Socket Mobile, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited interim financial statements. Socket Mobile develops mobile data-capture solutions, principally cordless barcode scanners, and also sells Windows-based handheld computers and service plans.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $4.49 million | $4.39 million | $8.49 million | $8.19 million |
| Gross profit | $2.11 million | $1.90 million | $3.92 million | $3.52 million |
| Gross margin | 47.1% | 43.3% | 46.2% | 43.0% |
| Operating income | $489,000 | $276,000 | $500,000 | $348,000 |
| Net income | $401,000 | $93,000 | $330,000 | $21,000 |
| Net income per diluted share | $0.07 | $0.02 | $0.06 | $0.00 |
- Q2 revenue rose 2%; first-half revenue rose 4%. Cordless barcode scanning and accessories grew 7% in Q2 and 14% in the first half. Handheld computer and related-product revenue fell 25% and 35%, respectively.
- Gross margin improvement reflected lower component costs and a product mix shift toward higher-margin cordless scanners and away from lower-margin handheld computers.
- Operating expenses were $1.63 million in Q2 and $3.42 million in the first half. First-half sales and marketing expense increased 22%, while research and development declined 1% and general and administrative expense increased 4% year over year.
- Net interest expense and other was $80,000 in Q2 and $155,000 in the first half, down from $113,000 and $249,000, respectively, in the prior-year periods. The prior-year periods included a $61,500 debt-extinguishment loss.
Cash flow, liquidity and debt
- First-half operating cash flow was $108,000, versus $124,000 in 2014; investing cash use was $62,000. Financing provided $152,000, mainly from warrant and stock-option exercises. Cash increased $198,000 to $830,000.
- At June 30, current assets were $3.49 million and current liabilities $5.72 million: a 0.61 current ratio and $2.23 million working-capital deficit. Accumulated deficit was $60.36 million; stockholders’ equity was $1.62 million.
- Cash included approximately $816,000 drawn on the bank line. The filing reports about $493,000 of additional borrowing capacity, subject to eligibility, bank discretion and facility terms. The balance sheet reports bank borrowing of $815,819; the financing note reports $815,891.
- Other reported debt included $600,000 of short-term subordinated notes and approximately $753,000 of related-party convertible notes. The notes carry stated rates of 18% and 8%, respectively, or 18% for the long-term convertible notes; the notes are secured by company assets and subordinated to the bank. On July 31, the company repaid a $100,000 investor note.
- Management and the auditor’s filing disclosure identify substantial doubt about the company’s ability to continue as a going concern, citing its working-capital deficit, historical losses and reliance on continued profitability and financing. The company says it may reduce expenses or seek additional capital, including equity, but availability and terms are not assured and could dilute shareholders.
Changes, outlook and risks
- Management attributed scanner growth to selected Series-7 and Series-8 models, while underlying scanner run-rate business grew 26% in Q2 and 29% in the first half after excluding larger project deployments. Project-based scanner revenue was $0.4 million in Q2, down from $0.9 million.
- In early July, an OEM customer placed a $1.6 million last-time-buy order, expected to ship in Q4 2015 and Q1 2016. Handheld computer sales have been declining as customers shift to smartphones and tablets.
- Management expected R&D expense to rise moderately in Q3, sales and marketing expense to increase over the next several quarters due to planned hires and program costs, and G&A expense to remain flat for the rest of 2015. No numerical revenue or earnings guidance was provided.
- Three distributors—Ingram Micro, ScanSource and BlueStar—accounted for approximately 70% of first-half revenue. Customer receivables and supplier purchases are also concentrated; two suppliers represented 61% of Q2 inventory purchases.
- Contractual obligations included $1.69 million of inventory purchase commitments and $3.17 million of future operating lease payments. The company reported no material legal proceedings and no off-balance-sheet arrangements.
- Other key risks include reliance on application developers and distribution partners, limited component suppliers, variable bank advances and possible line termination, product demand and execution uncertainty, foreign-currency exposure, and potential dilution from equity issuance, options, warrants or convertible notes.
Important facts for investors to verify
- Whether operating profitability and cash generation can continue, and whether the company can address its $2.23 million working-capital deficit without unacceptable dilution.
- Availability and terms of the bank facility, including the filing’s differing reported borrowing balances and the disclosed right of the bank to terminate or decline advances.
- Timing, delivery and collectability of the $1.6 million OEM order, and the durability of scanner growth as handheld-computer revenue declines.
- Exposure to distributor, customer and supplier concentration, and the company’s ability to meet purchase commitments while managing inventory and liquidity.