Socket Mobile, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. Socket Mobile develops Bluetooth-connected barcode scanning and RFID/NFC data-capture products and software for mobile devices, selling primarily through distributors and resellers. Management attributed lower sales primarily to COVID-19-related curtailment of business activity.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $2.72 million | $5.06 million | $6.94 million | $9.69 million |
| Gross profit | $1.36 million | $2.63 million | $3.59 million | $5.03 million |
| Gross margin | 50% | 52% | 52% | 52% |
| Operating income (loss) | ($810,000) | $218,000 | ($901,000) | $265,000 |
| Net income (loss) | ($768,000) | $120,000 | ($858,000) | $132,000 |
| Net income (loss) per share | ($0.13) | $0.02 | ($0.14) | $0.02 |
- Cash flow: First-half operating cash flow was positive $244,000, versus cash used of $137,000 in 2019. The company attributed the improvement mainly to lower accounts receivable associated with reduced shipments. Investing activities used $256,000; financing activities used $20,000. Cash declined $32,000 to $927,000.
- Liquidity and debt: At June 30, cash was $927,000 and current assets were $6.36 million, against current liabilities of $4.23 million. Bank lines of credit outstanding were $450,000; the bank term loan balance was $83,000. The company reported approximately $687,000 of available borrowing capacity. PPP and EIDL borrowings brought notes payable to approximately $1.29 million in total. The revolving credit facility maturity was extended to January 31, 2022; the company reported an asset coverage ratio of 1.5:1 against a 1.25:1 minimum.
- Other balance-sheet items: Inventory was $3.25 million, goodwill $4.43 million, and deferred tax assets $5.51 million. Total liabilities were $5.49 million and stockholders’ equity was $12.63 million.
Material changes versus prior periods
- Revenue fell 46% in Q2 and 28% in the first half year over year; Q2 gross margin declined two percentage points, while the first-half margin was unchanged.
- The company moved from profit to loss in both comparable periods. Operating expenses declined year over year, with management citing reduced employee compensation as a short-term COVID-19 cost-saving measure.
- First-half cash flow from operations improved, primarily because accounts receivable fell; this reflected lower shipments rather than stronger sales.
- Ingram Micro and BlueStar together generated 53% of first-half revenue, versus 61% in 2019. In Q2, those distributors represented 29% and 25% of revenue, respectively. Three customers accounted for 84% of June 30 receivables.
Outlook, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management said COVID-19’s duration and business impact were uncertain and that it would monitor conditions and respond. It warned that a prolonged downturn could materially harm results, financial position and cash flows, and that return to profitability is not assured.
- The company received a $1.059 million PPP loan, primarily used for payroll, rent and utilities. It intended to apply for forgiveness but could not assure eligibility. It also received a $150,000 EIDL loan, secured by company assets, at 3.75% interest, and a $10,000 EIDL grant that does not require repayment.
- Reported other income was $50,000 for Q2 and $70,000 for the first half; the notes identify the $10,000 EIDL grant as other income but do not clearly reconcile the remaining amount.
- Non-cancelable inventory purchase commitments were approximately $3.65 million. Operating lease liabilities totaled $964,000. The filing reported no material legal proceedings or off-balance-sheet arrangements.
- Key risks include continued COVID-19 disruption, distributor and customer concentration, component supply constraints, dependence on application developers, bank covenant compliance, possible difficulty raising capital, and the risk that deferred tax assets or goodwill may require write-downs. The filing also notes that PPP forgiveness is uncertain and that suppliers are concentrated.
- Product developments announced in July included the D755 medical-grade scanner and DuraSled compatibility for Samsung XCover Pro.
Important facts for investors to verify
- Whether sales and cash generation recover as COVID-19 disruptions ease; first-half operating cash flow benefited substantially from collecting receivables while shipments declined.
- The status and amount of PPP loan forgiveness, and the terms and balance of the secured EIDL loan.
- Compliance with bank covenants, available borrowing capacity and liquidity relative to the $3.65 million inventory purchase commitments.
- The explanation for the difference between reported other income and the $10,000 EIDL grant described in the notes.
- Whether distributor concentration, supply constraints and the carrying values of goodwill and deferred tax assets change materially.