SOCKET MOBILE, INC. annual report, FY2019

Socket Mobile, Inc. — 2019 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2019. The filing also provides unaudited quarterly results, including fourth-quarter 2019. Socket Mobile designs Bluetooth-connected barcode scanners and RFID/NFC readers, plus developer software, for mobile business applications. Sales are primarily through distributors and resellers.

Financial performance

Metric20192018
Revenue$19.253 million$16.454 million
Gross profit / margin$10.101 million / 52.5%$8.456 million / 51.4%
Operating income (loss)$606,000($586,000)
Income (loss) before taxes$506,000($715,000)
Net income (loss)$287,000($571,000)
Diluted earnings (loss) per share$0.05($0.09)
Cash from operating activities$874,000$750,000

Revenue increased 17%. SocketScan products generated 58% of 2019 revenue and grew 22%; DuraScan represented about 19% and grew 1%; DuraSled and attachable scanners represented 12% and grew 5%. Fourth-quarter revenue was $4.584 million, versus $4.144 million in Q4 2018; quarterly net income was $61,000, versus a $163,000 loss.

Liquidity, debt and cash flow

  • At year-end, cash was $959,000, current assets were $7.521 million and current liabilities were $5.468 million.
  • Bank line borrowings were $1.412 million and the current term-loan balance was $333,000; the term loan was fully current. Unused credit availability was approximately $400,000.
  • Operating cash flow of $874,000 was offset by $603,000 of investing outflows and $397,000 of financing outflows; cash declined $126,000 during the year. Inventory rose to $3.179 million from $2.272 million, and accounts receivable rose to $2.837 million from $2.367 million.
  • Management said cash resources, projected operating cash flow and remaining bank-line capacity were expected to cover working-capital needs and planned capital expenditures. The revolving-credit maturity was extended in January 2020 to January 31, 2022.
  • Contractual obligations totaled $4.792 million, including $3.554 million in inventory purchase commitments due within one year and $1.230 million in operating lease payments. No off-balance-sheet arrangements were reported.

Changes, outlook and risks

  • The company returned to profitable growth after a 2018 loss attributed to lower sales during a longer-than-expected SocketScan product transition and weak corporate deployments. Gross margin improved modestly; operating expenses increased 5% to $9.494 million.
  • Management said it expected to continue significant R&D investment and believed redesigned DuraScan products could support future growth. The filing gives no specific revenue or earnings guidance.
  • The filing identifies COVID-19 and global economic weakness as potential threats to purchases, revenue, funding access and product-development plans. Other key risks include dependence on application developers and a small distributor base, component-supplier concentration, competition and pricing pressure, quarterly sales volatility, and the need to maintain bank covenants.
  • Ingram Micro and BlueStar accounted for 59% of 2019 revenue, compared with 53% in 2018. Together they also represented 77% of year-end receivables. The bank waived an April 2019 asset-coverage covenant breach; the filing says the company was in compliance at year-end.
  • The company reported no material legal proceedings and no goodwill impairment. Deferred tax assets were $5.507 million; their realization depends on future taxable income. Management assessed internal control over financial reporting as effective; the auditor did not provide an internal-control attestation.

Important facts for investors to verify

  • Whether 2019’s return to profitability and SocketScan-led growth continued, particularly amid the COVID-19 disruption noted in the filing.
  • Whether cash generation and available credit remain adequate given rising inventory and receivables, limited unused credit capacity, and the $3.554 million purchase commitment.
  • Whether distributor and customer concentration, supplier dependence, and bank covenant requirements create material operational or financing exposure.
  • Whether future taxable income supports realization of the $5.507 million deferred tax asset.
  • Potential dilution: 2.393 million options were outstanding at year-end, in addition to restricted stock and shares available for grants.