Socket Mobile, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2019. Socket Mobile develops Bluetooth barcode-scanning and RFID/NFC data-capture devices and related software, selling primarily through distributors and resellers.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 or prior date |
|---|---|---|
| Revenue | $4.629 million | $3.981 million; up 16% |
| Gross profit / margin | $2.400 million / approximately 52% | $2.064 million / approximately 52% |
| Operating income (loss) | $47,010 | $(285,037) |
| Net income (loss) | $11,839 | $(225,029) |
| Diluted earnings (loss) per share | $0.00 | $(0.03) |
| Cash from operating activities | $(406,101) | $(388,764) |
| Cash and cash equivalents | $929,270 at March 31, 2019 | $1,084,991 at December 31, 2018 |
Operating expenses were $2.353 million, nearly unchanged year over year. Revenue growth and lower R&D expense helped move operating results from a loss to a modest profit; net income remained close to break-even. The company used $100,318 for equipment purchases and ended the quarter with $12.538 million of stockholders’ equity.
Current assets were $6.953 million and current liabilities were $5.430 million at quarter-end, implying working capital of approximately $1.523 million. Bank line borrowings were $1.796 million and term-loan debt was $708,333, or about $2.505 million combined, excluding lease liabilities. Available borrowing capacity under the lines was approximately $75,000. The asset coverage ratio was 1.4:1 against a stated minimum of 1.25:1.
Changes versus the prior comparable period
- Revenue increased 16%; U.S. revenue rose 22% and Asia/rest-of-world revenue rose 38%, while European revenue declined 23%.
- Gross margin held at approximately 52%. Operating expenses were essentially flat; R&D declined 6%, sales and marketing rose 2%, and G&A rose 6%.
- Operating results improved by about $332,000, from a loss to income; net results improved by about $237,000.
- Operating cash use increased by about $17,000. Working-capital movements used $647,000, mainly from higher receivables and inventory, partly offset by higher payables.
- Q1 2019 financing cash flow was a net source of $350,698, including $4.109 million of line-of-credit proceeds and $3.629 million of repayments, plus $125,000 of term-loan repayment. Q1 2018 financing included the stock repurchase and $4.0 million term-loan proceeds.
Outlook, risks, and notable items
- Management expected R&D expense to increase during the rest of 2019 as it added headcount for product development and updates. Sales and marketing expense was expected to remain flat; G&A was expected to decline moderately in Q2 from Q1 and then remain flat. The filing provided no revenue or earnings guidance.
- Management attributed Q1 growth to the transition to the SocketScan product line and deployment of business applications requiring barcode scanning, including mPOS, commercial services, transportation, and health care.
- Liquidity and covenant compliance merit attention: the company reported only about $75,000 of remaining line capacity, variable-rate borrowing, and covenant requirements. It had previously disclosed 2018 covenant noncompliance, later waived after a required loan paydown; the filing reports the Q1 2019 asset coverage ratio above its minimum.
- Distributor concentration is substantial: Ingram Micro and BlueStar represented 63% of Q1 revenue and 75% of quarter-end accounts receivable. Two suppliers represented 45% of Q1 inventory purchases. The company also disclosed approximately $4.834 million of non-cancelable inventory purchase commitments.
- Other risks include continued profitability and cash generation, customer and distributor dependence, component availability, demand forecasting and inventory exposure, competition and product transitions, and realization of deferred tax assets. Deferred tax assets were $5.774 million; goodwill was $4.427 million.
- Operating lease adoption increased reported assets and liabilities; at March 31, operating lease right-of-use assets were approximately $1.19 million and lease liabilities approximately $1.42 million. No material legal proceedings or subsequent events requiring disclosure were reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether revenue growth persists, particularly given the reliance on two distributors and the European sales decline.
- Whether operating cash flow improves as receivables and inventory convert to cash, and whether the company needs additional borrowing or capital.
- Ongoing compliance with bank covenants, available credit, debt repayment capacity, and exposure to variable interest rates.
- Whether supplier constraints, purchase commitments, or inventory obsolescence affect product availability, margins, or liquidity.
- Whether future taxable profitability supports realization of the $5.774 million deferred tax asset.