SOCKET MOBILE, INC. annual report, FY2014

Business context and reporting period

Socket Mobile, Inc. designs mobile barcode scanners, handheld computers and related services for business mobility. This Form 10-K reports the fiscal year ended December 31, 2014; it is not a quarterly filing. The company traded on OTCQB under SCKT and reported 50 employees at year-end.

Financial performance and position

• Revenue grew 9%. Cordless barcode scanning and related products and services contributed $13.67 million (80% of revenue), up 40%; handheld computers and related products and services contributed $3.26 million, down 38%. OEM and legacy revenue fell 84% to $100,000.
• Barcode scanner margin increased from 52% to 56%, primarily due to component cost reductions; handheld-computer margin was 52% in both years. Operating expenses totaled $6.48 million, broadly stable year over year.
• FY 2014 cash from operations was modest despite reported profit, as working-capital changes used $937,000, principally from lower payables and higher receivables. Investing activities used $166,000; financing provided $140,000.
• At year-end, current assets were $3.61 million and current liabilities $6.47 million: a 0.6 current ratio and $2.8 million working-capital deficit. Total liabilities were $7.34 million and equity $1.03 million; accumulated deficit was $60.69 million.
• Debt included $816,000 drawn on the bank line, $600,000 of short-term notes, and $753,000 of related-party convertible notes. The notes carry 8% or 18% interest, are secured by company assets and are subordinated to the bank line. The bank line’s effective rate was 7.15% at year-end.

Changes, outlook and risks

• The company returned to annual profitability from a 2013 loss, with higher revenue and gross margin. Fourth-quarter 2014 revenue was $3.91 million and net loss $20,000, versus revenue of $3.67 million and net loss of $418,000 in fourth-quarter 2013.
• Management provided no specific numeric revenue or earnings guidance. It said growth and profitability may require funding higher receivables and inventory and increased employee-related costs. Management cited new products, developer and distributor support, cost management, working-capital management, bank borrowing and possible additional equity financing as measures to support results and liquidity.
• The filing and auditor’s report state that the working-capital deficit, historical losses and financing needs raise substantial doubt about the company’s ability to continue as a going concern. The statements contain no adjustments for a possible failure to continue as a going concern. Additional financing may be unavailable or dilutive.
• Customer/channel concentration is material: Ingram Micro, ScanSource and BlueStar represented 67% of FY 2014 revenue, versus 55% in 2013. Three customers accounted for 81% of year-end receivables. A single supplier represented 22% of year-end accounts payable; three suppliers accounted for 71% of annual inventory purchases.
• Other key risks include dependence on application developers and distributors, component-supply constraints, competitive and pricing pressure, quarterly volatility, bank-line availability and covenants, and possible dilution from options, warrants and convertible notes. Handheld-computer sales face a longer-term shift toward smartphones and tablets.
• A $61,500 loss on extinguishment of debt was recorded in 2014, associated with replacement subordinated notes and options issued as consideration. Goodwill of $4.43 million was not impaired in the 2014 annual test. The company reported no material legal proceedings and no off-balance-sheet arrangements.
• The auditor issued an unqualified opinion on the financial statements but included a going-concern emphasis. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal-control effectiveness.

Important facts for investors to verify

• Whether operating profitability can continue and translate into stronger operating cash flow and improved working capital.
• Availability and terms of financing, including bank-line renewal and borrowing capacity, note repayment or holder-call rights, and possible equity dilution.
• Whether barcode-scanner growth and distributor sell-through can offset continued declines in handheld computers and legacy products.
• Ongoing exposure to major distributors, receivables concentrations and limited-source suppliers.
• The potential effects of outstanding equity awards, warrants and convertible notes on future share count.