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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended March 31, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from
__________ to ___________
Commission file number 1-13810
SOCKET COMMUNICATIONS, INC.
(Name of small business issuer as specified in its charter)
Delaware 94-3155066
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
37400 Central Court, Newark, CA 94560
(Address of principal executive offices including zip code)
(510) 744-2700
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. YES X NO
--- ---
Number of shares of Common Stock ($0.001 par value) outstanding as of
May 13, 1999 was 8,064,072 shares.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. Financial information
Condensed Balance Sheets - March 31, 1999 and
December 31, 1998.......................................
Condensed Statements of Operations - Three Months Ended
March 31, 1999 and 1998.................................
Condensed Statements of Cash Flows - Three Months Ended
March 31, 1999 and 1998.................................
Notes to Condensed Financial Statements...................
Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................
Part II. Other information.........................................
Signatures.........................................................
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
SOCKET COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1999 1998 *
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $567,631 $971,157
Accounts receivable, net........................... $1,132,890 $874,895
Inventories........................................ $533,246 $479,578
Prepaid expenses................................... $22,945 $41,764
------------- -------------
Total current assets............................ 2,256,712 2,367,394
Property and equipment:
Machinery and office equipment..................... $624,809 $595,419
Computer equipment................................. $507,859 $480,725
------------- -------------
1,132,668 1,076,144
Accumulated depreciation........................... ($879,977) ($850,056)
------------- -------------
252,691 226,088
Other assets........................................ $70,520 $68,603
------------- -------------
Total assets.................................... $2,579,923 $2,662,085
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank lines of credit............................... $588,272 $520,727
Accounts payable and accrued expenses.............. $1,521,791 $1,362,228
Accrued payroll and related expenses............... $221,946 $201,952
Deferred revenue................................... $251,613 $240,118
Current portion of capital leases and
equipment financing notes........................ $15,050 $41,083
------------- -------------
Total current liabilities....................... 2,598,672 2,366,108
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.001 par value: Authorized
shares - 3,000,000
Series B Convertible Preferred Stock:
Designated shares - 37,500; Issued and
outstanding shares - 27,311 at March 31,
1999 and 30,065 at December 31, 1998;
Aggregate liquidation preference - $1,393,264
at March 31, 1999............................ $1,423,845 $1,565,976
Series C Convertible Preferred Stock:
Designated shares - 175,000; Issued and
outstanding shares - 163,468 at March 31,
1999 and at December 31, 1998;
Aggregate liquidation preference - $1,858,773
at March 31, 1999............................ $1,714,043 $1,714,043
Series D Convertible Preferred Stock:
Designated shares - 175,000; Issued and
outstanding shares - 174,292 at March 31,
1999 and at December 31, 1998;
Aggregate liquidation preference - $1,020,000
at March 31, 1999............................ $769,887 $769,887
Common stock, $0.001 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - 7,726,884 at
March 31, 1999 and 7,365,914 at
December 31, 1998............................. $7,727 $7,366
Additional paid-in capital......................... $14,501,247 $14,217,366
Accumulated deficit................................ ($18,435,498) ($17,978,661)
------------- -------------
Total stockholders' equity (deficit)............ (18,749) 295,977
------------- -------------
Total liabilities and stockholders'
equity (deficit)......................... $2,579,923 $2,662,085
============= =============
</TABLE>
* Derived from audited financial statements.
See accompanying notes.
<PAGE>
SOCKET COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues............................ $1,460,607 $1,175,670
Cost of revenue..................... 610,990 520,083
------------ ------------
Gross profit........................ 849,617 655,587
Operating expenses:
Research and development......... 267,781 251,797
Sales and marketing.............. 556,387 457,108
General and administrative....... 391,738 298,600
------------ ------------
Total operating expenses...... 1,215,906 1,007,505
------------ ------------
Operating loss...................... (366,289) (351,918)
Interest income..................... -- 4
Interest expense.................... (6,688) (62,700)
------------ ------------
Net loss............................ (372,977) (414,614)
Preferred stock dividend............ (83,860) (14,794)
Accretion of preferred stock........ -- (250,000)
------------ ------------
Net loss applicable to
common stockholders............... ($456,837) ($679,408)
============ ============
Basic and diluted net loss
per share applicable
to common stockholders............ ($0.06) ($0.10)
============ ============
Weighted average shares
outstanding....................... 7,491,709 6,501,275
============ ============
</TABLE>
See accompanying notes.
<PAGE>
SOCKET COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss............................................ ($372,977) ($414,614)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 29,921 54,576
Compensatory stock option grant and warrants.... 58,251 --
Changes in operating assets and liabilities:
Accounts receivable........................... (257,995) 124,062
Inventories................................... (53,668) (125,949)
Prepaid expenses.............................. 18,819 (1,636)
Other assets.................................. (1,917) 3,500
Accounts payable and accrued expenses......... 159,563 (297,564)
Accrued payroll and related expenses.......... 19,994 (65,641)
Deferred revenue.............................. 11,495 (10,645)
------------ ------------
Net cash used in operating activities....... (388,514) (733,911)
INVESTING ACTIVITIES
Purchase of equipment............................... (56,524) (4,770)
------------ ------------
Net cash used in investing activities....... (56,524) (4,770)
FINANCING ACTIVITIES
Proceeds from sale of preferred stock, net of
issuance costs.................................... -- 1,470,647
Payments on capital leases and equipment
financing notes................................... (26,033) (16,052)
Proceeds (repayment) from borrowing under bank
line of credit.................................... 67,545 (150,234)
------------ ------------
Net cash provided by financing activities... 41,512 1,304,361
------------ ------------
Net increase(decrease) in cash and cash equivalents... (403,526) 565,680
Cash and cash equivalents at beginning of period...... 971,157 276,900
------------ ------------
Cash and cash equivalents at end of period............ $567,631 $842,580
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.............................. $6,688 $14,975
Dividends accrued, payable in common stock.......... $83,860 $14,794
Notes payable and accrued interest
converted to preferred stock...................... -- $1,544,175
Notes payable and accrued interest
converted to common stock......................... -- $335,901
Accretion of preferred stock........................ -- $250,000
Series B preferred stock converted to common stock.. $142,131 --
</TABLE>
See accompanying notes.
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - Basis of Presentation
The accompanying financial statements of Socket Communications,
Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB item 310(b).
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals)
considered necessary for fair presentation have been included.
The financial statements have been prepared on a going concern
basis. The Report of Independent Auditors on the Company's
financial statements for the year ended December 31, 1998 included
in Form 10-KSB contained an explanatory paragraph which indicated
substantial doubt about the Company's ability to continue as a
going concern because of the Company's recurring operating losses,
stockholders' equity, and working capital balances. As of March
31, 1999, the Company had cumulative losses of $18,435,498, a net
capital deficiency of $18,749, and a working capital deficit of
$341,960. The Company believes its existing capital resources will
be insufficient to satisfy its working capital requirements through
the end of 1999. The Company will need to raise additional capital
to fund operations during 1999 and beyond which the Company intends
to accomplish through the issuance of additional equity securities,
through increased borrowings on the Company's bank lines as the
levels of receivables permit, and through development funding from
development partners. The Company believes that sufficient outside
financing sources will be available, however, there can be no
assurance that the Company will be able to obtain such financing on
commercially reasonable terms, if at all, and such terms may be
dilutive to existing stockholders. The Company's inability to
secure the necessary funding would have a material adverse affect
on the Company's financial condition and results of operations.
The Company's actual working capital needs will depend upon
numerous factors, however, including the extent and timing of
acceptance of the Company's products in the market, the Company's
operating results, the progress of the Company's research and
development activities, the cost of increasing the Company's sales
and marketing activities and the status of competitive products,
none of which can be predicted with certainty. The financial
statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets
or the amounts and classification of assets and liabilities that
may result from the outcome of this uncertainty.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates. Operating results for the three
months ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999.
NOTE 2 - Inventories
Inventories consist principally of raw materials and sub-assemblies,
which are stated at the lower of cost (first-in, first-out) or market.
March 31, December 31,
1999 1998
------------ ------------
Raw materials and sub-assemblies........ $519,154 $454,836
Finished goods.......................... 14,092 24,742
------------ ------------
$533,246 $479,578
============ ============
NOTE 3 - Income Taxes
Due to the Company's loss position, there was no provision for
income taxes for the three months ended March 31, 1999 and 1998.
NOTE 4 - Net Loss Per Share and Net Loss Per Share Applicable to
Common Stockholders
The Company calculates earnings per share in accordance with
Financial Accounting Standards Board Statement No. 128, Earnings
per Share.
The following table sets forth the computation of basic
net loss per share:
<TABLE>
<CAPTION>
Quarter Ended March 31,
-------------------------
1999 1998
------------ ------------
<S> <C> <C>
Numerator for basic:
Net loss.............................. ($372,977) ($414,614)
Preferred stock dividends............. (83,860) (14,794)
Accretion of preferred stock.......... -- (250,000)
------------ ------------
Net loss applicable to common
stockholders.......................... ($456,837) ($679,408)
============ ============
Denominator:
Weighted average common shares
outstanding used in computing
basic net loss per share............ 7,491,709 6,501,275
============ ============
Basic and diluted net loss per share
applicable to common stockholders..... ($0.06) ($0.10)
============ ============
</TABLE>
The diluted net loss per share is equivalent to the basic net
loss per share because the Company has experienced losses since
inception and thus no potential common shares from the exercise of
stock options, conversion of convertible preferred stock, or
exercise of warrants have been included in the net loss per share
calculation.
NOTE 5 - Bank Financing Arrangements
The Company entered into a credit agreement with a bank
("Agreement"), which commenced in July 1995 and expired on April
15, 1999. In April 1999, the Agreement was extended to July 31,
1999. The Agreement is secured by the Company's current and future
assets. The credit facility under the Agreement allows the Company
to borrow up to $500,000 based on the level of qualified
receivables at the lenders index rate, which is based on prime,
plus 1.5% (9.25% at March 31, 1999). The Agreement contains
covenants that require the Company to maintain certain financial
ratios including current ratio and tangible net worth. As of March
31, 1999 and December 31, 1998 the Company was not in compliance
with the covenants and had obtained a waiver from the bank. The
wavier as of March 31, 1999 was effective through the expiration
date of the extension. As of March 31, 1999 and December 31, 1998,
outstanding borrowings under the Agreement were $447,103 and
$419,727, respectively, which were the amounts available under the
line.
In 1998, the Company entered into an international credit
agreement (the International Agreement) with a commercial lending
institution which expires on August 31, 1999. The International
Agreement is secured by the Company's international receivables and
by the Company's current and future assets. The credit facility
under the International Agreement allows the Company to borrow up
to $500,000 based on the level of qualified international
receivables. As of March 31, 1999 and December 31, 1998,
outstanding borrowings under the International Agreement were
$141,169 and $101,000, respectively, which were the amounts
available under the line.
NOTE 6 - Convertible Preferred Stock
The company is required to pay dividends quarterly on its Series
B and Series D Convertible Preferred Stock. Dividends accrue at
the rate of 8% per annum and are payable in cash or in Common Stock
at the option of the board of directors of the Company. Accrued
dividends at March 31, 1999 for the Series B Convertible Preferred
Stock were $29,407, which were paid through the issuance of 45,681
shares of Common Stock in April 1999. Accrued dividends at March
31, 1999 for the Series D Convertible Preferred Stock were $20,000,
which were paid through the issuance of 29,907 shares of Common
Stock in April 1999.
During the first quarter 1999, holders of Series B elected to
convert 2,754 shares in the amount of $142,131 into Common Stock.
Each share of Series B is convertible into 100 shares of Common
Stock resulting in 275,400 shares issued during the first quarter.
Dividends on the Company's Series C Convertible Preferred Stock
accrue at the rate of 8% per annum and are payable through the
issuance of Common Stock at the time of conversion. Accrued
dividends for the first quarter of 1999 were $34,453 payable
through the issuance of 57,594 shares of Common Stock at the time
of conversion.
At March 31, 1999, convertible preferred shares were convertible
into common shares at the option of the holder as follows:
Shares
------------
Series B............................... 2,731,100
Series C plus accrued dividends........ 3,106,700
Series D............................... 1,742,920
------------
Total shares 7,580,720
============
NOTE 7 - Segment Information
The Company operates in one segment, connection solutions for
mobile computers. The Company markets its products in the United
States and foreign countries through its sales personnel and
distributors. Information regarding geographic areas for the
quarters ended March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Quarter Ended March 31,
-------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
United States.................... $971,025 $640,222
Europe........................... 407,609 420,343
Asia and rest of world........... 81,973 115,105
------------ ------------
$1,460,607 $1,175,670
============ ============
</TABLE>
Export revenues are attributable to countries based on the location
of the customers. The Company does not hold long lived assets in
foreign locations.
Major customers who accounted for at least 10% of total revenues
were as follows:
<TABLE>
<CAPTION>
Quarter Ended March 31,
-------------------------
1999 1998
------------ ------------
<S> <C> <C>
Ingram Micro..................... 29% 27%
Compaq Computer Corp. ........... 10% --
Tech Data........................ -- 17%
PPCP Ltd (UK).................... -- 15%
</TABLE>
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements
(identified with an asterisk "*") that involve risks and
uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but
are not limited to, those discussed under "-Risk Factors" below.
OVERVIEW
The Company is a leading supplier of connectivity products to the
emerging Windows CE handheld computing market and believes that it
is the world's leading supplier of serial plug-in cards for
notebooks and for Windows computers with PC card slots. The
Company's family of low-power serial and Ethernet plug-in card
connection products and its family of low-power plug-in card data
collection products are its principal sources of revenues. During
1998, the Company expanded its PC Card connection family of
products to add a family of CompactFlash ("CF+") serial, low power
Ethernet and bar code scanning products to support the smallest
Windows CE computer, the Palm-size PC.
By the end of the first quarter of 1999, three classes of Windows
CE computers were available from a number of computer
manufacturers: the H/PC professional (mini-notebook); the H/PC
(clam shell design with keyboard); and the Palm-size PC (pocket-
sized computer). These computers are desktop companions designed
to synchronize with a Windows desktop computer. They also operate
on double-A or triple-A size batteries, and so low power
consumption is an important feature for products that plug into and
are powered by the computer. The H/PC professional and the H/PC
have a PC Card slot for input/output. The Palm-size PC and some
H/PC professionals have a CF+ slot for input/output. The H/PC
professionals were released in the second half of 1998 and the
color Palm-size PCs were released in the first quarter of 1999.
Both of these products experienced some initial periods of short
supply. All of the Company's low power Battery Friendly? products
are designed to work with these Windows CE computers and also with
Windows notebook computers.
The Company distributes its products primarily through worldwide
distribution channels. In the U.S., the Company's products are
distributed by Ingram Micro, Merisel and Tech Data who resell to
computer retail stores, electronic products catalog companies and
Value Added Resellers. The Company also sells its products
internationally through more than 30 distributors in 24 countries
in Europe, Asia and the Pacific Rim. In addition, the Company
sells direct to selected large customers, particularly for custom
products sold to Other Equipment Manufacturers. During 1998, the
Company entered into a contract with Compaq Computer Corporation to
incorporate the Company's serial PC card into Compaq's remote
server management product, and volume shipments commenced in the
fourth quarter of 1998
The Company's core technologies are in transferring data into
and out of Windows CE and Windows mobile computing devices through
the PC Card or CF+ slot, achieving high data transfer speeds and
low power consumption. The Company's serial connection products
are designed to connect one or more peripheral devices to a mobile
computer. The Company's Ethernet connection products are designed
to connect a mobile computer to an Ethernet network. The Company's
connection product strategy has been to create a broad family of
low-power connection products in PC card and in CF+ form factor,
with standard (removable cable) or ruggedized (fixed cable) designs
that work with Windows CE and Windows notebook computers.
The Company has also identified three specific product areas
where it has aligned itself with industry leaders to create
products for Windows CE and Windows mobile computers: the data
collection market; the paging market; and the cellular telephone
market.
In the data collection market, the Company has aligned with
Welch Allyn to create bar code scanning wand plug-in cards and has
aligned with Symbol Technologies to attach two of Symbol's laser
scanning guns through plug-in cards, which began shipping at the
end of 1998. These products sell with bar code scanning software
created by the Company.
In the paging market, the Company entered into a development
contract in 1998 with Motorola Corporation to interface the
Company's paging receiver software with a CF+ receiver module being
developed by Motorola for the Palm-size PC. The software transfers
paged information of any length to either an inbox (email) or to
the application the paged information is intended to update such as
Internet pages and user files.
In the cellular telephone market, the Company entered into a
Memorandum of Understanding with Bell Mobility to connect new CDMA
mobile digital telephones with a built-in serial port directly to a
mobile computer. CDMA is the digital telephone technology most
widely deployed in North America. These phones and the Company's
telephone connection cards are expected to begin selling in Canada
during the second quarter of 1999.* The Company also expects
nationwide digital services to be available in the United States
during the summer of 1999, and the Company plans to offer its
telephone connection cards in the U.S. market.*
The Company expects to continue to expand its relationships
and develop additional mobile computing products in the areas of
general connections, data collection, paging and digital cellular
telephones during 1999.* The Company believes that it has developed
strong working relationships with Microsoft and with Windows CE
handheld computer manufacturers for integrating connection
solutions into Windows CE devices, with its strategic development
partners, and with software application developers in providing
technical assistance in the porting of their applications to the
Windows CE operating system.
Although the Company believes that its focus on the Windows CE
operating system for hand held computers and its new products and
strategic relationships position the Company for revenue growth in
1999, the Company has incurred significant quarterly and annual
operating losses in every fiscal period since its inception, and
the Company expects to incur quarterly operating losses at least
through the first half of 1999 and possibly longer.* The Company's
ability to achieve profitability will be highly dependent upon:
- increased market acceptance of the Company's products
including recently introduced products;
- growth and acceptance of handheld computers and devices using
the Windows CE operating system;
- the ability to raise capital to fund the Company's product
development and sales and marketing efforts;
- the development of new products for new and existing markets;
- the improvement of gross margins through maintaining of sales
prices, higher sales volumes and contract manufacturing
efficiencies;
- expanding distribution capability;
- completing software development contracts; and
- managing its operating expenses.
There can be no assurances that the Company will meet any of these
objectives or ever achieve profitability.
As of March 31, 1999, the Company had a net capital deficiency of
$18,749 and a working capital deficit of $341,960. The Company will
require additional funding in 1999 to meet its working capital
needs.* The inability to obtain such funding could require the
Company to significantly reduce or suspend operations, sell
additional securities on terms that are highly dilutive to
investors or otherwise have a material adverse effect on its
financial condition or operating results. See "-Liquidity and
Capital Resources" and "-Risk Factors" for a discussion of the
Company's need for additional capital, the uncertainty regarding
the Company's continued listing on the Pacific Exchange and other
risks that may affect the Company's ability to attain
profitability.
_____________________
*This statement is a forward-looking statement reflecting
current expectations. There can be no assurance that the
Company's actual future performance will meet the Company's
current expectations due to factors described in this
Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
RESULTS OF OPERATIONS
Revenue
Revenue for the first quarter of 1999 totaled $1,460,607, a 24%
increase from the corresponding period a year ago. The Company
experienced growth across all of its product families. The largest
increase was in connection product sales, including sales of
standard serial PC cards to an OEM customer that commenced volume
shipments in the fourth quarter of 1998, higher sales of dual
serial PC cards (adding two ports to a handheld or mobile computer
through the PC card slot) and increased low power Ethernet sales
(attaching a mobile computer to a network through the PC or CF+
slots). The Company also experienced moderate growth in its data
collection card product sales including bar code scanning wands and
initial sales of laser scanning plug-in cards which were introduced
at the end of 1998. Growth was partially offset by lower sales of
standard Ethernet products which are being phased out in favor of
low power Ethernet cards.
Gross Profit
The Company's gross profit for the first quarter of 1998 was
58.2% of revenues compared to 55.8% for the same quarter a year ago
due to favorable product mix including higher margins on newer
products.
Research and Development
Research and development expense was $267,781 for the first
quarter of 1999, an increase of 6% from the corresponding period a
year ago, primarily due to higher outside development costs of new
products to be introduced later this year. The Company expects to
further increase its research and development expense moderately in
1999.*
Sales and Marketing
Sales and marketing expense was $556,387 for the first quarter
of 1999, a 22% increase over the corresponding period a year ago.
The increase reflected additional staffing, higher sales
commissions relating to higher 1999 revenues, and increased
advertising and promotion expense. The Company expects to further
increase its sales and marketing expense in 1999.*
General and Administrative
General and administrative expense was $391,738 for the first
quarter of 1999, a 31% increase from the corresponding period a
year ago. Included in 1999 general and administrative expense is a
charge of $60,000 for fees associated with an executive search that
commenced during the quarter, and $58,251 in charges relating to
compensatory stock option grants and warrants (including $42,000
associated with a warrant issued during the quarter). 1999 general
and administrative expense, after deducting these charges, was
$273,487 or 8% lower than the same quarter one year ago due
primarily to lower fees for outside professional services rendered
during the quarter compared to the same period one year ago. The
Company expects to increase its executive staff during 1999 and to
incur increases in general and administrative expense relating to
such staffing increases.*
Interest Expense and Preferred stock dividends, Accretion of
Preferred Stock
Interest expense was $6,688 for the first quarter of 1999
compared to $62,700 for the first quarter of 1998. Interest
expense for the first quarter of 1998 included interest on
convertible subordinated notes which were converted into preferred
stock at the end of the first quarter and in the second quarter of
1998. Preferred stock dividends in 1999 reflected dividends on
Series B, C and D preferred stock. Preferred stock dividends in
1998 reflected dividends on Series B preferred stock which was
issued on various dates during the first quarter of 1998.
Accretion of preferred stock in 1998 reflects the accounting
effects of the issuance of a portion of the Series B Preferred
Stock in the first quarter of 1998 at a 20% discount to current
market prices. There were no financings during the first quarter
of 1999.
Income Taxes
There was no provision for federal or state income taxes for the
quarters ended March 31, 1999 and 1998 as the Company incurred net
operating losses in both periods.
_____________________
*This statement is a forward-looking statement reflecting
current expectations. There can be no assurance that the
Company's actual future performance will meet the Company's
current expectations due to factors described in this
Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarters of 1999 and 1998, the Company used
$388,514 and $733,911, respectively, in cash for operating
activities. Net cash used for operations in the first quarter of
1999 resulted primarily from the net loss, increases in accounts
receivable and inventories, partially offset by a non-cash charge
for a compensatory stock option grant and warrants, and increases
in accounts payable and accrued liabilities. Net cash used for
operations in the first quarter of 1998 resulted primarily from the
net loss, increases in inventory and decreases in accounts payable
and accrued payroll and related expenses, offset in part by
decreases in accounts receivable.
Cash used for investing activities was $56,524 in the first
quarter of 1999 and $4,770 in the first quarter of 1998. 1999
amounts reflected tooling costs for new products, costs of
purchased software and new computer equipment.
Cash provided by financing activities during the first quarter of
1999 reflected increased borrowings under the Company's revolving
lines of credit, partially offset by payments on equipment
financing notes. Cash provided by financing activities during the
first quarter of 1998 reflected the issuance of $1,500,000 in
Series B Convertible Preferred Stock net of issuance costs of
$29,353 and partially offset by payments on capital leases and
equipment financing notes and from a reduction in outstanding
borrowings under the Company's revolving lines of credit.
The Company will require additional funding in 1999 to fund its
operations and to strengthen its working capital balances, which
the Company intends to accomplish through the issuance of
additional equity securities, through increased borrowings on the
Company's bank line as the levels of receivables permit, and
through development funding from development partners.*
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of many currently installed
computer programs being written using two digits rather than four
to define the applicable year. As a result, these computer
programs are unable to distinguish between 21st century dates and
20th century dates, and could cause computer system failures or
miscalculations that result in significant business disruptions.
The Company has evaluated its products and, with the assistance
of third party specialists, its internal systems, and communicated
with its key suppliers and distributors relating to the existence
of Year 2000 issues that could adversely affect the supplier's
ability to deliver product to the Company or the distributor's
ability to deliver product to the customer. This project did not
impact other information technology projects. The Company's
products do not use or rely on computer date information and are
therefore not affected by the Year 2000 date change. The Company
has made the necessary upgrades to its internal systems to make its
systems Year 2000 compliant at an approximate cost of $15,000, paid
from operating funds. The Company believes that all of its internal
systems are Year 2000 compliant. The Company has also communicated
with its major suppliers and distributors, and is not aware of any
compliance issues. The Company has not assessed its non-information
technology systems to determine whether there are any Year 2000
issues. The Company believes that its most reasonably likely worst
case Year 2000 scenarios would relate to problems with the systems
of third parties rather than with the Company's internal systems or
its products. It is clear that the Company has the least ability
to assess and remedy the Year 2000 problems of third parties and
the Company believes the risks are greatest with infrastructure
(e.g. electricity supply, water and sewer service),
telecommunications, transportation supply chains and critical
suppliers of materials. The Company is of the belief that
disruption of services, if any, are likely to be of limited
duration (less than 30 days), and that inventory balances of the
Company's products in its distribution channels should be
sufficient to cover any limited duration interruptions. In
addition, should such disruptions affect a supplier or a
distributor for a longer time period, the Company believes that it
has or can develop alternative sources of supply and alternative
distribution channels, ship its product directly from its suppliers
or directly to its customers, or employ other contingency steps to
minimize any disruption affecting its business, results of
operations, or financial condition. *
RISK FACTORS
We need to raise additional capital to fund our operations. Our
independent auditors have expressed doubt about our ability to
continue as a going concern.
As of March 31, 1999, we had cash and cash equivalents of
$567,631and a working capital deficit of $341,960. We believe our
existing capital resources will be insufficient to satisfy our
working capital requirements beyond the first half of 1999.* In
this regard, we will need to raise additional capital to fund our
working capital requirements for the second half of 1999 and
beyond. The Report of Independent Auditors on our financial
statements for the year ended December 31, 1998 contains an
explanatory paragraph regarding our need for additional financing
and indicating substantial doubt about our ability to continue as a
going concern. We may not be able to raise additional capital on
acceptable terms, if at all. If we do, the additional capital may
be on terms that are dilutive to existing stockholders. Our
inability to secure any necessary funding would significantly
impair our ability to operate and would adversely affect our
financial condition.
_____________________
*This statement is a forward-looking statement reflecting
current expectations. There can be no assurance that the
Company's actual future performance will meet the Company's
current expectations due to factors described in this
Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
The trading market for our common stock is illiquid, and we may be
delisted from the Pacific Exchange
Our common stock trades on the OTC Bulletin Board. Our common
stock is also quoted on the Pacific Exchange. The continued listing
criteria of the Pacific Exchange requires us to have:
- at least 300,000 publicly held shares of common stock with a
market value of at least $500,000,
- at least 250 public beneficial holders of our common stock,
- total net tangible assets (the same as stockholders' equity
for Socket) of at least $500,000 or net worth of at least
$2,000,000, and
- a share bid price of at least $1.00 per share of common stock.
We have not been in compliance with the net tangible asset
requirements of the Pacific Exchange since December 31, 1996.
Except for brief periods of time, we also have not been in
compliance with the share bid price requirements of the Pacific
Exchange. Therefore, we have been subject to possible delisting
procedures since December 31, 1996. In April 1999, the Pacific
Exchange granted us a further extension of time to come into
compliance with the continued listing criteria and advised us that
it would next review our qualification for continued listing in
October 1999. As of March 31, 1999, we had a stockholders' deficit
of $18,749. We will need to increase our stockholders' equity to
at least $500,000, by raising additional equity capital or through
profitability, in order to comply with the Pacific Exchange's
minimum listing criteria, and we may not be successful in doing so.
In that case, the Pacific Exchange may decide to initiate delisting
proceedings against us.
If our common stock becomes delisted from the Pacific
Exchange, trading in our stock will become subject to the
Commission's "penny stock" rules, which will make it more difficult
for our stockholders to dispose of our stock. The "penny stock"
rules under the Securities Exchange Act of 1934, as amended,
generally impose additional sales practices and market making
requirements on broker-dealers who sell and/or make a market in
such securities Consequently, our delisting from the Pacific
Exchange and our becoming subject to the rules on penny stocks
would affect the ability or willingness of broker-dealers to sell
and/or make a market in our securities and therefore would severely
adversely affect the market liquidity for our securities.
Shares eligible for future sale may adversely affect the market
price for our common stock
As of March 31, 1999, we had outstanding securities convertible
into or exercisable for the following amounts of common stock:
1,918,508 shares of issuable upon the exercise of options under our
1995 and 1993 Stock Plans; 4,181,940 shares issuable upon exercise
of warrants, certain of which include dilution adjustments whenever
we issue common stock or securities converting into common stock at
prices below $6.00 per share; 2,731,100 shares issuable upon the
conversion of Series B Convertible Preferred Stock; 3,106,700
shares issuable upon conversion of Series C Convertible Preferred
Stock and accrued dividends at March 31, 1999, plus additional
shares will accrue for dividends through the date of conversion;
and 1,742,920 shares issuable upon the conversion of Series D
Preferred Stock.
All of the common stock underlying the Series B and Series C
Convertible Preferred Stock, the common stock dividends on that
preferred stock, and certain other shares of common stock have been
registered on a Form S-3 registration statement. Accordingly, that
common stock may be sold into the market under that registration
statement without restriction under the Securities Act of 1933. In
addition, we expect to register during the second quarter of 1999
the common shares that will be issued upon conversion of Series D
Preferred Stock and upon exercise of certain warrants. The sale of
these common shares in the market, and the appearance that such
shares are available for sale, has in the past and could in the
future adversely affect the market price of our common stock and
could make it more difficult to sell equity securities in the
future.
We intend to issue additional equity securities in 1999 in order
to increase our working capital and to achieve compliance with the
net tangible asset requirements of the Pacific Exchange.* To the
extent we do so, existing stockholders may experience substantial
dilution, particularly if the terms of such issuance include
discounts to market prices or the issuance of warrants, as we did
in connection with the issuance of $1,500,000 of Series B Preferred
Stock and the issuance of $1,000,000 of Series D Preferred Stock.
We have a history of operating losses and we cannot assure you that
we will ever achieve profitability
We were incorporated in March 1992 and we have incurred
significant operating losses in every fiscal period since
inception. We are likely to continue to incur quarterly operating
losses at least through the first half of 1999 and possibly
longer.* Profitability, if any, will depend upon:
- increased market acceptance of products,
- our ability to obtain additional capital to fund our working
capital requirements,
- market acceptance of mobile computers that use Microsoft's
Windows CE operating system,
- the expansion of development and OEM customer relationships to
increase development and product sales revenues,
- the development of successful new products for new and
existing markets,
- our ability to increase gross margins through higher sales
volumes and contract manufacturing efficiencies,
- our ability to expand our distribution capability,
- our ability to perform on development contracts, and
- our ability manage our operating expenses.
We may not meet any of these objectives or ever achieve
profitability.
_____________________
*This statement is a forward-looking statement reflecting
current expectations. There can be no assurance that the
Company's actual future performance will meet the Company's
current expectations due to factors described in this
Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
We are highly dependent on the market for mobile computers,
particularly those that use the Windows CE operating system
Substantially all of our products are designed for use in mobile
computers, including notebooks, handheld PCs, Palm-size PCs and
H/PC Professionals (Windows-CE based mini notebooks). The market
for mobile computers is characterized by rapidly changing
technology, evolving industry standards, frequent new product
introductions and significant price competition. These
characteristics result in short product life cycles and regular
reductions of average selling prices over the life of a specific
product. Accordingly, growth in demand for mobile computers is
uncertain. If such growth does not occur, demand for our products
would be reduced.
Our success is substantially dependent on the commercial success
of handheld PCs (H/PCs, Palm-size PCs and H/PC Professionals) and
other devices that operate on the Windows CE operating system. As
a result, our future success depends on factors outside of our
control, including market acceptance of Windows CE generally and
other factors affecting the commercial success of Windows CE
computers and devices, including changes in industry standards or
the introduction of new or competing technologies. Any delays in
or failure of Windows CE to achieve market acceptance would reduce
the number of potential customers of our products, which could
adversely affect our business.
Our ability to comply with industry standards is critical to our
business
Our ability to compete successfully will depend on our ability to
identify and ensure compliance with evolving industry standards.
Unanticipated changes in industry standards could render our
products incompatible with products developed by major hardware
manufacturers and software developers, including Microsoft and
Motorola. We could be required, as a result, to invest significant
time and resources to redesign our products to ensure compliance
with relevant standards. If our products are not in compliance
with prevailing industry standards for a significant period of
time, we would miss opportunities to have our products specified as
standards for new hardware components designed by mobile computer
manufacturers and OEMs. The failure to achieve any such design win
would result in the loss of any potential sales volume that could
be generated by such newly designed hardware component.
The market for our products changes rapidly, and our success
depends upon our ability to develop new and enhanced products
The market for our products is characterized by rapidly changing
technology, evolving industry standards and short product life
cycles. Accordingly, our success will depend on a number of
factors, including:
- our ability to identify emerging standards in the field of
mobile computing products,
- our ability to enhance our products by adding additional
features to differentiate our products from those of our
competitors, and
- our ability to maintain superior or competitive performance in
our products and bring products to market quickly.
Given the emerging nature of the mobile computing products market,
our products or technology may be rendered obsolete by alternative
technologies. Further, short product life cycles expose our
products to the risk of obsolescence and require frequent new
product introductions. If we do develop or obtain access to
advanced mobile communications technologies as they become
available, or if we do not develop and introduce competitive new
products on a timely basis, our future operating results will be
adversely affected.
Our products may contain undetected flaws and defects
Although we perform testing prior to new product introductions,
our hardware and software products may contain undetected flaws,
which may not be discovered until the products have been used by
customers. From time to time, we may temporarily suspend or delay
shipments or divert development resources from other projects to
correct a particular product deficiency. Such efforts to identify
and correct errors and make design changes may be expensive and
time consuming. Failure to discover product deficiencies in the
future could delay product introductions or shipments, require us
to recall previously shipped products to make design modifications
or cause unfavorable publicity, any of which could adversely affect
our business.
Our quarterly operating results may fluctuate in future periods and
our future results are difficult to predict because we have little
order backlog
We have experienced significant quarterly fluctuations in
operating results and we anticipate such fluctuations in the
future. We generally ship orders as received and as a result
typically have little or no backlog. Quarterly revenues and
operating results therefore depend on the volume and timing of
orders received during the quarter, which are difficult to
forecast. Historically, we have often recognized a substantial
portion of our revenues in the last month of the quarter. This
subjects us to the risk that even modest delays in orders adversely
affect our quarterly operating results. Our operating results may
also fluctuate due to factors such as:
- the demand for our products,
- the size and timing of customer orders,
- unanticipated delays or problems in the introduction of our
new products and product enhancements,
- the introduction of new products and product enhancements by
our competitors,
- changes in the proportion of revenues attributable to
royalties and engineering development services,
- product mix,
- timing of software enhancements,
- changes in the level of operating expenses, and
- competitive conditions in the industry including competitive
pressures resulting in lower average selling prices.
Because we base our staffing and other operating expenses on
anticipated revenue, a substantial portion of which is not
typically generated until the end of each quarter, delays in the
receipt of orders can cause significant variations in operating
results from quarter to quarter. As a result of any of the
foregoing factors, our results of operations in any given quarter
may be below the expectations of public market analysts or
investors, in which case the market price of our common stock would
be adversely affected.
We depend on alliances and other business relationships with a
small number of third parties
Our strategy is to establish strategic alliances and business
relationships with leading participants in various segments of the
communications and mobile computer markets.* In accordance with
this strategy, we have entered into alliances or relationships with
Bell Mobility, Compaq Computer Corporation, Microsoft, Motorola,
Symbol Technologies and Welch Allyn. Our success will depend not
only on our continued relationships with these parties, but also on
our ability to enter into additional strategic arrangements with
new partners on commercially reasonable terms. We believe that, in
particular, relationships with application software developers are
important in creating commercial uses for our products. Any future
relationships may require us to share control over our development,
manufacturing and marketing programs or to relinquish rights to
certain versions of our technology. Also, our strategic partners
may revoke their commitment to our products or services at any time
in the future, or may develop their own competitive products or
services. Also, the hardware or software of such companies that is
integrated into our products may contain defects or errors.
Accordingly, our strategic relationships may not result in
sustained business alliances, successful product or service
offerings or the generation of significant revenues. Failure of
one or more of such alliances could result in delay or termination
of product development projects, reduction in market penetration,
decreased ability to win new customers or loss of confidence by
current or potential customers.
We have devoted significant research and development resources to
design activities for Windows CE-based products, diverting
financial and personnel resources from other development projects.
These design activities are not undertaken pursuant to any
agreement under which Microsoft is obligated to continue the
collaboration or to support resulting products. Consequently,
Microsoft may terminate its collaborations with us for a variety of
reasons including our failure to meet agreed-upon standards or for
reasons beyond our control, including changing market conditions,
increased competition, discontinued product lines and product
obsolescence.
_____________________
*This statement is a forward-looking statement reflecting
current expectations. There can be no assurance that the
Company's actual future performance will meet the Company's
current expectations due to factors described in this
Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
We depend on key employees and we need to hire additional sales and
marketing and product development personnel
Our future success will depend upon the continued service of
certain key technical and senior management personnel. Competition
for such personnel is intense, and there can be no assurance that
we will be able to retain our existing key managerial, technical or
sales and marketing personnel. The loss of key personnel in the
future has in the past and could in the future, adversely affect
our business.
We believe our ability to achieve increased revenues and to
develop successful new products and product enhancements will
depend in part upon our ability to attract and retain highly
skilled sales and marketing and product development personnel.
Competition for such personnel is intense, and we may not be able
to retain such key employees, and there are no assurances that we
will be successful in attracting and retaining such personnel in
the future. In addition, our ability to hire and retain such
personnel will depend upon our ability to raise capital or achieve
increased revenue levels to fund the costs associated with such
personnel. Failure to attract and retain key personnel will
adversely affect our business.
We depend on distributors, resellers and OEMs to sell our products
We sell our products primarily through distributors, resellers
and other equipment manufacturers ("OEMs"). Our OEM sales to
Compaq Computer Corporation accounted for approximately 10% of our
revenues during the first quarter of 1999. Our largest
distributor, Ingram Micro in the U.S., accounted for approximately
29% of our revenue in the first quarter of 1999. Our agreements
with OEMs, distributors and resellers, in large part, are
nonexclusive and may be terminated on short notice by either party
without cause. Our OEMs, distributors and resellers are not within
our control, are not obligated to purchase products from us and may
represent other lines of products. A reduction in sales effort or
discontinuance of sales of our products by our OEMs, distributors
and resellers could lead to reduced sales.
Use of distributors also entails the risk that distributors will
build up inventories in anticipation of a growth in sales. If such
growth does not occur as anticipated, these distributors may
substantially decrease the amount of product ordered in subsequent
quarters. Such fluctuations could contribute to significant
variations in our future operating results. The loss or
ineffectiveness of any of our major distributors or OEMs could
adversely affect our operating results.
We allow our distributors to return a portion of our inventory to
us for full credit against other purchases. In addition, in the
event we reduce our prices, we credit our distributors for the
difference between the purchase price of products remaining in
their inventory and our reduced price for such products. Actual
returns and price protection may adversely affect future operating
results, particularly since we seek to continually introduce new
and enhanced products and are likely to face increasing price
competition.*
A significant portion of our revenues are derived from export sales
Export sales (sales to customers outside the United States)
accounted for approximately 34% of our revenue in the first quarter
of 1999. Accordingly, our operating results are subject to the
risks inherent in export sales, including longer payment cycles,
unexpected changes in regulatory requirements, import and export
restrictions and tariffs, difficulties in managing foreign
operations, the burdens of complying with a variety of foreign
laws, greater difficulty or delay in accounts receivable
collection, potentially adverse tax consequences and political and
economic instability. In addition, our export sales are currently
denominated predominately in United States dollars. Accordingly,
an increase in the value of the United States dollar relative to
foreign currencies could make our products more expensive and
therefore potentially less competitive in foreign markets.
_____________________
*This statement is a forward-looking statement reflecting
current expectations. There can be no assurance that the
Company's actual future performance will meet the Company's
current expectations due to factors described in this
Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
On January 20, 1999, the Company issued 85,570 common shares
to holders of Series B and Series D Convertible Preferred Stock for
payment of Series B and Series D Preferred Stock dividends of
$40,543 for the quarter ended December 31, 1998. The issuance did
not constitute a sale and was not registerable under the Securities
Act of 1933, as amended.
On March 22, 1999, the Company issued a five-year warrant to
purchase 100,000 shares of common stock at a market price of
$0.57375 per share. The warrant was issued to an investment banking
firm in connection with a one year contract to provide financial
advisory services to the Company. The warrant may be exercised
anytime at the option of the holder and contains certain anti-
dilution and net exercise provisions. The issuance of the warrant
as a private placement transaction was exempt from registration
based on Section 4(2) of the Securities Act of 1933, as amended.
Items 3-5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
27.1 Financial Data Schedule (Edgar only)
b. Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended March 31, 1999
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
SOCKET COMMUNICATIONS, INC.
---------------------------
Registrant
Date: May 13, 1999 /s/ David W. Dunlap
--------------------------
David W. Dunlap
Vice President of Finance
and Administration and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SOCKET
COMMUNICATIONS, INC. CONDENSED FINANCIAL STATEMENTS FOR THE INTERIM PERIOD
ENDED MARCH 31, 1999 INCLUDED IN FORM 10-QSB AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 567,631
<SECURITIES> 0
<RECEIVABLES> 1,132,890
<ALLOWANCES> 0
<INVENTORY> 533,246
<CURRENT-ASSETS> 2,256,712
<PP&E> 1,132,668
<DEPRECIATION> 879,977
<TOTAL-ASSETS> 2,579,923
<CURRENT-LIABILITIES> 2,598,672
<BONDS> 0
0
3,907,775
<COMMON> 7,727
<OTHER-SE> (3,934,251)
<TOTAL-LIABILITY-AND-EQUITY> 2,579,923
<SALES> 1,460,607
<TOTAL-REVENUES> 1,460,607
<CGS> 610,990
<TOTAL-COSTS> 610,990
<OTHER-EXPENSES> 1,215,906
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,688
<INCOME-PRETAX> (372,977)
<INCOME-TAX> 0
<INCOME-CONTINUING> (372,977)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (456,837)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
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