Socket Mobile(SCKT) - 2020 Q1 - Quarterly Report

Part I. Financial Information Financial Statements The unaudited condensed financial statements for the three months ended March 31, 2020, show a decrease in revenue to $4.2 million from $4.6 million in the prior-year period, resulting in a net loss of $90,327 compared to a net income of $11,839 in Q1 2019, with total assets slightly increasing to $19.6 million and net cash used in operating activities improving to ($50,790) from ($406,101) year-over-year, and a significant subsequent event being the receipt of a $1.06 million SBA loan in April 2020 Condensed Statements of Operations (Three Months Ended March 31) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Revenues | $4,220,686 | $4,628,592 | | Gross Profit | $2,223,715 | $2,399,843 | | Operating Income (Loss) | ($90,835) | $47,010 | | Net Income (Loss) | ($90,327) | $11,839 | | Diluted EPS | ($0.01) | $0.00 | Condensed Balance Sheet Highlights | Metric | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $7,775,556 | $7,520,724 | | Total Assets | $19,634,717 | $19,458,487 | | Total Current Liabilities | $5,727,681 | $5,468,488 | | Total Liabilities | $6,367,249 | $6,224,261 | | Total Stockholders' Equity | $13,267,468 | $13,234,226 | Condensed Statements of Cash Flows (Three Months Ended March 31) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | ($50,790) | ($406,101) | | Net cash used in investing activities | ($154,681) | ($100,318) | | Net cash provided by financing activities | $389,436 | $350,698 | | Net increase (decrease) in cash | $183,965 | ($155,721) | | Cash and cash equivalents at end of period | $1,142,825 | $929,270 | - Subsequent to the quarter end, on April 20, 2020, the Company received a U.S. Small Business Administration (SBA) loan of $1,058,700 pursuant to the Paycheck Protection Program (PPP) under the CARES Act[59] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 9% year-over-year revenue decline in Q1 2020 to the COVID-19 pandemic, which severely impacted its retail-centric business segment, resulting in an operating loss of approximately $91,000 despite stable gross margins and slightly lower operating expenses, with liquidity managed through bank credit lines and significantly improved net cash used in operations compared to Q1 2019 - Q1 2020 revenue was approximately $4.2 million, a 9% decrease from Q1 2019, primarily impacted by the COVID-19 pandemic as over 70% of the company's business is driven by retail-centric applications[71] - Gross profit margins were 53% in Q1 2020, a slight improvement from 52% in Q1 2019[72] - Operating expenses for Q1 2020 were $2.31 million, a slight decrease from $2.35 million in Q1 2019, with reductions in R&D and G&A expenses partially offset by a small increase in Sales and Marketing[9][73][74] - Net cash used in operating activities was $50,790 in Q1 2020, a significant improvement from $406,000 used in Q1 2019. Net cash from financing activities was approximately $390,000, primarily from net borrowings on bank lines of credit[81][84] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are interest rate risk on its variable-rate bank loans and foreign currency risk from sales denominated in Euros and British pounds, with a 1% interest rate increase estimated to raise Q1 2020 borrowing costs by only $3,500, and an unprotected 10% adverse change in foreign exchange rates estimated to decrease Q1 2020 net income by approximately $20,000, though hedging mitigates a significant portion of European receivables currency risk - Exposure to interest rate risk is primarily from the bank term loan and credit line facilities, which have variable rates. A hypothetical 1% increase in the interest rate would have increased Q1 2020 borrowing costs by approximately $3,500[87] - The company is exposed to foreign currency risk as it requires European distributors to purchase in Euros and pays European employees in Euros and British pounds. An adverse 10% change in exchange rates would have resulted in a decrease in net income of approximately $20,000 for Q1 2020 if left unprotected[88] Controls and Procedures Based on an evaluation as of March 31, 2020, the company's Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective, with no material changes in the company's internal control over financial reporting during the first quarter of 2020 - Management, including the CEO and CFO, concluded that as of the end of the period covered by the report, the company's disclosure controls and procedures were effective[90] - There were no changes in internal control over financial reporting during the quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, internal controls[91] Part II. Other Information Risk Factors The company identifies significant risks that could adversely affect its business, including the negative impact of global economic conditions such as the COVID-19 pandemic on product demand, high dependence on application developers and a limited number of distributors (Ingram Micro and BlueStar), potential inability to return to profitability, reliance on a limited number of component suppliers, intense market competition, and the need to rapidly develop new products to keep pace with changing technology - The COVID-19 pandemic has reduced product purchases due to worldwide business curtailments and could restrict access to capital markets if conditions worsen[94] - The company is dependent on application developers to integrate its products into their solutions and successfully market them. Delays or failures by these developers would adversely affect revenue[97] - A significant portion of revenue comes from a limited number of distributors. In Q1 2020, Ingram Micro and BlueStar represented approximately 53% of worldwide revenues[110] - Several component parts are sourced from a limited number of suppliers, exposing the company to risks of shortages or supply interruptions that could materially harm financial results[106] - The market is characterized by rapidly changing technology and short product life cycles, requiring successful and timely new product introductions to compete effectively[107] Exhibits This section lists the exhibits filed with the Form 10-Q, which consist of the certifications by the Chief Executive Officer and Chief Financial Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 - The exhibits filed with this report include: * 31.1: Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act * 31.2: Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act * 32.1: Certification of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act[142] Signatures Signatures The quarterly report was duly signed and authorized on May 15, 2020, by the company's principal executive and financial officers - The report is signed by Kevin J. Mills, President and Chief Executive Officer, and Lynn Zhao, Vice President of Finance and Administration and Chief Financial Officer[145]