Socket Mobile, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The unaudited statements cover a single business segment: mobile systems solutions, including cordless barcode scanners and mobile handheld computers.
Financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $4.922 million | $3.292 million | $13.108 million | $11.992 million |
| Gross profit / margin | $2.144 million / 44% | $1.283 million / 39% | $5.667 million / 43% | $4.796 million / 40% |
| Operating income (loss) | $520,000 | ($189,000) | $868,000 | $151,000 |
| Net income (loss) | $431,000 | ($321,000) | $453,000 | ($203,000) |
| Basic / diluted EPS | $0.09 / $0.08 | ($0.07) / ($0.07) | $0.09 / $0.09 | ($0.04) / ($0.04) |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $198,000 | ($311,000) |
- Revenue increased 50% in Q3 and 9% year to date. Cordless scanner revenue grew 79% in Q3 and 46% year to date; handheld-computer revenue declined 7% and 41%, respectively. Other product revenue fell sharply as legacy products were phased out.
- Management attributed stronger gross margins primarily to sales mix shifting toward scanners, which carry slightly higher-than-average margins, and higher revenue relative to fixed overhead.
- Nine-month investing cash outflow was $119,000, mainly for tooling and equipment. Financing provided $55,000; cash increased $133,000 to $740,000.
- At September 30, cash was $740,000; current assets were $3.437 million and current liabilities $6.422 million. Working capital was negative $2.986 million and the current ratio was 0.5. The company reported $816,000 drawn on its bank line and approximately $333,000 of additional borrowing capacity.
- Total liabilities were $7.370 million and stockholders’ equity $860,000. Debt included $816,000 under the bank line, $650,000 of short-term subordinated notes, and $864,000 of related-party convertible notes including accrued interest. The subordinated notes bear 18% interest; convertible notes bear 8% or 18%. The bank facility’s effective rate was 7.15% at quarter-end.
Changes, outlook, and material risks
- The company reported profit for Q3 and the first nine months, but had a first-quarter loss; it reported a $620,493 net loss for fiscal 2013. Despite recent profitability, management stated that the working-capital deficit and other conditions raise substantial doubt about the company’s ability to continue as a going concern.
- Management said it may improve liquidity through working-capital management, bank borrowing, development-partner funding, warrant or option exercises, and additional equity issuance. Availability and terms are uncertain, and equity financing could dilute shareholders. The bank may terminate the facility at any time and is not obligated to advance funds.
- No revenue or earnings forecast was provided. Management expected Q4 R&D expense to remain around Q3 levels, sales and marketing expense to increase with added personnel, and general and administrative expense to increase slightly.
- Contractual obligations totaled approximately $6.510 million, including $2.360 million of inventory purchase commitments, $3.456 million of operating lease payments, $650,000 of short-term notes, and $44,000 of capital leases. The headquarters lease runs through June 2022.
- Risks include dependence on a few distributors and customers, component-supplier concentration, uncertain demand and quarterly order timing, declining handheld-computer sales amid tablet and smartphone adoption, reliance on third-party developers and platforms, and access to liquidity. In Q3, three distributors represented about 64% of revenue; one supplier and two others accounted for 66% of inventory purchases.
- A $61,500 loss on extinguishment of debt was recorded in the first half of 2014 in connection with replacement subordinated notes and related options. In October 2014, a note holder redeemed $50,000 of subordinated notes; a warrant holder exercised 516,000 warrants cashlessly, resulting in 278,266 shares issued.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether operating profitability and positive operating cash flow can be sustained, given the going-concern warning and $2.986 million working-capital deficit.
- Availability and continuation of bank advances, compliance with facility covenants, and the ability to meet near-term notes and purchase commitments.
- Whether scanner growth can offset continued weakness in handheld computers and whether the improved product mix and gross margin persist.
- Exposure to major distributors, customers, and limited-source suppliers, as well as potential dilution from convertible notes, warrants, options, or future capital raises.
- Effects of subsequent note redemptions and warrant exercises on liquidity, share count, and ownership dilution.