Socket Mobile, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited results; comparisons are with the corresponding 2013 periods. Socket Mobile designs mobile barcode scanners and handheld computers for business use, selling through distributors, resellers, partners and OEMs.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $4.391 million | $4.435 million | $8.186 million | $8.701 million |
| Gross profit | $1.901 million | $1.805 million | $3.524 million | $3.513 million |
| Gross margin | 43% | 41% | 43% | 40% |
| Operating income | $276,000 | $177,000 | $348,000 | $340,000 |
| Net income | $93,000 | $44,000 | $21,000 | $118,000 |
| Net income per diluted share | $0.02 | $0.01 | $0.00 | $0.02 |
- Q2 revenue decreased about 1% year over year; first-half revenue declined about 6%. Q2 net income improved, but first-half net income fell substantially.
- Cordless barcode scanning revenue grew 42% in Q2 and 31% in the first half. Mobile handheld computer and related revenue fell 62% and 52%, respectively; management cited lower unit sales, competition from tablets and smartphones, and prior uncertainty about Microsoft support for Windows Embedded Handheld 6.5.
- First-half operating cash flow was positive $124,000, versus negative $450,000 in 2013. Investing cash outflow was $62,000; financing provided $34,000. Cash increased $96,000 to $702,000.
- At June 30, cash was $702,000, accounts receivable $2.204 million, current assets $3.840 million and current liabilities $7.332 million. Working capital deficit was $3.493 million; current ratio was 0.5 to 1.0.
- Outstanding bank-line borrowings were $815,000, with approximately $494,000 of additional stated borrowing capacity. The balance sheet also reported $650,000 of short-term related-party and other notes and about $836,000 of convertible notes, including accrued interest. Debt and leases remain material relative to available liquidity.
Changes, outlook and key risks
- Gross margin improved as sales mix shifted toward higher-margin cordless scanners and away from lower-margin handheld computers; management also cited margin improvement within product lines.
- Operating expenses were broadly flat in the first half. Q2 sales and marketing expense declined 10% year over year, while general and administrative expense increased 14%. Management expected research and development, sales and marketing, and general and administrative expenses each to moderately increase in Q3 from Q2 levels.
- A new Bridge Bank revolving facility, effective March 7, 2014, provides for borrowing up to $2.5 million subject to receivables, cash and other borrowing conditions. The bank may terminate the facility and is not obligated to advance funds; the facility is secured by company assets.
- Replacement of $650,000 of subordinated notes with two-year notes at 18% annual interest, payable monthly, included a holder repayment request right beginning October 1, 2014. Related options issued as consideration resulted in a $61,500 Q2 loss on extinguishment of debt.
- Management and the filing state that substantial doubt exists about the company’s ability to continue as a going concern, citing its accumulated deficit of $61.1 million, working capital deficit and dependence on continued profitability and additional financing. Management said it could cut costs, manage working capital and seek funding, including equity or partner funding, but gave no assurance capital would be available on acceptable terms. Failure to secure liquidity could require suspension of some or all operations.
- No specific revenue or earnings forecast was provided. Management said sustained growth could require more cash for receivables, inventory and staffing. First-half inventory purchase commitments were approximately $3.1 million; total contractual obligations were approximately $7.335 million, including leases and notes.
- Revenue and receivables are concentrated: Ingram Micro, ScanSource and BlueStar accounted for 78% of Q2 revenue combined; two customers represented 74% of receivables at June 30. A single supplier represented 20% of accounts payable, and two suppliers accounted for 63% of Q2 inventory purchases.
- Other disclosed risks include dependence on limited suppliers and distributors, application partners and third-party device platforms; volatile quarterly orders; competition and product obsolescence; possible goodwill impairment; and access to financing. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the company can sustain profitability and address the stated going-concern uncertainty without materially dilutive financing.
- Availability, borrowing-base limits, covenant compliance and termination risk under the Bridge Bank facility, and repayment or call rights on related-party notes.
- Whether growth in scanner sales can offset continuing declines in handheld-computer revenue, and whether customer and supplier concentration changes.
- Cash conversion and working-capital needs, especially receivable growth, inventory commitments and near-term contractual payments.
- Potential dilution from outstanding options, warrants and convertible notes; the filing identifies substantial shares potentially issuable upon exercise or conversion.