Socket Mobile, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The company develops mobile barcode-scanning and RFID/NFC data-capture products and related software. Financial statements are unaudited.
Key financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $5.06 million | $4.19 million | $9.69 million | $8.17 million |
| Gross profit | $2.63 million | $2.13 million | $5.03 million | $4.20 million |
| Gross margin | 52% | 51% | 52% | 51% |
| Operating income (loss) | $218,000 | $(144,000) | $265,000 | $(429,000) |
| Net income (loss) | $120,000 | $(138,000) | $132,000 | $(363,000) |
| Diluted EPS | $0.02 | $(0.02) | $0.02 | $(0.06) |
- Revenue increased 21% in Q2 and 19% in the first half. Management cited mPOS as the principal Q2 growth driver, with additional growth in commercial services and healthcare.
- Q2 revenue from the Americas rose 20% year over year and Asia Pacific rose 99%; Europe declined 5%.
- Operating expenses were $2.41 million in Q2, up from $2.28 million. Research and development increased 9%; sales and marketing rose 5%; general and administrative expense rose 3%.
- Net interest expense was $29,000 in Q2 and $58,000 in the first half, down from $48,000 and $68,000, respectively, a year earlier.
Cash, liquidity, and debt
- Cash and cash equivalents were $1.02 million at June 30, 2019, compared with $1.08 million at year-end 2018. Current assets were $7.15 million and current liabilities $5.43 million.
- First-half operating cash flow was negative $137,000, compared with positive $409,000 in the prior-year period. The company attributed the 2019 use primarily to higher receivables from increased shipments, inventory buildup, and prepayments.
- First-half investing cash outflow was $187,000. Financing provided $256,000; net cash decreased $69,000.
- At June 30, bank lines of credit totaled $1.83 million and the term loan was $583,000. Remaining borrowing capacity was approximately $194,000. The company also reported operating lease obligations and $5.50 million of non-cancelable inventory purchase commitments, mostly due within one year.
- The bank waived an April 2019 asset-coverage covenant default under a June amendment. The ratio was 1.57:1 at June 30, above the 1.25:1 minimum. Credit availability remains subject to covenant compliance and the bank’s discretion.
Outlook, risks, and other notable items
- No company-wide revenue or earnings guidance is provided in the filing. Management expected R&D expense to increase slightly in the second half, sales and marketing expense to remain flat, and Q3 G&A expense to increase, partly due to legal costs for preparing an option-exchange tender offer.
- Management cautioned that ongoing profitability is not assured. Risks include reliance on a small group of distributors and application developers, component-supplier constraints, uncertain demand and quarterly order timing, competition, and access to working capital.
- Ingram Micro accounted for 41% of Q2 revenue and 48% of receivables at June 30; BlueStar accounted for 18% of Q2 revenue and 17% of receivables. The two distributors together represented approximately 61% of first-half revenue.
- Three suppliers represented 53% of Q2 inventory purchases; the top three suppliers accounted for 23% of accounts payable at quarter-end.
- The company reported $5.71 million in deferred tax assets and $4.43 million in goodwill; failure to generate sufficient future taxable income or impairment could affect reported results. No material legal proceedings or subsequent events requiring disclosure were reported.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during Q2.
Important facts for investors to verify
- Whether revenue growth continues to convert into operating cash flow, given negative first-half operating cash flow and higher receivables and inventory.
- Whether the company maintains its bank covenant compliance and borrowing availability, especially with only about $194,000 of stated unused capacity.
- Whether major distributors remain customers and concentrated receivables are collected on time.
- Whether supplier availability and the $5.50 million of purchase commitments are consistent with actual demand and working-capital needs.
- Whether management’s expense expectations and planned option-exchange tender offer progress as described.