Socket Mobile, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Financial statements are unaudited.
Business context
Socket Mobile develops mobile handheld computers and barcode-scanning products for business users. It sells primarily through distributors, resellers, industry partners and OEMs, and operates as one business segment. Its products include cordless scanners and SoMo handheld computers.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $3.292 million | $2.796 million | $11.992 million | $10.788 million |
| Gross profit | $1.283 million | $0.982 million | $4.796 million | $4.004 million |
| Gross margin | 39% | 35% | 40% | 37% |
| Operating income (loss) | $(0.189) million | $(0.905) million | $0.151 million | $(2.460) million |
| Net income (loss) | $(0.321) million | $(0.983) million | $(0.203) million | $(2.610) million |
| Net loss per share | $(0.07) | $(0.20) | $(0.04) | $(0.54) |
Revenue growth was led by cordless barcode scanning, up 68% in Q3 and 65% for the nine months. Handheld-computer and related revenue fell 24% and 31%, respectively, reflecting lower SoMo 655 sales during the product transition and reduced sales of related accessories and services. Management attributed improved gross margins principally to product mix and lower overhead. Operating expenses fell year over year, especially sales and marketing costs.
Interest expense and other, net, rose to $124,000 in Q3 and $330,000 for the nine months, versus $70,000 and $126,000, respectively, a year earlier. Income tax expense was $7,985 for Q3 and $23,955 for the nine months.
Cash flow, debt and liquidity
- Cash and cash equivalents were $402,000 at September 30, 2013, compared with $391,000 at December 31, 2012. Nine-month operating cash use was $312,000; investing cash use was $133,000; financing provided $457,000.
- Current assets were $3.353 million and current liabilities $7.310 million, producing a reported current ratio of 0.5 and a working-capital deficit of $3.957 million.
- Bank-line borrowings were $846,460. The facility had approximately $144,000 of additional availability at September 30, was extended after quarter-end, and was due to expire January 10, 2014. The bank may terminate it at any time and is not obligated to advance funds.
- Outstanding related-party and other short-term notes were $550,000, due on or before December 1, 2013, bearing interest at 1% per week. Related-party convertible notes totaled $777,625; certain replacement notes bear 8% or 18% interest and are convertible into common stock.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern. It cited accumulated losses, limited cash, the working-capital deficit and dependence on continued profitability and additional financing. Additional equity or other capital may be unavailable or dilutive; failure to obtain funding could require suspension of some or all operations.
Outlook, risks and unusual items
- No revenue or earnings guidance was provided. Management expected Q4 research and development expense to remain near Q3 levels; sales and marketing expense to increase slightly; and general and administrative expense to increase moderately.
- Management said it would seek to improve liquidity through working-capital management, bank borrowing, development-partner funding and potentially additional equity. It also cited past cost reductions and the possibility of further expense cuts.
- On October 9, 2013, Hudson Bay Master Fund filed a lawsuit alleging that anti-dilution provisions in a 2010 warrant entitled it to changes in exercise price and share count. The company was evaluating the claim.
- Revenue and credit exposure were concentrated: three distributors represented approximately 55% of nine-month revenue. At September 30, three customers represented 70% of accounts receivable. The company also disclosed reliance on a limited number of component suppliers.
- Contractual obligations totaled approximately $6.728 million, including $3.830 million of operating-lease payments and $2.284 million of purchase obligations, as presented in the filing. The headquarters lease runs through June 2022.
Important facts for investors to verify
- Whether the bank facility was renewed beyond January 10, 2014, and whether the company maintained its borrowing covenants and access to advances.
- Whether short-term and related-party obligations were repaid, refinanced or extended, and the terms and potential dilution of convertible notes and warrants.
- Whether operating cash flow and profitability improved enough to address the disclosed going-concern uncertainty and working-capital deficit.
- Developments in the Hudson Bay warrant litigation and any related anti-dilution adjustment or share issuance.
- Trends in scanner growth versus declining handheld-computer sales, distributor concentration, receivable collections and supplier availability.