================================================================================
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, 2000
[ ] 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
April 24, 2000 was 20,085,871 shares.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. Financial information
Condensed Balance Sheets - March 31, 2000 and
December 31, 1999....................................... 3
Condensed Statements of Operations - Three Months Ended
March 31, 2000 and 1999................................. 4
Condensed Statements of Cash Flows - Three Months Ended
March 31, 2000 and 1999................................. 5
Notes to Condensed Financial Statements................... 6 - 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 9 - 18
Part II. Other information......................................... 19
Signatures......................................................... 19
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
SOCKET COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31
2000 1999 *
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $8,129,462 $4,284,670
Accounts receivable, net........................... 1,345,788 1,557,369
Inventories........................................ 787,332 736,079
Prepaid expenses................................... 157,185 40,999
------------ ------------
Total current assets............................ 10,419,767 6,619,117
Property and equipment:
Machinery and office equipment..................... 739,164 657,012
Computer equipment................................. 589,839 548,255
------------ ------------
1,329,003 1,205,267
Accumulated depreciation........................... (931,991) (884,828)
------------ ------------
397,012 320,439
Other assets........................................ 88,825 72,667
------------ ------------
Total assets.................................... $10,905,604 $7,012,223
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.............. 1,475,722 1,385,573
Accrued payroll and related expenses............... 315,743 271,642
Deferred revenue................................... 363,924 346,411
------------ ------------
Total current liabilities....................... 2,155,389 2,003,626
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; Authorized
shares - 3,000,000
Series B Convertible Preferred Stock:
Designated shares - 37,500; Issued and
outstanding shares - none at March 31,
2000 and 4,335 at December 31, 1999.......... -- 215,472
Series C Convertible Preferred Stock:
Designated shares - 175,000; Issued and
outstanding shares - 16,857 at March 31,
2000 and 46,431 at December 31, 1999;
Aggregate liquidation preference - $193,856
at March 31, 2000............................ 167,728 479,647
Series D Convertible Preferred Stock:
Designated shares - 175,000; Issued and
outstanding shares - 43,573 at March 31,
2000 and December 31, 1999;
Aggregate liquidation preference - $250,000
at March 31, 2000............................ 192,472 192,472
Common stock, $0.001 par value:
Authorized shares - 50,000,000
Issued and outstanding shares - 19,798,398 at
March 31, 2000 and 15,922,220 at
December 31, 1999............................. 19,798 15,922
Additional paid-in capital......................... 27,866,318 23,174,113
Accumulated deficit................................ (19,496,101) (19,069,029)
------------ ------------
Total stockholders' equity...................... 8,750,215 5,008,597
------------ ------------
Total liabilities and stockholders'
equity................................... $10,905,604 $7,012,223
============ ============
</TABLE>
* Derived from audited financial statements.
See accompanying notes.
-3-
<PAGE>
SOCKET COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenue............................... $2,003,800 $1,460,607
Cost of revenue....................... 832,302 610,990
------------ ------------
Gross profit.......................... 1,171,498 849,617
------------ ------------
Operating expenses:
Research and development........... 500,261 267,781
Sales and marketing................ 764,089 556,387
General and administrative......... 383,935 391,738
------------ ------------
Total operating expenses........ 1,648,285 1,215,906
------------ ------------
Operating loss........................ (476,787) (366,289)
Interest income....................... 63,735 --
Interest expense...................... (702) (6,688)
------------ ------------
Net loss.............................. (413,754) (372,977)
Preferred stock dividend.............. (13,318) (83,860)
------------ ------------
Net loss applicable to
common stockholders................. ($427,072) ($456,837)
============ ============
Basic and diluted net loss per share
applicable to common stockholders... ($0.02) ($0.06)
============ ============
Weighted average shares
outstanding......................... 17,663,019 7,491,709
============ ============
</TABLE>
See accompanying notes.
-4-
<PAGE>
SOCKET COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss............................................ ($413,754) ($372,977)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 47,163 29,921
Compensatory stock option grants and warrants... 87,767 58,251
Changes in operating assets and liabilities:
Accounts receivable........................... 211,581 (257,995)
Inventories................................... (51,253) (53,668)
Prepaid expenses.............................. (116,186) 18,819
Other assets.................................. (16,158) (1,917)
Accounts payable and accrued expenses......... 90,149 159,563
Accrued payroll and related expenses.......... 44,101 19,994
Deferred revenue.............................. 17,513 11,495
------------ ------------
Net cash used in operating activities....... (99,077) (388,514)
INVESTING ACTIVITIES
Purchase of equipment............................... (123,736) (56,524)
------------ ------------
Net cash used in investing activities....... (123,736) (56,524)
FINANCING ACTIVITIES
Proceeds from public and other warrant exercises.... 3,328,934 --
Proceeds from stock options exercises............... 221,322 --
Proceeds from sale of common stock.................. 517,349 --
Payments on capital leases and equipment
financing notes................................... -- (26,033)
Net proceeds from borrowing under bank
line of credit........................... -- 67,545
------------ ------------
Net cash provided by financing activities... 738,671 41,512
------------ ------------
Net increase(decrease) in cash and cash equivalents... 3,844,792 (403,526)
Cash and cash equivalents at beginning of period...... 4,284,670 971,157
------------ ------------
Cash and cash equivalents at end of period............ $8,129,462 $567,631
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.............................. $702 $6,688
Dividends accrued, payable in common stock.......... $13,318 $83,860
Series B preferred stock converted to common stock.. $215,472 $142,131
Series C preferred stock and dividends
converted to common stock......................... $311,919 --
</TABLE>
See accompanying notes.
-5-
<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 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, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000.
In December of 1999, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue
Recognition, which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC.
SAB 101 outlines the basic criteria that must be met to recognize
revenue and provides guidance for disclosures related to revenue
recognition policies. We believe that our revenue recognition policy
is in compliance with the provisions of SAB 101 and that the adoption
of SAB 101 had no material effect on our financial position or results
of operations.
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,
2000 1999
------------ ------------
Raw materials and sub-assemblies........ $753,075 $707,820
Finished goods.......................... 34,257 28,259
------------ ------------
$787,332 $736,079
============ ============
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, 2000 and 1999.
-6-
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Numerator for basic:
Net Loss....................... ($413,754) ($372,977)
Preferred stock dividends...... (13,318) (83,860)
------------ ------------
Net loss applicable to
common stockholders............ ($427,072) ($456,837)
============ ============
Denominator:
Weighted average common
shares outstanding used
in computing basic net
loss per share................. 17,663,019 7,491,709
============ ============
Basic and diluted net
loss per share applicable
to common stockholders......... ($0.02) ($0.06)
============ ============
</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 - 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, 2000 for the Series B Convertible Preferred Stock were $548
which were paid through the issuance of 20 shares of Common Stock in
April 2000. Accrued dividends at March 31, 1999 for the Series D
Convertible Preferred Stock were $5,000, which were paid through the
issuance of 183 shares of Common Stock in April 2000.
During the first quarter 2000 the remaining 4,335 shares of Series
B Preferred Stock in the amount of $215,472 were converted into Common
Stock in accordance with the mandatory conversion provisions of Series
B stock. Each share of Series B is convertible into 100 shares of
Common Stock resulting in 433,500 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 $7,770 payable through the issuance
of 15,160 shares of Common Stock at the time of conversion.
-7-
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
During the first quarter 2000, holders of Series C elected, or
reached mandatory conversion dates, to convert 29,574 shares in the
amount of $311,919 into Common Stock. A total of 723,551 shares of
Common Stock were issued during the first quarter for conversion of
Series C plus accrued dividends.
At March 31, 2000, convertible preferred shares were convertible
into common shares at the option of the holder as follows:
Common
Shares
------------
Series C plus accrued dividends... 365,765
Series D.......................... 435,730
------------
Total Shares...................... 801,495
============
NOTE 6 - 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, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Quarter Ended
March 31,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
United States............ $1,489,012 $971,025
Europe................... 388,855 407,609
Asia and rest of world... 125,933 81,973
------------ ------------
$2,003,800 $1,460,607
============ ============
</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,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Ingram Micro............. 26% 29%
Compaq Computer Corp. ... 14% 10%
Merisel.................. 11% *
------------------
(* Denotes less than 10%)
</TABLE>
-8-
<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 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,
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 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, the color Pocket PCs were released in the first quarter of
1999 and the tablet PCs were released beginning in the third quarter
of 1999. All of our low power Battery Friendly(TM) 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, Merisel 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 27 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. 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. Sales to Compaq Computer Corporation
remain a significant source of revenue in the first quarter of 2000
and for the same period a year ago
-9-
<PAGE>
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.
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 fourth quarter of 2000, and
- Cambridge Silicon Radio and its affiliated company, Cambridge
Consultants in licensing Bluetooth hardware components and software
for a Bluetooth connection card expected to be available near the end
of 2000,
- Sprint Corporation to develop a universal connectivity kit
incorporating Socket's Digital Phone Card which will connect Windows-
powered mobile computers and the Apple PowerBook to Internet-ready
Sprint PCS Phones for use on the Sprint PCS nationwide network.
-10-
<PAGE>
Results of Operations
- ---------------------
Revenue
Revenue for the first quarter of 2000 totaled $2,003,800, a 37%
increase from the corresponding period a year ago. Increases in
revenue were due to sales of new products introduced during the second
half of 1999, including the In-Hand Scan card and the Digital Phone
Card, and higher sales volumes of peripheral connection products,
including increased sales to OEMs. Sales of Ethernet connection cards
were flat between the two periods, with increases in low power
Ethernet sales for Windows-powered handheld computers in the first
quarter 2000 offset by decreased sales of standard Ethernet products
compared to the same quarter a year ago.
Gross Profit
The Company's gross profit for the first quarter of 2000 was 58.5%
of revenues compared to 58.2% for the same quarter a year ago due to
greater volumes of higher margin products partially offset by an
increase in overhead due to increased staffing.
Research and Development
Research and development expense was $500,261 for the first quarter
of 2000, an increase of 87% from the corresponding period a year ago,
due to higher levels of development activity, including an increase in
the number of engineering employees, relating to two major new
products: a Bluetooth Wireless Personal Area Network Card(TM) and a
combination input/output card with removable memory, which are
expected to be released in the fourth quarter of this year. The
Company expects to continue its current level of development expense.
Sales and Marketing
Sales and marketing expense was $764,089 for the first quarter of
2000, a 37% increase over the corresponding period a year ago. The
increase reflected higher levels of selling and marketing activities
and additional staffing including filling the position of vice
president of worldwide sales. The Company expects to continue its
current level of sales and marketing activity.
General and Administrative
General and administrative expense was $383,935 for the first
quarter of 2000, remaining flat with the corresponding period a year
ago. The Company expects moderate increases in general and
administrative expense.
Interest income, interest expense and preferred stock dividends
Interest income was $63,735 for the first quarter of 2000 generated
from cash balances held in money market accounts. Interest expense in
the first quarter of 2000 was $702 compared with $6,688 for the same
period a year ago and reflects the decreased use of the Company's bank
lines of credit.
-11-
<PAGE>
Preferred stock dividends for the first quarter 2000 amounted to
$13,318 compared to $83,860 for the same period a year ago. The
decreased dividends are the result of continued conversions of the
Company's Series B, C, and D issues of preferred stock to Common
Stock.
Income Taxes
There was no provision for federal or state income taxes for the
quarters ended March 31, 2000 and 1999 as the Company incurred net
operating losses in both periods.
Liquidity and Capital Resources
- -------------------------------
During the first quarters of 2000 and 1999, the Company used
$99,077 and $388,514, respectively, in cash for operating activities.
Net cash used for operations in the first quarter of 2000 resulted
primarily from the net loss, increases in prepaid expenses and
inventories, offset by decreases in accounts receivables, increases in
payables and a non-cash charge for compensatory stock option grants
and warrants. 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
compensatory stock option grants and warrants, and increases in
accounts payable and accrued liabilities.
Cash used for investing activities was $123,736 in the first
quarter of 2000 and $56,524 in the first quarter of 1999. The
amounts in the first quarter 2000 reflected purchases of machinery and
equipment, tooling costs for new products, and costs for computer
equipment.
Cash provided by financing activities was $4,067,605 during the
first quarter of 2000 and came primarily from proceeds from the
exercise of public and other warrants. The Company also received
proceeds from the sale of common stock and from stock option
exercises. 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.
The Company's cash balances at March 31, 2000 were approximately
$8.1 million. An additional $0.9 million in cash was available at
March 31, 2000 from the Company's bank credit lines based upon
qualified levels of receivables. An additional $0.4 million has
been raised subsequent to March 31, 2000 through warrant exercises
and stock option exercises. The Company believes that its cash
balances are adequate to fund its operations during 2000. The
Company, however, may elect to raise additional funding in 2000 to
fund its operations and to strengthen its working capital balances.
Such additional funding would be raised through the issuance of
additional equity securities, through increased borrowings on its
bank lines as the levels of receivables permit, and through
development funding from development partners.
-12-
<PAGE>
Risk Factors
- ------------
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 have incurred significant
operating losses in every fiscal period since inception. We may
continue to incur quarterly operating losses at least through the
first half of 2000 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-
powered operating system for handheld computers (formerly Windows
CE);
- 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 to manage our operating expenses.
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 $28 million in
equity capital and at March 31, 2000, we had an accumulated deficit of
approximately $19.5 million. Although we believe that our cash
balances as of March 31, 2000 of $8.1 million are adequate to fund our
operations during 2000, 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 April 24, 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
-13-
<PAGE>
and accordingly, may be sold into the market without restriction under
the Securities Act of 1933:
- 3,045,777 shares issuable upon the exercise of stock options under
our 1999, 1995 and 1993 stock plans;
- 1,900,938 shares issuable upon exercise of warrants;
- 801,494 shares issuable upon the conversion of outstanding shares of
convertible preferred stock;
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, Palm-size 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.
-14-
<PAGE>
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, Hewlett-Packard Corporation,
Hitachi, Microsoft, SanDisk Corporation, Sprint PCS, Symbol
Technologies, Welch Allyn and Zebra Technologies. 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:
- identify emerging standards in the field of mobile computing
products,
- enhance our products by adding additional features to differentiate
our products from those of our competitors, and
- 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 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.
-15-
<PAGE>
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 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:
- 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, 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.
-16-
<PAGE>
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
approximately 24% of our revenue in 1999 and 26% of our revenue in the
first quarter of 2000. 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 1999 and 26% of our
revenue in the first quarter of 2000. Accordingly, our operating
results are subject to the risks inherent in export sales, including
- longer payment cycles,
-17-
<PAGE>
- 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.
-18-
<PAGE>
PART II. OTHER INFORMATION
Items 1 - 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, 2000.
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 12, 2000 /s/ David W. Dunlap
-------------------
David W. Dunlap
Vice President of Finance
and Administration and
Chief Financial Office
-19-
<PAGE>
<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, 2000 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 8,129,462
<SECURITIES> 0
<RECEIVABLES> 1,345,788
<ALLOWANCES> 0
<INVENTORY> 787,332
<CURRENT-ASSETS> 10,419,767
<PP&E> 1,329,003
<DEPRECIATION> 931,991
<TOTAL-ASSETS> 10,905,604
<CURRENT-LIABILITIES> 2,155,389
<BONDS> 0
0
360,200
<COMMON> 19,798
<OTHER-SE> 8,370,217
<TOTAL-LIABILITY-AND-EQUITY> 10,905,604
<SALES> 2,003,800
<TOTAL-REVENUES> 2,003,800
<CGS> 832,302
<TOTAL-COSTS> 832,302
<OTHER-EXPENSES> 1,648,285
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 702
<INCOME-PRETAX> (413,754)
<INCOME-TAX> 0
<INCOME-CONTINUING> (413,754)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (427,072)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
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