Socket Mobile, Inc. — Q3 2021 Form 10-Q
Business and period: Socket Mobile develops mobile barcode-scanning and RFID/NFC data-capture products and software. This unaudited quarterly report covers the three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $6.32 million | $4.11 million | $17.08 million | $11.04 million |
| Gross profit | $3.42 million | $2.27 million | $9.25 million | $5.86 million |
| Gross margin | 54.2% | 55.3% | 54.2% | 53.0% |
| Operating income (loss) | $954,000 | $(3.98) million | $2.01 million | $(4.88) million |
| Net income (loss) | $644,000 | $(4.00) million | $3.47 million | $(4.86) million |
| Diluted earnings (loss) per share | $0.07 | $(0.62) | $0.37 | $(0.76) |
Q3 and nine-month revenue increased 54% and 55%, respectively. Management attributed growth to ongoing distributor sales and large customers, particularly retail deployments as the economy reopened. Q3 margin fell year over year due primarily to higher component and shipping costs; the nine-month margin improved with higher revenue and better fixed-overhead absorption.
Cash flow and liquidity: Cash from operating activities was $1.18 million for the first nine months of 2021, versus $387,000 in 2020. The cash-flow statement reports investing outflows of $563,000 and financing inflows of $2.61 million; cash increased by $3.23 million to $5.35 million. Operating cash was pressured by inventory, receivables and prepaid-asset increases as demand rose and the company built inventory amid supply-chain disruption. Current assets were $13.24 million and current liabilities $5.08 million at quarter-end.
Debt and obligations: The CalCap loan had $750,000 outstanding ($500,000 current, $250,000 long-term). Secured subordinated convertible notes were carried at approximately $1.34 million in total, net of discount, and bear 10% interest; noteholders may demand repayment after August 31, 2021, and may convert at $1.46 per share. The company reported no outstanding balances on its bank credit lines during the period. Inventory purchase commitments totaled approximately $9.70 million, mostly due within one year. The bank facilities’ stated maturity was extended to January 31, 2023.
Material changes and unusual items
- 2020 results included a $4.43 million goodwill impairment charge; no such charge was recorded in 2021.
- Nine-month 2021 net income included a $1.61 million income-tax benefit, which management linked primarily to tax deductions from disqualified incentive-stock-option dispositions. Deferred tax assets were $7.12 million at September 30, 2021.
- The company acquired SpringCard contactless technology in exchange for shares and a warrant, recorded intangible assets of approximately $1.85 million net of amortization, and agreed to pay SpringCard $192,293 to resolve implementation issues. The technology is amortized over 15 years.
- Stock-option exercises generated $1.86 million in financing cash proceeds during the first nine months. Shares outstanding were 7,174,363 at September 30, versus 6,102,630 at December 31, 2020.
Outlook, risks and contingencies
No numerical revenue or earnings guidance is provided. Management expects continued significant R&D investment as revenue grows and expects sales and marketing expense to rise for the rest of 2021 as it improves its website and builds brand awareness and customers beyond retail. It cautions that interim results may not indicate full-year performance.
Key risks include COVID-19 and economic uncertainty; supply-chain constraints and dependence on a limited number of component suppliers; customer, distributor and geographic concentration; unpredictable order timing and limited backlog; competition and product-development demands; and potential limits on realizing deferred tax assets. The top three suppliers represented 56% of Q3 inventory purchases. Ingram Micro and BlueStar together accounted for about 54% of nine-month sales; Ingram Micro alone represented 33% of Q3 revenue. The company reported no material legal proceedings and no off-balance-sheet arrangements. It had approximately $9.70 million of non-cancelable inventory purchase commitments.
Disclosure note: The statements show a $260,000 deferred income-tax benefit for Q3 2021, while MD&A describes a $260,000 income-tax expense for that quarter. The filing text does not reconcile this inconsistency. MD&A also gives operating cash flow as approximately $1.179 million, compared with $1.183 million in the cash-flow statement.
Investor verification priorities
- Reconcile the Q3 income-tax presentation and the differing operating-cash-flow figures between the financial statements and MD&A.
- Track whether revenue growth and gross margins persist amid higher component and freight costs and supply constraints.
- Assess inventory growth, purchase commitments and working-capital needs against demand and supplier availability.
- Review convertible-note repayment/conversion terms, bank-facility availability and dilution from equity awards and conversions.
- Evaluate customer and supplier concentration, the deferred-tax-asset realization assumptions, and the impact of COVID-19 and economic conditions.