Socket Mobile, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited interim results; comparisons are with the corresponding 2017 periods. Socket Mobile develops mobile barcode-scanning and RFID/NFC data-capture products and sells primarily through distributors and resellers.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $4.14 million | $5.48 million | $12.31 million | $16.90 million |
| Gross profit | $2.18 million | $3.05 million | $6.37 million | $9.07 million |
| Gross margin | 52.6% | 55.6% | 51.8% | 53.7% |
| Operating income (loss) | $(31,000) | $776,000 | $(460,000) | $2.35 million |
| Net income (loss) | $(45,000) | $414,000 | $(409,000) | $1.29 million |
| Diluted EPS | $(0.01) | $0.06 | $(0.07) | $0.19 |
- Revenue declined 24% in Q3 and 27% year to date. Cordless scanners and accessories, the principal product category, fell 19% and 26%, respectively. Management attributed the decline to lower enterprise deployments, smaller orders, and delayed shipments of the new SocketScan products.
- Gross margins fell as lower unit volume spread fixed manufacturing costs over fewer products and expedited production raised costs. Q3 2017 legacy products and services had also contributed 2.0 percentage points to that period’s margin.
- Year-to-date operating expenses increased 2% to $6.83 million: R&D rose 9% to $2.75 million, while sales and marketing and general and administrative expenses declined slightly. Increased R&D reflected personnel additions.
- Income-tax benefits were $18,000 for Q3 and $151,000 year to date, versus tax expenses of $341,000 and $981,000 in 2017. The company reported a $5.79 million deferred tax asset and expects to use its net operating loss benefits, contingent on future taxable profits.
Cash flow, balance sheet, and financing
- Operating cash flow was $612,000 for the first nine months, down from $1.48 million in 2017. Capital expenditures were $389,000, versus $196,000. Financing activities used $2.28 million, mainly reflecting $5.02 million spent on share repurchases.
- Cash fell to $1.32 million at September 30 from $3.38 million at year-end 2017. Current assets were $6.26 million and current liabilities $4.33 million, implying working capital of about $1.93 million and a current ratio of about 1.44.
- Outstanding bank borrowings were $2.49 million: $959,000 on the term loan and $1.53 million on revolving credit lines. The term loan is secured by company assets; credit-line and term-loan rates are variable and tied to prime.
- The company repurchased 1.25 million shares for $4.9 million, excluding fees, in a March tender offer funded in part by a $4.0 million term loan. Shares outstanding were 5,883,109 at September 30, down from 7,011,128 at December 31, 2017.
- After covenant noncompliance was anticipated for Q1, the lender modified the financing terms and waived the resulting defaults after required repayments. The company reported full covenant compliance in Q3; cash plus available credit was $1.62 million and the asset coverage ratio was 1.48:1. Minimum coverage requirements were scheduled to increase after quarter-end.
Outlook, risks, and other notable items
- Management expected to complete the SocketScan product transition in Q4 2018. Shipments began in late April, later than planned because of technical issues; application partners were evaluating the new products and updating customer guidance.
- Management expected Q4 R&D and sales and marketing expenses to moderately increase, and G&A to remain flat from Q3. The filing gives no revenue or earnings guidance.
- The company reported losses in each of the prior three quarters and cautioned that continued profitability is uncertain. It cited dependence on application developers, concentrated distributors, product adoption and deployment timing, product and component availability, competition, and potential need for additional capital.
- Three distributors accounted for approximately 65% of nine-month 2018 revenue; Ingram Micro alone represented 32%. Two suppliers accounted for 49% of nine-month inventory purchases. Non-cancelable inventory purchase commitments were approximately $5.14 million.
- Other commitments included $1.80 million of future minimum operating lease payments through June 2022. The company reported no material legal proceedings and no off-balance-sheet arrangements. It hedged a significant portion of euro receivables; a hypothetical 10% adverse currency move was estimated to reduce Q3 net income by about $33,200 if unprotected.
Most important facts to verify
- Whether new-product shipments and the planned Q4 product transition were completed, and whether deployments and sales recovered.
- Subsequent revenue, margins, operating cash flow, and progress toward profitability after three consecutive quarterly losses.
- Ongoing compliance with bank covenants, available credit, loan balances, and any changes in borrowing terms or liquidity.
- Whether concentrated distributors and suppliers, inventory commitments, and product-return exposure materially affect sales or cash requirements.
- Whether the deferred tax asset and goodwill remain recoverable in light of future results.