Socket Mobile, Inc.

Welcome to the Socket Mobile Q3 2021 Management Conference Call. Today we have Kevin Mills, President and CEO, and Lin Zhao, CFO. My name is Adrienne, and I'll be your operator for today's call. Before we begin, I'd like to remind everyone that this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, but are not limited to, statements regarding mobile data collection and mobile data collection products, including details and timing, distribution and market acceptance of products and statements predicting the trends, sales and market conditions, and opportunities in the markets in which socket mobile sells its products. Such statements include risks and uncertainties, and actual results could differ materially from the results anticipated in such forward-looking statements, Because of a number of factors including, but not limited to, the risk of the manufacturer of Socket's products may be delayed or not rolled out as predicted due to technological, market, or financial factors, including the availability of product components and necessary working capital. The risk of market acceptance and sales opportunities may not happen as anticipated, and the risk that Socket's application partners and current distribution channels may choose not to distribute products or may not be successful in doing so. The risk that acceptance of Socket's products in vertical application markets may not happen as anticipated, as well as other risks described in Socket's most recent Form 10-K and 10-K reports filed within the Securities and Exchange Permissions. Socket does not undertake any obligation to update any forward-looking statements. At this time, all participants are in listen-only mode. Later, we'll conduct a question-and-answer session. During the question-and-answer session, If you have a question, please press star then one on your touch tone phone. Please note this conference is being recorded. And I'll turn the call over to Kevin Mills, President and CEO. Kevin Mills, you may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. Our third quarter revenue was $6.3 million, an increase of 54% compared to the $4.1 million for the same period in 2020. The growth was driven by the deployment of business applications in the retail industry. Operating income for the third quarter of 2021 was $954,000 compared to an operating loss of $4 million in the prior year. Lynn will provide a more detailed breakdown of our results in a few minutes. In Q3, our revenue was driven by our retail-centric customers led by Shopify. Our retail-centric business continues to benefit from both the reopening of the economy and ongoing retail changes that require customers to be serviced in a more mobile-friendly way. We also benefited from the deployment of an assisted selling app in Q3. The solid retail demand we saw in Q3 continues as we enter Q4. so we expect it to taper as we enter the second half of Q4, as is traditional for retail-centric businesses. Sales to the commercial services application segment were more robust in Q3, and we expect to see further increases in Q4. We believe the gains in this segment will offset the traditional Q4 retail seasonal slowdowns and allow us to deliver another solid revenue performance in Q4. On the supply situation, it is a very challenging environment and we continue to navigate industry-wide electronic component shortages and delays. However, we took various strategic actions to increase our inventory in 2020 and throughout the past nine months, so we would be able to continue to supply to our application partners and their many consumers. We remain focused on navigating the money delivery and supply issues so we can continue to support our customers in 2022. We anticipate the component shortages, lengthening lead times, and inflationary costs will persist well into 2022. We continue to invest in our NFC-centric products, which we expect to be a significant revenue driver in 2022 and beyond. the emerging market for NFC readers as they expand the mobile wallet's capabilities and functionalities. In iOS 15, Apple made it possible to carry digital identification, such as a mobile driver's license, as a mobile pass in your digital wallet, making it possible to integrate this functionality into many applications. As outlined in our recent press release, We also see new opportunities in the emerging secure supply chain segment, which is possible by combining NFC and blockchain technologies. We believe that our S550 and D600 NFC products are ideal for these emerging markets. So in summary, Q3 was another very good quarter, and we expect to maintain our momentum into Q4, even though it's a reasonably weak quarter for us. and we look forward to further growth in 2022. With that said, I'd now like to turn the call over to Lin Zhao, our CFO. Lin.

Thanks, Kevin. Good afternoon, everyone. I'm pleased to be with you today to share our Q3 results, another quarter in which we delivered a strong financial and operating performance. The nine-month revenue was $17.1 million, representing a 55% increase from the same period last year. The revenue growth rate between nine months of 2019 and 2021 was 17%. In Q3, we experienced a component cost and freight increases, which reduced our gross margin slightly by 1%, compared with both the prior year and last quarter. Although we currently are navigating the challenges well through supplier diversification and inventory management, the ongoing industry-wide electronic component shortages could result in future supply disruptions and higher production costs. Our Q3 operating expenses increased 35% compared with the prior year quarter if excluding the non-cash goodwill impairment charge of $4.4 million in Q3 2020, an increase of 1% compared with the last quarter. The increase compared to the prior year reflects the cost associated with the higher headcount, investment in technology, consulting in the external professional services, and the increase of compensation related to improved company performance. Moving to our capital position. We ended the quarter with a cash balance of $5.4 million compared with $2.1 million at the end of 2020. Even with an increase in strategic investments in our inventory position, as well as an increase in receivables due to strong sales growth, our cash flow from operations increased in the third quarter thanks to the increase in net profit. Our balance sheet has further strengthened with a current ratio of 3.54 as of September 30th. Through the first nine months of the year, we've been very happy with our performance. The strong demand for our products is a testament to the underlying strength of our business and of our application-driven business model, which we believe will drive long-term profitable growth. With that, I will turn things back to the operator for your questions. Operator.