Socket Mobile, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; financial statements are unaudited. Socket Mobile develops and sells mobile barcode-scanning and RFID/NFC data-capture products, primarily through distributors and resellers.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $4.19 million | $5.81 million | $8.17 million | $11.43 million |
| Gross profit / margin | $2.13 million / 50.9% | $3.11 million / 53.6% | $4.20 million / 51.3% | $6.02 million / 52.7% |
| Operating income (loss) | $(144,000) | $908,000 | $(429,000) | $1.58 million |
| Net income (loss) | $(138,000) | $490,000 | $(363,000) | $876,000 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $409,000 | $702,000 |
Revenue fell 28% in both the quarter and first half. Cordless scanners and accessories generated nearly all revenue and declined 27% in Q2 and 29% in the first half. Management attributed the decline mainly to fewer enterprise deployments, unusually large customer shipments in 2017 that did not recur, and delayed shipments of new products. Lower unit volume reduced gross margins; Q2 margin was also affected by expedited production costs on initial SocketScan shipments. Operating expenses rose 3% in Q2 and 4% in the first half, with higher R&D partly offset by lower sales and marketing costs.
Financial position, liquidity and debt
- At June 30, cash and cash equivalents were $1.30 million, versus $3.38 million at year-end 2017. Current assets were $6.30 million and current liabilities $4.42 million.
- Outstanding borrowings included $1.535 million on credit lines and a $1.0 million term loan; total liabilities were $5.15 million. The credit lines are variable-rate and secured, as is the term loan.
- First-half investing cash outflow was $270,000, mainly for equipment. Financing cash outflow was $2.22 million, including $5.02 million for stock repurchases, partly offset by net borrowings and option exercises.
- Inventory was $2.21 million. Contractual obligations included $3.215 million of inventory purchase commitments and $1.915 million of operating-lease payments.
Material changes, outlook and risks
- In March, the company borrowed $4 million under a term loan and completed a tender offer repurchasing 1.25 million shares at $3.90 per share, for approximately $4.9 million before fees. Shares outstanding declined from 7.01 million at December 31, 2017 to 5.88 million at June 30, 2018.
- The company disclosed expected noncompliance with two loan financial covenants based on Q1 results. The bank agreed to forbear; the company paid down the term loan to $1 million by June 30, and the June financing amendment permanently waived those defaults upon the required paydown. A July 30 amendment subsequently imposed daily cash-plus-available-credit and increasing asset-coverage requirements. Continued access to credit depends on covenant compliance.
- No specific revenue or earnings guidance is provided. Management expected R&D and sales and marketing expenses to remain flat for the remainder of 2018, with general and administrative expense expected to decline slightly. Management noted that developers may need several months to qualify new SocketScan products.
- The company reported losses in each of the first two quarters and cautioned it may not maintain profitability or generate sufficient cash to support operations. Key risks include uncertain enterprise deployments and product adoption, dependence on a small number of distributors and suppliers, product-launch and component-supply delays, and bank covenant and financing risks.
- Ingram Micro, BlueStar and ScanSource together represented about 64% of first-half revenue. Ingram Micro and BlueStar accounted for 38% and 32% of accounts receivable, respectively, at June 30.
- Deferred tax benefits were recorded based on an expectation of at least breakeven for the full year. Deferred tax assets were $5.77 million and depend on future taxable profitability. The filing also cites foreign-exchange exposure and potential goodwill impairment; no material legal proceedings were reported.
Important facts for investors to verify
- Whether enterprise customer deployments and orders recover, and whether new SocketScan products gain developer qualification and sales traction.
- Subsequent revenue, gross-margin and cash trends, given two consecutive quarterly losses and reduced cash.
- Compliance with the amended bank covenants, available borrowing capacity and repayment schedule.
- Distributor concentration, receivable collection, supplier availability and the use of deferred tax assets.
- The effect of the large repurchase and outstanding stock options on liquidity and future share dilution.