Socket Mobile, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Financial statements are unaudited. Socket Mobile develops mobile handheld computers and data-collection products, selling mainly through distributors, resellers, industry partners, and OEMs.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $4.68m | $3.41m | $13.07m | $10.88m |
| Gross profit / margin | $2.00m / 43% | $1.36m / 40% | $5.34m / 41% | $4.47m / 41% |
| Operating loss | $(0.14)m | $(0.72)m | $(0.93)m | $(2.23)m |
| Net loss | $(0.73)m | $(0.77)m | $(2.05)m | $(2.38)m |
| Loss per share, basic and diluted | $(0.16) | $(0.20) | $(0.49) | $(0.63) |
- For the nine months, mobile handheld computer revenue rose 21% to $6.50m and data-collection revenue rose 43% to $5.61m. OEM embedded revenue declined 54% to $0.55m, primarily amid product phase-outs.
- Q3 gross margin improved three percentage points year over year; nine-month gross margin was unchanged. Management attributed the quarterly improvement partly to higher revenue against fixed costs, offset by product-mix pressures.
- Q3 and nine-month interest expense was $0.58m and $1.09m, respectively, versus $0.04m and $0.14m a year earlier. Much of 2011 interest expense reflected noncash amortization of the convertible note discount; it also included a $0.09m conversion premium.
- Cash used in operations was $0.21m for the first nine months, compared with $0.17m used in 2010. Investing activities used $0.10m. Financing activities provided $0.75m, including release of $0.71m of restricted cash. Cash and cash equivalents ended the period at $0.91m, up from $0.46m at year-end 2010.
Financial position and material changes
- At September 30, current assets were $5.00m and current liabilities $6.26m: working capital deficit of $1.26m and a current ratio of 0.8:1. Accumulated deficit was $56.83m.
- The $1.0m senior secured convertible note and accrued interest were converted into common stock by September 6, eliminating the note balance and its collateralization requirement. The conversion involved issuance of 721,009 shares during the nine months. The company also issued 282,485 shares to its contract manufacturer to settle $0.50m of trade payables.
- Accounts receivable increased to $2.61m from $0.81m at year-end 2010, while inventory declined to $1.29m from $1.70m. Accounts payable was $4.11m.
- Goodwill was $4.43m; the annual impairment test found no impairment as of September 30, 2011.
Outlook, risks, and unusual items
- Going concern: Management stated that recurring losses, cash of $0.91m, and the working capital deficit raise substantial doubt about the company’s ability to continue as a going concern. Continued operations depend on improving profitability and obtaining capital; additional financing may not be available on acceptable terms and could dilute shareholders. The company warned it may have to suspend some or all operations if it cannot secure necessary capital.
- Subsequent credit facility: On October 12, 2011, the company entered a receivables-based bank facility of up to $2.5m, subject to eligibility and borrowing-base limits. It expires October 12, 2013 and requires a monthly minimum liquidity ratio of 2:1. As of November 4, gross borrowings were $824,163 and repayments were $30,749.
- Supply and shipments: LCD touch-screen shortages continued to constrain handheld computer shipments. The company reported approximately $1.4m of Q3 orders not shipped on schedule and rescheduled for Q4. Late-quarter shipments also raised distributor-channel handheld inventory by $0.7m from June 30 levels. Management said component availability improved in Q3, but timing remained a constraint.
- Management expectations: No specific revenue or earnings guidance is provided. Management expected Q4 R&D expense to rise with development activity, sales and marketing expense to increase slightly, and G&A expense to rise due to audit-related professional fees. It cited new products, distributor and application-partner support, cost management, working-capital management, possible development funding, bank financing, and equity issuance as steps toward improved liquidity and profitability.
- Concentration and operating risks: Ingram Micro represented 14% of nine-month revenue and ScanSource 14%; Epocal represented 13%. Four customers comprised 53% of receivables. One supplier represented 42% of accounts payable and 52% of nine-month inventory purchases. The filing also identifies reliance on limited suppliers, distribution partners, component availability, demand and product acceptance, competition, and access to capital as significant risks.
- Contractual obligations totaled $7.23m, including $4.56m of contract-manufacturer purchase obligations due within one year and $2.65m of operating leases. The company reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the new receivables-backed facility provides adequate, durable liquidity and whether the company meets its 2:1 minimum liquidity covenant.
- Whether the delayed $1.4m of handheld orders shipped in Q4 and whether distributor inventory cleared to end customers without returns or revenue-recognition effects.
- Whether LCD touch-screen supply stabilized and whether the company’s major supplier and customer concentrations changed.
- Whether revenue growth translates into positive operating cash flow and profitability, given the going-concern warning and ongoing funding needs.
- Potential dilution from future equity financing, outstanding options and warrants, and the shares issued through note conversion and payable settlement.