Socket Mobile, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Unaudited interim results; filed May 14, 2013. Socket Mobile makes mobile handheld computers and barcode-scanning products, sold primarily through distributors and resellers.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $4.27 million | $3.95 million |
| Gross profit / margin | $1.71 million / 40.0% | $1.52 million / 38.5% |
| Operating income (loss) | $163,074 | ($834,161) |
| Net income (loss) | $74,802 | ($871,774) |
| Basic and diluted EPS | $0.02 | ($0.18) |
| Cash flow from operations | ($266,991) | $351,341 |
Revenue grew approximately 8%. Gross margin improved 1.5 percentage points, while lower operating expenses—particularly research and development and sales and marketing—helped the company move from an operating loss to operating income. Interest expense and other, net, increased to $80,287 from $29,628.
Operating cash use reflected working-capital needs, including higher accounts receivable and prepaid expenses, partly offset by increased accounts payable. Financing activities provided $515,261, including $550,000 of new short-term notes. Cash increased $248,270 to $638,783; no cash was used for investing activities in the quarter.
Liquidity, debt, and balance sheet
At March 31, 2013, current assets were $3.86 million and current liabilities were $7.64 million, producing a 0.5 current ratio and a $3.78 million working-capital deficit. Stockholders’ equity was $637,722; accumulated deficit was $60.43 million. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
Bank-line borrowings totaled $875,505, with approximately $322,000 of additional reported borrowing capacity. The asset-based facility is subject to bank discretion, a minimum liquidity covenant, and termination by either party; it expires in October 2013 unless renewed. The effective rate on actual advances was 13.7% annually in Q1, including fees.
The company also had $750,000 of related-party convertible notes bearing 8% interest and maturing August 1, 2014, secured by company assets and subordinated to the bank. A separate short-term subordinated credit line had $550,000 outstanding at 1% interest per week, due August 1, 2013 unless extended. The company completed repayment of a prior short-term note during the quarter.
Material changes and management commentary
- Barcode-scanning products and related services increased 61% to $2.43 million, driven mainly by the entry-level Apple-certified 7Ci scanner.
- Handheld-computer products and related services decreased 38%; the SoMo 655 product transition and customer qualification periods contributed to lower sales. The MD&A contains an inconsistent narrative amount for this product family; see investor checks below.
- Other revenue rose to $387,000, primarily from one-time OEM purchases of legacy Bluetooth and wireless LAN products.
- Management cited cost reductions, new-product introductions, distributor and application-partner support, and working-capital management as measures to improve profitability and liquidity. It said Q2 research and development and sales and marketing expenses were expected to increase moderately, with general and administrative expense expected to increase slightly.
- Management warned that continued profitability is not assured and that additional capital may be needed. Financing may not be available on acceptable terms and could dilute shareholders; inability to obtain adequate capital could require suspension of some or all operations.
Risks, contingencies, and unusual items
- In April 2013, Wyncomm LLC sued the company in Delaware, alleging infringement of a WiFi technology patent. The company was evaluating the claim; the filing does not quantify potential exposure.
- Revenue is concentrated: ScanSource and Ingram Micro represented 36% combined in Q1 2013, and CF Company represented 18%. Several customers also represented significant shares of receivables.
- Supplier concentration is material: one supplier represented 34% of accounts payable, and one supplier plus another accounted for 60% of Q1 inventory purchases. The filing warns that supply interruptions or tighter supplier credit could impair operations.
- Contractual obligations totaled approximately $7.69 million, including $3.07 million of purchase commitments with contract manufacturers and $4.01 million of operating-lease commitments.
- Management identified foreign-exchange exposure; a 10% adverse exchange-rate movement was estimated to reduce Q1 net income by approximately $39,500 if unprotected. A 1% increase in applicable bank borrowing rates was estimated to add about $10,000 in borrowing costs.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts to verify
- Confirm the working-capital and going-concern position, and whether the bank facility was renewed before its October 2013 expiry.
- Assess repayment, extension, or conversion prospects for the $550,000 short-term notes carrying 1% weekly interest, and the company’s ability to service its other secured debt.
- Reconcile the handheld-computer revenue discussion: the product-family table reports $1.448 million for Q1 2013, while the narrative refers to approximately $2.4 million for that category.
- Confirm the status and potential financial impact of the Wyncomm patent lawsuit, including any customer-indemnification exposure.
- Verify the precise bank-line expiry date: the notes state October 12, 2013, while the MD&A states October 11, 2013.
- Evaluate whether distributor concentration, supplier dependence, and the reported $3.07 million of near-term purchase commitments are supportable given limited liquidity.