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Previous: WSI INTERACTIVE CORP, 6-K, 2000-11-15 |
Next: SOCKET COMMUNICATIONS INC, 10QSB, EX-27.1, 2000-11-15 |
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 September 30, 2000
Commission file number 1-13810
SOCKET COMMUNICATIONS, INC. (Name of small business issuer as specified in its charter)
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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 November 13, 2000 was 22,744,526 shares.
SOCKET COMMUNICATIONS, INC.
FORM 10-QSB
INDEX
PART I. Financial information
Condensed Balance Sheets - September 30, 2000 and December 31, 1999
Condensed Statements of Operations - Three Months and Nine Months Ended September 30, 2000 and 1999
Condensed Statements of Cash Flows - Nine Months Ended September 30, 2000 and 1999
Notes to Condensed Financial Statements
Management's Discussion and Analysis of Financial Condition and Results of Operations
PART I. FINANCIAL INFORMATION
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SOCKET COMMUNICATIONS, INC. CONDENSED BALANCE SHEETS |
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(Unaudited) September 30, 2000 |
December 31, 1999* |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ 8,862,577 |
$ 4,284,670 |
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Accounts receivable, net |
1,952,702 |
1,557,369 |
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Inventories |
1,358,153 |
736,079 |
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Prepaid expenses |
211,106 |
40,999 |
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Total current assets |
12,384,538 |
6,619,117 |
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Property and equipment: |
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Machinery and office equipment |
885,007 |
657,012 |
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Computer equipment |
720,832 |
548,255 |
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Total property and equipment |
1,605,839 |
1,205,267 |
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Accumulated depreciation |
(1,049,647) |
(884,828) |
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Total property and equipment net of depreciation |
556,192 |
320,439 |
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Other assets |
345,937 |
72,667 |
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Total assets |
$ 13,286,667 |
$ 7,012,223 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable and accrued expenses |
$ 2,152,770 |
$ 1,385,573 |
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Accrued payroll and related expenses |
366,290 |
271,642 |
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Deferred revenue |
380,812 |
346,411 |
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Total current liabilities |
2,899,872 |
2,003,626 |
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Commitments and contingencies |
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Stockholders' equity: |
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Preferred stock, $0.001 par value: Authorized shares - 3,000,000 |
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Series B Convertible Preferred Stock: Designated shares - 37,500: Issued and outstanding shares - none at September 30, 2000 and 4,335 at December 31, 1999 |
-- |
215,472 |
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Series C Convertible Preferred Stock: Designated shares - 175,000: Issued and outstanding shares - none at September 30, 2000 and 46,431 at December 31, 1999 |
-- |
479,647 |
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Series D Convertible Preferred Stock: Designated shares - 175,000: Issued and outstanding shares - none at September 30, 2000 and 43,573 at December 31, 1999 |
-- |
192,472 |
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Common stock, $0.001 par value: Authorized shares - 100,000,000 Issued and outstanding shares - 21,942,254 at September 30, 2000 and 15,922,220 at December 31, 1999 |
21,942 |
15,922 |
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Additional paid-in capital |
32,322,615 |
23,174,113 |
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Deferred compensation |
(557,513) |
-- |
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Accumulated deficit |
(21,400,249) |
(19,069,029) |
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Total stockholders' equity |
10,386,795 |
5,008,597 |
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Total liabilities and stockholders' equity |
$ 13,286,667 |
$ 7,012,223 |
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_________________________ |
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*Derived from audited financial statements. |
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SOCKET COMMUNICATIONS, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) |
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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2000 |
1999 |
2000 |
1999 |
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Revenues |
$ 3,264,648 |
$ 1,504,213 |
$ 7,686,561 |
$ 4,767,118 |
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Cost of revenue |
1,448,296 |
621,857 |
3,297,513 |
1,935,422 |
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Gross profit |
1,816,352 |
882,356 |
4,389,048 |
2,831,696 |
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Operating expenses: |
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Research and development |
531,890 |
314,471 |
1,618,380 |
876,859 |
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Sales and marketing |
899,361 |
566,614 |
2,570,020 |
1,673,063 |
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General and administrative |
411,242 |
264,945 |
1,091,984 |
861,556 |
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Amortization of deferred compensation related to compensatory stock option grants |
1,087,636 |
24,018 |
1,665,467 |
98,520 |
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Total operating expenses |
2,930,129 |
1,170,048 |
6,945,851 |
3,509,998 |
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Operating loss |
(1,113,777) |
(287,692) |
(2,556,803) |
(678,302) |
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Interest income |
106,913 |
-- |
274,559 |
-- |
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Interest expense |
(541) |
(12,650) |
(1,797) |
(30,201) |
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Net loss |
(1,007,405) |
(300,342) |
(2,284,041) |
(708,503) |
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Preferred stock dividend |
(27,174) |
(50,748) |
(47,179) |
(209,751) |
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Net loss applicable to common Stockholders |
$ (1,034,579) |
$ (351,090) |
$ (2,331,220) |
$ (918,254) |
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Net loss per share applicable to common stockholders - basic and diluted |
$ (0.05) |
$ (0.03) |
$ (0.12) |
$ (0.10) |
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Shares used in computation of net loss per share applicable to common stockholders - basic and diluted |
21,392,022 |
10,646,072 |
19,851,830 |
8,798,925 |
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SOCKET COMMUNICATIONS, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) |
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Nine Months Ended September 30, |
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2000 |
1999 |
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Operating activities |
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Net loss |
$ (2,284,041) |
$ (708,503) |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
164,819 |
96,748 |
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Amortization of deferred compensation related to compensatory stock option grants |
1,665,467 |
98,520 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
(395,333) |
26,053 |
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Inventories |
(622,074) |
(238,709) |
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Prepaid expenses |
(170,107) |
(25,644) |
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Other assets |
(273,270) |
(3,317) |
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Accounts payable and accrued expenses |
767,197 |
396,205 |
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Accrued payroll and related expenses |
94,648 |
85,224 |
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Deferred revenue |
34,401 |
46,172 |
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Net cash used in operating activities |
(1,018,293) |
(227,251) |
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Investing activities |
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Purchase of equipment |
(400,572) |
(206,742) |
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Net cash used in investing activities |
(400,572) |
(206,742) |
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Financing activities |
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Proceeds from stock option and warrant exercises |
5,479,423 |
63,767 |
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Proceeds from sale of common stock |
517,349 |
863,399 |
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Payments on capital leases and equipment financing notes |
-- |
(41,083) |
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Net proceeds from borrowings under bank lines of credit |
-- |
144,925 |
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Net cash provided by financing activities |
5,996,772 |
741,158 |
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Net increase in cash and cash equivalents |
4,577,907 |
307,165 |
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Cash and cash equivalents at beginning of period |
4,284,670 |
971,157 |
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Cash and cash equivalents at end of period |
$ 8,862,577 |
$ 1,278,322 |
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Supplemental cash flow information |
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Cash paid for interest |
$ 1,797 |
$ 30,201 |
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Dividends accrued, paid/payable in common stock |
$ 47,179 |
$ 209,751 |
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Series B preferred stock converted to common stock |
$ 215,472 |
$ 731,672 |
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Series C preferred stock converted to common stock |
$ 479,647 |
$ 1,184,224 |
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Warrants issued in connection with equity financing |
-- |
$ 252,102 |
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.
Certain reclassifications have occurred in the condensed statements of operations to bring prior periods in conformity with the current presentation of the amortization of deferred compensation related to compensatory stock option grants. None of the reclassifications affect the gross margin, loss from operations, or earnings per share.
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 and nine months ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000.
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.
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September 30, |
December 31, |
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2000 |
1999 |
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Raw materials and sub-assemblies |
$ 1,311,422 |
$ 707,820 |
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Finished goods |
46,731 |
28,259 |
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Total |
$ 1,358,153 |
$ 736,079 |
NOTE 3 - Income Taxes
Due to the Company's loss position, there was no provision for income taxes for the three months and nine months ended September 30, 2000 and 1999.
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 and diluted net loss per share:
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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2000 |
1999 |
2000 |
1999 |
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Numerator for basic: |
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Net Loss |
$ (1,007,405) |
$ (300,342) |
$ (2,284,041) |
$ (708,503) |
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Preferred stock dividends |
(27,174) |
(50,748) |
(47,179) |
(209,751) |
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Net loss applicable to common stockholders |
$ (1,034,579) |
$ (351,090) |
$ (2,331,220) |
$ (918,254) |
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Denominator: |
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Weighted average common shares outstanding used in computing basic and diluted net loss per share |
21,392,022 |
10,646,072 |
19,851,830 |
8,798,925 |
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Basic and diluted net loss per share applicable to common stockholders |
$ (0.05) |
$ (0.03) |
$ (0.12) |
$ (0.10) |
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. At September 30, 2000 4,035,237 shares were issuable upon the exercise of stock options under our 1999, 1995 and 1993 stock plans, and 1,068,272 shares were issuable upon the exercise of warrants.
NOTE 5 - 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. The remaining shares of Series B Preferred Stock were converted into common stock during the first quarter. The remaining shares of Series D Preferred Stock were converted into common stock during the third quarter. Accrued dividends at September 30, 2000 for the Series D Convertible Preferred Stock were $27,174, which were paid through the issuance of 1,980 shares of common stock in October 2000. 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. The remaining shares of Series C Preferred Stock plus accrued dividends were converted into common stock during the second quarter.
NOTE 6 - Deferred Compensation
The Company recorded deferred compensation in the amount of $557,513 at September 30, 2000 representing the fair value, as measured using the Black-Scholes valuation model, of unvested compensatory stock option grants given to various consultants. The remaining deferred compensation will be charged to operations over the vesting period of the grants from one to four years. The amount of stock compensation expensed each period and the value of deferred compensation at the end of each period will fluctuate with the Company's stock price. The deferred compensation in 2000 is primarily due to a stock option grant to Charlie Bass as Chairman and Chief Executive Officer that began vesting in 1997 and became classified as compensatory in April 2000 following the appointment of Kevin Mills as President and Chief Executive Officer at the end of March 2000. This grant became fully vested during the quarter ended September 30, 2000. During the three months and nine months ended September 30, 2000, the Company recorded compensation of $1,087,636 and $1,665,467, respectively, related to such grants. Stock option compensation expense was $24,018 and $98,520 for the three months and nine months ended September 30, 1999, respectively.
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 quarter and nine months ended September 30, 2000 and 1999 are as follows:
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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Revenues: |
2000 |
1999 |
2000 |
1999 |
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United States |
$ 2,695,897 |
$ 990,771 |
$ 6,099,123 |
$ 3,150,340 |
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Europe |
391,655 |
361,753 |
1,134,823 |
1,250,044, |
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Rest of world |
177,096 |
151,689 |
452,615 |
366,734 |
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Total |
$ 3,264,648 |
$ 1,504,213 |
$ 7,686,561 |
$ 4,767,118 |
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:
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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2000 |
1999 |
2000 |
1999 |
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Ingram Micro |
22% |
25% |
26% |
25% |
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Gtran |
19% |
* |
* |
* |
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Tech Data |
11% |
* |
* |
* |
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Merisel |
* |
14% |
11% |
10% |
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__________________ |
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(* Denotes less than 10%) |
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NOTE 8 - Subsequent Event: Acquisition of 3rd Rail Engineering
On October 4, 2000, the Company acquired 3rd Rail Engineering, Inc. ("3rd Rail Engineering"), an engineering services and product design company, in a cash and stock transaction valued at approximately $12 million based on the average closing price of Socket common stock for the twenty trading day period ending on October 3, 2000. The Company paid cash of approximately $1 million and issued 796,292 shares of the Company's common stock in exchange for all of the outstanding common shares of 3rd Rail Engineering. The Company is in the process of obtaining a valuation of the underlying net assets of 3rd Rail Engineering. 3rd Rail Engineering became a wholly owned subsidiary of the Company. The acquisition will be accounted for under the purchase method of accounting.
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 that involve risks and uncertainties. Such forward-looking statements include statements regarding the Company's market position and its ability to create and maintain strategic partnerships. 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
We are a leading supplier of connectivity products to the Windows-powered handheld and notebook computing market. During 1998, we expanded our PC Card connection family of products to add a family of CompactFlash ("CF+") Peripheral Connection, low power Ethernet and Data Collection (bar code scanning) connection products to support the smallest Windows-powered handheld computer, the Pocket PC. We expanded this family in the second half of 1999 with the development of an integrated CF+ bar code scanner ("In-Hand Scan Card") and Digital Phone Cards for the North American CDMA and worldwide GSM telephone markets. Our families of low-power Peripheral Connection and Ethernet Card connection products, our family of Data Collection Cards for bar code scanning products, and, commencing with the fourth quarter of 1999, our family of Digital Phone Cards, are our principal sources of revenues.
Four classes of Windows-powered handheld computers are now available from a number of computer manufacturers: the H/PC professional (mini-notebook); the H/PC (clam shell design with keyboard); the Pocket PC (pocket-sized computer) and the tablet PC (ruggedized touch screen in mini-notebook size). These computers are desktop companions designed to synchronize with a Windows desktop computer. They also operate on double-A size rechargeable batteries, as 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 Pocket PC, some H/PC professionals and the tablet PCs have a CF+ slot for input/output. The H/PC professionals were released in the second half of 1998, color Palm-size PCs were released in the first quarter of 1999 and their successor, the Pocket PC, was released in April 2000, and the tablet PCs were released beginning in the third quarter of 1999. All of our low power Battery FriendlyÔ products are designed to work with these Windows-powered handheld computers and also with Windows notebook computers.
We distribute our products primarily through worldwide distribution channels. In the United States, our products are distributed by Ingram Micro and Tech Data who resell to computer retail stores, electronic products catalog companies and value added resellers. We also sell our products internationally through 35 distributors in 24 countries in Europe, Asia and the Pacific Rim. In addition, we sell direct to selected large customers, particularly for custom products sold to original equipment manufacturers.
Our core technologies are in transferring data into and out of Windows-powered mobile computing devices through the PC Card or CF+ slot, achieving high data transfer speeds and low power consumption. Our peripheral connection products are designed to connect one or more peripheral devices such as a keyboard, monitor or another computer, to a mobile computer. Our data collection cards are designed to connect bar code scanners such as a bar code wand, scanning gun, or a bar code printer to a mobile computer. Our digital phone cards are designed to connect a data-enabled mobile phone to a mobile computer. Our Ethernet cards are designed to connect a mobile computer to an Ethernet network. Our 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-powered handheld and notebook computers.
Our research and development activities during 2000 include the development of a smaller input/output connection product in the secure digital (SD) open standard form factor initially introduced by SanDisk Corporation as a memory card product, the addition of a removable MultiMediaCard memory slot to our CF+ input/output cards to create combination input/output and removable memory cards, and the creation of Personal Network CF+ cards and embedded modules utilizing Bluetooth wireless technology to facilitate wireless communications between electronic devices within a 30 foot range of each other. These products are expected to reach the market during the first half of 2001. We also acquired 3rd Rail Engineering in October 2000, an engineering design and services company whose business is the design of embedded systems, and we plan to offer design and integration services for our Bluetooth modules and other products.
We believe that we have developed strong working relationships with Microsoft and with Windows-powered mobile computer manufacturers for integrating connection solutions into Windows-powered mobile computing devices. We have also developed strategic relationships with:
· Welch Allyn and Symbol Technologies in creating data collection cards to connect their bar code scanners to Windows-powered mobile computers;
· Software application developers in providing technical assistance in the porting of their applications to the various Windows-powered operating systems;
· SanDisk Corporation for developing combination removable memory and input/output cards utilizing MultiMediaCard memory from SanDisk across several of our product lines which are expected to be available in the first half of 2001;
· Cambridge Silicon Radio and its affiliated company, Cambridge Consultants in licensing Bluetooth hardware components and software for our Bluetooth Personal Network connection card expected to be commercially shipping during the first half of 2001;
· Sprint Corporation with whom we developed a universal connectivity kit incorporating Socket's Digital Phone Card which connects Windows-powered mobile computers and the Apple PowerBook to Internet-ready Sprint PCS Phones for use on the Sprint PCS nationwide network. Sprint began to purchase our Digital Phone Cards in the second quarter of 2000 and began distributing the cards during the third quarter of 2000; and · Targus International with whom we have reached agreement for Targus to distribute our products through their worldwide retail electronic store distribution channels commencing in the fourth quarter of 2000.Results of Operations
Revenue
Revenue for the three and nine months ended September 30, 2000 of $3,264,648 and $7,686,561 increased 117% and 61%, respectively, over the corresponding periods a year ago. Revenues increased across all of the Company's product lines. The largest increase for the quarter resulted from sale of the Company's interface chip to one customer. The Company also experienced significant revenue growth for the three and nine months ended September 30, 2000 compared to the corresponding periods a year ago, from its In-Hand Scan card and Digital Phone Card which were introduced in the second half of 1999 and from the Company's low-power Ethernet card, along with moderate increases in the Company's peripheral connection products.
Gross Profit
Gross profit for the third quarter of 2000 was 56% compared to 59% for the same quarter a year ago. Our gross profit for the nine months in 2000 was 57% compared to 59% for the same period a year ago. The change in gross margin was due to moderate declines in average selling prices and due to the addition of lower-margin chip sales to the product mix.
Research and Development
Research and development expenses for the three and nine months ended September 30, 2000 were $531,890 and $1,618,380, respectively, a 69% and 85% increase compared to the three and nine months periods ended a year ago. The increases were due to higher levels of development activity, including an increase in the number of engineering employees. The Company expects to increase its level of development activities and to significantly increase its research and development expense during the fourth quarter of 2000 as a result of acquiring 3rd Rail Engineering.
Sales and Marketing
Sales and marketing expenses for the three and nine months ended September 30, 2000 were $899,361 and $2,570,020, respectively, a 59% and 54% increase, respectively, over the corresponding periods a year ago. The increase reflected higher levels of selling and marketing activities including increased travel from participation in more sales events and higher advertising expense, and additional increases in personnel. The Company expects to moderately increase its current level of sales and marketing activity during the fourth quarter of 2000.
General and Administrative
General and administrative expenses for the three and nine months ended September 30, 2000 were $411,242 and $1,091,984, respectively, a 55% increase for the quarter and a 27% increase for the nine months over the corresponding periods a year ago. Increases were primarily due to increased personnel costs, increased fees associated with the Company's Nasdaq National Market System listing in July 2000, higher professional service costs for accounting services and for shareholder communications due to an expanding shareholder base, partially offset by lower public relations costs. The Company expects to moderately increase its current level of general and administrative activity during the fourth quarter of 2000.
Compensatory Stock Option Grants
Non-cash charges for the three and nine months ended September 30, 2000 were $1,087,636 and $1,665,467, respectively, compared to $24,018 and $98,520 for the same periods a year ago. The non-cash charges relate to the vesting of stock option grants to consultants and primarily relate to the vesting of options granted in 1998 to the Company's Chairman, Charlie Bass, for his services as Chief Executive Officer from April 1997 to the end of March 2000. Charges in the second and third quarters of 2000 resulted from a change in status for Mr. Bass following the appointment of Kevin Mills as President and Chief Executive Officer. Mr. Bass' grant was fully vested as of September 30, 2000 and will not create additional compensation charges in future quarters.
Interest Income, Interest Expense
Interest income for the three and nine months ended September 30, 2000 was $106,913 and $274,559, respectively, compared to no interest income for the same periods in 1999. Interest income is generated from cash balances held in money market accounts. Interest expense for the three and nine months ended September 30, 2000 was $541 and $1,797, respectively, compared to $12,650 and $30,201 for the same periods a year ago and reflects the decreased use of the Company's bank lines of credit.
Income Taxes
There was no provision for federal or state income taxes as we incurred net operating losses in all periods presented.
Preferred Stock Dividends
Preferred stock dividends for the three and nine months ended September 30, 2000 were $27,174 and $47,179, respectively, compared to $50,748 and $209,751 for the same periods a year ago. The decreased dividends are the result of conversions of the Company's Series B, C, and D preferred stock to Common Stock. All of the Company's preferred stock had converted to common stock as of September 30, 2000 and no additional preferred stock dividends will accrue.
Liquidity and Capital Resources
During the nine months ended September 30, 2000, we used $1,018,293 in cash for operating activities. Net cash used in operations in 2000 resulted primarily from the net loss (net of deferred compensation related to compensatory stock option grants) and changes in assets and liabilities associated with increased revenue growth including increases in accounts receivables, inventories, prepaid expenses and other assets, offset by increases in payables, accrued payroll and related expenses and deferred revenue.
Cash used for investing activities was $400,572 for the nine months ended September 30, 2000 reflecting increased purchases of machinery and equipment, tooling costs for new products, and costs for computer equipment and software.
Cash provided by financing activities was $5,996,772 during the first nine months of 2000 and came primarily from proceeds from the exercise of public and other warrants in the first half of the year. The Company also received proceeds from the sale of common stock and from stock option exercises.
Our cash balances at September 30, 2000 were $8.9 million. An additional $1.5 million in cash was available at September 30, 2000 from our bank credit lines based upon qualified levels of receivables. We believe that our cash balances are adequate to fund our operations at least through the next twelve months. The Company, however, may elect to raise additional funding to fund its operations and to strengthen its working capital balances. Such additional funding could be raised through the issuance of additional equity securities, through borrowings on its bank lines as the levels of receivables permit, and through development funding from development partners.
Risk Factors
We have a history of operating losses and we cannot assure you that we will ever achieve ongoing profitability
We were incorporated in March 1992 and have incurred significant operating losses in every fiscal period since inception. We may continue to incur quarterly operating losses at least through the end of 2000 and possibly longer. Profitability, if any, will depend upon:
We have historically relied on our ability to raise equity capital to fund our operating losses and working capital requirements
Since our inception, we have raised approximately $32 million in equity capital and at September 30, 2000, we had an accumulated deficit of approximately $21.4 million. Although we believe that our cash balances as of September 30, 2000 of $8.9 million are adequate to fund our operations, continued losses could make it necessary for us to raise additional capital in the future. 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.
Shares eligible for future sale may adversely affect the market price for our common stock
As of November 13, 2000, we had outstanding securities convertible into or exercisable for the following amounts of common stock, all of which have been registered for resale under the Securities Act of 1933 and accordingly, may be sold into the market without restriction under the Securities Act of 1933:
The sale of these shares of common stock in the market, as well as the perception 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 make it more difficult to sell our common stock in the future.
We depend significantly on the market for mobile computers, particularly those that use the Windows-powered operating system for handheld computers (formerly Windows CE)
Substantially all of our products are designed for use in mobile computers, including notebooks, handheld PCs, Palm-size PCs, tablet PCs, and H/PC Professionals (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 ability to generate increased revenues depends significantly on the commercial success of Windows-powered notebooks, handheld PCs (H/PCs, Pocket PCs, tablet PCs, and H/PC Professionals) and other devices. As a result, our future success depends on factors outside of our control, including market acceptance of Windows-powered operating system devices generally and other factors affecting the commercial success of Windows-powered computers and devices, including changes in industry standards or the introduction of new or competing technologies. Any delays in or failure of Windows-powered devices to achieve or maintain market acceptance would reduce the number of potential customers of our products.
Our ability to comply with industry standards is critical to our business
We must continue to identify and ensure compliance with evolving industry standards to remain competitive. Unanticipated changes in industry standards could render our products incompatible with products developed by major hardware manufacturers and software developers. 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.
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 Axis Communications, Bell Mobility, Cambridge Silicon Radio, Compaq Computer Corporation, Hewlett-Packard Corporation, Hitachi, Intermec, Microsoft, SanDisk Corporation, Sprint PCS, Symbol Technologies, Targus International 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-powered mobile 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.
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, to remain competitive we must:
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 fail to develop or obtain access to advanced mobile communications technologies as they become available, or if we fail to 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 typically have little order backlog
We expect to experience quarterly fluctuations in operating results 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:
Because we base our staffing and other operating expenses on anticipated revenue, 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 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 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 original equipment manufacturers, or OEMs. Our largest distributor, Ingram Micro in the United States, accounted for 26% of our revenue in the first nine months of 2000 and approximately 24% of our revenue in 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 21% of our revenue in the first nine months of 2000 and 34% of our revenue in 1999. Accordingly, our operating results are subject to the risks inherent in export sales, including
In addition, our export sales are currently denominated predominately in United States dollars and in Euros for a portion of our sales to our European distributors. 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 and declines in value in the Euro relative to the dollar may result in foreign currency losses relating to collection of Euro denominated receivables.
PART II. OTHER INFORMATION
Item 1 - 3. Not applicable.
Item 4. Submission of matters to a vote of Security Holders.
At the Annual Meeting of Stockholders of the Company, held at the Company's Newark facilities on June 21, 2000, the Company extended the voting to August 31, 2000 on a proposal to amend the 1995 Stock Plan to reserve an additional 1,200,000 shares of common stock for issuance thereunder in order to obtain a majority of shareholders voting. Total voting shares on the record date of April 24, 2000 consisted of 20,084,570 common shares issued and outstanding and 435,730 common shares assuming conversion of Series D convertible preferred stock for a total of 20,520,300 shares. The proposal was passed at the reconvened Annual Meeting of Stockholders on August 31, 2000. A total of 10,323,006 shares were voted with 9,934,089 approving, 353,520 shares voting no, and 35,397 shares abstaining.
Item 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
Form 8-K was filed on October 20, 2000 with the Securities and Exchange Commission to report the acquisition of 3rd Rail Engineering on October 4, 2000 with an effective date of October 5, 2000.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SOCKET COMMUNICATIONS, INC.
Registrant
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