Socket Mobile, Inc. — Q3 2019 Form 10-Q
Business and period: Socket Mobile develops and sells mobile barcode-scanning and RFID/NFC data-capture products and related software. This unaudited report covers the three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $4.98 million | $4.14 million | $14.67 million | $12.31 million |
| Gross profit / margin | $2.64 million / 52.9% | $2.18 million / 52.6% | $7.67 million / 52.3% | $6.37 million / 51.8% |
| Operating income (loss) | $129,471 | $(30,920) | $394,328 | $(459,925) |
| Net income (loss) | $94,298 | $(45,257) | $225,927 | $(408,528) |
| Net income (loss) per diluted share | $0.01 | $(0.01) | $0.04 | $(0.07) |
- Revenue trends: Revenue increased 20% in Q3 and 19% year to date. Management identified mobile point-of-sale applications as the primary Q3 growth driver. Japan benefited from a government incentive program for small businesses upgrading to online POS; Europe growth reflected an iPad-based deployment, while Americas sales were essentially unchanged.
- Expenses: Q3 research and development rose 15% to $1.02 million, sales and marketing increased 6% to $785,295, and general and administrative expense rose 21% to $706,485. Management attributed R&D and sales and marketing increases mainly to compensation and staffing; G&A growth included legal costs for a stock-option exchange offer.
- Cash flow: Nine-month operating cash flow was $507,165, down from $612,443. Investing used $437,083, primarily for equipment; financing used $273,958. Cash declined $203,876 to $881,115.
- Liquidity and debt: At September 30, current assets were $7.13 million and current liabilities $5.39 million, implying working capital of approximately $1.74 million and a current ratio of about 1.32. Bank line borrowings were $1.43 million and the current term-loan balance was $458,333; no term loan remained classified as long-term. The company reported approximately $237,000 of borrowing capacity. The revolving facility matures January 31, 2020. Operating lease liabilities totaled approximately $1.23 million.
- Other balance-sheet items: Total assets were $19.28 million, stockholders’ equity $13.02 million, deferred tax assets $5.67 million, and goodwill $4.43 million.
Changes, outlook, and risks
- The company moved from losses to positive operating and net income in both the quarter and first nine months. Gross margin improved modestly. Despite higher sales, operating cash flow declined, chiefly reflecting increased receivables, inventory, and other working-capital needs.
- In June 2019, the bank waived a prior asset-coverage covenant default for April and amended eligible-receivable terms. The company reported an asset coverage ratio of 1.88 to 1.00 at September 30, above the 1.25-to-1.00 minimum. Bank advances remain subject to lender discretion and covenant compliance.
- Management expected R&D expense to increase slightly for the rest of 2019 and Q4 sales and marketing expense to remain flat. The filing provides no specific revenue or earnings guidance.
- Product and market developments included repositioning the scanning sled as DuraSled, with new models supporting iPhone 10 and 11; S550 Token Exchange was available to developers and scheduled for launch in Q1 2020.
- Key risks include dependence on a small number of distributors and customers, limited or sole-source component suppliers, order and quarterly revenue variability, the need to sustain profitability and secure working capital, competition and product-development execution, bank covenant/credit availability, and potential non-realization of deferred tax assets or goodwill impairment.
- Ingram Micro and BlueStar together accounted for 57% of nine-month revenue. Ingram Micro alone represented 39%; the top three suppliers accounted for 53% of Q3 inventory purchases. The company had $3.76 million of non-cancelable inventory purchase commitments, largely due within one year. It reported no material legal proceedings and no off-balance-sheet arrangements.
- Foreign-exchange sensitivity analysis estimated that an adverse 10% exchange-rate movement would reduce Q3 net income by approximately $97,000 if unprotected; the company hedges a significant portion of euro receivables. A 1% interest-rate increase was estimated to raise Q3 borrowing costs by approximately $3,938.
Important facts for investors to verify
- Whether Q3 revenue growth, especially in Japan and Europe, is repeatable and supported by end-customer demand rather than distributor stocking.
- Cash conversion and working-capital trends, including the growth in receivables and inventory and the company’s limited cash and remaining borrowing capacity.
- Compliance with bank covenants and the refinancing or repayment plan for the January 2020 revolving-credit maturity.
- Distributor and supplier concentration, component availability, and the potential cash impact of $3.76 million in purchase commitments.
- Whether sustained profitability supports realization of the $5.67 million deferred tax asset and the carrying value of goodwill.