Socket Mobile, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Comparisons are with the three months ended March 31, 2011 unless otherwise stated.
Business context and reporting period
Socket Mobile develops mobile handheld computers and data-collection products for business customers, selling through distributors, resellers, industry partners and OEMs. It reports one operating segment. The company announced its next-generation SoMo 655 handheld computer in January 2012, with shipments expected to begin in the second quarter.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $3.954 million | $4.039 million; down 2% |
| Gross profit / margin | $1.523 million / 38.5% | $1.514 million / 37.5% |
| Operating expenses | $2.357 million | $2.093 million |
| Operating loss | $834,161 | $579,588 |
| Net loss | $871,774 | $928,260 |
| Basic and diluted loss per share | $0.18 | $0.24 |
| Cash from operations | $351,341 provided | $398,134 used |
| Cash and cash equivalents, quarter-end | $957,723 | $957,022 at December 31, 2011 |
| Bank line borrowings, quarter-end | $854,725 | $1.110 million at December 31, 2011 |
Q1 2012 investing activities used $106,388, principally for tooling and equipment; financing activities used $244,252, mainly reflecting net repayments on bank lines. Cash increased by $701 during the quarter. Operating cash flow benefited from working-capital movements, including lower receivables and higher payables; it should not be read as evidence of operating profitability.
At March 31, current assets were $5.197 million and current liabilities were $7.301 million: a 0.71 current ratio and a $2.104 million working-capital deficit. Stockholders’ equity was $2.446 million. The company reported no material long-term debt. It had approximately $571,000 of additional borrowing capacity under its receivables-based bank lines, which expire October 12, 2013 unless renewed. Advances are discretionary to the bank and subject to a minimum liquidity covenant.
Material changes versus the prior comparable period
- Revenue declined slightly overall, but product mix shifted substantially: cordless handheld barcode scanner revenue rose 81% to $1.514 million; mobile handheld computer and related product revenue fell 5% to $2.310 million; and other revenue fell 83% to $130,000.
- U.S. revenue declined to $2.223 million from $2.924 million, while Europe increased to $1.229 million from $874,169 and Asia/rest of world increased to $501,205 from $240,828.
- Gross margin improved by 1.0 percentage point, attributed mainly to better scanner margins and mobile-computer product mix.
- Operating expenses rose 13%, with higher research and development and sales and marketing spending. Operating loss widened, despite a smaller net loss, because Q1 2011 included $316,216 of non-cash debt-discount amortization and other convertible-note interest.
- Operating cash flow improved from use of $398,134 to generation of $351,341, substantially reflecting working-capital changes. Inventory rose to $1.907 million from $1.461 million, while accounts payable rose to $3.954 million from $3.267 million.
Outlook, management commentary and risks
Management cited the SoMo 655 launch, continued distributor and application-partner support, cost controls and working-capital management as steps toward reducing losses and reaching profitability. Q2 2012 R&D expense was expected to remain near Q1 levels; sales and marketing was expected to increase slightly for the product launch; and general and administrative expense was expected to decline from Q1. These are expectations, not guarantees.
The filing’s liquidity disclosures are inconsistent: the financial-statement note says existing cash, cost controls, working-capital management and credit lines are expected to fund requirements at least through March 31, 2013, while MD&A says at least through March 31, 2012. The MD&A date is already past as of the filing and appears inconsistent; investors should verify the intended runway statement. Management warns that continued losses could consume cash and that additional capital might be required, potentially on dilutive terms; failure to obtain funding could require suspension of some or all operations.
- NASDAQ equity threshold: The filing states the continued-listing minimum stockholders’ equity was $2.5 million; reported equity was approximately $2.446 million. The company said it was developing plans to regain compliance.
- Concentration: Ingram Micro and ScanSource accounted for 16% and 22% of Q1 revenue, respectively. Three customers represented 60% of receivables. One supplier accounted for 50% of accounts payable, and two suppliers accounted for 65% of Q1 inventory purchases.
- Supply and demand: Limited-source components, including LCD touch screens, previously constrained handheld-computer shipments. The company also faces product obsolescence, inventory, channel, competition and demand-forecast risks.
- Commitments: Contractual obligations totaled $6.622 million, including $4.147 million of contract-manufacturer purchase obligations due within one year and $2.460 million of operating leases.
- Foreign currency: Management estimated an adverse 10% exchange-rate move could have increased Q1 net loss by approximately $76,000 if unprotected; hedging was used for a significant portion of euro- and yen-denominated receivables.
- Other disclosures: The company reported no off-balance-sheet arrangements, effective disclosure controls, and no material change in internal control over financial reporting during the quarter. Goodwill was $4.427 million; impairment remains a stated risk.
Important facts for investors to verify
- Clarify the conflicting liquidity runway dates of March 31, 2012 and March 31, 2013.
- Check the company’s progress and deadline for meeting the stated $2.5 million NASDAQ stockholders’ equity requirement.
- Monitor cash use, working-capital trends, borrowing availability and compliance with the bank’s liquidity covenant, including the bank’s discretion to advance funds.
- Track SoMo 655 launch timing, product acceptance and margins, and whether scanner growth offsets weakness in other product lines.
- Assess customer, distributor and supplier concentration, component availability, and the risk of purchase commitments or inventory exceeding demand.
- Note the filing’s MD&A sentence that calls $3.954 million “first quarter of 2011” revenue; the financial statements identify that figure as Q1 2012.