Socket Mobile, Inc. — Q1 2020 Form 10-Q
Business and period: The company develops and sells mobile barcode-scanning and RFID/NFC data-capture products and related software, primarily through distributors and resellers. This unaudited report covers the three months ended March 31, 2020, compared with Q1 2019; balance-sheet figures are compared with December 31, 2019.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $4.221 million | $4.629 million; down 9% as reported |
| Gross profit / margin | $2.224 million / 53% | $2.400 million / 52% |
| Operating income (loss) | $(90,835) | $47,010 |
| Net income (loss) | $(90,327); $(0.01) per share | $11,839; $0.00 per share |
| Operating cash flow | $(50,790) | $(406,101) |
| Capital expenditures | $(154,681) | $(100,318) |
| Cash and cash equivalents | $1.143 million at March 31 | $958,860 at December 31, 2019 |
| Current assets / current liabilities | $7.776 million / $5.728 million | $7.521 million / $5.468 million at December 31, 2019 |
Operating expenses totaled $2.315 million, slightly below $2.353 million a year earlier. Bank lines of credit outstanding were $1.939 million and the current term-loan balance was $208,333. The revolving credit facility was extended to January 31, 2022. Operating-lease liabilities totaled approximately $1.03 million. Financing activities provided $389,436 of cash, and cash increased by $183,965 during the quarter.
Material changes and management commentary
- Management attributed the revenue decline to COVID-19-related curtailments of business activity; more than 70% of the company’s business was driven by retail-centric applications, which were affected by lockdowns.
- U.S. revenue fell to $3.143 million from $3.678 million; Europe revenue rose to $616,000 from $493,000, while Asia and rest-of-world revenue was approximately flat at $462,000.
- Gross margin improved to 53% from 52%, but lower sales resulted in a shift from operating income to an operating loss.
- Management provided no quantitative revenue or earnings guidance. It warned that prolonged economic disruption could require expense reductions and deferral of product development.
Risks, contingencies, and unusual items
- COVID-19 and profitability: The company cautioned that sustained disruption could further reduce product purchases, constrain financing access, and threaten profitability. It stated it may need to use cash to support operating losses if profitability is not maintained.
- Funding and covenants: The bank facility requires a monthly asset coverage ratio of at least 1.25:1; advances are subject to the bank’s discretion. The filing describes a prior covenant waiver and identifies continued covenant compliance as a risk.
- Concentration: Ingram Micro and BlueStar represented 53% of Q1 revenue; they accounted for 43% and 22%, respectively, of March 31 receivables. Two suppliers represented 60% of Q1 inventory purchases.
- Commitments: Non-cancelable inventory purchase commitments were approximately $5.936 million, substantially due within one year. The company also disclosed operating-lease payments and ordinary-course indemnification exposure; it reported no material legal proceedings.
- Subsequent event: On April 20, 2020, the company received a $1.059 million Paycheck Protection Program loan at 1% interest, maturing April 20, 2022, with payments deferred for six months. Forgiveness is subject to program requirements, including the limitation that no more than 25% of forgiven amounts may be for non-payroll costs.
- Other exposures: Risks include reliance on a small number of distributors and component suppliers, inventory and returns exposure, competition, product-development execution, and realization of $5.507 million in deferred tax assets and $4.427 million in goodwill.
Important facts for investors to verify
- How COVID-19 affected subsequent-quarter orders, distributor inventory, customer collections, and demand across retail and other end markets.
- Available borrowing capacity and ongoing compliance with the bank facility’s asset-coverage covenant.
- Whether the PPP loan qualified for forgiveness and the resulting accounting and cash-flow effects.
- Ability to manage the $5.936 million purchase commitments, inventory levels, and supplier concentration amid uncertain demand.
- Whether future taxable income supports realization of deferred tax assets and whether goodwill remains unimpaired.
- The filing’s off-balance-sheet-arrangements disclosure refers to March 31, 2019, although this is the Q1 2020 report; confirm the intended date.