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spk05: Welcome to the Q4 2021 and Annual Financial Results Management Conference call. My name is Adrienne and I'll be your operator for today's call. Before we begin, I'd like to remind everyone that this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended. Such forward-looking statements include, but are not limited to, statements regarding mobile data collection and mobile data collection products, including details on timing, distribution, and market acceptance of products and statements predicting the trends, sales, and market conditions and opportunities in the markets in which the socket mobile sells its products. Such statements involve risks and uncertainties and actual results could differ materially from the results anticipated in such forward-looking statements because of a number of factors including, but not limited to, The risk that the manufacturer of Socket's products may be delayed or not rolled out as predicted due to technological, market, or financial factors, including the availability of product components and necessary working capital. The risk that market acceptance and sales opportunities may not happen as anticipated, and the risk that Socket's application partners and current distribution channels may choose not to distribute the products or may not be successful in doing so. The risk of acceptance of Socket's products in vertical application markets may not happen as anticipated, as well as other risks described in Socket's most recent form, 10-K, and 10 key reports filed with the Securities and Exchange Commission. Socket does not undertake any obligation to update any forward-looking statements. At this time, all participants are in listen-only mode. Later, we'll conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star then 1 on your touch-tone phone. Please note this conference is being recorded. On the phone with me, I have Kevin Mills, President and CEO, David Holmes, Chief Business Officer, and Lynn Zhao, Chief Financial Officer. I'll now turn the call over to Kevin Mills. Kevin, you may begin.
spk03: Thank you, Operator. Good afternoon, everyone, and thank you for joining us today. I want to start with a quick review of 2021 and our Q4 results, and I'll hand the call over to Dave Holmes. who will outline the product adjustments and improvements in our go-to-market strategy. We believe these improvements will enable Socket Mobile to maintain its track record of growth for the next few years. 2021 was a very good year for Socket Mobile. We grew our revenue by 48% to $23.1 million. We maintained our gross margin in the 53% range and reported operating income of $2.7 million. Lin Zhao will provide a more detailed breakdown of our financial results in a few minutes. Our 2021 results show the progress we have made as a company over the past 12 months. We achieved these results in a very difficult environment by maintaining our focus on the data capture market and a great deal of hard work by our amazing team here at Socket Mobile. The improvements also highlight the benefit of our application-driven business model and the leverage it brings over time as we continue to benefit from the success of our application partners. Switching to our Q4 results, in Q4, we grew our revenue by 31% to $6.1 million. Our gross margins were slightly lower at 52.1%, primarily due to increased costs associated with supply chain difficulties, resulting in an operating income of $700,000 for the quarter. These are very good results for Q4, which is a seasonally weak quarter for retail-related deployments. So we enter 2022 a significantly stronger and better company than we entered 2021. In addition to the financial progress we made in 2021. We also learned a great deal from our application partners and feel we are much better positioned to serve their going forward data capture needs. I'd now like to turn the call over to Dave Holmes, who will outline how we will better serve this market moving forward. Dave.
spk00: Thank you, Kevin, and good afternoon, everyone. When I joined Socket in the middle of last year, we embarked on a mission to strengthen our strategy to become a more comprehensive data capture company. We made great strides in the NFC market, which you may have heard about in our previous calls, and today I'd like to highlight another key element of that strategy. The announcement we made earlier this week introducing the SocketCam C820. This is the first member of the new SocketCam software product family that turns any mobile device into a high performance barcode scanner. We think this is a critical piece in the data capture journey. Today, socket mobile scanners are primarily used in the performance sensitive portion of the data capture market, which we have a commanding market share in. However, our application partners have end users with different data capture needs and are often not data capture experts. They typically only add our capture SDK to support socket scanners when their customers run into performance issues. Our research and experience tell us that data capture is a journey, and our end customer's requirements evolve over time. Through our customer feedback, we know that roughly 70% of our end users started out using a keyboard or camera-based scanning before they came to a socket scanner. While free scanning works very well in low-volume, well-lit environments, it can struggle as volumes increase or conditions become more difficult. The addition of the C820 will allow our development partners to bring Socket's scanning expertise and capabilities to a much wider audience, allowing our app partners to serve all their end users from the price sensitive to the performance sensitive with one integration. Enabling the app for the entire journey allows the developers to service a much bigger audience, eliminates the burden of lengthy and technical onboarding processes, and allows the end customers to select the best tool for their particular situation. We will continue investing in the SocketCam family to offer data capture solutions that benefit our developer community and end users. We have an advanced version available. We will have an advanced version available on the subscription basis later this year. And we think this is a critical evolution in how Socket serves the entire data capture journey. With that, I'll turn it over to Lynn for more details on our financial results. Lynn?
spk04: Okay. Thank you, Dave, and a good afternoon to everyone. We are very pleased with our 2021 results as we continue to grow our business and strengthen our financial position. We drove strong double-digit year-over-year revenue growth, growth margin improvement, and a record operating profitability. while continuing to invest in product roadmap. Year over year, Q4 revenue was up 31% to $6.1 million, and annual revenue was up 48% to $23.2 million, driven by strong demand for our products as we benefited from the economic recovery and the flywheel effect of our application-driven business model. Q4 growth margin was 1% lower than a year ago due to the rising component costs. For the year, however, our growth margin is 1.5% higher, which is the benefit of the increased revenue. Although we are confident that our focus on navigating the supply constraints will enable us to continue to meet our customers' needs, the ongoing industry-wide electronic component shortages could result in future higher component production costs. Operating expenses in Q4 were $2.5 million, increased 28% over the prior year quarter. Spend on engineering and product development led the way as our priority investment area increased 46%. Increases in general and administrative and the sales, marketing, and customer support are 28% and 19% respectively. Our full-year operating expenses increased 18% compared with the prior year if excluding the non-cash goodwill impairment charge of 4.4 million in 2020. The increase in 2021 reflects the cost associated with a higher headcount investment in technology, consulting and external professional services, and increased compensation related to improve the company performance. We believe a continued commitment to invest in talent and technology is essential to provide a new product offering and to better service our development partners. In Q4, we had a net income of $1.1 million, including a deferred tax benefit of $299,000, compared to $1.9 million in the comparable prior year quarter, which included a gain of $1 million on the forgiveness of PPP loan. Net income for the year was $4.5 million, including a deferred tax benefit of $1.9 million, compared to a loss of $3.3 million in 2020, which included $3.3 million of a goodwill impairment charge netting off their gain on PPP loan forgiveness. The deferred tax benefits recorded in 2021 are due to the recognition of tax deductions resulting from disqualified disposition of incentive stock options, disposition of non-qualified stock options, and the divest of employee restrict stock awards. Adjusted EBITDA in 2021 increased to $4.2 million compared to $1.2 million in 2020. adjusted EBITDA margin in 2021 was 18% compared to 8% in 2020. Q4 adjusted EBITDA was 1.1 million versus $0.8 million a year ago. Turning to our balance sheet, we continue to focus on driving strong cash flow. In 2021, we generated a record of $2.1 million in cash from operations. compared to 0.8 million generated in 2020. We ended the year with a cash balance of $6.1 million compared to $2.1 million a year ago. As of December 31st, 2021, our inventory level net of reserve was at $5.2 million compared to $3.2 million a year ago. Their increased inventory enables us to service our customers' full demand while navigating the supply constraints. Our balance sheet has further strengthened with the current ratio of 2.7 to 1 as of December 31st, compared to 1.9 to 1 a year ago. Now I will talk about their shared buyback program approved by our board of directors. After evaluating the company's financial statements for the year, as well as the recent developments of the company, the board determined that the company has a sufficient surplus as computed in accordance with section 154 of the general corporation law of the state of Delaware for the stock repurchase program. The use of the funds will not impair the company's capital But rather, the company will continue to have sufficient resources to operate for their foreseeable future. And currently, and following the repurchase program, the company's existing debts will not exceed the present value of the company's assets, even if their stock repurchase program is completed in full. The board hereby determined that the stock repurchase program is in the best interest of the company and its shareholders, and the board approved the program. All repurchases will be conducted in accordance with SEC Rule 10b-18. We'll enter 10b-51 plans during the open window, and our broker will execute the trades. This wraps up our prepared remarks. and the call over to the operator for questions.
spk05: Thank you. We'll now begin the question and answer session. If you have a question, please press star then one on your touch tone phone. If you wish to remove the cue, please press the pound sign or the hash key. They'll be delayed before the first question is announced. If you're using a speaker phone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then 1 on your touchtone phone. And our first question comes from Frank Petronas from Wells Fargo. Your line is open.
spk02: Congratulations on your rate of growth considering the COVID situation and, again, the other variants that have come about. I think you've done a great job. the stock repurchase program, I have a question as far as in 2016, you entered the NASDAQ. Now, I posed a question to you, I guess, about six months ago, and as far as you were going to consult with the board, a possibility of getting more eyes and more funds or institutional type of to, again, build from the New York Stock Exchange where, again, I think that these up and down gyrations have been horrible. I mean, the average investor, I'm a former retail broker, so what I'm saying is people that I did speak with and have bought the company, it's been like, you know, a nightmare. One day you see what your account is, next day it flops right back down. I think you can get a lot more stability if you can, again, get listed on the New York Stock Exchange and stop all this flipping. I think the flipping with the interest rate rise and so forth, it should soothe over. So my question is, have you guys considered a listing on the New York Stock Exchange?
spk03: Well, there's a lot in those questions, Frank, so let me just kind of address a few of them. I think that there's a lot of instability in the market, and certainly with a lower price and the availability of programs like Robinhood, there tends to be a lot of emotion driving the stock as opposed to fundamentals. I think as we look to 2022, we will make a more concerted effort to get to conferences to explain our story, which we now feel is sufficiently strong. We are doing a singular research conference as well as a capital research conference in the near future. So we will reach out more. And I think you are right. The more institutional investors we can get, the more stability it will bring to the markets or to the stock price, I should say. And I think, you know, this is one of the reasons why we're doing the buyback program is because the market price often doesn't reflect the value of the company. And we feel that as we have surplus cash, it would be good to show our commitment to the long term future by doing the repurchase program. So we have no plans in the short term to get on a second exchange. We've been on NASDAQ for many years, and as you point out, we basically re-entered the NASDAQ market. In fact, we were on the NASDAQ market for many years, and we were out of compliance and got back in compliance in 2016. So we hope to see some more stability in the stock price this year, especially as we get more institutional investors I don't think we can do a lot about the Reddits or the Robin Hoods in the short term. So I hope that answers your question.
spk02: Oh, yes. In part, yes. The only other thing is to say the Robin Hood people, I think they have been slapped on the hand and just evidenced by their own stock that's been trading again Everything they've done, I think, is wrong. But I think you more than qualify for the exchange. When I was with Prudential and then another major firm, we always had a problem with the smaller companies that we always had to write unsolicited and so forth. But I'm saying it's just in between the quarters, I mean, if you're going to have more transparency, that's wonderful. A buyback could help to some extent, but it can't, like the stock jumped just pre, well, after market, I should say, jumped to like $5.68 and think it's back to $5 again. But it's that kind of thing that I think the company should look for more stability. You know, your growth is fantastic. You're on a 45-degree curve that's, you know, more than average in this climate. It's amazing, and I congratulate you guys. And that's it. I thank you again for answering the question.
spk03: I appreciate the questions, Frank. Thank you very much. Okay.
spk05: And just as a reminder, to ask a question or enter the queue, please press star then 1 on your touchtone phone. And we're standing by for more questions. And we have Frank Petronas from Wells Fargo. The line is open.
spk02: I do have one more. I have about 15, maybe 20 of my former clients that come to me and look for various recommendations. Now, the other problem is the understanding of the, I'm not a computer guy myself, but these people are much more advanced than I am, but I think if you can kind of lay it out in layman terms and explain from that point where we can get a little more transparency as far as these products are coming online and exactly what they mean down the road. I think you had a great explanation for the previous product, and the new one, I've gotten two calls, and nobody really understands. Maybe the computer geniuses. And the kids today, they could probably understand it much better than an old war horse like me.
spk03: So let me try and explain a little bit. So we are dependent on our developers to enable our software so that people can use our scanners. Our research has shown that many of the people who buy our scanners have gone from keyboard or camera-based scanners to our scanners. And what we're trying to do is to ensure that we service those customers earlier to smooth out the onboarding process so that as they need more functionality out of their scanner, they can use the current application they have. Today, it often takes us an extra year to even two years when customers need to use the more performance-centric scanners, but their application doesn't support it. So there's a development cycle, and we're trying to minimize that development cycle to make it easier for people who need performance-based scanning. It's a little bit complicated, I would agree. Our business model is a little bit complicated because we sell through our application partners and they enable their customers to buy our products. So this is why we refer to it as an application-driven business model because the application comes first. We're trying to improve, in fact, we have improved a lot on our webpage, how we inform people about our story. And I think as we go out to investors, that's an area we'll continue to work on to simplify the story, even though it is at times a little bit complicated.
spk02: Okay, great. The thing I do want to re-emphasize again, You guys have not stumbled in the last two years that I've really been invested in the company. I've not seen any step backwards. A lot of companies have been really falling back and then trying to recover. It's been a tough road. You guys are not there, and that's what I commend you again on that. Thank you. Jump on anybody else's question, but thank you again.
spk03: Thank you, Frank.
spk05: And just as a reminder to enter the queue, please press star then 1 on your touchtone phone. And our next question comes from William Carroll from Empower. Your line is open.
spk01: Yeah, just a question about the share repurchase program. Will that just be at the company's discretion from time to time, or do you have a planned purchase activity?
spk04: We're going to enter a 10b-5 plan next week. We'll be including a 45-day waiting period. That's all. This is following the SEC rules. Then after that, the plan will be in our broker's hands to execute.
spk01: Okay, great. Thank you.
spk04: You're welcome.
spk05: And just as a reminder to enter the queue, Please press star then one on your touch tone phone. Again, that's star one to ask a question. And currently we have no further questions.
spk03: Okay, so let me just finish by saying We feel we've made significant progress in 2021 and feel we've established a solid foundation that will enable us to grow our revenue and importance in the data capture market in the next few years. And I'd like to thank everyone for your time and interest in Socket Mobile and wish you all a good afternoon. Thank you.
spk05: Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating and you may now disconnect.
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