Socket Mobile(SCKT) - 2023 Q4 - Annual Report

Part I Business Socket Mobile offers Bluetooth-connected data capture solutions for mobile applications in diverse sectors - The company provides data capture solutions, including barcode scanners and NFC/RFID readers, for mobile applications in sectors like point of sale (POS), commercial services, asset tracking, and healthcare[14] - Socket Mobile's primary products are cordless data capture devices (barcode scanners, RFID/NFC readers) that connect via Bluetooth to iOS, Android, and Windows devices, offering the CaptureSDK for app developer integration[18] - The company designs its products and subcontracts manufacturing to third parties globally, with final assembly, testing, and distribution occurring at its Fremont, CA facility[28] - The company's growth is driven by the increasing adoption of mobile applications for smartphones and tablets in business, which creates demand for its data capture products[29] Risk Factors The company faces risks from economic uncertainty, profitability challenges, supply chain dependencies, and intense competition - The company may not return to profitability and might require additional capital in the future, which may not be available on reasonable terms[52][53] - Sales are highly dependent on application providers successfully integrating and marketing Socket Mobile's products within their own solutions[56] - The company relies on a limited number of suppliers for components, exposing it to risks of shortages or delays[60] - A significant portion of sales depends on a limited number of distributors, with Ingram Micro® and BlueStar together accounting for approximately 44% and 50% of worldwide sales in 2023 and 2022, respectively[69] - The business depends on strategic alliances with mobile operating system providers like Apple, Google, and Microsoft, who are not obligated to continue their collaboration[72][73] - The loss of key senior managers, many of whom have over twenty years of service, could adversely affect the company's ability to compete[83] Unresolved Staff Comments The company has no unresolved staff comments to report - None[98] Cybersecurity The company's cybersecurity program, led by the CTO and overseen by the board, manages risks with no material business impact to date - The cybersecurity program is led by the Chief Technology Officer (CTO), who reports to the CEO, and is overseen by the board of directors[100][102] - The company engages external experts to evaluate and test its risk management systems and requires annual cybersecurity training for all employees[101] - To date, cybersecurity risks have not materially affected the company's business, strategy, or financial condition, with only minor incidents reported[103] Properties The company leases a 35,913 sq-ft facility in Fremont, CA, for its headquarters and manufacturing under an 87-month operating lease - The company leases a 35,913 sq-ft facility in Fremont, CA for its office and manufacturing operations under an 87-month lease starting February 2022, with a monthly rent of $50,278 subject to 3% annual increases[104] Legal Proceedings The company is not currently involved in any material legal proceedings - The company is not currently involved in any material legal proceedings[105] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[106] 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", does not pay dividends, and repurchased shares in Q1 2023 - The company's common stock is traded on the NASDAQ under the symbol "SCKT", and the company has not paid dividends nor anticipates paying them in the foreseeable future[108] Share Repurchase Activity (Q1 2023) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Jan 3, 2023 to Mar 29, 2023 | 92,959 | $2.24 | Selected Financial Data The company reported 2023 revenues of $17.0 million and a net loss of $1.9 million, contrasting with 2022 revenues of $21.2 million Selected Financial Data (2019-2023) | (Amounts in thousands, except per share) | 2023 | 2022 | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $17,034 | $21,238 | $23,199 | $15,700 | $19,253 | | Gross profit | $8,463 | $10,366 | $12,436 | $8,335 | $10,101 | | Net income (loss) | $(1,919) | $87 | $4,466 | $(3,279) | $287 | | Basic net income (loss) per share | $(0.27) | $0.01 | $0.58 | $(0.51) | $0.05 | | Total assets | $28,742 | $28,598 | $25,575 | $15,609 | $20,009 | | Total stockholders' equity | $19,420 | $20,322 | $20,046 | $11,173 | $13,785 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, revenue decreased by 20% to $17.0 million, resulting in an operating loss of $3.1 million, despite a gross margin improvement - Net cash provided by operating activities was $48,562 in 2023, a significant improvement from net cash used of $111,415 in 2022[116] - The company believes its existing cash, available borrowing capacity on its $2.5 million revolving credit facility, and funds from operations are sufficient to meet anticipated capital requirements[118][119] Results of Operations (2023 vs. 2022) | Metric (in millions) | 2023 | 2022 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenues | $17.0 | $21.2 | $(4.2) | -20% | | Gross Profit | $8.5 | $10.4 | $(1.9) | -18% | | Gross Margin | 49.7% | 48.8% | +0.9pp | N/A | | R&D Expenses | $4.8 | $4.4 | $0.4 | +11% | | Sales & Marketing | $4.0 | $3.6 | $0.4 | +10% | | G&A Expenses | $2.7 | $2.8 | $(0.1) | -3% | Contractual Obligations as of Dec 31, 2023 | Contractual Obligations | Total | < 1 year | 1 to 3 years | 4 to 5 years | > 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Unconditional purchase obligations | $5,821,000 | $5,734,000 | $87,000 | $— | $— | | Operating leases | $3,794,000 | $637,000 | $1,325,000 | $1,406,000 | $426,000 | | Total | $9,615,000 | $6,371,000 | $1,412,000 | $1,406,000 | $426,000 | Quantitative and Qualitative Disclosures about Market Risk The company faces interest rate and foreign currency risks, with a hypothetical 10% adverse exchange rate change impacting Q4 2023 net income by $36,000 - Interest rate risk exposure is primarily from the bank term loan and credit line facilities, which have variable rates based on the lender's prime rate, though there were no outstanding balances at the moment[149] - The company has foreign currency risk as it requires European distributors to pay in Euros and British pounds, where a 10% adverse change in exchange rates would have resulted in a decrease in net income of approximately $36,000 for Q4 2023[150] Financial Statements and Supplementary Data Audited financial statements show a $1.9 million net loss in 2023, an unqualified auditor opinion, and stable total assets at $28.7 million - The independent auditor, Sadler, Gibb & Associates, LLC, issued an unqualified opinion on the financial statements, identifying the Deferred Tax Asset Valuation Allowance Assessment and the Long-Lived Asset Impairment Assessment as critical audit matters[152][157][159] Balance Sheet Summary (in thousands) | | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $10,699 | $12,769 | | Total Assets | $28,741 | $28,598 | | Total Current Liabilities | $6,500 | $4,972 | | Total Liabilities | $9,321 | $8,276 | | Total Stockholders' Equity | $19,420 | $20,322 | Statement of Operations Summary (in thousands) | | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Revenues | $17,034 | $21,238 | | Gross Profit | $8,463 | $10,366 | | Operating Loss | $(3,121) | $(446) | | Net Income (Loss) | $(1,919) | $87 | | Basic EPS | $(0.27) | $0.01 | - Major customers accounting for over 10% of total revenues in 2023 were Ingram Micro Inc. (22%), BlueStar, Inc. (22%), and ScanSource, Inc. (14%)[220] - As of December 31, 2023, the company had $3.0 million in outstanding secured subordinated convertible notes, with conversion prices of $1.46 and $1.34 per share[235][237] - As of December 31, 2023, the company had U.S. Federal net operating loss carryforwards of $21.7 million and state net operating loss carryforwards of $23.6 million[265] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not Applicable[277] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes reported - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period[278] - Management assessed internal control over financial reporting using the COSO framework and concluded that it was effective as of December 31, 2023[280][281] - There were no changes in internal control over financial reporting during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, these controls[283] Other Information The company reports no other information - None[284] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[285] Part III Directors, Executive Compensation, Security Ownership, and Related Matters Information for Items 10-14, covering directors, executive compensation, and security ownership, is incorporated by reference from the upcoming Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 15, 2024[288][289][290][292][293] Equity Compensation Plan Information (as of Dec 31, 2023) | Plan Category | 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 | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 1,151,114 | $3.11 | 459,950 | Part IV Exhibits, Financial Statement Schedules This section lists all financial statements and provides an index of exhibits filed with or incorporated by reference into the Form 10-K - All required financial statements are included in the report, and financial statement schedules are omitted because they are not applicable or the required information is included elsewhere[295][296] - An index of exhibits is provided, listing various corporate documents, agreements, and certifications filed as part of the report[301][302]