Socket Mobile, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. The unaudited filing covers a developer and seller of mobile handheld computers, barcode scanners, data-collection products, and related services for business customers.
Financial results and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $2.80 million | $4.68 million | $10.79 million | $13.07 million |
| Gross profit / margin | $0.98 million / 35% | $2.00 million / 43% | $4.00 million / 37% | $5.34 million / 41% |
| Operating loss | $0.90 million | $0.14 million | $2.46 million | $0.93 million |
| Net loss | $0.98 million | $0.73 million | $2.61 million | $2.05 million |
| Loss per share, basic and diluted | $0.20 | $0.16 | $0.54 | $0.49 |
- Revenue fell 40% in Q3 and 17% year to date. Gross margins also contracted, which management attributed mainly to lower sales, reduced distributor inventory, and poorer absorption of fixed overhead.
- Q3 revenue by product family: mobile handheld computers and related products declined 49% to $1.42 million; cordless handheld barcode scanners increased 8% to $1.22 million; other revenue declined 80% to $0.16 million. For the nine months, scanners rose 53% to $4.31 million while mobile handheld products declined 26% to $5.94 million.
- Cash used in operations was $0.67 million for the first nine months, versus $0.21 million in 2011; cash used in investing was $0.22 million. Financing provided $0.34 million. Cash declined $0.55 million from year-end to $0.41 million.
- At September 30, cash was $0.41 million, current assets $3.06 million, and current liabilities $6.56 million. Working capital deficit was $3.50 million and the current ratio was 0.5:1. Accumulated deficit was $59.81 million.
- Bank line borrowings totaled $0.65 million, with approximately $0.16 million of unused capacity reported. The company also had a $0.36 million short-term note and $0.40 million of convertible subordinated notes outstanding. Total liabilities were $7.03 million.
Material changes and management commentary
- Management attributed the handheld-computer decline partly to customer evaluation delays during the transition from the SoMo 650 to the SoMo 655, and to discounts used to sell older models. SoMo 655 shipments began in June 2012; SoMo 650 standard and antimicrobial inventory was exhausted during September.
- Scanner growth reflected sales of newer Apple-certified products. Lower sales of OEM connectivity products and the Cordless Ring Scanner contributed to the decline in other revenue.
- Management expected research and development and sales and marketing expenses in Q4 2012 to decline from Q3 levels. The filing gives no specific revenue, earnings, or profitability guidance.
- The company disclosed substantial doubt about its ability to continue as a going concern, citing recurring losses, low cash, and its working capital deficit. Management described expense reductions, product introductions, working-capital management, use of credit lines, and potential additional capital or development funding as intended responses. It warned that financing may not be available on acceptable terms and that failure to obtain funding could require suspension of some or all operations.
- On November 5, 2012, the board approved up to $350,000 of additional convertible subordinated notes to the chairman for working capital, to be issued as needed. The notes carry 8% interest, mature August 1, 2014, and are secured by company assets and subordinated to the bank line.
Risks, contingencies, and other notable items
- The bank facility is receivables-based, requires a minimum liquidity ratio, may be terminated, and advances are at the bank’s discretion. The company reported $4.65 million in unconditional contract-manufacturer purchase obligations, all due within one year; total contractual obligations were $7.45 million.
- Revenue is concentrated: ScanSource and Ingram Micro together represented 43% of Q3 revenue and 39% for the first nine months. Two suppliers accounted for 67% of inventory purchases during the first nine months; one supplier represented 36% of accounts payable at quarter-end.
- In October 2012, Telecomm Innovations LLC sued the company alleging infringement of two modem-related patents. Socket Mobile said it had discontinued modem sales several years earlier and did not believe the suit could materially affect it, while noting that its evaluation was incomplete.
- The company’s stock was delisted from Nasdaq on July 30, 2012 and began trading on the OTC Marketplace. Management identified economic weakness, product-transition delays, component availability, competition, customer and distributor concentration, and financing access as material risks.
- Annual goodwill testing found goodwill not impaired as of September 30, 2012. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. No off-balance-sheet arrangements were reported.
Investor verification points
- Confirm the company’s ability to fund operations, meet near-term obligations, and obtain the approved chairman financing and any other needed capital.
- Track SoMo 655 adoption and whether scanner growth can offset continued weakness in handheld-computer and other product sales.
- Review cash burn, working-capital trends, bank-line availability and covenants, and payment of near-term purchase and debt obligations.
- Assess the impact of distributor and supplier concentration, including any channel inventory or component-supply constraints.
- Monitor the patent lawsuit, potential dilution from convertible notes and outstanding equity awards, and the company’s OTC trading and liquidity.