Socket Mobile, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Socket Mobile develops mobile barcode-scanning and RFID/NFC data-capture products, sold primarily through distributors and resellers for use with mobile applications.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $3.981 million | $5.622 million; down 29% |
| Gross profit / margin | $2.064 million / 51.8% | $2.913 million / 51.8% |
| Operating income (loss) | $(285,037) | $668,034 |
| Net income (loss) | $(225,029), or $(0.03) per diluted share | $385,807, or $0.05 per diluted share |
| Cash from operations | $(388,764) | $240,836 provided |
| Cash and cash equivalents | $2.075 million at quarter-end | $3.380 million at December 31, 2017 |
Operating expenses totaled $2.349 million, up from $2.245 million. Research and development rose 19% to $947,000; sales and marketing fell 3% to $738,000; and general and administrative fell 4% to $665,000. The company reported a $79,927 income-tax benefit, compared with $252,551 of tax expense a year earlier. Cash used in investing was $164,198, primarily equipment purchases. Cash used in financing was $751,692, including the share repurchase, term-loan proceeds, and stock-option exercises.
At March 31, current assets were $7.757 million and current liabilities were $5.620 million. The company had $4.0 million outstanding under a term loan ($3.375 million current and $625,000 long-term); no revolving-line borrowings were outstanding at quarter-end. Revolver borrowing capacity was approximately $2.055 million. The loan is secured by company assets and carries financial covenants.
Material changes and notable items
- Revenue from cordless barcode scanners and accessories, 98% of total sales, declined 30% to $3.887 million. Management attributed the shortfall partly to delays in the new SocketScan launch, which began shipping in April rather than mid-Q1; approximately $200,000 of orders could not ship in Q1. Distributors also reduced orders while awaiting the new products.
- Enterprise deployment revenue was $317,000, compared with $1.2 million in Q1 2017. Management noted that deployments vary by quarter.
- The company completed a tender offer on March 9, repurchasing and retiring 1.25 million shares at $3.90 per share, for approximately $4.9 million before related fees and expenses. It drew $4.0 million under the term loan to help fund the repurchase. Shares outstanding were 5,878,980 at March 31, versus 7,011,128 at December 31, 2017.
- Cash declined by $1.305 million during the quarter. Operating cash use included a $238,000 increase in accounts receivable, which management linked to higher March shipments.
- The Tax Cuts and Jobs Act reduced the U.S. federal corporate tax rate; the company recorded an approximately $80,000 Q1 deferred tax benefit. Deferred tax assets were $5.717 million at quarter-end. The company had recorded a one-time $2.6 million reduction in deferred tax assets at December 31, 2017 due to the lower tax rate.
Outlook, risks, and contingencies
Management did not provide revenue or earnings guidance. It expected R&D expense to remain flat over the next several quarters, sales and marketing expense to be flat in Q2 and increase slightly in the second half, and G&A expense to decline moderately in Q2 and remain flat for the balance of the year. Management’s expectation of at least breakeven full-year results was cited as the basis for the Q1 deferred tax benefit, not presented as formal earnings guidance.
Credit covenant breach: At March 31, the company was not in compliance with the fixed-charge coverage and total-funded-debt-to-EBITDA ratios. It subsequently reduced the term loan from $4.0 million to $1.4 million by May 1, using cash and revolving-line borrowings. The filing says the bank lines remained effective; it does not clearly state whether the covenant breaches were waived or cured.
Other key exposures include reliance on a small number of distributors (Ingram Micro and BlueStar were 55% of Q1 revenue), dependence on limited or sole-source component suppliers (the top two suppliers represented 44% of Q1 inventory purchases), quarterly sales variability, product launch and deployment delays, and the ability to sustain profitability and realize deferred tax assets. The company had approximately $2.740 million of non-cancelable inventory purchase commitments and $2.024 million of future operating lease payments. It reported no material legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the bank waived or the company cured the Q1 covenant breaches, and its current compliance, debt balance, and revolver availability.
- Whether April’s SocketScan launch and subsequent shipments converted delayed orders into revenue, and whether distributor inventory and enterprise deployments recovered.
- Whether operating cash flow and liquidity improve after the repurchase-related borrowing and term-loan paydown.
- Whether major distributors and suppliers remain stable, given customer and component concentration.
- Whether future taxable profitability supports realization of the $5.717 million deferred tax asset.