Socket Mobile, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Unaudited interim financial statements. Socket Mobile develops mobile barcode scanners and handheld computers, selling primarily through distributors and application partners.
Financial performance and position
- Revenue: $4.01 million, up 6% from $3.80 million in Q1 2014. Cordless barcode scanning revenue rose 19% to $3.48 million; handheld computer revenue fell 43% to $487,000.
- Gross profit and margin: $1.81 million versus $1.62 million; gross margin was 45%, up from 43%. Management attributed the improvement to component cost reductions and a more favorable product mix.
- Operating results: Operating income was $11,000, down from $73,000. Operating expenses increased 16% to $1.80 million, including higher sales and marketing costs and a one-time executive termination charge.
- Net loss: $72,000, roughly unchanged from $71,000; loss per share was $0.01. Interest expense and other, net, declined to $75,000 from $136,000.
- Cash flow: Operations used $16,000, compared with $27,000 provided in Q1 2014. Investing used $28,000; financing provided $154,000, principally from warrant and option exercises. Cash increased to $743,000 from $633,000.
- Liquidity: Current assets were $3.32 million and current liabilities $6.01 million; the current ratio was 0.55 and working capital deficit was $2.70 million. Management stated cash included $816,000 advanced under the bank line; about $258,000 of additional borrowing capacity remained.
- Debt and obligations: Outstanding balances included $816,000 on the bank line, $600,000 of short-term related-party and other notes, and $753,000 of related-party convertible notes. Convertible notes bear 8% or 18% interest, are secured by company assets, and are subordinated to the bank line. The bank facility is discretionary and may be terminated by either party. Contractual obligations totaled approximately $5.75 million, including $1.85 million of inventory purchase commitments and $3.26 million of operating lease payments.
- Balance sheet: Total assets were $8.05 million, total liabilities $6.89 million, and stockholders’ equity $1.16 million. Goodwill was $4.43 million.
Material changes and management commentary
- Revenue growth was led by Apple-certified Series-7 barcode scanners, while handheld computer sales continued to decline as customers shifted toward smartphones and tablets.
- Research and development expense rose 4%; management expected moderate increases over coming quarters for product development. Sales and marketing expense rose 30%; management expected further increases for planned hires and programs. General and administrative expense rose 16%, partly due to a one-time termination charge; management expected a Q2 decline from Q1 levels and then broadly flat spending.
- The domestic bank line’s expiration was extended to February 27, 2017; other terms were unchanged. The international portion expires February 27, 2016.
- Management cited expense reductions, new products, distributor and developer support, working-capital management, bank borrowing, and possible equity issuance as steps to improve liquidity and pursue profitability. The filing provides no quantified earnings or revenue guidance.
Risks, contingencies, and unusual items
- Going concern: The company reported that its losses, accumulated deficit of $60.8 million, low current ratio, and working-capital deficit raise substantial doubt about its ability to continue as a going concern. It warned that unavailable financing could require suspension of some or all operations; additional equity could dilute shareholders.
- Revenue is concentrated: three distributors accounted for about 65% of Q1 revenue. Three customers represented 71% of accounts receivable at quarter-end. A single supplier represented 21% of accounts payable, and four suppliers accounted for 78% of Q1 inventory purchases.
- Risks include dependence on distributors and application developers, limited component suppliers, demand and product-transition uncertainty, competition, and the bank’s discretion over advances and ability to terminate its facility.
- Foreign exchange sensitivity analysis estimated that an unprotected adverse 10% currency move would have increased Q1 net loss by about $23,000; actual Q1 net currency and hedge effects were a $3,000 loss. No material legal proceedings or off-balance-sheet arrangements were reported.
- The company had $1.85 million of non-cancelable inventory purchase commitments and $3.26 million of future minimum operating lease payments. It also disclosed an approximately $730,000 unrecognized tax benefit, with no significant Q1 change.
Key facts investors should verify
- Whether the company can maintain liquidity and obtain financing, and whether the going-concern uncertainty changes.
- Availability, borrowing-base capacity, covenants, and termination terms of the bank facility, including its reliance on eligible receivables and the bank’s discretion.
- Whether barcode scanner growth can offset the continuing decline in handheld computer revenue and support profitability despite planned expense increases.
- Distributor, customer, and supplier concentration; inventory purchase commitments; and the ability to collect receivables and secure key components.
- Potential dilution from equity issuance, options, warrants, and conversion of related-party notes.