Socket Mobile(SCKT) - 2021 Q4 - Annual Report

PART I Details the company's business operations, risk factors, properties, and legal proceedings Item 1. Business Socket Mobile provides mobile data capture solutions, focusing on cordless barcode scanners and RFID/NFC devices 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][15] - The company's common stock trades on the NASDAQ Capital Market under the symbol 'SCKT'[15] 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] - The company offers a Software Developer Kit (Capture-SDK) for easy integration of advanced scanning features into mobile applications[17][23] - Product lines include the Companion SocketScan (S700 series), durable Companion DuraScan (D700 series), and one-handed Attachable Family (DuraSled, SocketScan 800)[18][19][21][22] - Contactless RFID/NFC reader/writers (D600, S550) utilize 1356 MHz technology for smart card and NFC applications[23] - Products are designed in-house, manufactured by third parties, and distributed from the Newark, California facility[24] Our Mission, Vision and Core Values 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] - Vision: To manage data capture and delivery complexity, allowing customers to focus on data applications[27] - Core Values: Accountability, Customer Focus, Excellence, Integrity, and Mutual Respect[27][28][29] Marketing Dynamics 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] - Revenues are primarily driven by barcode scanner sales integrated into mPOS (mobile Point of Sale) applications[32] - Products are distributed through a worldwide network including major distributors like Ingram Micro®, ScanSource®, and Blue Star[35] - The company emphasizes its brand image for quality, standards-based connectivity, compact design, and ease of use[36] Competition and Competitive Risks 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][39] - Competitors in cordless barcode scanning include Koamtec, Code Corporation, and camera-based apps, with Datalogic and Zebra offering more rugged devices[39] - For contactless RFID/NFC reader/writers, the company believes it is an early entrant with less direct competition[40] Proprietary Technology and Intellectual Property 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] - Proprietary software enables unique data collection functions for Apple, Android, and Windows mobile devices[43] - Intellectual property protection relies on patents, copyrights, trademarks, and confidentiality agreements[44] 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] - 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] Item 1A. Risk Factors 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][49][50] - Failure to maintain profitability or secure additional capital could adversely affect operations and growth[51][52] - Dependence on application providers for product integration means their failures could negatively impact sales[53] - Quarterly operating results are subject to significant fluctuations, making forecasting difficult[56][59] - Reliance on a limited number of suppliers and distributors creates manufacturing and sales channel risks[62][70] - The market is characterized by rapidly changing technology and short product life cycles, requiring continuous innovation[63][64] - Intellectual property rights may be insufficient to protect the company's competitive position[75][78][82] - The loss of senior personnel or inability to attract skilled staff could harm the business[84][86] - Export sales expose the company to economic, political, regulatory, and foreign currency risks[87] Item 1B. Unresolved Staff Comments The company has no unresolved staff comments from the SEC - No unresolved staff comments[93] Item 2. Properties 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] - New facility: 35,913 sq-ft in Fremont, CA, 87-month lease starting May 1, 2022[95] Item 3. Legal Proceedings The company is not currently a party to any material legal proceedings - The company is not a party to any material legal proceedings[96] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[97] 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 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] - As of March 25, 2022, there were approximately 10,000 beneficial stockholders and 7,273,051 shares outstanding[6][99] - The company has not paid dividends and intends to retain earnings for business use[99] - A five-year performance graph compares stockholder return against the Russell 2000 and NASDAQ Computer & Data Processing indices[102] Item 6. Selected Financial Data 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 Analyzes the company's financial condition, liquidity, and results of operations for fiscal years 2021 and 2020 Liquidity and Capital Resources 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] - The company has an existing $2.5 million revolving credit facility maturing January 31, 2023, with no outstanding drawings[110] Critical Accounting Policies 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] - Revenue from distributors is recognized upon shipment, less a reserve for estimated returns[116] 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] - Goodwill was fully written off ($4.4 million) as of September 30, 2020, due to a stock price drop[125][193] - Deferred tax assets are recognized based on the likelihood of future profitability, with a valuation allowance applied if uncertain[127] Results of Operations for Years Ended December 31, 2021 and 2020 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] - Companion SocketScan products represented 69% of 2021 revenue, increasing 58% YoY[129] - R&D expenses increased due to higher personnel costs, incentive compensation, and amortization of new intangible assets[132] - The 2021 effective tax rate was negative 45.6%, including a $9.2 million tax benefit from stock option dispositions[139] Quarterly Results of Operations 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] Contractual Obligations 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 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] Recent Accounting Pronouncements 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] Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are interest rate fluctuations and foreign currency exchange rate changes Interest Rate Risk 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] - The term loan bears interest at prime plus 1.75%, while revolving credit facilities are at prime plus 0.75%[148] Foreign Currency Risk 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] - A significant portion of European receivables is hedged to mitigate foreign currency risk[149] - A 10% adverse change in exchange rates would have resulted in a $71,900 decrease in net income for Q4 2021 if unhedged[149] - The net adjustment for foreign currency effects in Q4 2021 was a net loss of $31,100[149] Item 8. Financial Statements and Supplementary Data 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 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][161] - The critical audit matter identified was the Deferred Tax Asset Valuation Allowance Assessment due to significant management estimates[155][157] Balance Sheets 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 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 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 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 Provides detailed disclosures on accounting policies, financial instruments, commitments, and other supplementary information NOTE 1 — Organization and Summary of Significant Accounting Policies 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] - Products connect over Bluetooth and work with Apple (iOS), Google (Android), and Microsoft (Windows) operating systems[177] - The company subcontracts manufacturing globally and performs final assembly and distribution from its Newark, California facility[178] - The functional currency is the U.S. dollar, but the company hedges Euro-denominated receivables[185] 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] 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] - Advertising costs incurred were $13,627 in 2021 and $19,863 in 2020[209] 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 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][228] - Consideration included 184,332 shares of common stock and a 10-year warrant to purchase up to 50,000 shares[228] - The acquired intangible assets, net of amortization, were $1,813,961 as of December 31, 2021, and will be amortized over fifteen years[229][232] NOTE 3 — Bank Financing Arrangements 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] - The $1.0 million CalCap Loan was advanced on February 16, 2021, with maturity extended to January 31, 2023[236] 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][241] NOTE 4 — Secured Subordinated Convertible Notes Payable 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] - Notes have a three-year term, accrue interest at 10% per annum, and are convertible into common stock at $1.46 per share[243] - Total issuance costs of $96,515 are amortized over three years[244] - Total interest expenses related to convertible notes were $174,842 in 2021 and $62,172 in 2020[246] - In 2021, two noteholders converted $130,000 of note principal into common stock[246] NOTE 5 — Commitments and Contingencies 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] 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] - The company is not currently a party to any material legal proceedings[252] NOTE 6 — Stock-Based Compensation Plan 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] - The plan provides for an annual increase in authorized shares, with 244,105 shares added in 2021[254] 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] 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] NOTE 7 — Shares Reserved 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 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] NOTE 9 — Income Taxes 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] - The company maintains a full valuation allowance against U.S. federal R&D tax credits[277] 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 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] - In February 2022, the company entered into an operating lease for a new 35,913 sq-ft facility in Fremont, CA[284] - As of February 1, 2022, 233,800 shares of restricted stock were granted from the 2004 Equity Incentive Plan[285] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure - Not Applicable[286] Item 9A. Controls and Procedures 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] - Management assessed internal control over financial reporting using the COSO 2013 framework and concluded it was effective[289][290] - The company is a non-accelerated filer and is exempt from the auditor's attestation report on internal control[291] - No material changes in internal control over financial reporting occurred during the last fiscal quarter[293] Item 9B. Other Information There is no other information to report under this item - None[294] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[295] PART III Incorporates by reference information on directors, executive compensation, security ownership, and related party transactions Item 10. Directors, Executive Officers and Corporate Governance 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] Item 11. Executive Compensation 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] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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] 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] Item 13. Certain Relationships and Related Transactions, and Director Independence 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] Item 14. Principal Accounting Fees and Services 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] PART IV Contains a list of exhibits, financial statement schedules, and the report's signatures Item 15. Exhibits, Financial Statement Schedules 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][308] - Financial statement schedules are omitted as they are not applicable or the required information is included elsewhere[308] 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][312] Index to Exhibits 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][315][318] - Certifications by the CEO and CFO pursuant to the Sarbanes-Oxley Act are included[315]