Socket Mobile, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2016, compared with the same 2015 periods. Socket Mobile sells mobile data-capture products, principally Bluetooth barcode scanners, through distributors. It phased out its SoMo handheld-computer line in Q2 because of component obsolescence and expects to sell remaining units in Q3 2016.
Financial performance and position
- Revenue: Q2 revenue was $5.212 million, up 16% year over year; first-half revenue was $10.256 million, up 21%. Q2 growth was led by handheld-computer sales, including a $0.6 million last-buy order received a year earlier. First-half cordless-scanner revenue rose 9%; SoMo sales excluding that order declined.
- Profit and margins: Q2 gross profit was $2.580 million and gross margin was 49.5%, versus 47.2% a year earlier. Q2 operating income was $579,000 and net income was $517,000, versus $489,000 and $401,000, respectively. First-half operating income was $1.179 million and net income $1.065 million, versus $500,000 and $330,000. Diluted EPS was $0.07 for Q2 and $0.15 for the first half, versus $0.07 and $0.06 in 2015.
- Expenses and interest: Q2 R&D, sales and marketing, and general and administrative expenses increased 35%, 12%, and 24%, respectively, year over year. Interest expense declined to $30,000 in Q2 and $73,000 for the first half, reflecting lower debt balances.
- Cash flow: First-half operating cash flow was $457,000, compared with $108,000 in 2015. Investing activities used $99,000; financing activities used $243,000, primarily reflecting repayment of $500,000 of related-party notes, partly offset by option and warrant exercises. Cash increased $116,000 to $1.054 million.
- Liquidity and debt: Current assets were $4.577 million and current liabilities $3.793 million at June 30; working capital was approximately $784,000. The company had no bank-line borrowings and reported approximately $1.53 million of available borrowing capacity under its receivables-based facility. Related-party convertible-note principal totaled approximately $753,000, with about $326,000 accrued interest; the notes are secured by company assets and convertible at $1.25 per share. The $500,000 short-term related-party notes were repaid in January 2016.
- Commitments: Contractual obligations totaled approximately $5.436 million, including $2.642 million of inventory purchase commitments and $2.766 million of operating-lease payments.
Material changes and management commentary
- U.S. revenue increased to $8.278 million for the first half from $6.409 million; European revenue was broadly flat, while Asia/rest-of-world revenue declined.
- Management attributed improved gross margin to supplier component-cost reductions associated with higher scanner volumes and lower inventory-management overhead.
- R&D expense for the remainder of 2016 was expected to remain flat with Q2 levels; sales and marketing expense was expected to increase moderately; G&A expense was expected to decrease. The filing provides no specific revenue or earnings forecast.
- The company began shipping the DuraScan 750 in Q2 and expected to ship the D730 and D700 and introduce its Apple-certified DuraCase in Q3 2016. Management also described development of NFC products.
- Q2 G&A included a one-time $50,000 NASDAQ listing application fee. The filing also reports higher stock-based compensation: $151,000 for the first half versus $96,000 a year earlier.
Risks, contingencies, and unusual items
- Revenue concentration is substantial: Ingram Micro, BlueStar, and ScanSource together represented about 62% of Q2 revenue and 62% of first-half revenue. Major distributors also held significant portions of receivables.
- Two suppliers accounted for 68% of Q2 inventory purchases; the company warns that limited component sources could cause shortages or delays.
- The bank facility requires a minimum 1.75-to-1 quick-assets-to-bank-obligations ratio. Advances are at the bank’s discretion, and the bank has a first-priority lien on company assets. Related-party convertible notes are also asset-secured.
- Other disclosed risks include maintaining profitability, obtaining capital if needed, demand and order volatility, competition, product-development and launch execution, distributor dependence, and inventory obsolescence. Goodwill was $4.427 million, a significant portion of total assets, and is subject to impairment review.
- The company reported no material legal proceedings and no off-balance-sheet arrangements. It disclosed routine customer intellectual-property indemnities but no claims to date. Non-cancelable operating-lease payments extend through June 2022.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether scanner growth and new DuraScan/DuraCase launches can offset the SoMo phaseout and the temporary contribution from the last-buy order.
- Whether profitability and operating cash generation continue, especially given distributor concentration, purchase commitments, and inventory and receivables exposure.
- The terms, accrued interest, conversion potential, and repayment timing of the secured related-party notes, and the availability of bank-line advances under the covenant.
- Whether management’s stated expense expectations for the rest of 2016 are achieved; no specific revenue or earnings guidance was provided.