Socket Mobile, Inc. — FY2013 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2013; it also provides unaudited fourth-quarter results. Socket Mobile sells cordless barcode scanners and mobile handheld computers for business mobility markets. It reported one operating segment. The filing was signed March 28, 2014.
Financial results and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $15.66 million | $13.56 million |
| Gross profit / margin | $6.30 million / 40% | $5.05 million / 37% |
| Operating loss | $123,000 | $3.01 million |
| Net loss | $620,000; $0.13 per share | $3.30 million; $0.68 per share |
| Cash used in operating activities | $94,000 | $907,000 |
- Fourth-quarter 2013 revenue was $3.67 million, gross profit $1.51 million, operating expenses $1.78 million, and net loss $418,000 ($0.09 per share). The comparable fourth-quarter 2012 net loss was $688,000.
- At December 31, 2013, cash and cash equivalents were $606,000; current assets were $3.23 million and current liabilities $7.50 million. Working capital was negative $4.26 million and the current ratio was 0.4 to 1.0.
- Year-end borrowings included $763,000 under the bank line, $650,000 in short-term notes, and $778,000 in related-party convertible notes. Stockholders’ equity was $133,000; accumulated deficit was $61.1 million.
- Financing activities provided $469,000 in 2013. Investing activities used $159,000. Contractual obligations totaled $6.50 million, including $2.05 million of purchase commitments and $3.74 million of operating lease payments.
Changes versus prior period
- Revenue grew 15% year over year, led by cordless barcode scanning, which rose 63% to $9.75 million and accounted for 62% of revenue. Handheld computer revenue fell 26% to $5.29 million, reflecting lower SoMo 655 sales during the product transition and reduced sales of related peripherals and services.
- Gross margin improved to 40% from 37%, principally because of the product mix shift toward barcode scanners and lower overhead costs.
- Operating expenses declined 20% to $6.43 million: research and development fell 16%, sales and marketing 31%, and general and administrative 7%. Operating and net losses narrowed substantially, but the company remained loss-making for the year.
- Operating cash use decreased from $907,000 to $94,000. Cash increased to $606,000 from $391,000, while short-term notes payable rose to $650,000 from $95,000.
Outlook, risks, and unusual items
- Going concern: Management and the independent auditor said recurring losses and the working-capital deficit raise substantial doubt about the company’s ability to continue as a going concern. The financial statements contain no adjustments for a possible failure to continue operations. Management’s plans include cost control, revenue growth, working-capital management, bank borrowing, and possible additional capital or partner funding; success and availability on acceptable terms are not assured.
- Financing: In 2013 the company obtained short-term subordinated financing carrying interest of 1% per week, with $650,000 outstanding at year-end and maturity extended to June 1, 2014. The company also reissued related-party convertible notes, with stated interest rates varying by tranche and conversion prices subject to specified terms. After year-end, it transferred its receivables-based facility to Bridge Bank; the new facility provides for up to $2.5 million, subject to eligible collateral, borrowing limits, and the bank’s discretion. The transfer was completed March 7, 2014.
- Quarterly performance: The company was profitable in Q1 and Q2 2013 but posted losses in Q3 and Q4. Management expects quarterly fluctuations because orders are difficult to forecast, shipments may be concentrated late in a quarter, and the business has limited backlog. No specific numerical revenue or earnings guidance is provided.
- Material settlement: A warrant-holder dispute was settled in December 2013 without a judgment on the merits. The warrant was reset to $1.25 per share and expanded from 550,000 to 976,000 shares, preserving the stated aggregate proceeds; the company also recorded a $28,500 expense and issued 37,500 shares in January 2014.
- Key risks: Reliance on a limited number of distributors and suppliers, customer and application-developer adoption, competition and price pressure, component availability, product transitions and technology changes, potential dilution from financing and securities, and the need to maintain bank covenants. Three distributors represented approximately 55% of 2013 revenue. The auditor’s financial-statement opinion was unqualified but included a going-concern emphasis.
Important facts for investors to verify
- Whether the company can sustain revenue growth, reach profitability, and secure sufficient financing to address its going-concern uncertainty and near-term obligations.
- Current status, availability, and borrowing-base capacity of the Bridge Bank facility, and repayment or refinancing of the short-term notes.
- Whether barcode-scanner growth can offset continued weakness in handheld computers, and how product mix affects gross margin and cash generation.
- Distributor concentration, supplier dependence, receivables collectability, inventory exposure, and the potential effects of returns or price protection.
- Potential dilution from convertible notes, warrants, and stock options; the filing reports substantial reserved or potentially issuable shares.