Socket Mobile, Inc. — Q2 2013 Form 10-Q
Business and period: Socket Mobile develops mobile handheld computers and barcode-scanning products, selling through distributors, resellers, industry partners and OEMs. This unaudited report covers the three and six months ended June 30, 2013; comparisons are with the same 2012 periods.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $4.44 million | $4.04 million | $8.70 million | $7.99 million |
| Gross profit / margin | $1.80 million / 40.7% | $1.50 million / 37.1% | $3.51 million / 40.4% | $3.02 million / 37.8% |
| Operating income (loss) | $177,000 | ($721,000) | $340,000 | ($1.55 million) |
| Net income (loss) | $44,000 | ($755,000) | $118,000 | ($1.63 million) |
| Diluted earnings (loss) per share | $0.01 | ($0.16) | $0.02 | ($0.34) |
- Operating expenses fell 27% in the first half to $3.17 million, principally reflecting lower personnel, sales and marketing, and development costs.
- First-half operating cash flow was negative $450,000, versus positive $36,000 a year earlier. Investing cash use was $42,000; financing provided $761,000. Cash increased $269,000 to $660,000.
- At June 30, cash was $660,000, including $1.15 million drawn on bank lines. The company reported approximately $410,000 of additional line availability, a 0.5 current ratio and a $3.66 million working-capital deficit. Stockholders’ equity was $745,000; accumulated deficit was $60.38 million.
- Debt and financing included $1.15 million drawn on bank lines, $550,000 of short-term notes, and $725,000 of related-party convertible notes. The convertible notes bear 8% interest, are secured and mature August 1, 2014. The short-term line bears interest of 1% per week; its maturity was extended in July to December 1, 2013. Bank-line effective borrowing cost was 13.7% in the first half, including fees.
Changes, outlook and material risks
- Revenue rose 10% in Q2 and 9% in the first half. Cordless barcode-scanner revenue grew 66% in Q2 and 63% in the first half, driven mainly by the 7Ci product. Handheld-computer revenue fell 27% and 32%, respectively, as SoMo 655 sales lagged the prior-generation models during and after the product transition. First-half “other” revenue rose 90%, mainly from one-time OEM purchases of legacy products.
- Gross margin improved, which management attributed to a sales mix favoring scanners over lower-margin handheld computers and lower overhead costs. Management expected research and development and sales and marketing expense to increase slightly in Q3 from Q2 levels, and general and administrative expense to increase moderately. The filing provides no specific revenue or earnings guidance.
- Management stated that first-half profitability was only $118,000 and warned that substantial doubt exists about the company’s ability to continue as a going concern. It cited the working-capital deficit, limited cash and reliance on continued profitability and additional financing. The bank facility could be terminated at any time and was due to expire in October 2013 unless renewed; the filing gives October 12 in the note and October 11 in MD&A. The bank may also decline advances at its discretion. Failure to obtain financing could require suspension of some or all operations; any equity financing could dilute shareholders.
- Operating cash use reflected higher receivables associated with increased distributor shipments, inventory growth and lower accounts payable. Growth may require additional cash to fund receivables, inventory and staffing.
- Three distributors accounted for about 54% of Q2 revenue (ScanSource 21%, Ingram Micro 19%, BlueStar 15%; percentages may not sum due to rounding). Three customers represented 61% of receivables at June 30. A single supplier represented 32% of accounts payable, and two suppliers accounted for 48% of Q2 inventory purchases.
- Contractual obligations totaled approximately $7.81 million, including $3.27 million of unconditional contract-manufacturer purchase commitments and $3.92 million of operating lease payments. The company also disclosed dependence on limited suppliers, product-transition and demand uncertainty, competition, and possible future capital needs.
- A patent-infringement suit filed in April 2013 was settled in August, after quarter-end. The settlement granted the company, its suppliers and customers a license and was described as not material to operations. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the bank facility was renewed, remained available, and was in compliance with its liquidity covenant after its October 2013 stated expiration.
- Whether the company sustained profitability and generated operating cash, given the going-concern warning and negative first-half operating cash flow.
- Repayment or further extension of the $550,000 short-term notes and the cost and terms of any subsequent financing.
- Whether scanner growth continued and handheld-computer sales recovered, and whether distributor shipments translated into end-customer demand rather than channel inventory.
- Changes in customer and supplier concentration, receivables collections, inventory levels, purchase commitments and related liquidity needs.