Socket Mobile, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited quarterly results, including Q4 2018. Socket Mobile designs Bluetooth-connected barcode and RFID/NFC data-capture products and software for mobile applications, selling mainly through distributors and resellers.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $16.45 million | $21.29 million |
| Gross profit / margin | $8.46 million / 51.4% | $11.39 million / 53.5% |
| Operating income (loss) | ($0.59 million) | $2.42 million |
| Net income (loss) | ($0.57 million) | ($1.43 million) |
| Basic and diluted loss per share | ($0.09) | ($0.23) |
| Cash from operating activities | $0.75 million | $2.38 million |
| Cash and cash equivalents at year-end | $1.08 million | $3.38 million |
- FY2018 revenue fell 23%; management attributed the decline chiefly to a delayed transition to new SocketScan products and limited corporate deployments. The April 2018 product launch was about four months behind schedule.
- R&D expense increased 5% to $3.64 million, or 22% of revenue; sales and marketing expense was approximately flat, and G&A declined 5% to $2.42 million.
- Year-end borrowings were $1.32 million on revolving credit lines and $0.83 million on the term loan. Cash was $1.08 million, and unused line capacity was approximately $0.2 million. Total assets were $17.33 million; stockholders’ equity was $12.40 million.
- Operating cash flow declined from 2017. FY2018 investing activities used $0.42 million, while financing activities used $2.62 million, including $5.02 million for share repurchases, partly offset by borrowings and option-exercise proceeds.
- Current assets were $6.20 million and current liabilities $4.36 million at year-end. The filing reports no off-balance-sheet arrangements.
Material changes and Q4 detail
- Annual revenue declined in the Americas (24%) and Europe (29%); Asia Pacific revenue increased 25%, primarily reflecting new third-party point-of-sale applications in Japan.
- Q4 2018 revenue was $4.14 million, versus $4.38 million in Q4 2017. Q4 gross profit was $2.08 million; net loss was $0.16 million, compared with a $2.72 million loss in Q4 2017. The prior-year quarterly loss included a substantial tax-related charge.
- Gross margin contracted by 2.1 percentage points year over year, which management attributed to fixed manufacturing costs spread over fewer units.
- In March 2018, the company completed a tender offer for 1.25 million shares at $3.90 per share, funded in part by a $4.0 million bank term loan. The term loan was subsequently paid down to $1.0 million by June; year-end term-loan principal was $0.83 million.
- The company disclosed that it anticipated noncompliance with two loan covenants based on Q1 2018 results. The bank modified the financing arrangements; the company reported compliance with required covenants in Q3 and Q4.
- Three distributors—Ingram Micro, BlueStar and ScanSource—accounted for approximately 63% of FY2018 revenue, down from 70% in FY2017. Ingram Micro and BlueStar represented 41% and 19% of year-end receivables, respectively.
Outlook, risks and unusual items
- Management expected Q1 2019 revenue to exceed Q4 2018, citing improved sales after completing the product transition. The filing gives no numerical revenue or earnings guidance.
- Management said it was controlling expenses and improving efficiency, while expecting continued significant R&D investment. It cautioned that a return to profitability and access to additional financing were uncertain; unavailable or unacceptable financing could require suspension of some or all operations.
- Key risks include dependence on a small number of distributors and component suppliers, product-transition and demand uncertainty, quarterly revenue volatility, competition and pricing pressure, and the need to maintain bank covenant compliance. Most 2018 revenue came from sales of barcode scanners integrated into retail point-of-sale applications.
- FY2017 net results were affected by a $2.65 million deferred-tax-asset remeasurement charge following the U.S. tax-law change. FY2018 included a $0.14 million income-tax benefit. The company reported $5.78 million of net deferred tax assets, whose realization depends on future taxable income.
- The company reported no material legal proceedings and no goodwill impairment for 2018. It had $5.92 million of non-cancelable inventory purchase commitments due within one year and $1.69 million of operating lease payments in total.
Important facts for investors to verify
- Whether the new SocketScan products sustain the expected post-transition sales recovery and support a return to operating profitability.
- Available liquidity, borrowing capacity and compliance with amended loan covenants, particularly given year-end cash of $1.08 million and only about $0.2 million of unused line capacity.
- Distributor concentration, receivables collection, inventory levels and the company’s ability to manage its $5.92 million of near-term purchase commitments.
- Assumptions supporting realization of the $5.78 million deferred tax asset and the absence of goodwill impairment.
- The effects of the 2018 share repurchase and outstanding options on capital allocation and future share dilution.