Socket Mobile, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative period is Q1 2013. Socket Mobile designs mobile barcode scanners and handheld computers, subcontracting manufacturing and selling through distributors, resellers, application partners and OEMs.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $3.795 million | $4.265 million | Down 11% |
| Gross profit / margin | $1.623 million / 43% | $1.708 million / 40% | Profit down 5%; margin up 3 percentage points |
| Operating income | $72,505 | $163,074 | Down 56% |
| Net income (loss) | $(71,424) | $74,802 | Shifted to a loss |
| Basic and diluted EPS | $(0.01) | $0.02 | Shifted to a loss |
| Cash from operating activities | $26,657 | $(266,991) | Improved |
| Cash from investing activities | $(8,100) | $0 | Equipment purchases |
| Cash from financing activities | $45,534 | $515,261 | Lower financing inflow |
Cash and cash equivalents were $670,346 at March 31, 2014, versus $606,255 at year-end 2013. Total assets were $8.05 million and total liabilities were $7.94 million; stockholders’ equity was $114,198. Current assets of $3.26 million compared with current liabilities of $7.45 million, yielding a 0.4-to-1 current ratio and a $4.19 million working-capital deficit.
Debt and credit included $814,571 drawn under the bank line, $650,000 in related-party and other short-term notes, and $777,625 in related-party convertible notes. The company entered a new Bridge Bank facility in March: up to $2.5 million, subject to eligible receivables, cash and bank discretion; approximately $284,000 of additional capacity was reported as available at quarter-end. The facility bears prime plus 1.5% (4.75% stated rate at inception, with an effective rate of 4.95% including fees) and can be terminated by either party.
Material changes and management commentary
- Cordless barcode scanning revenue rose 20% to $2.912 million, or 77% of total revenue, driven by Series-7 and Series-8 scanner volumes.
- Mobile handheld computer and related revenue fell 41% to $848,000, reflecting lower unit sales and lower sales of related plug-in products and accessories. Management cited the shift toward tablets and smartphones; Microsoft had clarified support for Windows Embedded Handheld 6.5 through early 2020.
- Other revenue fell 91% to $35,000, largely due to lower legacy-product and OEM sales. U.S. revenue increased to $2.682 million, while Europe and Asia/rest of world declined. Ingram Micro, ScanSource and BlueStar together represented about 61% of Q1 revenue.
- Gross margin improved primarily because sales mix favored higher-margin cordless scanners over handheld computers. Operating expenses were nearly flat at $1.551 million: R&D rose 6%, sales and marketing fell 15%, and general and administrative expense rose 13%.
- Net interest expense and other increased to $135,944 from $80,287, primarily because of higher note balances. Q1 2014 operating cash flow benefited in part from a $409,241 inventory reduction, offset by higher receivables and prepaid expenses and lower accrued payroll.
- Management expected Q2 R&D and sales and marketing expense to moderately increase from Q1, and general and administrative expense to moderately decline. The filing gives no specific revenue or earnings guidance.
Liquidity, risks and contingencies
- Going concern: The company reported an accumulated deficit of $61.2 million and losses in Q1 2014 and fiscal 2013. Management stated that these conditions raise substantial doubt about the company’s ability to continue as a going concern. It cited cost management, working-capital management, bank borrowing and potential partner funding or equity issuance as possible measures, but gave no assurance that additional capital would be available on acceptable terms. Failure to obtain funding could require suspension of some or all operations.
- Related-party financing: The $650,000 short-term note line was due by June 1, 2014 and accrued interest at 1% per week. Convertible notes carried rates of 8% or 18% and were secured by company assets; certain holders had conversion rights and one note group had a holder call provision effective September 2014. The remaining $25,000 of original convertible notes was repaid in April 2014.
- Commitments: Non-cancelable inventory purchase commitments were approximately $2.081 million. Future operating lease minimum payments totaled approximately $3.645 million, including the Newark headquarters lease through June 2022.
- Business risks: Revenue and receivables were concentrated among a small number of distributors/customers; three customers accounted for 82% of receivables at quarter-end. The company also cited reliance on limited or sole-source suppliers, competition and product obsolescence, dependence on third-party applications and device platforms, order volatility, and potential difficulty raising capital.
- The filing reported no off-balance-sheet arrangements and no customer indemnification claims to date. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the company can improve liquidity and reach sustained profitability, given the going-concern warning and $4.19 million working-capital deficit.
- Availability and terms of bank advances, compliance with facility covenants, and repayment or refinancing of related-party notes, including the short-term note maturity.
- Whether scanner growth can continue to offset declines in handheld computers, legacy products and OEM revenue, and whether distributor/customer concentration changes.
- Ability to meet the $2.081 million purchase commitments and lease obligations while managing supplier concentration and cash needs.
- Potential dilution: 4,914,563 common shares were outstanding as of May 9, 2014; the filing also disclosed outstanding options, warrants and convertible notes with potential share issuance.