SOCKET MOBILE, INC. quarterly report, Q2 FY2019

Socket Mobile, Inc. — Q2 2019 Form 10-Q

Reporting period: Three and six months ended June 30, 2019. The company develops mobile barcode-scanning and RFID/NFC data-capture products and related software. Financial statements are unaudited.

Key financial results

MetricQ2 2019Q2 2018First half 2019First half 2018
Revenue$5.06 million$4.19 million$9.69 million$8.17 million
Gross profit$2.63 million$2.13 million$5.03 million$4.20 million
Gross margin52%51%52%51%
Operating income (loss)$218,000$(144,000)$265,000$(429,000)
Net income (loss)$120,000$(138,000)$132,000$(363,000)
Diluted EPS$0.02$(0.02)$0.02$(0.06)
  • Revenue increased 21% in Q2 and 19% in the first half. Management cited mPOS as the principal Q2 growth driver, with additional growth in commercial services and healthcare.
  • Q2 revenue from the Americas rose 20% year over year and Asia Pacific rose 99%; Europe declined 5%.
  • Operating expenses were $2.41 million in Q2, up from $2.28 million. Research and development increased 9%; sales and marketing rose 5%; general and administrative expense rose 3%.
  • Net interest expense was $29,000 in Q2 and $58,000 in the first half, down from $48,000 and $68,000, respectively, a year earlier.

Cash, liquidity, and debt

  • Cash and cash equivalents were $1.02 million at June 30, 2019, compared with $1.08 million at year-end 2018. Current assets were $7.15 million and current liabilities $5.43 million.
  • First-half operating cash flow was negative $137,000, compared with positive $409,000 in the prior-year period. The company attributed the 2019 use primarily to higher receivables from increased shipments, inventory buildup, and prepayments.
  • First-half investing cash outflow was $187,000. Financing provided $256,000; net cash decreased $69,000.
  • At June 30, bank lines of credit totaled $1.83 million and the term loan was $583,000. Remaining borrowing capacity was approximately $194,000. The company also reported operating lease obligations and $5.50 million of non-cancelable inventory purchase commitments, mostly due within one year.
  • The bank waived an April 2019 asset-coverage covenant default under a June amendment. The ratio was 1.57:1 at June 30, above the 1.25:1 minimum. Credit availability remains subject to covenant compliance and the bank’s discretion.

Outlook, risks, and other notable items

  • No company-wide revenue or earnings guidance is provided in the filing. Management expected R&D expense to increase slightly in the second half, sales and marketing expense to remain flat, and Q3 G&A expense to increase, partly due to legal costs for preparing an option-exchange tender offer.
  • Management cautioned that ongoing profitability is not assured. Risks include reliance on a small group of distributors and application developers, component-supplier constraints, uncertain demand and quarterly order timing, competition, and access to working capital.
  • Ingram Micro accounted for 41% of Q2 revenue and 48% of receivables at June 30; BlueStar accounted for 18% of Q2 revenue and 17% of receivables. The two distributors together represented approximately 61% of first-half revenue.
  • Three suppliers represented 53% of Q2 inventory purchases; the top three suppliers accounted for 23% of accounts payable at quarter-end.
  • The company reported $5.71 million in deferred tax assets and $4.43 million in goodwill; failure to generate sufficient future taxable income or impairment could affect reported results. No material legal proceedings or subsequent events requiring disclosure were reported.
  • Management said disclosure controls were effective and reported no material change in internal control over financial reporting during Q2.

Important facts for investors to verify

  • Whether revenue growth continues to convert into operating cash flow, given negative first-half operating cash flow and higher receivables and inventory.
  • Whether the company maintains its bank covenant compliance and borrowing availability, especially with only about $194,000 of stated unused capacity.
  • Whether major distributors remain customers and concentrated receivables are collected on time.
  • Whether supplier availability and the $5.50 million of purchase commitments are consistent with actual demand and working-capital needs.
  • Whether management’s expense expectations and planned option-exchange tender offer progress as described.