Socket Mobile, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; financial statements are unaudited. Socket Mobile develops mobile handheld computers and barcode-scanning and data-collection products for business users, selling through distributors, resellers, partners, and OEMs.
Key financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $4.04 million | $4.35 million | $7.99 million | $8.39 million |
| Gross profit / margin | $1.50 million / 37% | $1.83 million / 42% | $3.02 million / 38% | $3.34 million / 40% |
| Operating loss | $721,000 | $211,000 | $1.55 million | $791,000 |
| Net loss | $755,000 | $392,000 | $1.63 million | $1.32 million |
| Loss per share, basic and diluted | $0.16 | $0.09 | $0.34 | $0.32 |
- For the first half, operating expenses rose 11% to $4.58 million, led by higher research and development and sales and marketing costs.
- Net interest expense fell substantially year over year, mainly because 2011 included noncash convertible-note discount amortization. The remaining 2012 expense was primarily related to bank-line borrowings.
- Six-month operating cash flow was positive $36,000, compared with cash use of $124,000 in 2011. Investing used $206,000, principally for tooling; financing used $174,000, primarily from net repayments on the bank lines. Cash declined $345,000 to $612,000.
Changes and operating drivers
- Q2 revenue declined 7% and first-half revenue declined 5%. Mobile handheld computer and related product revenue fell 23% in Q2 and 15% for the half; management cited lower volumes, discounts on older SoMo 650 models, and weaker sales of certain plug-in products.
- Cordless handheld barcode-scanning revenue increased 86% in Q2 and 84% for the half, driven by higher sales of imager scanners, Apple-certified products, and a new entry-level scanner.
- Other revenue fell 61% in Q2 and 73% for the half, mainly due to lower ring-scanner, legacy connectivity, and OEM component sales. U.S. revenue weakened, while Europe and Asia/rest-of-world revenue increased year over year for the first half.
- Gross margin declined, primarily due to discounts to clear SoMo 650 inventory ahead of the SoMo 655 launch and lower absorption of fixed overhead as distributor inventory decreased.
- The company began shipping the SoMo 655 in June 2012. Management expected it to replace the SoMo 650 series during the second half of 2012.
Liquidity, debt, and outlook
- At June 30, cash was $612,394, while bank-line borrowings were $897,415. The company reported a current ratio of 0.6 and a working-capital deficit of $2.66 million; accumulated deficit was $58.83 million.
- Unused capacity on the receivables-based bank lines was approximately $423,000. The facility expires October 12, 2013, advances are discretionary, and the company must meet a monthly minimum liquidity ratio. The filing warns that termination or covenant default could constrain funding.
- On August 1, 2012, after quarter-end, the company issued $400,000 of secured, subordinated convertible notes to selected officers and directors for working capital. The notes bear 8% interest, mature August 1, 2014, and are convertible at $2.44 per share while specified Hudson Bay warrants remain outstanding, or $2.00 thereafter.
- Management stated that cash, cost reductions, working-capital management, and available bank lines should fund requirements at least through June 30, 2013. This is not a profitability forecast: the company cautioned that continued losses could require additional capital and that financing may be unavailable or dilutive.
- Management expected Q3 research and development expense to decline from Q2 as major SoMo 655 development concluded; sales and marketing expense was expected to remain near Q2 levels.
- Contractual obligations totaled $7.34 million, including $4.90 million of contract-manufacturer purchase obligations due within one year and $2.36 million of operating-lease commitments. No off-balance-sheet arrangements were reported.
Risks and unusual items
- Material risks include recurring losses and limited liquidity, dependence on bank financing and customer collections, revenue concentration, distributor inventory and returns, competition and pricing pressure, product-transition execution, and reliance on a limited number of component suppliers and contract manufacturers.
- Ingram Micro and ScanSource represented 37% of first-half revenue combined. At June 30, three customers represented 66% of accounts receivable combined; one supplier represented 37% of accounts payable, and two suppliers accounted for 61% of Q2 inventory purchases.
- Export sales were approximately 44% of first-half revenue. Management estimated that an unhedged 10% adverse currency move would have increased Q2 net loss by about $63,000; actual Q2 currency-related net adjustment was a loss of $1,600.
- The company disclosed that its shares were delisted from Nasdaq on July 30, 2012 and began trading on the OTC Marketplace. It also reported substantial operating and funding risks and the possibility that operations could be suspended if necessary capital cannot be secured.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the SoMo 655 transition and scanner growth generate enough revenue and margin to offset declines in handheld and other products.
- Cash runway, bank-line availability and covenant compliance, and the terms and potential dilution of the post-quarter $400,000 note issuance.
- Customer and supplier concentration, distributor inventory and return exposure, and fulfillment of $4.90 million in near-term purchase obligations.
- Progress toward sustainable profitability, given the working-capital deficit and continued operating losses; the filing provides no specific revenue or earnings guidance.
- Trading and liquidity implications of the Nasdaq delisting and OTC trading status.