Socket Mobile(SCKT) - 2018 Q4 - Annual Report

Part I Business Socket Mobile provides cordless data capture devices like barcode scanners and RFID/NFC readers, supporting mobile applications through its SDK, with manufacturing outsourced and final assembly in Newark, California - The company's core business is providing cordless data capture devices (barcode scanners, RFID/NFC readers) for mobile applications across various industries like retail POS, logistics, and healthcare[14] - A key strategy is supporting software application developers with a Software Developer Kit (Capture SDK), which integrates Socket Mobile's hardware into the developers' applications, making the hardware an ingredient of the overall solution[14][20][29] - The company outsources component manufacturing to third parties in the US, Mexico, and Asia, but performs final product assembly, testing, and distribution from its facility in Newark, California[22][27] - Primary product lines include the durable DuraScan® series, the standard SocketScan® series, the attachable SocketScan 800 series, and the D600 Contactless RFID/NFC Reader/Writer[16][17][18][19] - As of December 31, 2018, the company had 56 employees[44] Risk Factors The company faces risks including profitability challenges, reliance on third-party developers and key distributors, intense competition, supply chain disruptions, and the need for continuous innovation - The company may not return to profitability and may require additional capital, which might not be available on reasonable terms[46][47] - Sales are highly dependent on application developers successfully integrating, marketing, and selling applications that incorporate Socket Mobile's products[48] - A significant portion of revenue comes from a limited number of distributors; in 2018, Ingram Micro®, ScanSource®, and BlueStar represented approximately 63% of worldwide revenues[63] - The company faces competition from similar hardware products, camera-based scanning applications (e.g., Scandit), and more rugged integrated devices from larger competitors like Honeywell and Zebra Technologies[37][65] - Dependence on a limited number of suppliers for certain components exposes the company to risks of shortages or delays[59] - The market is characterized by rapidly changing technology and short product life cycles, requiring constant and successful new product development to remain competitive[61] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[94] Properties Socket Mobile leases a 37,100 square foot facility in Newark, California, which serves as its headquarters and manufacturing operations, with the lease expiring in June 2022 - The company leases a 37,100 square foot facility in Newark, California under a lease expiring in June 2022[95] Legal Proceedings The company is not currently a party to any material legal proceedings - The company is not currently a party to any material legal proceedings[97] Mine Safety Disclosures This item is not applicable to the company - Not applicable[98] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under 'SCKT', with approximately 2,500 beneficial stockholders, and does not anticipate paying dividends, retaining earnings for business use - The company's common stock trades on the NASDAQ under the ticker symbol "SCKT"[101] - The company has a policy of retaining future earnings for business use and does not anticipate paying dividends[101] Selected Financial Data This section summarizes five years of financial performance, showing a revenue decline to $16.5 million in 2018, a net loss of $571,000, and decreased total assets Selected Financial Data (2014-2018) | (Amounts in thousands) | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $16,454 | $21,286 | $20,788 | $18,400 | $17,021 | | Gross profit | $8,456 | $11,390 | $10,434 | $8,935 | $7,413 | | Net income (loss) | $(571) | $(1,431) | $12,147 | $1,817 | $432 | | Total assets | $17,331 | $19,854 | $21,587 | $9,688 | $8,370 | | Total stockholders' equity | $12,405 | $17,230 | $16,170 | $3,343 | $1,029 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2018, revenue decreased 23% to $16.5 million due to product transition delays, resulting in a net loss and reduced liquidity, with critical accounting policies and cash flow impacts detailed Liquidity and Capital Resources In 2018, liquidity weakened with cash decreasing to $1.1 million, offset by $1.3 million in credit lines and a $0.8 million term loan, with future liquidity dependent on profitability Liquidity Position (Year-End) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Cash | $1.1 million | $3.4 million | | Bank Lines of Credit | $1.3 million | $0 | | Term Loan | $0.8 million | $0 | - Sources of liquidity include cash on hand, cash from operations, and a revolving credit facility with approximately $0.2 million of unused capacity at year-end 2018[108] Critical Accounting Policies Key accounting policies include Revenue Recognition (ASC 606 adoption in 2017), Inventory Valuation, Stock-Based Compensation, and annual Goodwill impairment testing, all requiring significant estimates - On January 1, 2017, the company adopted ASC 606, which changed revenue recognition for distributor sales from a sell-through basis to recognizing revenue upon shipment, net of a reserve for estimated returns[114] - Inventory is valued by comparing stock on hand to a nine-month forecast, with reserves created for any surplus[119] - Goodwill is tested for impairment annually on September 30th; the test as of September 30, 2018, indicated no impairment[122][124] Results of Operations In 2018, revenue decreased 23% to $16.5 million due to product transition delays, gross margin declined to 51.4%, R&D increased 5%, S&M remained flat, and G&A decreased 5% Year-over-Year Financial Performance | Metric | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Revenue | $16.5 million | $21.3 million | -23% | | Gross Margin | 51.4% | 53.5% | -2.1 p.p. | | R&D Expense | $3.6 million | $3.5 million | +5% | | S&M Expense | $3.0 million | $3.0 million | 0% | | G&A Expense | $2.4 million | $2.5 million | -5% | - The 2018 revenue decline was caused by a longer than expected transition to new SocketScan products, which were released four months behind schedule[125] - Geographically, 2018 revenue from the Americas decreased by 24% and from Europe by 29%, while Asia Pacific revenue increased by 25%[126] Quarterly Results of Operations Unaudited quarterly data for 2017-2018 shows a consistent decline in revenue from $5.8 million (Q2 2017) to approximately $4.1 million (2018), transitioning from net income to consistent net losses Quarterly Revenue (in thousands) | Quarter | 2018 | 2017 | | :--- | :--- | :--- | | Q1 | $3,981 | $5,622 | | Q2 | $4,192 | $5,806 | | Q3 | $4,137 | $5,475 | | Q4 | $4,144 | $4,383 | Quarterly Net Income (Loss) (in thousands) | Quarter | 2018 | 2017 | | :--- | :--- | :--- | | Q1 | $(225) | $386 | | Q2 | $(138) | $490 | | Q3 | $(45) | $414 | | Q4 | $(163) | $(2,721)* | - *Q4 2017 net loss was primarily driven by a one-time $2.6 million deferred tax revaluation expense due to the Tax Cuts and Jobs Act of 2017[137][140] Cash Flows and Contractual Obligations In 2018, operating cash flow decreased to $0.75 million, investing activities used $0.4 million, and financing activities used $2.6 million due to a $5.0 million stock repurchase, with total contractual obligations of $7.6 million Cash Flow Summary (in millions) | Activity | 2018 | 2017 | | :--- | :--- | :--- | | Net Cash from Operations | $0.75 | $2.38 | | Net Cash used in Investing | $(0.4) | $(0.4) | | Net Cash from (used in) Financing | $(2.6) | $0.3 | - The primary use of cash in financing activities in 2018 was a $5.0 million repurchase of company stock[146] Contractual Obligations at Dec 31, 2018 | Contractual Obligations | Total | Due in 1 year | | :--- | :--- | :--- | | Unconditional purchase obligations | $5,922,000 | $5,922,000 | | Operating leases | $1,690,000 | $460,000 | | Capital leases | $24,000 | $16,000 | | Total | $7,636,000 | $6,398,000 | Quantitative and Qualitative Disclosures about Market Risk The company faces market risks from variable interest rates on its bank loans and foreign currency fluctuations from European sales, with Euro receivables partially hedged - Interest rate risk exists due to variable interest rates on the bank term loan and credit lines, which are tied to the lender's prime rate[152] - Foreign currency risk is present as European sales are transacted in Euros and British pounds; the company hedges a significant portion of its Euro receivables[153] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2018 and 2017, including the Independent Auditor's Report, Balance Sheets, Statements of Operations, Stockholders' Equity, Cash Flows, and detailed Notes to Financial Statements Key Financial Statement Data (2018 vs 2017) | (Amounts in thousands) | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Balance Sheet | | | | Total Current Assets | $6,197 | $8,855 | | Total Assets | $17,331 | $19,854 | | Total Current Liabilities | $4,356 | $2,323 | | Total Liabilities | $4,927 | $2,624 | | Total Stockholders' Equity | $12,404 | $17,230 | | Income Statement | | | | Revenues | $16,454 | $21,286 | | Gross Profit | $8,456 | $11,390 | | Operating Income (Loss) | $(586) | $2,418 | | Net Loss | $(571) | $(1,431) | NOTE 1 — Organization and Summary of Significant Accounting Policies This note details the company's business, basis of presentation, and key accounting policies, including ASC 606 revenue recognition, inventory valuation, goodwill impairment, foreign currency, and concentrations of credit risk with major distributors Revenue by Geographic Area (in thousands) | Region | 2018 | 2017 | | :--- | :--- | :--- | | United States | $12,562 | $16,621 | | Europe | $2,526 | $3,572 | | Asia and rest of world | $1,366 | $1,093 | | Total | $16,454 | $21,286 | Major Customer Revenue Concentration | Customer | 2018 | 2017 | | :--- | :--- | :--- | | Ingram Micro Inc. | 32% | 37% | | BlueStar, Inc. | 21% | 17% | | ScanSource, Inc. | 10% | 16% | NOTE 3 — Bank Financing Arrangements In January 2018, the company secured a $2.5 million revolving credit line and a $4.0 million term loan, subsequently breaching financial covenants which were later waived after loan modification and partial paydown, with $833,333 term loan and $1,316,778 credit lines outstanding at year-end 2018 - Entered into a financing agreement for a $2.5 million revolving credit line and a $4.0 million term loan in January 2018[225] - The company breached two financial covenants for the quarter ended March 31, 2018; the bank agreed to forbear and later permanently waived the defaults after the loan agreement was modified and the term loan was paid down to $1.0 million[231][234] Outstanding Debt at Dec 31, 2018 | Debt Instrument | Amount Outstanding | | :--- | :--- | | Term Loan | $833,333 | | Lines of Credit | $1,316,778 | NOTE 4 — Commitments and Contingencies The company has future commitments including an operating lease for its Newark, CA facility totaling approximately $1.7 million through June 2022, and non-cancelable inventory purchase commitments of approximately $5.9 million due in 2019 - Future minimum lease payments under the operating lease for its headquarters total $1,689,777 through June 2022[240] - As of December 31, 2018, the company had non-cancelable inventory purchase commitments of approximately $5,922,000 for 2019[244] NOTE 5 — Stock-Based Compensation Plan The company's 2004 Equity Incentive Plan resulted in $487,806 in stock-based compensation expense in 2018, with 2,374,124 options outstanding at a weighted average exercise price of $2.54, and $906,605 in remaining unamortized expense Stock-Based Compensation Expense | Year | Total Expense | | :--- | :--- | | 2018 | $487,806 | | 2017 | $426,950 | - As of December 31, 2018, there were 2,374,124 stock options outstanding and 1,894,933 options exercisable[249] - Total remaining unamortized stock-based compensation expense was $906,605 as of year-end 2018[253] NOTE 8 — Income Taxes The company recorded a $143,000 income tax benefit in 2018, contrasting with a $3.77 million expense in 2017, significantly impacted by a $2.6 million deferred tax asset write-down from the Tax Cuts and Jobs Act, and holds $21.6 million in federal NOL carryforwards - The Tax Cuts and Jobs Act of 2017 resulted in a one-time tax expense of $2.6 million in 2017 from the re-measurement of deferred tax assets[258] Net Deferred Tax Assets | Date | Amount | | :--- | :--- | | Dec 31, 2018 | $5,781,000 | | Dec 31, 2017 | $5,637,000 | - As of December 31, 2018, the company had federal net operating loss carryforwards of approximately $21.6 million and California NOLs of $12.0 million[262] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable, indicating no changes in or disagreements with the company's accountants - Not Applicable[269] Controls and Procedures Management concluded that the company's disclosure controls and procedures, and internal control over financial reporting (based on COSO framework), were effective as of December 31, 2018, with no material changes reported - Management concluded that disclosure controls and procedures were effective as of December 31, 2018[270] - Management assessed internal control over financial reporting based on the COSO framework and concluded it was effective as of December 31, 2018[272][273] Other Information The company reports no other information under this item - None[278] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's Proxy Statement for the May 22, 2019 annual stockholders' meeting - Information is incorporated by reference from the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 22, 2019[8][281] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's Proxy Statement for the May 22, 2019 annual stockholders' meeting - Information is incorporated by reference from the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 22, 2019[8][282] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the Proxy Statement, detailing 2,374,124 securities to be issued upon option exercise and 116,703 available for future issuance under equity compensation plans as of December 31, 2018 Equity Compensation Plan Information as of Dec 31, 2018 | Plan Category | Securities to be issued upon exercise of outstanding options | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 2,374,124 | $2.54 | 116,703 | Certain Relationships and Related Transactions, and Director Independence Information concerning related party transactions and director independence is incorporated by reference from the company's Proxy Statement for the May 22, 2019 annual stockholders' meeting - Information is incorporated by reference from the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 22, 2019[8][286] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's Proxy Statement for the May 22, 2019 annual stockholders' meeting - Information is incorporated by reference from the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 22, 2019[8][288] Part IV Exhibits, Financial Statement Schedules This section provides an index to the financial statements and all exhibits filed with or incorporated by reference into the Form 10-K report, noting the omission of financial statement schedules as not applicable - This section contains the index to the financial statements and a list of all exhibits filed with the report[290][291][292]