Socket Mobile(SCKT) - 2022 Q4 - Annual Report

PART I This section covers the company's business operations, associated risks, and foundational corporate information Business 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][15] - 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][24] - Product families encompass SocketScan, DuraScan (IP54-rated), DuraSled, and Contactless RFID/NFC reader/writers, with SocketCam C820 software scanner introduced in Q1 2022[18][20][21][22][23] - Manufacturing is subcontracted globally, with final assembly in Fremont, California, and worldwide distribution through a two-tier network including major distributors[25][37] - 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][29][30][31] - 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][41] - As of December 31, 2022, the company had 56 employees across sales, engineering, finance, and operations[49] Risk Factors 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][53][54] - 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][62][63] - 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][68][71] - 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][80][84] - External risks encompass economic, political, and regulatory challenges in export sales, potential disruptions from natural disasters or health epidemics, and geopolitical instability[90][91][93] Unresolved Staff Comments The company reports no unresolved staff comments - No unresolved staff comments[104] Properties 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] - The lease commenced May 1, 2022, for 87 months at a monthly rent of $50,278, with 3% annual increases[105] Legal Proceedings The company is not currently involved in any material legal proceedings - The company is not currently a party to any material legal proceedings[106] Mine Safety Disclosures Mine Safety Disclosures are not applicable to the company - Mine Safety Disclosures are not applicable[107] PART II 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 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][110] - The company has not paid dividends on its common stock, intending to retain future earnings for business reinvestment[110] 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] Selected Financial Data 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 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][119] - The company maintains a $2.5 million revolving credit facility maturing January 31, 2025, with no outstanding drawings as of December 31, 2022[120] 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] 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 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] - 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] - 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] Financial Statements and Supplementary Data 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] - 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][169] 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][237] - 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][247][248] - 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][282][283] - 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][291][292] 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[294] Controls and Procedures 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] - 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][298] - 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] - No material changes occurred in internal control over financial reporting during the last fiscal quarter[301] Other Information This section reports no other information - None[302] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This disclosure is not applicable to the company - Not applicable[303] PART III This section incorporates information on directors, executive compensation, security ownership, related transactions, and accounting fees by reference Directors, Executive Officers and Corporate Governance 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] Executive Compensation 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] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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] 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 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] Principal Accounting Fees and Services 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] PART IV This section includes exhibits, financial statement schedules, and required signatures for the report Exhibits, Financial Statement Schedules 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] - 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] - A detailed Index to Exhibits lists all exhibits filed or incorporated by reference within this report[316][317] 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][321] Index to Exhibits 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][325] - Each exhibit entry specifies its original filing for traceability of corporate and financial documents[327]