by approximately **$24,000** if unhedged[159](index=159&type=chunk) - In Q4 2022, the net adjustment for foreign currency effects on cash, collections, payables, and derivatives resulted in a net gain of **$15,400**[159](index=159&type=chunk) [Financial Statements and Supplementary Data](index=32&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the audited financial statements for 2022 and 2021, including balance sheets, statements of operations, cash flows, and comprehensive notes - Sadler, Gibb & Associates, LLC issued an unqualified opinion on the financial statements for the years ended December 31, 2022 and 2021[162](index=162&type=chunk) - A critical audit matter was the Deferred Tax Asset Valuation Allowance Assessment, due to significant management estimates and assumptions in the undiscounted cash flow analysis[168](index=168&type=chunk)[169](index=169&type=chunk) Balance Sheet Highlights (As of December 31) | Asset/Liability | 2022 | 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $3,623,469 | $6,095,886 | | Total current assets | $12,768,536 | $14,380,788 | | Total assets | $28,597,988 | $25,575,101 | | Total current liabilities | $4,972,429 | $5,389,357 | | Total liabilities | $8,276,231 | $5,528,638 | | Total stockholders' equity | $20,321,757 | $20,046,463 | Statements of Operations Highlights (Years Ended December 31) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Revenues | $21,237,768 | $23,199,061 | | Gross profit | $10,366,456 | $12,436,444 | | Total operating expenses | $10,812,475 | $9,739,063 | | Operating income (loss) | $(446,019) | $2,697,381 | | Net income | $86,931 | $4,466,257 | | Basic Net income per share | $0.01 | $0.58 | | Fully diluted Net income per share | $0.01 | $0.48 | Statements of Cash Flows Highlights (Years Ended December 31) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(111,415) | $2,144,270 | | Net cash used in investing activities | $(1,183,188) | $(691,771) | | Net cash (used in) provided by financing activities | $(1,177,814) | $2,521,624 | | Net increase (decrease) in cash and cash equivalents | $(2,472,417) | $3,974,123 | | Cash and cash equivalents at end of year | $3,623,469 | $6,095,886 | - In 2021, the company acquired a perpetual, non-exclusive license to SpringCard SAS's Contactless Technology Package, issuing **184,332 shares** of common stock and a **10-year warrant**, with intangible assets amortized over **fifteen years**[236](index=236&type=chunk)[237](index=237&type=chunk) - Secured Subordinated Convertible Notes Payable, totaling **$1.53 million** (including **$1.35 million** from related parties), were extended to mature on August 30, 2024, accruing **10% interest** and convertible at **$1.46 per share**[246](index=246&type=chunk)[247](index=247&type=chunk)[248](index=248&type=chunk) - As of December 31, 2022, the company held U.S. Federal net operating loss carryforwards of **$22.5 million** and R&D credit carryforwards of **$0.5 million**, with a full valuation allowance against R&D tax credits[281](index=281&type=chunk)[282](index=282&type=chunk)[283](index=283&type=chunk) - Subsequent events include the grant of **402,370 restricted stocks**, exercise of **29,195 stock options**, repurchase of **89,197 common shares**, and an ICS Deposit Placement Agreement for unlimited FDIC insurance[290](index=290&type=chunk)[291](index=291&type=chunk)[292](index=292&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=56&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) There have been no changes in or disagreements with accountants on accounting and financial disclosure - Not applicable[294](index=294&type=chunk) [Controls and Procedures](index=56&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[295](index=295&type=chunk) - Management assessed and concluded that the company's internal control over financial reporting was effective as of December 31, 2022, using the COSO framework[297](index=297&type=chunk)[298](index=298&type=chunk) - The company is exempt from auditor attestation on internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act as a non-accelerated filer[299](index=299&type=chunk) - No material changes occurred in internal control over financial reporting during the last fiscal quarter[301](index=301&type=chunk) [Other Information](index=57&type=section&id=Item%209B.%20Other%20Information) This section reports no other information - None[302](index=302&type=chunk) [Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](index=57&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections) This disclosure is not applicable to the company - Not applicable[303](index=303&type=chunk) [PART III](index=58&type=section&id=PART%20III) This section incorporates information on directors, executive compensation, security ownership, related transactions, and accounting fees by reference [Directors, Executive Officers and Corporate Governance](index=58&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the company's Proxy Statement for the Annual Meeting of Stockholders on June 7, 2023[306](index=306&type=chunk) [Executive Compensation](index=58&type=section&id=Item%2011.%20Executive%20Compensation) Executive compensation details are incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the company's Proxy Statement for the Annual Meeting of Stockholders on June 7, 2023[307](index=307&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=58&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Security ownership and related stockholder matters are incorporated by reference, with **1.29 million securities** for outstanding options - Information is incorporated by reference from the company's Proxy Statement for the Annual Meeting of Stockholders on June 7, 2023[308](index=308&type=chunk) Equity Compensation Plan Information (as of December 31, 2022) | | Number of securities to be issued upon exercise of outstanding options | Weighted average exercise price of outstanding options | Number of securities remaining available for future issuance under equity compensation plans | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 1,296,722 | $2.93 | 453,798 | [Certain Relationships and Related Transactions, and Director Independence](index=58&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on related transactions and director independence is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the company's Proxy Statement for the Annual Meeting of Stockholders on June 7, 2023[311](index=311&type=chunk) [Principal Accounting Fees and Services](index=58&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Principal accounting fees and services information is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the company's Proxy Statement for the Annual Meeting of Stockholders on June 7, 2023[312](index=312&type=chunk) [PART IV](index=59&type=section&id=PART%20IV) This section includes exhibits, financial statement schedules, and required signatures for the report [Exhibits, Financial Statement Schedules](index=59&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists financial statements, schedules, and a comprehensive index of exhibits filed or incorporated by reference - This section includes the Independent Registered Public Accounting Firm's Report, Balance Sheets, Statements of Income, Stockholders' Equity, Cash Flows, and Notes to Financial Statements[314](index=314&type=chunk) - All financial statement schedules are omitted as they are not applicable, not required, or the information is already included in the financial statements or notes[315](index=315&type=chunk) - A detailed Index to Exhibits lists all exhibits filed or incorporated by reference within this report[316](index=316&type=chunk)[317](index=317&type=chunk) [SIGNATURES](index=60&type=section&id=SIGNATURES) This section contains the required signatures of the company's officers and directors, affirming the report's filing on March 30, 2023 - The report is signed by the President and CEO, Chairman of the Board, VP of Finance and Administration and CFO, and other Directors, all dated March 30, 2023[320](index=320&type=chunk)[321](index=321&type=chunk) [Index to Exhibits](index=61&type=section&id=Index%20to%20Exhibits) This index provides a comprehensive list of all exhibits accompanying the Form 10-K, detailing each exhibit's number, description, and original filing reference - The index lists various exhibits, including corporate documents, financing agreements, equity incentive plans, and certifications[324](index=324&type=chunk)[325](index=325&type=chunk) - Each exhibit entry specifies its original filing for traceability of corporate and financial documents[327](index=327&type=chunk)

Socket Mobile, Inc. (NASDAQ:SCKT) Q4 2022 Earnings Conference Call February 22, 2023 5:00 PM ET Company Participants Kevin Mills - President and CEO Lynn Zhao - CFO David Holmes - Chief Business Officer Conference Call Participants Chris Sakai - Singular Research Operator Welcome to the Fourth Quarter and Full Year 2022 Financial Results for Socket Mobile. My name is Darrell, and I will be your operator for today's call. Before we begin, I'd like to remind everyone that this conference call may contain forw ...

[Part I. Financial Information](index=4&type=section&id=Part%20I.%20Financial%20Information) [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) Unaudited statements show a significant revenue decline, a shift to net loss, and negative operating cash flow for the period [Condensed Statements of Operations](index=4&type=section&id=Condensed%20Statements%20of%20Operations) Revenues decreased 41% year-over-year in Q3 2022, leading to a net loss of $874,034 versus a prior-year profit Condensed Statements of Operations Highlights (Unaudited) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | **Revenues** | $3,727,871 | $6,319,044 | $16,066,855 | $17,084,913 | | **Gross Profit** | $1,654,859 | $3,422,721 | $7,818,203 | $9,251,907 | | **Operating Income (Loss)** | ($947,427) | $953,773 | ($294,439) | $2,010,118 | | **Net Income (Loss)** | ($874,034) | $643,626 | ($428,142) | $3,473,635 | | **Diluted EPS** | ($0.11) | $0.07 | ($0.05) | $0.37 | [Condensed Balance Sheets](index=5&type=section&id=Condensed%20Balance%20Sheets) Total assets and liabilities increased due to a new operating lease, while stockholders' equity slightly decreased Condensed Balance Sheet Data (Unaudited) | Metric | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | **Total Current Assets** | $12,981,853 | $14,380,788 | | **Total Assets** | $28,197,023 | $25,575,101 | | **Total Current Liabilities** | $5,080,317 | $5,389,357 | | **Total Liabilities** | $8,501,268 | $5,528,638 | | **Total Stockholders' Equity** | $19,695,755 | $20,046,463 | [Condensed Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Statements%20of%20Stockholders'%20Equity) Stockholders' equity declined to $19.70 million, driven by a net loss and treasury stock repurchases - Key activities impacting stockholders' equity in the nine months ended September 30, 2022 include a net loss, **stock-based compensation of $735,378**, and the **repurchase of treasury shares for $653,684**[15](index=15&type=chunk)[20](index=20&type=chunk) [Condensed Statements of Cash Flows](index=9&type=section&id=Condensed%20Statements%20of%20Cash%20Flows) Cash from operations turned negative due to net loss and inventory growth, resulting in a $1.86 million cash decrease Cash Flow Summary (Nine Months Ended September 30) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | **Net cash (used in) provided by operating activities** | ($30,182) | $1,183,013 | | **Net cash used in investing activities** | ($910,603) | ($562,910) | | **Net cash (used in) provided by financing activities** | ($917,759) | $2,610,872 | | **Net (decrease) increase in cash** | ($1,858,544) | $3,230,975 | [Notes to Condensed Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Financial%20Statements) Notes detail a new headquarters lease, $9.5 million in purchase commitments, and high customer concentration - The company commenced a new lease for its corporate headquarters in Fremont, CA on May 1, 2022, with the lease term expiring on July 31, 2029, resulting in a **right-of-use asset of $3,674,173** as of September 30, 2022[72](index=72&type=chunk)[74](index=74&type=chunk) - As of September 30, 2022, the company had **non-cancelable purchase commitments for inventory amounting to approximately $9,494,000**[79](index=79&type=chunk) - A share repurchase program was authorized in January 2022, and the company repurchased **180,942 shares for $653,684** during the nine months ended September 30, 2022[60](index=60&type=chunk) Major Customer Revenue Concentration (Nine Months Ended Sep 30) | Customer | 2022 | 2021 | | :--- | :--- | :--- | | Ingram Micro Inc. | 27% | 29% | | BlueStar, Inc. | 22% | 25% | | ScanSource, Inc. | 13% | 11% | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the Q3 revenue decline, lower gross margins, and the impact on liquidity and operating results - Q3 2022 revenue **decreased 41% YoY to $3.7 million**, attributed to weaker end-user demand and a reduction of inventory in the distribution channel[94](index=94&type=chunk) - Gross profit margins for Q3 2022 **decreased to 44.4% from 54.2%** in the prior year, driven by higher component and freight costs and lower production volumes[96](index=96&type=chunk) - Net cash used in operating activities was **approximately $30,000** in the first nine months of 2022, a sharp contrast to the **$1.18 million provided** in the same period of 2021, primarily due to the net loss and increased inventory levels[105](index=105&type=chunk)[106](index=106&type=chunk) Year-over-Year Operating Expense Changes (Three Months Ended Sep 30) | Expense Category | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Research and Development | $1,096,000 | $1,014,000 | +8.1% | | Sales and Marketing | $865,000 | $788,000 | +9.7% | | General and Administrative | $641,000 | $667,000 | -3.9% | [Quantitative and Qualitative Disclosures about Market Risk](index=28&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company is exposed to market risks from interest rate fluctuations and foreign currency exchange rates - Interest rate risk is tied to the company's bank term loan and credit line facilities, which have **variable interest rates** based on the lender's prime rate[114](index=114&type=chunk) - Foreign currency risk stems from sales denominated in Euros and British pounds, with a **net adjustment of approximately $37,000** in Q3 2022[115](index=115&type=chunk) [Controls and Procedures](index=29&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective with no material changes in internal controls - Management concluded that the company's **disclosure controls and procedures were effective** as of the end of the period covered by the report[117](index=117&type=chunk) - **No changes in internal control over financial reporting occurred** during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[118](index=118&type=chunk) [Part II. Other Information](index=30&type=section&id=Part%20II.%20Other%20Information) [Risk Factors](index=30&type=section&id=Item%201A.%20Risk%20Factors) The company faces macroeconomic headwinds, supplier and distributor dependency, and intense market competition - The ongoing COVID-19 pandemic and deteriorating global economic conditions pose risks of **reduced product demand, manufacturing disruptions, and supply chain failures**[122](index=122&type=chunk)[124](index=124&type=chunk) - The company is dependent on a limited number of distributors; Ingram Micro and BlueStar represented approximately **49% of worldwide sales** in the first nine months of 2022[145](index=145&type=chunk) - Several component parts are sourced from a **limited number of suppliers**, creating a risk of shortages or delays that could materially affect financial results[137](index=137&type=chunk) - The market is characterized by **rapidly changing technology and short product life cycles**, requiring successful and timely introduction of new products to compete effectively[138](index=138&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=41&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company repurchased 180,942 shares, with approximately $1.15 million remaining under the buyback program Share Repurchase Activity (Nine Months Ended Sep 30, 2022) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Apr 11 - May 4, 2022 | 90,913 | $4.16 | | Jul 1 - Aug 10, 2022 | 90,029 | $3.06 | | **Total** | **180,942** | **N/A** | [Exhibits](index=41&type=section&id=Item%206.%20Exhibits) This section lists filed exhibits, including required CEO and CFO certifications under the Sarbanes-Oxley Act - The report includes required certifications from the CEO and CFO pursuant to the **Sarbanes-Oxley Act of 2002**[170](index=170&type=chunk)

Socket Mobile, Inc. (NASDAQ:SCKT) Q3 2022 Earnings Conference Call October 27, 2022 5:00 PM ET Corporate Participants Kevin Mills - President and Chief Executive Officer Lynn Zhao - Chief Financial Officer David Holmes - Chief Business Officer Conference Call Participants Chris Sakai - Singular Research John Harrington - Wells Fargo Operator Welcome to the Socket Mobile 2022 Third Quarter Financial Results Conference Call. My name is Darrell, and I will be your operator for today's call. Before we begin, I' ...

[Part I. Financial Information](index=4&type=section&id=Part%20I.%20Financial%20Information) This section presents the company's unaudited financial statements and management's discussion and analysis of financial condition and results of operations [Item 1. Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents the company's unaudited condensed financial statements, including statements of operations, balance sheets, stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, financial instruments, revenue recognition, leases, financing, and other critical financial information for the periods ended June 30, 2022 and 2021 [Condensed Statements of Operations](index=4&type=section&id=Condensed%20Statements%20of%20Operations) This statement provides a summary of the company's revenues, net income, and earnings per share for the three and six months ended June 30, 2022 and 2021 Three Months Ended June 30 | Metric | 2022 (USD) | 2021 (USD) | | :------------------------- | :--------------- | :--------------- | | Revenues | $6.05 million | $5.95 million | | Net Income | $0.10 million | $2.63 million | | Basic Net Income Per Share | $0.01 | $0.34 | | Diluted Net Income Per Share | $0.01 | $0.27 | Six Months Ended June 30 | Metric | 2022 (USD) | 2021 (USD) | | :------------------------- | :--------------- | :--------------- | | Revenues | $12.34 million | $10.77 million | | Net Income | $0.45 million | $2.83 million | | Basic Net Income Per Share | $0.06 | $0.38 | | Diluted Net Income Per Share | $0.05 | $0.31 | [Condensed Balance Sheets](index=5&type=section&id=Condensed%20Balance%20Sheets) This statement presents the company's financial position, including assets, liabilities, and stockholders' equity, as of June 30, 2022, and December 31, 2021 Balance Sheet Summary | Metric | June 30, 2022 (Unaudited, USD) | December 31, 2021 (USD) | | :-------------------------- | :----------------------------- | :---------------------- | | Total Assets | $30.89 million | $25.58 million | | Total Liabilities | $10.34 million | $5.53 million | | Total Stockholders' Equity | $20.56 million | $20.05 million | | Cash and Cash Equivalents | $5.59 million | $6.10 million | [Condensed Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Statements%20of%20Stockholders'%20Equity) This statement details changes in stockholders' equity, including net income and treasury share transactions, for the periods presented Stockholders' Equity Summary | Metric | June 30, 2022 (USD) | December 31, 2021 (USD) | | :-------------------------- | :------------------ | :-------------------- | | Total Stockholders' Equity | $20.56 million | $20.05 million | | Net Income (3 months ended) | $0.10 million | $2.63 million | | Treasury shares purchased | $(0.38) million | $0 | [Condensed Statements of Cash Flows](index=9&type=section&id=Condensed%20Statements%20of%20Cash%20Flows) This statement outlines the cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2022 and 2021 Cash Flow Activities (Six Months Ended June 30) | Cash Flow Activity | 2022 (USD) | 2021 (USD) | | :-------------------------------------- | :--------------- | :--------------- | | Net cash provided by operating activities | $0.60 million | $0.45 million | | Net cash used in investing activities | $(0.56) million | $(0.30) million | | Net cash (used in) provided by financing activities | $(0.55) million | $2.65 million | | Net (decrease) increase in cash and cash equivalents | $(0.51) million | $2.80 million | | Cash and cash equivalents at end of period | $5.59 million | $4.92 million | [Notes to Condensed Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Financial%20Statements) This section provides detailed explanations and disclosures regarding the accounting policies, estimates, and specific financial statement line items [NOTE 1 — Basis of Presentation](index=11&type=section&id=NOTE%201%20%E2%80%94%20Basis%20of%20Presentation) This note describes the accounting principles and preparation methods used for the unaudited interim financial statements - The unaudited condensed financial statements are prepared in accordance with GAAP for interim information and Form 10-Q instructions, including all necessary normal recurring accruals for fair presentation[21](index=21&type=chunk) - Interim results are not necessarily indicative of operating results for the full fiscal year or any future period[21](index=21&type=chunk) [NOTE 2 — Summary of Significant Accounting Policies](index=11&type=section&id=NOTE%202%20%E2%80%94%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines the critical accounting policies and estimates applied in preparing the financial statements, including revenue recognition and cash equivalents - Financial statements rely on management's estimates and assumptions, which may materially differ from actual results[22](index=22&type=chunk) - Cash equivalents are highly liquid investments purchased with a maturity of **90 days or less**; cash balances may exceed federally insured limits[23](index=23&type=chunk) - Revenue from distributor sales is recognized upon product shipment and title transfer, net of estimated returns. SocketCare extended warranty revenue is recognized ratably over the contract life[25](index=25&type=chunk)[27](index=27&type=chunk) - The company adopted ASU 2016-02 (Leases, Topic 842) effective January 1, 2019, requiring recognition of right-of-use assets and lease liabilities for operating leases[29](index=29&type=chunk) [NOTE 3 — Acquisition of Intangible Assets](index=12&type=section&id=NOTE%203%20%E2%80%94%20Acquisition%20of%20Intangible%20Assets) This note details the acquisition of an intangible asset, including its consideration, amortization policy, and estimated future amortization schedule - On February 26, 2021, 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[31](index=31&type=chunk)[32](index=32&type=chunk) - Consideration for the acquisition included **184,332 shares of common stock** and a **10-year warrant to purchase up to 50,000 shares**[32](index=32&type=chunk) - Intangible assets are amortized over an estimated useful life of **fifteen years** on a straight-line basis, commencing April 1, 2021[33](index=33&type=chunk) Estimated Future Amortization of Intangible Assets (as of June 30, 2022) | Fiscal Year | Amount (USD) | | :---------- | :------------- | | 2022 (July 1 - Dec 31) | $63.65 thousand | | 2023 | $127.30 thousand | | 2024 | $127.30 thousand | | 2025 | $127.30 thousand | | 2026 | $127.30 thousand | | Thereafter | $1.18 million | | **Total** | **$1.75 million** | [NOTE 4 — Inventories](index=13&type=section&id=NOTE%204%20%E2%80%94%20Inventories) This note details the company's inventory valuation policy and provides a breakdown of inventory components, net of reserves - Inventories, primarily raw materials and sub-assemblies, are stated at the lower of cost (first-in, first-out) or market[34](index=34&type=chunk) Inventories, Net | Category | June 30, 2022 (USD) | December 31, 2021 (USD) | | :------------------------ | :------------------ | :-------------------- | | Raw materials and sub-assemblies | $6.59 million | $5.76 million | | Finished goods | $179.65 thousand | $277.60 thousand | | Inventory reserves | $(880.94) thousand | $(880.94) thousand | | **Inventory, net** | **$5.89 million** | **$5.15 million** | [NOTE 5 — Bank Financing Arrangements](index=14&type=section&id=NOTE%205%20%E2%80%94%20Bank%20Financing%20Arrangements) This note describes the company's bank financing agreements, including credit lines, loan terms, and related interest expenses - The Amended and Restated Business Financing Agreement (January 29, 2021) increased the Domestic Line of Credit to **$3.0 million**, including a **$2.0 million revolving facility** and a **$1.0 million nonformula loan (CalCap Loan)**[37](index=37&type=chunk) - The First Business Financing Modification Agreement (February 9, 2022) consented to a share repurchase program of up to **$1.8 million** and increased the business credit card limit to **$250,000**[38](index=38&type=chunk) CalCap Loan Outstanding (June 30, 2022) | Category | Amount (USD) | | :------------------------ | :------------- | | Current portion of CalCap Loan | $375 thousand | | Long-term portion of CalCap Loan | $0 | | **CalCap Loan** | **$375 thousand** | Interest Expense on CalCap Loan | Period | 2022 (USD) | 2021 (USD) | | :------------------------ | :------------- | :------------- | | Three Months Ended June 30 | $5.30 thousand | $11.58 thousand | | Six Months Ended June 30 | $11.96 thousand | $17.55 thousand | [NOTE 6 — Secured Subordinated Convertible Notes Payable](index=15&type=section&id=NOTE%206%20%E2%80%94%20Secured%20Subordinated%20Convertible%20Notes%20Payable) This note details the terms of the company's secured subordinated convertible notes, including interest rates, maturity, conversion options, and debt discount amortization - On August 31, 2020, the company completed a **$1.53 million** secured subordinated convertible note financing, with **$1.35 million** from officers, directors, and their family members[41](index=41&type=chunk) - The notes have a **three-year term**, accrue interest at **10% per annum**, mature on August 30, 2023, and are convertible into common stock at **$1.46 per share**[42](index=42&type=chunk) - Amortization of debt discount for the six months ended June 30, 2022, was **$16,546**, with a remaining debt discount of **$38,606** to be amortized through August 31, 2023[43](index=43&type=chunk) Interest Expense on Convertible Notes | Period | 2022 (USD) | 2021 (USD) | | :------------------------ | :------------- | :------------- | | Three Months Ended June 30 | $43.18 thousand | $43.18 thousand | | Six Months Ended June 30 | $84.46 thousand | $87.72 thousand | [NOTE 7 — Segment Information and Concentrations](index=15&type=section&id=NOTE%207%20%E2%80%94%20Segment%20Information%20and%20Concentrations) This note provides information on the company's operating segment, geographic revenue distribution, and concentrations of revenue and accounts receivable from major customers and suppliers - The company operates in the mobile barcode scanning and RFID/NFC data capture market, distributing products globally through distributors and resellers[45](index=45&type=chunk) Revenues by Geographic Area (Six Months Ended June 30) | Region | 2022 (USD) | 2021 (USD) | | :----------- | :--------------- | :--------------- | | Americas | $9.36 million | $8.32 million | | Europe | $1.65 million | $1.65 million | | Asia Pacific | $1.32 million | $0.80 million | | **Total** | **$12.34 million** | **$10.77 million** | Major Customer Revenue Concentration (Six Months Ended June 30) | Customer | 2022 (%) | 2021 (%) | | :--------------- | :------- | :------- | | Ingram Micro Inc. | 30% | 26% | | BlueStar, Inc. | 20% | 31% | | ScanSource, Inc. | 14% | 10% | Major Customer Accounts Receivable Concentration (June 30) | Customer | 2022 (%) | 2021 (%) | | :--------------- | :------- | :------- | | Ingram Micro Inc. | 34% | 28% | | BlueStar, Inc. | 17% | 21% | | ScanSource, Inc. | 13% | 24% | - The top three suppliers accounted for **55% of inventory purchases** for the three months ended June 30, 2022 and 2021[50](index=50&type=chunk) [NOTE 8 — Stock-Based Compensation](index=17&type=section&id=NOTE%208%20%E2%80%94%20Stock-Based%20Compensation) This note outlines the company's accounting policy for stock-based compensation and provides details on stock options granted, restricted stock awarded, and total compensation expenses - Compensation cost for stock-based awards is recognized on a straight-line basis over the vesting period[51](index=51&type=chunk) Stock Options Granted (Six Months Ended June 30) | Year | Stock Options Granted | | :--- | :-------------------- | | 2022 | 40,000 | | 2021 | 182,000 | Restricted Stock Awarded (Six Months Ended June 30) | Year | Shares Awarded | | :--- | :------------- | | 2022 | 323,800 | | 2021 | 302,425 | Total Stock-Based Compensation Expenses (Six Months Ended June 30) | Year | Expenses (USD) | | :--- | :--------------- | | 2022 | $475.0 thousand | | 2021 | $320.8 thousand | [NOTE 9 — Net Income Per Share](index=18&type=section&id=NOTE%209%20%E2%80%94%20Net%20Income%20Per%20Share) This note presents the basic and diluted net income per share calculations and the weighted average shares outstanding for the periods presented Net Income Per Share (Six Months Ended June 30) | Metric | 2022 (USD) | 2021 (USD) | | :------------------------- | :--------- | :--------- | | Basic Net Income Per Share | $0.06 | $0.38 | | Diluted Net Income Per Share | $0.05 | $0.31 | Weighted Average Shares Outstanding (Six Months Ended June 30) | Metric | 2022 (Shares) | 2021 (Shares) | | :-------------------------------- | :------------ | :------------ | | Basic | 7,225,641 | 6,808,339 | | Diluted | 7,687,980 | 8,593,630 | - **903,369 stock options** and **50,000 warrants** were excluded from the diluted net income per share calculation for the six months ended June 30, 2022, as their effect would have been anti-dilutive[56](index=56&type=chunk) [NOTE 10 — Income Taxes](index=19&type=section&id=NOTE%2010%20%E2%80%94%20Income%20Taxes) This note details the income tax benefit or expense, the valuation of deferred tax assets, and the primary drivers of tax changes Income Tax (Benefit) Expense (Six Months Ended June 30) | Year | Amount (USD) | | :--- | :--------------- | | 2022 | $116.49 thousand | | 2021 | $(1.86) million | - The deferred tax asset was valued at **$7.84 million** on June 30, 2022, primarily representing future income tax savings from net operating loss carryforwards[93](index=93&type=chunk) - The income tax benefit in 2021 was primarily attributed to a **$7.97 million tax deduction** from the disqualified disposition of incentive stock options[93](index=93&type=chunk) [NOTE 11 — Commitments and Contingencies](index=19&type=section&id=NOTE%2011%20%E2%80%94%20Commitments%20and%20Contingencies) This note outlines the company's operating lease commitments for its corporate headquarters and non-cancelable purchase commitments for inventory - The company commenced a new operating lease agreement for its corporate headquarters in Fremont, CA, on May 1, 2022, with the lease term expiring on **July 31, 2029**[59](index=59&type=chunk)[60](index=60&type=chunk) Operating Lease Balances (June 30, 2022) | Metric | Amount (USD) | | :-------------------------- | :--------------- | | Right-of-use assets | $3.78 million | | Operating lease liabilities | $3.88 million | Operating Lease Expense (Six Months Ended June 30) | Year | Amount (USD) | | :--- | :--------------- | | 2022 | $322.60 thousand | | 2021 | $214.44 thousand | - As of June 30, 2022, the company has non-cancelable purchase commitments for inventory totaling approximately **$12.07 million**[66](index=66&type=chunk) Future Minimum Lease Payments (as of June 30, 2022) | Period | Amount (USD) | | :----------------------------------- | :--------------- | | 2022 (July 1 - Dec 31) | $251.39 thousand | | 2023 | $615.41 thousand | | 2024 | $633.87 thousand | | 2025 | $652.88 thousand | | 2026 | $672.47 thousand | | Thereafter | $1.83 million | | **Total minimum payments** | **$4.66 million** | | Less: Present value factor | $(774.38) thousand | | **Total operating lease liabilities**| **$3.88 million** | [NOTE 12 — Subsequent Events](index=21&type=section&id=NOTE%2012%20%E2%80%94%20Subsequent%20Events) This note discloses significant events that occurred after the balance sheet date, including share repurchases, stock option exercises, and new stock grants - **89,274 shares of common stock** were repurchased from the market at an average price of **$3.02**[69](index=69&type=chunk) - **24,800 shares of common stock** were issued upon the exercise of stock options[70](index=70&type=chunk) - **6,900 shares of restricted stock** and **9,000 stock options** were granted from the 2004 Equity Incentive Plan[71](index=71&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial performance and condition, detailing product offerings, revenue trends, cost structures, liquidity, and capital resources. It highlights key drivers of financial changes and outlines critical accounting estimates [The Company and its Products](index=22&type=section&id=The%20Company%20and%20its%20Products) This section describes Socket Mobile's core business as a provider of data capture solutions, highlighting its product compatibility and recent new product introductions - Socket Mobile is a leading provider of data capture and delivery solutions, including barcode scanning and RFID/NFC technologies, for workforce mobilization across various industries[75](index=75&type=chunk) - Products are compatible with applications on Apple (iOS), Google (Android), and Microsoft (Windows) operating systems, supported by an easy-to-use Software Developer Kit (CaptureSDK)[75](index=75&type=chunk)[82](index=82&type=chunk) - New product introductions in Q2 2022 include the SocketScan S720 (1D/2D barcode scanner) and the S370 (barcode scanning and NFC reading/writing, including Mobile Driver's License standard)[76](index=76&type=chunk)[80](index=80&type=chunk) - In Q1 2022, the company launched SocketCam C820, a software-based barcode scanner offering a free data capture solution for App partners, turning mobile devices into high-performance scanners[83](index=83&type=chunk) [Results of Operations](index=24&type=section&id=Results%20of%20Operations) This section analyzes the company's revenue, gross profit margins, operating expenses, interest expense, and income tax for the reported periods Revenue Performance | Period | 2022 Revenue (USD) | 2021 Revenue (USD) | YoY Change (%) | | :------------------------- | :----------------- | :----------------- | :------------- | | Three Months Ended June 30 | $6.05 million | $5.95 million | +2% | | Six Months Ended June 30 | $12.3 million | $10.8 million | +15% | - The revenue increase was primarily driven by the deployment of business applications, particularly in retail, following the easing of COVID-19 restrictions[85](index=85&type=chunk) Gross Profit Margins | Period | 2022 Margin (%) | 2021 Margin (%) | Change (pp) | | :------------------------- | :-------------- | :-------------- | :---------- | | Three Months Ended June 30 | 50.2% | 54.7% | -4.5% | | Six Months Ended June 30 | 50.0% | 54.1% | -4.1% | - Margin decreases were primarily due to rising component costs and higher freight costs[87](index=87&type=chunk) Operating Expenses (Six Months Ended June 30) | Expense Category | 2022 Amount (USD) | 2021 Amount (USD) | YoY Change (%) | | :----------------------- | :---------------- | :---------------- | :------------- | | Research and Development | $2.18 million | $1.90 million | +14.3% | | Sales and Marketing | $1.86 million | $1.40 million | +33.7% | | General and Administrative | $1.47 million | $1.48 million | -0.3% | - R&D expense increase was mainly due to hiring for new product offerings and customer support. Sales and marketing increase was due to higher headcount and increased consulting. G&A saw a slight decrease overall, but a quarterly increase due to non-cash straight-line rent expense for new office space[88](index=88&type=chunk)[89](index=89&type=chunk)[90](index=90&type=chunk) Interest Expense, Net (Six Months Ended June 30) | Year | Amount (USD) | | :--- | :------------- | | 2022 | $91 thousand | | 2021 | $100 thousand | Income Tax (Benefit) Expense (Six Months Ended June 30) | Year | Amount (USD) | | :--- | :--------------- | | 2022 | $116.49 thousand | | 2021 | $(1.86) million | [Liquidity and Capital Resources](index=26&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's cash flow from operating, investing, and financing activities, highlighting key drivers of changes in liquidity Net Cash Provided by Operating Activities (Six Months Ended June 30) | Year | Amount (USD) | | :--- | :------------- | | 2022 | $599 thousand | | 2021 | $450 thousand | - Net cash used in operating activities in H1 2022 was approximately **$1.17 million**, primarily due to increased inventory levels (coping with supply issues and longer lead times), higher accounts receivable, and increased prepaid expenses/security deposit for the new lease agreement[96](index=96&type=chunk) Net Cash Used in Investing Activities (Six Months Ended June 30) | Year | Amount (USD) | | :--- | :--------------- | | 2022 | $(560) thousand | | 2021 | $(305) thousand | - Net cash used in financing activities was approximately **$546,000** in H1 2022, mainly from **$378,000 in treasury stock repurchases** and **$250,000 in term loan repayments**, partially offset by **$81,531 from employee stock options exercised**[99](index=99&type=chunk) - In H1 2021, net cash provided by financing activities was approximately **$2.65 million**, primarily from **$1.78 million in employee stock option proceeds** and **$875,000 borrowed on the CalCap loan**[99](index=99&type=chunk) [Critical Accounting Estimates](index=27&type=section&id=Critical%20Accounting%20Estimates) This section identifies the key accounting policies that require significant management estimates and judgments, such as revenue recognition and inventory valuation - Key accounting policies requiring significant estimates and judgments include Revenue Recognition and Accounts Receivable Reserves, Inventory Valuation, Stock-Based Compensation, Income Taxes, and Valuation of Goodwill[100](index=100&type=chunk) [Contractual Obligations](index=27&type=section&id=Contractual%20Obligations) This section presents a table summarizing the company's contractual cash obligations, including purchase commitments and operating lease payments, over various periods Contractual Cash Obligations (June 30, 2022) | Contractual Obligations | Total (USD) | Less than 1 year (USD) | 1 to 3 years (USD) | 4 to 5 years (USD) | More than 5 years (USD) | | :---------------------- | :------------ | :--------------------- | :----------------- | :----------------- | :---------------------- | | Unconditional purchase obligations with contract manufacturers | $12.07 million | $11.54 million | $526 thousand | $0 | $0 | | Operating lease | $4.66 million | $556 thousand | $1.27 million | $1.35 million | $1.49 million | | **Total** | **$16.73 million** | **$12.10 million** | **$1.79 million** | **$1.35 million** | **$1.49 million** | [Off-Balance Sheet Arrangements](index=28&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms that the company has no off-balance sheet arrangements as defined by Regulation S-K - As of June 30, 2022, the company had no off-balance sheet arrangements as defined in Item 303 of Regulation S-K[103](index=103&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=28&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section details the company's exposure to market risks, specifically interest rate fluctuations on its bank loans and credit lines, and foreign currency exchange rate risks, along with its hedging strategies [Interest Rate Risk](index=28&type=section&id=Interest%20Rate%20Risk) This section discusses the company's exposure to interest rate fluctuations on its variable-rate bank loans and credit lines - The company's exposure to market risk from interest rate changes primarily relates to its bank term loan and credit line facilities, which have variable interest rates based on the lender's prime rate[104](index=104&type=chunk) - Increases in interest rates could lead to higher interest expense on outstanding term loan and credit line balances[104](index=104&type=chunk) [Foreign Currency Risk](index=28&type=section&id=Foreign%20Currency%20Risk) This section addresses the company's exposure to foreign currency exchange rate risks, particularly for Euro-denominated transactions, and its hedging strategies - A substantial majority of the company's revenue, expense, and purchasing activities are transacted in U.S. dollars, but European distributors purchase in Euros, and European employee expenses are paid in Euros and British pounds[105](index=105&type=chunk) - The company hedges a significant portion of its European receivables denominated in Euros to mitigate foreign currency risk[105](index=105&type=chunk) - A **10% adverse change** in exchange rates would have resulted in an approximate **$38,000 decrease in net income** for Q2 2022 if left unprotected[105](index=105&type=chunk) - The total net adjustment for foreign currency effects in Q2 2022 was approximately **$15,900**[105](index=105&type=chunk) [Item 4. Controls and Procedures](index=29&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the quarter [Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures](index=29&type=section&id=Conclusion%20Regarding%20the%20Effectiveness%20of%20Disclosure%20Controls%20and%20Procedures) This section confirms management's conclusion that the company's disclosure controls and procedures were effective as of the reporting date - Management, with the participation of the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[107](index=107&type=chunk) [Changes in Internal Control Over Financial Reporting](index=29&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) This section reports that there were no material changes in internal control over financial reporting during the quarter - There were no changes in internal control over financial reporting during the quarter ended June 30, 2022, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[108](index=108&type=chunk) [Part II. Other Information](index=30&type=section&id=Part%20II.%20Other%20Information) This section provides additional information beyond the financial statements, including risk factors, equity sales, and exhibits [Item 1A. Risk Factors](index=30&type=section&id=Item%201A.%20Risk%20Factors) This section details various risks and uncertainties that could materially and adversely affect the company's business, financial condition, and results of operations, including global economic conditions, operational dependencies, market competition, intellectual property, and personnel-related challenges [Impact of COVID-19 Pandemic](index=30&type=section&id=Impact%20of%20COVID-19%20Pandemic) This section outlines the risks posed by the COVID-19 pandemic, including demand volatility, manufacturing disruptions, and supply chain failures - The ongoing COVID-19 pandemic poses risks including reductions or volatility in product demand, inability to meet customer needs due to manufacturing disruptions, and potential failures of third-party suppliers, manufacturers, and distributors[112](index=112&type=chunk)[113](index=113&type=chunk) - The ultimate impact of the pandemic and potential future variants on liquidity, financial position, results of operations, and cash flows remains highly uncertain[112](index=112&type=chunk) [Deterioration in Global Economic Conditions](index=31&type=section&id=Deterioration%20in%20Global%20Economic%20Conditions) This section highlights the adverse effects of global economic downturns and geopolitical events on the company's business and funding capabilities - A deterioration in global economic conditions, including impacts from COVID-19 and geopolitical events, may adversely affect the business and financial condition, potentially limiting the ability to raise additional funds[114](index=114&type=chunk) [Inability to Maintain Ongoing Profitability](index=31&type=section&id=Inability%20to%20Maintain%20Ongoing%20Profitability) This section discusses the challenges in sustaining profitability, requiring continuous business growth, App provider support, and successful new product development - Maintaining profitability requires continued business growth, ongoing support to App providers, and successful new product development; failure to achieve these objectives could lead to operating losses or suspension of operations[115](index=115&type=chunk) [Need for Additional Capital](index=31&type=section&id=Need%20for%20Additional%20Capital) This section addresses the potential need for additional capital to fund growth or cover operating losses, with no guarantee of availability or favorable terms - The company may require additional capital to fund growth or operating losses, but there is no assurance such capital will be available on reasonable terms or without substantial dilution to investors[116](index=116&type=chunk) [Dependence on Application Providers](index=31&type=section&id=Dependence%20on%20Application%20Providers) This section highlights the company's reliance on App providers for product integration, marketing, and sales, and the potential revenue impact of their delays or failures - Sales projections are highly dependent on App providers successfully integrating, marketing, and selling their applications that use the company's data capture products; delays or failures by these providers could adversely affect revenue[117](index=117&type=chunk) [Failure to Maintain Effective Internal Controls](index=32&type=section&id=Failure%20to%20Maintain%20Effective%20Internal%20Controls) This section warns that inadequate internal controls could negatively impact financial reporting, fraud prevention, business operations, and stock price - Failure to maintain adequate internal controls could materially adversely affect business, operating results, and stock price by hindering reliable financial reporting and fraud prevention[118](index=118&type=chunk) [Security Risks](index=32&type=section&id=Security%20Risks) This section addresses the risk of unauthorized access to business records and information despite existing security measures - Despite security protections, business records and information could be hacked by unauthorized personnel, potentially bypassing existing controls and procedures[119](index=119&type=chunk) [Fluctuating Quarterly Operating Results](index=32&type=section&id=Fluctuating%20Quarterly%20Operating%20Results) This section explains that quarterly operating results are subject to fluctuations due to various factors, including demand, order timing, and competitive conditions - Quarterly operating results are expected to fluctuate due to factors such as demand, timing of orders, new product introductions, competitive conditions, and general economic conditions[120](index=120&type=chunk)[121](index=121&type=chunk) - Unanticipated declines or delays in orders can cause significant variations in operating results, potentially leading to a decline in stock price[122](index=122&type=chunk) [Compliance with Bank Covenants](index=33&type=section&id=Compliance%20with%20Bank%20Covenants) This section emphasizes the necessity of complying with bank credit agreement covenants to maintain lines of credit, noting the bank's discretion in making advances - The company must remain in compliance with bank credit agreement covenants to maintain lines of credit, and the bank retains discretion in making advances[123](index=123&type=chunk) [Dependence on Deferred Tax Assets](index=33&type=section&id=Dependence%20on%20Deferred%20Tax%20Assets) This section highlights that deferred tax assets are a significant portion of assets, and their realization depends on future tax profitability - Deferred tax assets are a significant portion of assets and depend on future tax profitability for realization; failure to achieve sufficient profitability could result in a loss for these assets[124](index=124&type=chunk) [Reliance on Limited Suppliers](index=34&type=section&id=Reliance%20on%20Limited%20Suppliers) This section addresses the risks associated with relying on a limited number of suppliers for component parts, which could lead to manufacturing disruptions - The company relies on a limited number of suppliers for component parts, and shortages or delays could disrupt manufacturing and materially adversely affect financial results[126](index=126&type=chunk) [Failure to Develop New Products Rapidly](index=34&type=section&id=Failure%20to%20Develop%20New%20Products%20Rapidly) This section discusses the risk of failing to rapidly develop and introduce new products in a fast-changing technology market, which could harm competitiveness - The market for products is characterized by rapidly changing technology and short product life cycles; failure to develop and introduce new products successfully and on a timely basis would harm competitiveness and revenue generation[127](index=127&type=chunk)[128](index=128&type=chunk) [Accounts Receivable Collection Risk](index=34&type=section&id=Accounts%20Receivable%20Collection%20Risk) This section addresses the risk of uncollectible receivables from customers, particularly distributors, potentially requiring increased reserves - There is a risk of not collecting receivables from customers, particularly distributors, who may experience financial difficulties, potentially requiring increased reserves for uncollectible accounts[129](index=129&type=chunk) [Increased Competition](index=35&type=section&id=Increased%20Competition) This section highlights the highly competitive market, intense price competition, and the presence of larger competitors, which could lead to reduced margins and market share loss - The market is highly competitive, with larger competitors, intense price competition, and products with built-in competing functions, which could lead to price reductions, fewer orders, reduced margins, and loss of market share[130](index=130&type=chunk)[133](index=133&type=chunk) [Inaccurate Demand Forecasting](index=35&type=section&id=Inaccurate%20Demand%20Forecasting) This section explains how inaccurate demand forecasting can lead to excess inventory, write-downs, reduced cash, or increased costs and lower profit margins - Inaccurate demand forecasting can lead to excess inventory, write-downs, and reduced cash if demand is lower than expected, or increased costs and lower profit margins if demand exceeds forecasts and strains production[131](index=131&type=chunk)[132](index=132&type=chunk) [Reliance on Distributors](index=36&type=section&id=Reliance%20on%20Distributors) This section discusses the risks associated with relying on distributors for product distribution, including inventory build-up, product returns, and potential agreement terminations - The company relies primarily on distributors for product distribution, exposing it to risks such as inventory build-up, product returns, and the potential termination of nonexclusive agreements on short notice[134](index=134&type=chunk)[135](index=135&type=chunk)[136](index=136&type=chunk) [Dependence on Alliances and Third-Party Relationships](index=36&type=section&id=Dependence%20on%20Alliances%20and%20Third-Party%20Relationships) This section highlights the company's dependence on strategic alliances and relationships with mobile application market participants, and the risks of disruptions or terminations - The company depends on strategic alliances and business relationships with mobile application market participants; disruptions in these relationships could hinder product development and sales[137](index=137&type=chunk) - Collaborations with major operating system providers (Apple, Google, Microsoft) are not guaranteed and can be terminated, impacting product compatibility and market opportunities[138](index=138&type=chunk) [Intellectual Property Protection](index=37&type=section&id=Intellectual%20Property%20Protection) This section addresses the risks related to the sufficiency of intellectual property protection and the potential for infringement claims - The company's intellectual property and proprietary rights may be insufficient to protect its competitive position, as competitors could copy technology, develop similar solutions independently, or design around patents[139](index=139&type=chunk)[140](index=140&type=chunk) - The company faces risks of intellectual property infringement claims, which can be complex, costly, protracted, and disruptive to business operations[142](index=142&type=chunk)[144](index=144&type=chunk) [New Industry Standards](index=38&type=section&id=New%20Industry%20Standards) This section discusses how evolving industry standards may necessitate costly product redesigns and could render existing products incompatible - Evolving industry standards may require product redesigns, leading to significant investments in time and resources, and potentially rendering products incompatible if not compliant[146](index=146&type=chunk) [Product Flaws and Defects](index=38&type=section&id=Product%20Flaws%20and%20Defects) This section addresses the adverse impact of undetected product flaws and defects on sales, requiring remedial action and potentially causing negative publicity - Undetected flaws and defects in products may disrupt sales, require expensive and time-consuming remedial action, and cause unfavorable publicity, adversely affecting business and operating results[147](index=147&type=chunk) [Loss of Senior Personnel](index=38&type=section&id=Loss%20of%20Senior%20Personnel) This section highlights the company's dependence on key officers and senior managers, and the potential adverse impact of their loss on competitiveness - The company's future success depends on the continued service of key officers and senior managers; the loss of such personnel could adversely affect its ability to compete[148](index=148&type=chunk) [Expensing of Options and Restricted Stocks](index=39&type=section&id=Expensing%20of%20Options%20and%20Restricted%20Stocks) This section explains that expensing stock options and restricted stocks reduces net income and earnings per share, potentially impacting profitability and employee attraction - The expensing of stock options and restricted stocks reduces net income and earnings per share, making profitability harder to achieve and potentially impacting the ability to attract and retain employees[150](index=150&type=chunk) [Attracting and Retaining Skilled Personnel](index=39&type=section&id=Attracting%20and%20Retaining%20Skilled%20Personnel) This section emphasizes the challenge of attracting and retaining highly skilled sales, marketing, and product development personnel in a competitive market - The ability to achieve increased revenues and develop new products depends on attracting and retaining highly skilled sales, marketing, and product development personnel, for whom competition is intense[151](index=151&type=chunk) [Risks of Export Sales](index=39&type=section&id=Risks%20of%20Export%20Sales) This section details the risks associated with export sales, including longer payment cycles, regulatory changes, foreign operation management, and currency fluctuations - Export sales are subject to risks including longer payment cycles, unexpected changes in regulatory requirements, difficulties in managing foreign operations, and political/economic instability[152](index=152&type=chunk) - An increase in the U.S. dollar's value relative to the Euro or British pound could make products less competitive in European markets and result in foreign currency losses[152](index=152&type=chunk) [External Events Affecting Facilities/Operations](index=40&type=section&id=External%20Events%20Affecting%20Facilities/Operations) This section addresses the potential for major disasters, health epidemics, or geopolitical instability to damage facilities, disrupt production, and incur expenses - Major disasters (e.g., earthquakes in Northern California), health epidemics (e.g., COVID-19), or geopolitical instability (e.g., Russia's military action against Ukraine) could seriously damage facilities, disrupt production, and incur expenses[153](index=153&type=chunk) [Stock Price Volatility](index=40&type=section&id=Stock%20Price%20Volatility) This section discusses the potential for stock price fluctuations due to factors such as substantial share sales, general economic conditions, and market sentiment - The sale of a substantial number of common shares, including those underlying outstanding options and restricted stock, could cause the market price of the common stock to decline[154](index=154&type=chunk)[156](index=156&type=chunk) - The trading price of common stock is subject to wide fluctuations due to factors beyond the company's control, including general economic conditions and market sentiment for high-technology stocks[157](index=157&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=41&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section states that there were no unregistered sales of equity securities or use of proceeds to report during the period - No unregistered sales of equity securities or use of proceeds were reported[159](index=159&type=chunk) [Item 6. Exhibits](index=41&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed or furnished with the Form 10-Q, including various certifications and the XBRL document - Exhibits include certifications from the CEO and CFO (31.1*, 31.2*, 32.1**) and the XBRL Document (101)[159](index=159&type=chunk) [Signatures](index=42&type=section&id=Signatures) This section contains the official signatures of the company's President and Chief Executive Officer, and the Vice President of Finance and Administration and Chief Financial Officer, certifying the report - The report was signed by Kevin J. Mills (President and CEO) and Lynn Zhao (VP of Finance and Administration and CFO) on August 15, 2022[165](index=165&type=chunk)

Financial Data and Key Metrics Changes - In Q2 2022, the company's revenue increased slightly to $6.05 million compared to $6 million in Q2 2021, while gross margins decreased to 50.2% from 54.7% in Q2 2021 [6][7] - Earnings per share were $0.01, down from $0.27 in Q2 2021, which included a tax benefit of $0.20 per share [7][25] - Operating income was $189,000, representing a 3% operating margin, with adjusted EBITDA decreasing by 46% to $0.6 million from $1.2 million in the prior year [25][26] Business Line Data and Key Metrics Changes - Retail business deployment was significantly impacted by hardware component shortages, leading to a 38% drop in deployment-associated revenue [9] - The upgrade portion of the business increased to 62% of total retail revenue, indicating strong performance in this segment [10] Market Data and Key Metrics Changes - The company faced supply chain issues that affected its ability to deliver products, particularly impacting retail customers who could not obtain necessary hardware [21][22] - Inventory levels were at $4.9 million, down from $5.2 million at the end of 2021, with increased inventory helping navigate supply chain disruptions [27] Company Strategy and Development Direction - The company plans to focus more on the upgrade business for the remainder of the year and introduced the SocketScan S720, designed to meet the growing demand for QR code scanning [11][12] - Significant progress was made in enhancing software tools, including the Capture SDK, which now includes camera-based scanning capabilities [14][16] - The company is investing in the NFC business and sees potential in the digital ID space, positioning itself as a significant player in the mobile driver's license reader market [20] Management's Comments on Operating Environment and Future Outlook - Management acknowledged strong headwinds from supply chain issues and material shortages, impacting overall performance [7][21] - The company remains optimistic about future growth opportunities, particularly with new product introductions and enhancements in technology [12][20] Other Important Information - Operating expenses increased by 17% year-over-year, driven by higher costs in engineering and sales and marketing [22][25] - The company generated a free cash flow of $0.6 million and ended Q2 with a cash balance of $5.6 million [26][27] Q&A Session Summary Question: Share buyback details - The company has purchased 150,000 shares under its 10B5 plan and plans to continue buying another 30,000 shares this quarter [31] Question: Criteria for share buyback - The share buyback is based on the average trading volume of the previous four weeks [34] Question: Product expectations and supply chain issues - Management discussed the impact of supply chain disruptions on product availability and the need for a diverse product range to meet varying customer needs [39][40] Question: Scanner sales in Q2 - The company sold 26,537 scanners in Q2, slightly down from the previous quarter [47] Question: Future pricing strategy - Management indicated that they do not plan to raise prices to offset increased component costs, aiming to stabilize gross margins instead [48][49] Question: Sales and marketing expenses - Increased sales and marketing costs are attributed to website upgrades and international market expansion efforts, which are expected to stabilize after initial investments [51][55] Question: Upgrade program for scanners - The upgrade program allows customers to exchange their old scanners for new ones at a rebate, with a focus on sustainability by refurbishing returned units [56][62] Question: QR code strategy - Management sees a growing trend in QR code usage for payments and plans to enhance product offerings to support this shift [76][78]

Part I [Part I. Financial Information](index=4&type=section&id=Part%20I%2E%20Financial%20Information) Unaudited Q1 2022 financial statements show revenue up 31% to $6.3 million, net income at $342 thousand, and $452 thousand net cash used in operations [Item 1. Financial Statements](index=4&type=section&id=Item%201%2E%20Financial%20Statements) Unaudited Q1 2022 financial statements show revenue up 31% to $6.3 million, net income at $342 thousand, total assets at $25.9 million, and $452 thousand net cash used in operations [Condensed Statements of Operations](index=4&type=section&id=Condensed%20Statements%20of%20Operations) Q1 2022 revenues increased 31% to $6.3 million, with gross profit at $3.1 million, operating income at $464 thousand, and net income at $342 thousand Condensed Statements of Operations | Financial Metric | Three Months Ended March 31, 2022 ($) | Three Months Ended March 31, 2021 ($) | | :--- | :--- | :--- | | **Revenues** | $6,293,002 | $4,812,979 | | **Gross Profit** | $3,127,662 | $2,574,043 | | **Operating Income** | $463,704 | $242,010 | | **Net Income** | $341,933 | $202,902 | | **Diluted EPS** | $0.04 | $0.03 | [Condensed Balance Sheets](index=5&type=section&id=Condensed%20Balance%20Sheets) As of March 31, 2022, total assets reached $25.9 million, total liabilities decreased to $5.4 million, and stockholders' equity increased to $20.5 million Condensed Balance Sheets | Balance Sheet Item | March 31, 2022 (Unaudited) ($) | December 31, 2021 ($) | | :--- | :--- | :--- | | **Total Current Assets** | $14,724,100 | $14,380,788 | | **Total Assets** | $25,893,255 | $25,575,101 | | **Total Current Liabilities** | $5,336,440 | $5,389,357 | | **Total Liabilities** | $5,357,096 | $5,528,638 | | **Total Stockholders' Equity** | $20,536,159 | $20,046,463 | [Condensed Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Statements%20of%20Stockholders%27%20Equity) Stockholders' equity increased to $20.5 million by March 31, 2022, driven by $342 thousand net income and $223 thousand stock-based compensation - Key changes in stockholders' equity for the three months ended March 31, 2022, included net income of **$341,933**, stock-based compensation of **$223,446**, and a reduction of **$115,215** from restricted stock retired for tax withholding[17](index=17&type=chunk) [Condensed Statements of Cash Flows](index=8&type=section&id=Condensed%20Statements%20of%20Cash%20Flows) Q1 2022 saw a net cash outflow of $673 thousand, primarily from $452 thousand used in operating activities and $135 thousand in investing activities Condensed Statements of Cash Flows | Cash Flow Activity | Three Months Ended March 31, 2022 ($) | Three Months Ended March 31, 2021 ($) | | :--- | :--- | :--- | | **Net cash (used in) provided by operating activities** | ($452,413) | $291,236 | | **Net cash used in investing activities** | ($134,919) | ($163,379) | | **Net cash (used in) provided by financing activities** | ($85,468) | $2,711,658 | | **Net (decrease) increase in cash** | ($672,800) | $2,839,515 | [Notes to Condensed Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Financial%20Statements) Notes detail accounting policies, SpringCard intangible asset, inventory, bank financing, segment revenues, customer concentrations, and a subsequent share repurchase program - In February 2021, the company acquired a technology license from SpringCard SAS, resulting in an intangible asset with a carrying amount of **$1,782,137** as of March 31, 2022, which is being amortized over 15 years[34](index=34&type=chunk)[36](index=36&type=chunk)[37](index=37&type=chunk) Revenue by Geography | Revenue by Geography | Q1 2022 ($) | Q1 2021 ($) | | :--- | :--- | :--- | | United States | $4,882,773 | $3,563,055 | | Europe | $697,971 | $777,580 | | Asia and rest of world | $712,258 | $472,344 | - The company has significant customer concentration, with Ingram Micro, BlueStar, and ScanSource accounting for **27%**, **20%**, and **19%** of total revenues, respectively, in Q1 2022[53](index=53&type=chunk) - Subsequent to the quarter end, the company repurchased **90,913** shares of common stock at an average price of **$4.11**[75](index=75&type=chunk)[76](index=76&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=21&type=section&id=Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q1 2022 revenue growth of 31% driven by economic reopening, gross margin decline due to rising costs, increased operating expenses from hiring, and net cash outflow from operations - Total revenues for Q1 2022 increased **31%** to approximately **$6.3 million** compared to **$4.8 million** in Q1 2021, driven by the deployment of business applications in retail as the economy re-opens[92](index=92&type=chunk) - Gross profit margins decreased to **49.7%** in Q1 2022 from **53.5%** in Q1 2021, primarily due to rising component costs and higher freight costs[94](index=94&type=chunk) - Operating expenses increased year-over-year, with R&D expenses up **13%** and Sales & Marketing expenses up **36%**, mainly due to hiring[95](index=95&type=chunk)[96](index=96&type=chunk) - Net cash used in operating activities was **$452,413** in Q1 2022, a significant shift from the **$291,236** provided by operations in Q1 2021, mainly due to increases in accounts receivable and a security deposit for a new office lease[102](index=102&type=chunk)[103](index=103&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=27&type=section&id=Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company faces market risks from interest rate fluctuations on variable-rate loans and foreign currency exposure from Euro and British pound sales, partially mitigated by hedging - Interest rate risk is tied to the company's bank term loan and credit lines, which have variable interest rates based on the lender's prime rate[111](index=111&type=chunk) - Foreign currency risk is primarily from European sales denominated in Euros and British pounds; a hypothetical **10%** adverse change in exchange rates would have decreased Q1 2022 net income by approximately **$34,000** if unprotected[112](index=112&type=chunk) [Controls and Procedures](index=28&type=section&id=Controls%20and%20Procedures) The CEO and CFO concluded that disclosure controls and procedures are effective, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[114](index=114&type=chunk) - No changes occurred in the company's internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[115](index=115&type=chunk) Part II [Part II. Other Information](index=29&type=section&id=Part%20II%2E%20Other%20Information) [Risk Factors](index=29&type=section&id=Item%201A%2E%20Risk%20Factors) The company identifies key risks including the COVID-19 pandemic, global economic conditions, supply chain reliance, competition, and intellectual property infringement - The business could be materially affected by the ongoing COVID-19 pandemic and deteriorating global economic conditions, which could reduce demand, disrupt manufacturing, and impact third-party suppliers[119](index=119&type=chunk)[121](index=121&type=chunk) - The company is dependent on a limited number of qualified suppliers for components, and shortages or delays could have a material adverse effect on financial results[134](index=134&type=chunk) - A significant portion of sales depends on a limited number of distributors; in Q1 2022, Ingram Micro® and BlueStar together represented approximately **47%** of worldwide sales[142](index=142&type=chunk) - The market is characterized by rapidly changing technology and short product life cycles, requiring successful and timely development of new products to compete effectively[135](index=135&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=40&type=section&id=Item%202%2E%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No unregistered sales of equity securities or use of proceeds were reported during the period - There were no unregistered sales of equity securities or use of proceeds to report for the period[165](index=165&type=chunk) [Exhibits](index=40&type=section&id=Item%206%2E%20Exhibits) This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and the XBRL document - Exhibits filed with the report include certifications from the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act, as well as the XBRL Interactive Data File[165](index=165&type=chunk) [Signatures](index=41&type=section&id=Signatures) The report was signed on May 16, 2022, by Kevin J. Mills, President and CEO, and Lynn Zhao, CFO - The report is signed by Kevin J. Mills (President and CEO) and Lynn Zhao (CFO) on May 16, 2022[170](index=170&type=chunk)

Financial Data and Key Metrics Changes - In Q1 2022, revenue increased by 31% to $6.3 million compared to $4.8 million in Q1 2021 [5] - Gross margins decreased to 49.7% from 52.1% in Q1 2021 due to higher component and freight costs [5] - Earnings per share rose to $0.04 from $0.03 in Q1 2021 [5] - Operating income was $464,000, representing a 7% operating margin [18] - Adjusted EBITDA increased to $0.9 million, up 57% from the prior quarter [18] Business Line Data and Key Metrics Changes - Significant progress was made with the Capture SDK software tools, including the announcement of Capture SDK for Flutter, which is used by over 2 million developers [9] - The launch of the SocketCam C820, a new product that turns mobile devices into high-performance barcode scanners, was highlighted [10] - The company aims to expand its offerings to serve a wider audience, from price-sensitive to performance-sensitive customers [11] Market Data and Key Metrics Changes - The company is experiencing supply chain challenges, particularly with the availability of printers and cash stores for mobile point-of-sale deployments [6] - Inventory levels increased to $5.2 million from $3.7 million a year ago, enabling the company to meet customer demand despite supply constraints [19] Company Strategy and Development Direction - The company is focused on becoming a more comprehensive data capture company and is investing in the digital ID and mobile driver's license space [13] - The strategy includes reducing discounts and increasing sales in lower discount channels to recover margin losses [15] Management's Comments on Operating Environment and Future Outlook - Management expects supply chain issues to remain challenging for most of 2022 but believes the situation is stabilizing [6] - The company is building a solid foundation for future revenue growth, with expectations for stronger performance in 2023 and beyond [8] Other Important Information - The company ended Q1 with a cash balance of $5.4 million and a current ratio of 2.8 to 1, indicating a strengthened balance sheet [19] - A share buyback program was approved, targeting the repurchase of 91,000 shares in Q2, with 71,000 shares already repurchased at an average price of $4.15 [19] Q&A Session Summary Question: How will the free C820 product help increase revenue and earnings? - Management explained that the free C820 product aims to reduce the rework cycle for application developers by allowing them to integrate both camera-based and dedicated scanning solutions [22][24] Question: What was the total units sold during Q1? - The company sold 27,700 units in Q1, which is an increase from the previous quarter [27][28] Question: What is the purpose of the share buyback program? - Management stated that the share buyback is intended to show confidence in the stock and to reduce the number of shares outstanding, as they believe the stock is undervalued [42][43]

PART I Details the company's business operations, risk factors, properties, and legal proceedings [Item 1. Business](index=4&type=section&id=Item%201.%20Business) Socket Mobile provides mobile data capture solutions, focusing on cordless barcode scanners and RFID/NFC devices [General](index=4&type=section&id=General) The company provides data capture solutions for various sectors and trades on NASDAQ under the symbol 'SCKT' - Socket Mobile, Inc, founded in 1992, is a leading provider of data capture solutions for workforce mobilization across multiple sectors[14](index=14&type=chunk)[15](index=15&type=chunk) - The company's common stock trades on the NASDAQ Capital Market under the symbol **'SCKT'**[15](index=15&type=chunk) [Products](index=5&type=section&id=Products) The company's product portfolio includes cordless data capture devices, RFID/NFC readers, and a software developer kit - Primary products are cordless data capture devices connecting via Bluetooth, compatible with **Apple, Google, and Microsoft** operating systems[17](index=17&type=chunk) - The company offers a Software Developer Kit (Capture-SDK) for easy integration of advanced scanning features into mobile applications[17](index=17&type=chunk)[23](index=23&type=chunk) - Product lines include the Companion SocketScan (S700 series), durable Companion DuraScan (D700 series), and one-handed Attachable Family (DuraSled, SocketScan 800)[18](index=18&type=chunk)[19](index=19&type=chunk)[21](index=21&type=chunk)[22](index=22&type=chunk) - Contactless RFID/NFC reader/writers (D600, S550) utilize 1356 MHz technology for smart card and NFC applications[23](index=23&type=chunk) - Products are designed in-house, manufactured by third parties, and distributed from the Newark, California facility[24](index=24&type=chunk) [Our Mission, Vision and Core Values](index=7&type=section&id=Our%20Mission%2C%20Vision%20and%20Core%20Values) The company aims to provide innovative data capture tools while managing complexity for its customers - **Mission**: To provide innovative and cost-effective data capture tools for businesses using mobile platforms[26](index=26&type=chunk) - **Vision**: To manage data capture and delivery complexity, allowing customers to focus on data applications[27](index=27&type=chunk) - **Core Values**: Accountability, Customer Focus, Excellence, Integrity, and Mutual Respect[27](index=27&type=chunk)[28](index=28&type=chunk)[29](index=29&type=chunk) [Marketing Dynamics](index=7&type=section&id=Marketing%20Dynamics) The company's marketing strategy focuses on supporting application providers and building a strong brand image - The company actively supports application providers with its Capture-SDK, training, and technical support[30](index=30&type=chunk) - Revenues are primarily driven by barcode scanner sales integrated into **mPOS (mobile Point of Sale)** applications[32](index=32&type=chunk) - Products are distributed through a worldwide network including major distributors like Ingram Micro®, ScanSource®, and Blue Star[35](index=35&type=chunk) - The company emphasizes its brand image for quality, standards-based connectivity, compact design, and ease of use[36](index=36&type=chunk) [Competition and Competitive Risks](index=9&type=section&id=Competition%20and%20Competitive%20Risks) The company differentiates itself through software in a competitive market and faces less competition in the RFID/NFC space - The mobile data capture market is competitive, with Socket Mobile differentiating its hardware via its **Capture-SDK software**[38](index=38&type=chunk)[39](index=39&type=chunk) - Competitors in cordless barcode scanning include Koamtec, Code Corporation, and camera-based apps, with Datalogic and Zebra offering more rugged devices[39](index=39&type=chunk) - For contactless RFID/NFC reader/writers, the company believes it is an early entrant with less direct competition[40](index=40&type=chunk) [Proprietary Technology and Intellectual Property](index=9&type=section&id=Proprietary%20Technology%20and%20Intellectual%20Property) The company protects its competitive position through a portfolio of patents, trademarks, and proprietary software - The company holds **56 U.S. patents**, 13 design patents, and registered trademarks including 'Socket' and 'DuraScan'[41](index=41&type=chunk) - Proprietary software enables unique data collection functions for Apple, Android, and Windows mobile devices[43](index=43&type=chunk) - Intellectual property protection relies on patents, copyrights, trademarks, and confidentiality agreements[44](index=44&type=chunk) [Personnel](index=10&type=section&id=Personnel) The company's employee headcount increased to 53 in 2021, distributed across key operational departments - Total employee headcount was **53 as of December 31, 2021**, up from 48 in 2020[45](index=45&type=chunk) - As of December 31, 2021, employees were distributed as follows: 14 in sales/marketing, 15 in engineering, 7 in finance/admin, and 17 in operations[45](index=45&type=chunk) [Item 1A. Risk Factors](index=11&type=section&id=Item%201A.%20Risk%20Factors) The company faces risks from the global economy, supply chain dependencies, technological changes, and competition - The **COVID-19 pandemic** and global economic conditions pose risks to demand, manufacturing, and third-party stability[48](index=48&type=chunk)[49](index=49&type=chunk)[50](index=50&type=chunk) - Failure to maintain profitability or secure additional capital could adversely affect operations and growth[51](index=51&type=chunk)[52](index=52&type=chunk) - Dependence on application providers for product integration means their failures could negatively impact sales[53](index=53&type=chunk) - Quarterly operating results are subject to **significant fluctuations**, making forecasting difficult[56](index=56&type=chunk)[59](index=59&type=chunk) - Reliance on a limited number of suppliers and distributors creates manufacturing and sales channel risks[62](index=62&type=chunk)[70](index=70&type=chunk) - The market is characterized by **rapidly changing technology** and short product life cycles, requiring continuous innovation[63](index=63&type=chunk)[64](index=64&type=chunk) - Intellectual property rights may be insufficient to protect the company's competitive position[75](index=75&type=chunk)[78](index=78&type=chunk)[82](index=82&type=chunk) - The loss of senior personnel or inability to attract skilled staff could harm the business[84](index=84&type=chunk)[86](index=86&type=chunk) - Export sales expose the company to economic, political, regulatory, and foreign currency risks[87](index=87&type=chunk) [Item 1B. Unresolved Staff Comments](index=21&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company has no unresolved staff comments from the SEC - No unresolved staff comments[93](index=93&type=chunk) [Item 2. Properties](index=22&type=section&id=Item%202.%20Properties) The company is relocating its headquarters from a leased facility in Newark to a new leased facility in Fremont, California - Current facility: 37,100 sq-ft office in Newark, CA, lease expires June 2022[94](index=94&type=chunk) - New facility: **35,913 sq-ft in Fremont, CA**, 87-month lease starting May 1, 2022[95](index=95&type=chunk) [Item 3. Legal Proceedings](index=22&type=section&id=Item%203.%20Legal%20Proceedings) The company is not currently a party to any material legal proceedings - The company is not a party to any material legal proceedings[96](index=96&type=chunk) [Item 4. Mine Safety Disclosures](index=22&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[97](index=97&type=chunk) PART II Presents the company's stock market information, selected financial data, management's analysis, and financial statements [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=22&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's stock trades on NASDAQ, with details on stockholders, dividend policy, and performance comparison - Common stock trades on NASDAQ Marketplace under symbol **'SCKT'**[99](index=99&type=chunk) - As of March 25, 2022, there were approximately **10,000 beneficial stockholders** and 7,273,051 shares outstanding[6](index=6&type=chunk)[99](index=99&type=chunk) - The company has not paid dividends and intends to retain earnings for business use[99](index=99&type=chunk) - A five-year performance graph compares stockholder return against the Russell 2000 and NASDAQ Computer & Data Processing indices[102](index=102&type=chunk) [Item 6. Selected Financial Data](index=24&type=section&id=Item%206.%20Selected%20Financial%20Data) This section provides a five-year summary of key income statement and balance sheet financial data Selected Financial Data (Years Ended December 31, in thousands) | Metric | 2017 | 2018 | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Income Statement Data:** | | | | | | | Revenues | $21,286 | $16,454 | $19,253 | $15,700 | $23,199 | | Gross profit | $11,390 | $8,456 | $10,101 | $8,335 | $12,436 | | Operating expenses | $8,972 | $9,042 | $9,494 | $12,686 | $9,739 | | Net income (loss) | $(880) | $(571) | $287 | $(3,279) | $4,466 | | Basic EPS | $(0.14) | $(0.09) | $0.05 | $(0.51) | $0.58 | | Diluted EPS | $(0.14) | $(0.09) | $0.05 | $(0.51) | $0.48 | | **Balance Sheet Data (At December 31):** | | | | | | | Cash and cash equivalents | $3,380 | $1,085 | $959 | $2,122 | $6,096 | | Total assets | $20,405 | $19,148 | $20,009 | $15,609 | $25,575 | | Total stockholders' equity | $17,781 | $12,956 | $13,785 | $11,173 | $20,046 | [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Analyzes the company's financial condition, liquidity, and results of operations for fiscal years 2021 and 2020 [Liquidity and Capital Resources](index=25&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity is supported by operating cash flow, stock option exercises, and credit facilities Cash and Cash Flow Summary (in millions) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Cash balance (Dec 31) | $6.1 | $2.1 | | Net cash from operating activities | $2.1 | $0.8 | | Net cash used in investing activities | $0.7 | $0.5 | | Net cash from financing activities | $2.5 | $0.9 | - Financing activities in 2021 included **$1.9 million** from employee stock option exercises and **$625,000** net borrowing on the CalCap Loan[109](index=109&type=chunk) - The company has an existing **$2.5 million** revolving credit facility maturing January 31, 2023, with no outstanding drawings[110](index=110&type=chunk) [Critical Accounting Policies](index=26&type=section&id=Critical%20Accounting%20Policies) Key accounting policies involve significant estimates for revenue recognition, inventory valuation, and goodwill - Key accounting policies requiring significant estimates include Revenue Recognition, Inventory Valuation, and Goodwill[113](index=113&type=chunk) - Revenue from distributors is recognized upon shipment, less a reserve for estimated returns[116](index=116&type=chunk) Deferred Revenue and Cost on Shipments to Distributors | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Deferred revenue | ~$407,000 | ~$451,000 | | Deferred cost | ~$159,000 | ~$170,000 | - Inventory is valued at the lower of cost or market, with reserves for surplus or obsolete items[122](index=122&type=chunk) - **Goodwill was fully written off ($4.4 million)** as of September 30, 2020, due to a stock price drop[125](index=125&type=chunk)[193](index=193&type=chunk) - Deferred tax assets are recognized based on the likelihood of future profitability, with a valuation allowance applied if uncertain[127](index=127&type=chunk) [Results of Operations for Years Ended December 31, 2021 and 2020](index=28&type=section&id=Results%20of%20Operations%20for%20Years%20Ended%20December%2031%2C%202021%20and%202020) Revenue grew significantly in 2021 due to strong demand, leading to improved profitability compared to 2020 Key Financial Results (Years Ended December 31, in millions) | Metric | 2021 | 2020 | Change YoY | | :--- | :--- | :--- | :--- | | Revenues | $23.2 | $15.7 | +48% | | Gross Margins | 53.6% | 53.1% | +0.5 pp | | Research and Development Expense | $4.0 | $3.1 | +26% | | Sales and Marketing Expense | $3.0 | $2.8 | +5% | | General and Administrative Expense | $2.8 | $2.3 | +22% | | Interest Expense, net | $0.20 | $0.10 | +100% | | Net income (loss) before income taxes | $2.56 | $(3.33) | N/A | | Income tax benefit (expense) | $1.90 | $0.05 | N/A | | Net income (loss) | $4.47 | $(3.28) | N/A | - The **48% revenue increase** in 2021 was driven by strong application-driven demand, particularly in retail[129](index=129&type=chunk) - Companion SocketScan products represented **69% of 2021 revenue**, increasing 58% YoY[129](index=129&type=chunk) - R&D expenses increased due to higher personnel costs, incentive compensation, and amortization of new intangible assets[132](index=132&type=chunk) - The 2021 effective tax rate was **negative 45.6%**, including a **$9.2 million** tax benefit from stock option dispositions[139](index=139&type=chunk) [Quarterly Results of Operations](index=30&type=section&id=Quarterly%20Results%20of%20Operations) Quarterly results show significant fluctuations driven by order timing, product mix, and operating expense levels Summary Quarterly Data (in thousands) | Metric | Mar 31, 2020 | Jun 30, 2020 | Sep 30, 2020 | Dec 31, 2020 | Mar 31, 2021 | Jun 30, 2021 | Sep 30, 2021 | Dec 31, 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $4,221 | $2,715 | $4,109 | $4,655 | $4,813 | $5,953 | $6,319 | $6,114 | | Gross profit | $2,224 | $1,361 | $2,274 | $2,476 | $2,574 | $3,255 | $3,423 | $3,185 | | Total operating expenses | $2,315 | $2,171 | $6,252 | $1,948 | $2,332 | $2,441 | $2,469 | $2,497 | | Net income (loss) | $(90) | $(768) | $(4,003) | $1,583 | $203 | $2,627 | $644 | $993 | | Basic net income (loss) per share | $(0.01) | $(0.13) | $(0.62) | $0.24 | $0.03 | $0.34 | $0.08 | $0.13 | | Fully diluted net income (loss) per share | $(0.01) | $(0.13) | $(0.62) | $0.22 | $0.03 | $0.27 | $0.07 | $0.11 | - Quarterly results fluctuate significantly due to order volume, new product introductions, competition, and supply shortages[143](index=143&type=chunk) [Contractual Obligations](index=31&type=section&id=Contractual%20Obligations) The company's primary contractual obligations consist of unconditional purchase obligations and operating leases Contractual Obligations as of December 31, 2021 (in thousands) | Contractual Obligations | Total | 1 year | 2 to 3 years | 4 to 5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Unconditional purchase obligations with contract manufacturers | $12,624 | $11,911 | $713 | $— | $— | | Operating leases | $263 | $263 | $— | $— | $— | | Total contractual obligations | $12,887 | $12,174 | $713 | $— | $— | [Off-Balance Sheet Arrangements](index=31&type=section&id=Off-Balance%20Sheet%20Arrangements) The company had no off-balance sheet arrangements as of December 31, 2021 - As of December 31, 2021, the company had no off-balance sheet arrangements[145](index=145&type=chunk) [Recent Accounting Pronouncements](index=32&type=section&id=Recent%20Accounting%20Pronouncements) The company adopted a new accounting standard for income taxes in 2021 with no material impact - The company adopted ASU 2019-12 for income taxes effective January 1, 2021, with no material impact on financial statements[225](index=225&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures about Market Risk](index=33&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company's primary market risks are interest rate fluctuations and foreign currency exchange rate changes [Interest Rate Risk](index=33&type=section&id=Interest%20Rate%20Risk) Interest rate risk exposure is related to variable-rate bank term loans and credit facilities - Exposure to interest rate risk relates to bank term loan and credit line facilities with variable rates based on the prime rate[148](index=148&type=chunk) - The term loan bears interest at **prime plus 1.75%**, while revolving credit facilities are at **prime plus 0.75%**[148](index=148&type=chunk) [Foreign Currency Risk](index=33&type=section&id=Foreign%20Currency%20Risk) The company is exposed to foreign currency risk from Euro-denominated sales, which are partially hedged - Primary foreign currency exposure is from **Euro-denominated sales** and British pound expenses[149](index=149&type=chunk) - A significant portion of European receivables is hedged to mitigate foreign currency risk[149](index=149&type=chunk) - A **10% adverse change** in exchange rates would have resulted in a **$71,900 decrease** in net income for Q4 2021 if unhedged[149](index=149&type=chunk) - The net adjustment for foreign currency effects in Q4 2021 was a net loss of **$31,100**[149](index=149&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=34&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the audited financial statements, independent auditor's report, and detailed notes for 2021 and 2020 [Report of Independent Registered Public Accounting Firm](index=34&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) The independent auditor provided an unqualified opinion on the financial statements for 2021 and 2020 - Sadler, Gibb & Associates, LLC, served as the independent auditor, providing an **unqualified opinion** on the 2021 and 2020 financial statements[151](index=151&type=chunk)[161](index=161&type=chunk) - The critical audit matter identified was the **Deferred Tax Asset Valuation Allowance Assessment** due to significant management estimates[155](index=155&type=chunk)[157](index=157&type=chunk) [Balance Sheets](index=37&type=section&id=Balance%20Sheets) The balance sheets detail the company's assets, liabilities, and stockholders' equity as of year-end 2021 and 2020 Balance Sheet Data (As of December 31) | Asset/Liability | 2021 | 2020 | | :--- | :--- | :--- | | **ASSETS** | | | | Cash and cash equivalents | $6,095,886 | $2,121,763 | | Accounts receivable, net | $2,576,240 | $2,112,514 | | Inventories, net | $5,154,524 | $3,195,842 | | Total current assets | $14,380,788 | $7,935,521 | | Property and equipment, net | $1,068,813 | $847,663 | | Intangible assets, net | $1,813,961 | $— | | Deferred tax assets | $7,960,419 | $6,057,690 | | Total assets | $25,575,101 | $15,609,244 | | **LIABILITIES AND STOCKHOLDERS' EQUITY** | | | | Accounts payable and accrued expenses | $2,169,055 | $1,372,701 | | Total current liabilities | $5,389,357 | $4,149,336 | | Total liabilities | $5,528,638 | $4,436,227 | | Total stockholders' equity | $20,046,463 | $11,173,017 | [Statements of Operations](index=39&type=section&id=Statements%20of%20Operations) The statements of operations present the company's revenues, expenses, and net income for 2021 and 2020 Statements of Operations (Years Ended December 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Revenues | $23,199,061 | $15,700,036 | | Cost of revenues | $10,762,617 | $7,365,135 | | Gross profit | $12,436,444 | $8,334,901 | | Total operating expenses | $9,739,063 | $12,685,472 | | Operating income (loss) | $2,697,381 | $(4,350,571) | | Net income (loss) before income taxes | $2,563,528 | $(3,329,359) | | Income tax benefit (expense) | $1,902,729 | $50,578 | | Net income (loss) | $4,466,257 | $(3,278,601) | | Basic Net income (loss) per share | $0.58 | $(0.51) | | Fully diluted Net income (loss) per share | $0.48 | $(0.51) | | Weighted average shares outstanding (Basic) | 6,991,194 | 6,036,310 | | Weighted average shares outstanding (Fully diluted) | 8,923,487 | 6,036,310 | [Statements of Stockholders' Equity](index=40&type=section&id=Statements%20of%20Stockholders'%20Equity) This statement shows changes in stockholders' equity resulting from net income, stock transactions, and other activities Statements of Stockholders' Equity (Years Ended December 31) | Metric | Dec 31, 2019 | Dec 31, 2020 | Dec 31, 2021 | | :--- | :--- | :--- | :--- | | Total Stockholders' Equity | $13,784,982 | $11,173,017 | $20,046,463 | | Common Stock Shares | 6,017,674 | 6,102,630 | 7,183,874 | | Additional Paid-In Capital | $61,066,971 | $61,733,522 | $66,139,630 | | Accumulated Deficit | $(47,288,007) | $(50,566,608) | $(46,100,351) | | Net income (loss) | — | $(3,278,601) | $4,466,257 | | Stock-based compensation | — | $507,051 | $693,425 | | Exercise of stock options | $168,065 | $168,065 | $1,899,561 | | Issuance of common stock for intangible assets | — | — | $1,687,140 | [Statements of Cash Flows](index=41&type=section&id=Statements%20of%20Cash%20Flows) This statement details the cash inflows and outflows from operating, investing, and financing activities Statements of Cash Flows (Years Ended December 31) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,144,270 | $804,445 | | Net cash used in investing activities | $(691,771) | $(536,481) | | Net cash provided by financing activities | $2,521,624 | $894,939 | | Net increase (decrease) in cash and cash equivalents | $3,974,123 | $1,162,903 | | Cash and cash equivalents at end of year | $6,095,886 | $2,121,763 | | Cash paid for interest | $176,091 | $94,417 | | Cash paid for income taxes | $6,289 | $4,918 | | Acquisition of intangible assets (non-cash) | $1,909,433 | — | [Notes to Financial Statements](index=43&type=section&id=Notes%20to%20Financial%20Statements) Provides detailed disclosures on accounting policies, financial instruments, commitments, and other supplementary information [NOTE 1 — Organization and Summary of Significant Accounting Policies](index=43&type=section&id=NOTE%201%20%E2%80%94%20Organization%20and%20Summary%20of%20Significant%20Accounting%20Policies) Outlines the company's business, basis of presentation, and key accounting policies for financial reporting - The company manufactures data capture products for mobile applications in Retail, Commercial Services, and Health Care[177](index=177&type=chunk) - Products connect over Bluetooth and work with Apple (iOS), Google (Android), and Microsoft (Windows) operating systems[177](index=177&type=chunk) - The company subcontracts manufacturing globally and performs final assembly and distribution from its Newark, California facility[178](index=178&type=chunk) - The functional currency is the U.S. dollar, but the company hedges Euro-denominated receivables[185](index=185&type=chunk) Accounts Receivable Allowances Activity | Year | Balance at Beginning of Year | Charged to Costs and Expenses | Amounts Written Off | Balance at End of Year | | :--- | :--- | :--- | :--- | :--- | | 2021 | $40,651 | $— | $— | $40,651 | | 2020 | $40,651 | $— | $— | $40,651 | Inventories, net of write-downs (As of December 31) | Category | 2021 | 2020 | | :--- | :--- | :--- | | Raw materials and sub-assemblies | $5,757,869 | $3,642,377 | | Finished goods | $277,598 | $281,104 | | Inventory reserves | $(880,943) | $(727,639) | | Inventory, net | $5,154,524 | $3,195,842 | Major Customers' Share of Accounts Receivable (As of December 31) | Customer | 2021 | 2020 | | :--- | :--- | :--- | | Ingram Micro, Inc | 28% | 34% | | ScanSource, Inc | 24% | 13% | | BlueStar, Inc | 21% | 29% | | Bluestar Europe Distribution BV | <10% | 11% | - Top three suppliers accounted for **54% of inventory purchases** in 2021[197](index=197&type=chunk) SocketCare Service Revenue and Deferred Revenue | Metric | 2021 | 2020 | | :--- | :--- | :--- | | SocketCare revenue | $26,000 | $35,000 | | Unrecognized SocketCare service revenue (Dec 31) | $31,409 | $54,316 | Product Warranty Costs Activity | Year | Balance at Beginning of Year | Additional Warranty Reserves | Amounts Charged to Reserves | Balance at End of Year | | :--- | :--- | :--- | :--- | :--- | | 2021 | $78,871 | $13,910 | $(13,910) | $78,871 | | 2020 | $78,871 | $73,734 | $(73,734) | $78,871 | - Amortization expense on capitalized software development costs was **$43,572** for both 2021 and 2020[208](index=208&type=chunk) - Advertising costs incurred were **$13,627 in 2021** and $19,863 in 2020[209](index=209&type=chunk) Major Customers' Share of Total Revenues (Years Ended December 31) | Customer | 2021 | 2020 | | :--- | :--- | :--- | | Ingram Micro, Inc | 30% | 31% | | BlueStar, Inc | 23% | 23% | | ScanSource, Inc | 11% | <10% | [NOTE 2 — Acquisition of Intangible Assets](index=53&type=section&id=NOTE%202%20%E2%80%94%20Acquisition%20of%20Intangible%20Assets) The company acquired a perpetual license to contactless technology in exchange for common stock and warrants - On February 26, 2021, the company acquired a perpetual, non-exclusive license to **SpringCard SAS's Contactless Technology Package**[227](index=227&type=chunk)[228](index=228&type=chunk) - Consideration included **184,332 shares of common stock** and a 10-year warrant to purchase up to 50,000 shares[228](index=228&type=chunk) - The acquired intangible assets, net of amortization, were **$1,813,961** as of December 31, 2021, and will be amortized over fifteen years[229](index=229&type=chunk)[232](index=232&type=chunk) [NOTE 3 — Bank Financing Arrangements](index=54&type=section&id=NOTE%203%20%E2%80%94%20Bank%20Financing%20Arrangements) The company maintains a financing agreement with Western Alliance Bank, including a revolving credit line and a term loan - The company has a financing agreement with Western Alliance Bank, increasing its Domestic Line of Credit to **$3.0 million**[236](index=236&type=chunk) - The **$1.0 million CalCap Loan** was advanced on February 16, 2021, with maturity extended to January 31, 2023[236](index=236&type=chunk) CalCap Loan Outstanding (As of December 30, 2021) | Portion | Amount | | :--- | :--- | | Current portion | $500,000 | | Long-term portion | $125,000 | | Total CalCap Loan | $625,000 | - Interest expense on the CalCap Loan for 2021 was **$36,302**[239](index=239&type=chunk)[241](index=241&type=chunk) [NOTE 4 — Secured Subordinated Convertible Notes Payable](index=55&type=section&id=NOTE%204%20%E2%80%94%20Secured%20Subordinated%20Convertible%20Notes%20Payable) The company issued secured subordinated convertible notes in 2020, with a portion converted to stock in 2021 - On August 31, 2020, the company completed a secured subordinated convertible note financing of **$1,530,000**[242](index=242&type=chunk) - Notes have a three-year term, accrue interest at **10% per annum**, and are convertible into common stock at **$1.46 per share**[243](index=243&type=chunk) - Total issuance costs of $96,515 are amortized over three years[244](index=244&type=chunk) - Total interest expenses related to convertible notes were **$174,842 in 2021** and $62,172 in 2020[246](index=246&type=chunk) - In 2021, two noteholders converted **$130,000 of note principal** into common stock[246](index=246&type=chunk) [NOTE 5 — Commitments and Contingencies](index=56&type=section&id=NOTE%205%20%E2%80%94%20Commitments%20and%20Contingencies) The company has commitments related to operating leases for its facilities and non-cancelable purchase orders for inventory - The company entered a new 87-month operating lease in Fremont, CA, for its new headquarters starting May 2022[247](index=247&type=chunk) Operating Lease Liabilities (As of December 31, 2021) | Metric | Amount | | :--- | :--- | | Right-of-use assets | $210,839 | | Operating lease liabilities | $258,097 | | Future minimum lease payments (2022) | $262,789 | - Non-cancelable purchase commitments for inventory for 2022 were approximately **$11,911,000** as of December 31, 2021[250](index=250&type=chunk) - The company is not currently a party to any material legal proceedings[252](index=252&type=chunk) [NOTE 6 — Stock-Based Compensation Plan](index=57&type=section&id=NOTE%206%20%E2%80%94%20Stock-Based%20Compensation%20Plan) The company grants stock options and restricted stock to employees and directors under its 2004 Equity Incentive Plan - The 2004 Equity Incentive Plan allows for grants of stock options and restricted stock, expiring April 23, 2024[253](index=253&type=chunk) - The plan provides for an annual increase in authorized shares, with **244,105 shares added in 2021**[254](index=254&type=chunk) Stock-Based Compensation Expense by Classification | Income Statement Classification | 2021 | 2020 | | :--- | :--- | :--- | | Cost of revenues | $96,254 | $86,649 | | Research and development | $218,559 | $137,537 | | Sales and marketing | $166,266 | $121,802 | | General and administrative | $212,346 | $161,063 | | Total stock-based compensation expenses | $693,425 | $507,051 | - Remaining unamortized stock-based compensation expense was **$1,843,981** as of December 31, 2021[257](index=257&type=chunk) Stock Option Activity Summary (Years Ended December 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Weighted-average estimated fair value of options granted | $4.46 | $0.50 | | Total intrinsic value of stock options exercised | $9,985,639 | $167,882 | | Cash received from stock option exercises | $1,899,561 | $168,065 | | Options outstanding (Dec 31) | 1,378,122 | 1,994,806 | | Weighted average exercise price (Dec 31) | $2.81 | $2.42 | Restricted Stock Activity Summary (Years Ended December 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Unvested restricted stocks (Dec 31) | 646,125 | 442,200 | | Weighted average price per share (Dec 31) | $3.32 | $1.58 | | Granted | 312,112 | 392,680 | | Vested | (59,659) | (17,306) | | Forfeited | (48,528) | (43,245) | - Remaining unamortized restricted stock compensation expense was **$1,004,664** as of December 31, 2021[267](index=267&type=chunk) [NOTE 7 — Shares Reserved](index=61&type=section&id=NOTE%207%20%E2%80%94%20Shares%20Reserved) This note details the common stock reserved for future issuance under various plans and agreements Common Stock Reserved for Future Issuance (As of December 31) | Category | 2021 | 2020 | | :--- | :--- | :--- | | Stock option grants outstanding | 1,378,122 | 1,994,806 | | Secured subordinated convertible notes | 958,904 | 1,047,945 | | Stock warrants issued to SpringCard SAS | 50,000 | — | | 2004 Equity Incentive Plan | 208,681 | 393,351 | | Total | 2,595,707 | 3,436,102 | [NOTE 8 — Retirement Plan](index=61&type=section&id=NOTE%208%20%E2%80%94%20Retirement%20Plan) The company offers a 401(k) plan with a matching contribution for qualified employees - The company offers a 401(k) Plan for qualified employees, with a company match of **3% of employee contributions** up to $100 per month[269](index=269&type=chunk) [NOTE 9 — Income Taxes](index=61&type=section&id=NOTE%209%20%E2%80%94%20Income%20Taxes) This note provides a detailed breakdown of the company's income tax components, effective tax rate, and deferred tax assets Income Tax Components (Years Ended December 31) | Category | 2021 | 2020 | | :--- | :--- | :--- | | Current Federal | $— | $(55,676) | | Current State | $— | $4,918 | | Total Current | $— | $(50,758) | | Deferred Federal | $(1,354,991) | $— | | Deferred State | $(547,738) | $— | | Total Deferred | $(1,902,729) | $— | | Income tax (benefit) expense | $(1,902,729) | $— | Reconciliation of Statutory Federal Income Tax Rate to Effective Tax Rate | Item | 2021 | 2020 | | :--- | :--- | :--- | | Income at US statutory rate | 21.0% | 21.0% | | State taxes, net of federal benefit | -11.2% | -1.9% | | Goodwill impairment | 0.0% | -27.9% | | PPP loan forgiveness | 0.0% | 6.7% | | Valuation allowance | 0.7% | 2.4% | | Stock compensation | -50.2% | -1.8% | | NOL true up | -1.2% | 0.0% | | Tax credits | -2.5% | 1.0% | | Other | -2.2% | -0.5% | | Provision for taxes | 45.6% | 0% | Deferred Tax Assets and (Liabilities) (As of December 31) | Category | 2021 | 2020 | | :--- | :--- | :--- | | Net operating loss carryforwards | $6,390,000 | $4,330,000 | | Tax credits | $1,032,000 | $948,000 | | Total deferred tax assets | $8,599,000 | $6,215,000 | | Valuation allowance | $(577,000) | $(545,000) | | Net deferred tax assets | $8,022,000 | $5,670,000 | | Net deferred tax asset (liability) | $7,960,000 | $5,507,000 | - As of December 31, 2021, the company had U.S. federal NOL carryforwards of **$25.2 million** and state NOL carryforwards of **$15.7 million**[275](index=275&type=chunk) - The company maintains a full valuation allowance against U.S. federal R&D tax credits[277](index=277&type=chunk) Unrecognized Tax Benefits Activity | Metric | Amount | | :--- | :--- | | Balance as of January 1, 2020 | $1,019,000 | | Balance as of December 31, 2020 | $1,064,000 | | Balance as of December 31, 2021 | $1,153,000 | [NOTE 10 — Subsequent Events](index=65&type=section&id=NOTE%2010%20%E2%80%94%20Subsequent%20Events) Subsequent to year-end, the company authorized a share repurchase program and entered a new headquarters lease - In January 2022, the Board authorized a share repurchase program of up to **$1.8 million**[283](index=283&type=chunk) - In February 2022, the company entered into an operating lease for a new **35,913 sq-ft facility** in Fremont, CA[284](index=284&type=chunk) - As of February 1, 2022, **233,800 shares of restricted stock** were granted from the 2004 Equity Incentive Plan[285](index=285&type=chunk) [Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=66&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) There have been no changes in or disagreements with accountants on accounting and financial disclosure - Not Applicable[286](index=286&type=chunk) [Item 9A. Controls and Procedures](index=66&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and internal control over financial reporting were effective - Disclosure controls and procedures were evaluated and deemed **effective** as of December 31, 2021[287](index=287&type=chunk) - Management assessed internal control over financial reporting using the COSO 2013 framework and concluded it was **effective**[289](index=289&type=chunk)[290](index=290&type=chunk) - The company is a non-accelerated filer and is exempt from the auditor's attestation report on internal control[291](index=291&type=chunk) - No material changes in internal control over financial reporting occurred during the last fiscal quarter[293](index=293&type=chunk) [Item 9B. Other Information](index=67&type=section&id=Item%209B.%20Other%20Information) There is no other information to report under this item - None[294](index=294&type=chunk) [Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](index=67&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections) This item is not applicable to the company - Not applicable[295](index=295&type=chunk) PART III Incorporates by reference information on directors, executive compensation, security ownership, and related party transactions [Item 10. Directors, Executive Officers and Corporate Governance](index=68&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement - Information is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders on June 15, 2022[298](index=298&type=chunk) [Item 11. Executive Compensation](index=68&type=section&id=Item%2011.%20Executive%20Compensation) Information is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement - Information is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders on June 15, 2022[299](index=299&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=68&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information on security ownership is incorporated by reference, with details on equity compensation plans provided - Information is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders on June 15, 2022[300](index=300&type=chunk) Equity Compensation Plan Information (As of December 31, 2021) | Metric | Amount | | :--- | :--- | | Number of securities to be issued upon exercise of outstanding options | 1,378,122 | | Weighted average exercise price of outstanding options | $2.81 | | Number of securities remaining available for future issuance under equity compensation plans | 208,681 | - An additional **287,355 shares** became available for grant under the 2004 Equity Incentive Plan on January 1, 2022[302](index=302&type=chunk) [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=68&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement - Information is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders on June 15, 2022[303](index=303&type=chunk) [Item 14. Principal Accounting Fees and Services](index=69&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement - Information is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders on June 15, 2022[305](index=305&type=chunk) PART IV Contains a list of exhibits, financial statement schedules, and the report's signatures [Item 15. Exhibits, Financial Statement Schedules](index=69&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists all financial statements and exhibits filed as part of the 10-K report - The report includes all financial statements and an index to exhibits[307](index=307&type=chunk)[308](index=308&type=chunk) - Financial statement schedules are omitted as they are not applicable or the required information is included elsewhere[308](index=308&type=chunk) [SIGNATURES](index=70&type=section&id=SIGNATURES) The report was signed by principal executive officers and directors on March 30, 2022 - The report was signed on March 30, 2022, by Kevin J Mills (President and CEO), Charlie Bass (Chairman), Lynn Zhao (VP of Finance and CFO), and other directors[311](index=311&type=chunk)[312](index=312&type=chunk) [Index to Exhibits](index=71&type=section&id=Index%20to%20Exhibits) This section provides a comprehensive list of exhibits filed with the Form 10-K - The index lists various exhibits, including organizational documents, financing agreements, and the Technology Transfer Agreement[314](index=314&type=chunk)[315](index=315&type=chunk)[318](index=318&type=chunk) - Certifications by the CEO and CFO pursuant to the Sarbanes-Oxley Act are included[315](index=315&type=chunk)