Socket Mobile, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Socket Mobile designs and sells mobile barcode-scanning and RFID/NFC data-capture products and software. Its products are sold mainly through distributors and resellers. Comparisons are with Q1 2021 unless noted.
Financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $6.293 million | $4.813 million | +31% |
| Gross profit | $3.128 million | $2.574 million | +22% |
| Gross margin | 49.7% | 53.5% | Down 3.8 percentage points |
| Operating income | $464,000 | $242,000 | +92% |
| Net income | $342,000 | $203,000 | +69% |
| Diluted EPS | $0.04 | $0.03 | — |
| Operating cash flow | $(452,000) | $291,000 | — |
Operating expenses were $2.664 million, up 14%. R&D rose 13% to $1.054 million and sales and marketing rose 36% to $900,000, mainly reflecting hiring; G&A declined 4% to $710,000. Management cited higher component and freight costs as the principal reasons for lower gross margin.
Cash, liquidity and obligations
- Cash and cash equivalents were $5.423 million at March 31, versus $6.096 million at December 31, 2021. Current assets were $14.724 million and current liabilities $5.336 million.
- Operating cash use was attributed primarily to higher accounts receivable from increased shipments and a security deposit for the new office. Accounts receivable increased to $3.446 million from $2.576 million.
- Capital expenditures were $135,000. Financing cash use was $85,000, including a $125,000 CalCap term-loan repayment, partly offset by $40,000 in option proceeds.
- Total liabilities were $5.357 million. The balance sheet included $500,000 of CalCap loan principal and subordinated convertible notes reported at $1.353 million net of discount. The notes carry 10% interest, mature August 30, 2023, and may be put to the company or converted by holders, subject to their terms. No bank credit-line balances were outstanding during Q1.
- Non-cancelable inventory purchase commitments totaled approximately $13.137 million, of which $12.456 million was due within one year. The existing Newark office lease expired June 30, 2022; a new 87-month Fremont lease was to take effect May 1, 2022.
Material changes and business developments
- Revenue growth was attributed to distributor and large-customer demand, particularly retail as the economy reopened. U.S. revenue rose to $4.883 million from $3.563 million; Europe revenue declined to $698,000 from $778,000.
- Three distributors accounted for 66% of revenue in Q1 2022: Ingram Micro 27%, BlueStar 20%, and ScanSource 19%. The top three suppliers represented 53% of inventory purchases.
- The company announced SocketCam C820, a software-based barcode scanner offered to application partners. Management expected an advanced camera-scanning version in the second half of 2022.
- Management expects sales and marketing expense to remain at a similar level for the rest of 2022 and expects continued significant R&D investment as revenue grows. The filing provides no quantitative revenue or earnings guidance.
- The bank consented to a share repurchase program of up to $1.8 million. Subsequent to quarter-end, the company repurchased 90,913 shares at an average $4.11 per share and issued 17,500 shares through option exercises.
Risks, contingencies and unusual items
- Management highlighted potential impacts from COVID-19, Russia’s military action against Ukraine, uncertain economic conditions, component availability and supplier concentration. Limited-source components could constrain production; purchase commitments also expose the company to excess or obsolete inventory risk.
- Distributor and customer concentration, product demand and shipment timing, competition, and reliance on application developers could create revenue volatility. The filing notes that quarterly results may fluctuate and that ongoing profitability is not assured.
- Deferred tax assets were $7.884 million and depend on future taxable profitability for realization. Management said future ownership changes could limit use of net operating loss carryforwards.
- The company reported no material legal proceedings and no off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
- Foreign-currency sensitivity analysis estimated that an adverse 10% exchange-rate movement, if unhedged, would have reduced Q1 net income by approximately $34,000.
Important facts for investors to verify
- Whether revenue growth is sustainable and whether rising component and freight costs continue to pressure gross margin.
- Whether receivables convert to cash and operating cash flow improves, given the Q1 cash outflow and customer concentration.
- The timing and fulfillment of the $13.137 million inventory purchase commitments amid supplier constraints and demand uncertainty.
- The terms, commencement accounting and cash costs of the new Fremont lease, and the effect of the share repurchase program on liquidity.
- The company’s ability to maintain profitability and realize its deferred tax assets, and the repayment, conversion or put risk of the 10% subordinated notes due in 2023.