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spk01: Welcome to the 2022 First Quarter Financial Results for Socket Mobile. My name is Darrell and I'll be your operator for today's call. Before we begin, I'd like to remind everybody that this 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 on 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 involve risks and uncertainties, and actual results could differ material from the results anticipated in such forward-looking statements because of a number of factors, including but not limited to the risk that 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 that market acceptance and sales opportunities may not happen as anticipated. The risk that Socket's application partners and current distribution channels may choose not to distribute the products or may not be successful doing so. The risk of 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-Q reports filed with the Securities and Exchange Commission. Socket does not undertake any obligation to update any such forward-looking statements. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press 01 on your touchtone phone. Please note that this conference is being recorded. On the call, we have Kevin Mills, Chief Executive Officer, Dave Holmes, Chief Business Officer, and Lin Zhao, Chief Financial Officer. I will now turn the call over to Kevin Mills. Kevin, you may begin.
spk04: Thank you, Operator. Good afternoon, everyone, and thank you for joining us today. In Q1, our revenue increased by 31% to $6.3 million, over our revenue of $4.8 million in Q1 2021. Our gross margins were 49.7% compared to 52.1% in Q1 2021. Our margins were lower as we paid more for components and freight costs were much higher due to ongoing global supply issues. Our earnings per share were 4 cents compared to 3 cents in Q1 2021. Our Q1 results demonstrate we are off to a solid start in 2022. Our results were achieved in a very difficult supply environment for which our operations team deserve a great deal of credit. We expect the supply situation to remain difficult for most of 2022, and we will have to continue to work hard to overcome many challenges and issues so we can continue to support our many customers. In addition to our own supply constraints, we are also being impacted by supply issues outside our control like the availability of printers and cash drawers, which are required for mobile point-of-sale deployment. However, we do feel the supply issues are stabilizing, and we hope they are less impactful in the second half of the year. In Q1, we made good progress on the building blocks we are putting in place to enable Socket Mobile to better service the growing data capture opportunity we see ahead. As our hardware and software solutions need to be available before they can be incorporated into third-party applications, much of the work we are doing today will strengthen our revenue in 2023 and beyond and will enable us to continue to grow our business long-term. I'll now hand the call over to Dave Holmes, who will explain the opportunity and activities we see ahead, how we plan to service and support them. Dave.
spk00: Thank you, Kevin, and good afternoon, everyone. Today, I'd like to highlight a couple of the key milestones that we achieved in Q1 as we continue our journey of becoming a more comprehensive data capture company. We made significant strides with our Capture SDK software tools. We continue to provide the best-in-class development tools for our application partners, and we support all major development environments in the market today. In Q1, we announced Capture SDK for Flutter. Flutter is used by over 2 million developers and has quickly become one of the most popular cross-platform frameworks in the world, with over 40% of all software developers having used it. In Q1, we also launched the SocketCam C820. This is the first member of our new SocketCam software product family that turns any mobile device into a high-performance barcode scanner. We think this is a critical piece of the data capture journey. Today, Socket mobile scanners are primarily used in the performance sensitive portion of the data capture market where we have a commanding market share. That said, our application partners have end users with different data capture needs. They typically only add our capture SDK to support socket scanners when their customers run into performance issues. The addition of the will allow our development partners to bring socket scanning expertise and capabilities to a much wider audience allowing our app partners to serve all of their end users from the price sensitive to the performance sensitive with one integration. One integration with Capture SDK gives our app partners the ability to support all of Socket Mobile's products from the high-end dedicated hardware barcode scanners and NFC readers to free software-based scanning on your mobile device. Enabling the app for the entire journey allows developers to service a much wider audience eliminates the burden of lengthy and technical onboarding processes, and allows the end customers to select the best data capture tools for their particular situation. We will continue investing in the SocketCam family to offer data capture solutions that benefit our developer community and end users. We will have an advanced version available on a subscription basis later this year. We think this is a critical evolution in how Socket Mobile serves the entire data capture journey. Finally, we continue to invest in the digital ID and mobile driver's license space. In Q1, we held a joint webinar with our partner UL outlining how MDL is poised to enter the retail mobile point of sale space in the coming months for things like electronic age verification for restricted goods and the like. We feel this is a big opportunity and that Socket Mobile is well positioned to become a significant player in the MDL reader space. Our products already conform to the predominant ISO standards being adopted in most jurisdictions where MDLs are being deployed and tested. This will mark another evolution in our data capture journey. We will go from reading barcodes to capture data about products to reading barcodes and NFC credentials about people and identities. With that, I'll turn it over to Lynn for more details on our financial results. Lynn?
spk03: Thanks, Dave. Hi, everyone. I'm pleased to be with you today to share our Q1 results. Year-over-year, Q1 revenue was up 31% to $6.3 million, compared to $4.8 million in the comparable prior year quarter, driven by strong demand for our products. The first quarter growth margin, however, decreased by 380 basis points compared to Q1 2021, and 240 basis points compared to Q4 2021, driven by significant inflation. To recover the margin loss, we will reduce some of the discounts we currently offer and increase the sales in our lowest discount channels. Operating expenses in Q1 were $2.66 million, increased 14% over the prior year quarter. Spend on engineering increased 13%, mainly driven by hiring as a continued commitment to research and development activities, which is essential to provide innovative new product offerings, to provide engineering support for key customers, and to maintain our existing products. Increases in their sales, marketing, and the customer support were 36%, which reflected the cost associated with their higher headcount and the consulting in the external professional services. General and administrative expenses decreased 4% related to a temporary headcount reduction. First quarter operating income was $464,000, representing a 7% operating margin. Our tax rate was 18%. Earnings were $342,000, or 4 cents per fully diluted share, compared to 3 cents per share for the prior quarter. Adjusted EBITDA in the first quarter was $0.9 million, up 57% from prior quarter of $.6 million. Top line growth contributed to the period over period EBITDA growth. Turning to our balance sheet, in Q1, changes in operating assets and the liabilities resulted in net cash used in the operating activities of 1.3 million, which was primarily from increased accounts receivable driven by higher shipment levels and the security deposit for our new office building's lease agreement. We ended Q1 with a cash balance of $5.4 million. As of March 31, 2022, our inventory level net reserve was at $5.2 million compared to $3.7 million a year ago. The increased inventory enables us to service our customers of full demand, which while navigating the supply constraints. Our balance sheet has further strengthened with a current ratio of 2.8 to 1 as of March 31st, compared to 2.1 to 1 a year ago. Now I'll talk about the share buyback program approved by our board of directors. The target is to repurchase 91,000 shares in Q2. As of today, we have repurchased the 71,000 shares of our common stock at the average price of $4.15. This wraps up our prepared remarks. Now I will hand the call over to the operator for questions. Operator.
spk01: Thank you. We will now begin the question and answer session. If you have a question, please press 01 on your touchtone phone. If you wish to be removed from the queue, please press 02. There will be a delay before the first question is announced. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press 01 on your touchtone phone. And I'm standing by for questions. And we have a question from Steve Swanson. Go ahead with your question.
spk02: First one, can you explain again how giving away or developing this free C820 product is going to help the company increase revenue and earnings over time? I'm not quite getting that.
spk04: Sure. Basically, Steve, what we're doing is we see that a lot of our customers only come to us after they have initially put in camera-based scanning. And their customers have complained that the camera-based scanning doesn't meet the requirements in many situations. And therefore, they go back to the application provider and request that they upgrade the application to include soccer scanners what we're trying to do is remove that we walk cycle right by providing software that both allows them to use the camera and the scanners an application developer can develop one time and then for customers who are able to use and live with the free camera-based scanning, it's all there for them. If a customer then has a situation that they need a dedicated scanner, there's no rework required, and they just simply go and buy the scanner, and the application is already there.
spk02: So... Does this get us more developers using our product, or is that the angle?
spk04: Correct.
spk02: So...
spk04: Today, a lot of developers are not very, we'll call it data capture aware, and they believe that the camera-based scanning will more than meet the needs. Then once they launch their product, they find out that the camera-based scanning doesn't work in all situations, and customers then complain to them. And when they get enough complaints, they do something about it and come back to us and say, I need to bake in the socket stuff to really service my higher ends and more performance sensitive customers. We're basically eliminating that requirement and saying, look, you can do this one installation of software. It'll support all of your price sensitive customers who believe they can get by with camera based scanning. And when performance-based customers come to you, you will already just say, go buy the scanner, it will work. We've seen that only 28% of our customers put in the SOCUS Capture SDK in revision one of their software. We have to wait until revision two or a higher revision for 72%, and that takes a long time. Basically, with this approach, we think we can get about 90% of developers to include our capture SDK the first time around. And sure, if they never buy a scanner, they never buy a scanner if they don't need us. But we'll be able to serve as a bigger developer community and a bigger end user community with this approach.
spk02: Okay, is it too early days to understand if we're getting traction with this?
spk04: Yeah, I mean, these things take a little bit of time. We currently have the Capture SDK with the built-in scanning and preview. We'll basically keep it in preview and work with some of the more advanced, more aggressive rather than advanced developers. We will make it generally available, I would say, in the next 60 days. And then when people start using it, it'll take another 90 days before we see if this is working. But there really is no downside for us in this. We've made an investment. We've built in the camera-based scanning, and now it's there, right? But it does create a foundation that we can build on going forward.
spk02: Okay. That helps me. Appreciate that. The second question I had was what was the total units that we sold during the first quarter of the – I'm looking back to your history, and what we said for the fourth quarter of 2021 was we sold a little over – or a little under 27,000 units. So I was wondering what the run rate was for the first quarter for the barcode scanning units sold.
spk03: I don't have the number – Steve, we sold at 27,700 in 2020.
spk02: So we're about flat then from the last quarter. Okay. And then I appreciate you talking about the going forward, Lynn, on the repurchase program, but I was kind of interested just through the end of March 31st, what was the total shares repurchased and what was our average price?
spk03: We entered their 10b-5-1 plan during their open window after we released the annual results. And there's a required 45 waiting period. So their plan didn't kick off until around like two weeks ago, roughly.
spk02: Okay, so basically we didn't buy anything in the first quarter then.
spk03: That's correct. Yeah, we didn't purchase any shares. Yeah.
spk02: Okay. So then could you repeat what you said about what you're hoping to do in the second quarter? Or whatever you said earlier, could you repeat that?
spk03: Okay. So what has been approved by our board directors, we purchased 1.25% of the prior quarter's outstanding shares. So the target number of shares to repurchase The first batch would be 91,000 shares. So, and as of today, we have bought 71,000 shares at the average price of $4.15. Okay.
spk02: That's helpful. All right. Thanks, guys. Appreciate it. Thank you. Okay.
spk01: And our next question comes from Frank Petrones. Go ahead, Frank.
spk06: Yeah, hi. I think it's very commendable that you guys have a $5.4 million cash balance, but my big question is, what's the purpose of using up precious monies in this day and age or buying back your stock where, number one, to reduce the flow rate, or is this more... And is it for the principals? And have you thought of or has your accountant come up with maybe a preferred where like 100 shares per one preferred could do the same thing and you could save your cash?
spk04: So the question was very, could you repeat the question please, Frank, and maybe speak a little louder?
spk06: Okay, I'll do it again. Let me take you off the speaker because I hear through a hearing aid. Okay. My question was, it's commendable that you have $5.4 million in cash. My question is, why buy the shares in the open market if the purpose is to reduce the float and eventually it would increase the earnings versus the sales. But in the meantime, my question is why buy it when cash at this point in time for most companies is very important and it's nice to have a good cash balance. And then there's also like right now I'm familiar with a Gabelli fund that It's called the Gabelli Equity Trust. It pays and has been paying since 1985. It's been paying a 10% distribution. They have another fund that pays $0.05 a month and one fund that pays $0.15 every quarter. And what I'm saying is the idle cash could be earning some very important monies, and it's also very liquid. And you can check with the company from that standpoint. From my other observation of buying back stock at this point in time is not, I don't see the purpose other than if you can look at maybe a preferred, like one preferred could equal 100 shares and you could do the same kind of ratio versus what kind of shares you're looking to buy and But my big question was, are they for the insiders, the principals? Is it for your 401k type monies? Or what is the ultimate purpose for buying back the shares? That's my main question.
spk04: Yeah, okay. So we're buying back the shares for one main reason, is we believe that they're undervalued and that we're generating a lot of cash. that we don't necessarily have immediate need in the business for. And we would like to show our support for our stock as well as basically reduce the number of shares because there's not a lot of interest in the stock. It's pretty simple, right? You know, when we talk to investors, they basically appreciate the fact that we have confidence in our stock and are buying it back. I think we generated close to a million dollars in EBITDA and we'll continue to generate any million dollars EBITDA per quarter is the expectation. So we're using our surplus cash to basically invest in ourselves. It's as simple as that.
spk06: Okay. I understand that. But the other, again, I worked for and with a New York Stock Exchange firm. And my big thing is if that's your ultimate purpose, it would probably be better to look at a financial PR firm that you can do dog and pony shows. I think you have some very interesting products and the way I see you're growing. And yes, I also believe your stock is underpriced. But if you have various dog and pony shows, going on every quarter you can achieve the same purpose because at this point with the market with the interest rates now as they're going to rise it's almost a sure thing it wouldn't be let's say correct in my eyes to use the cash to buy the stock where it just for the purpose of bolstering up the stock. I think the PR firm to show the product and your ratio of earnings versus your cash is tremendous. And I applaud you for that. It's only my suggestion.
spk04: Yes, let me answer. We have increased the number of financial conferences we did and are doing. And in Q1 alone, we did, I think, four different conferences, maybe even five. We did Maxim, we did Aegis, we did Singular Research, we did a few others. We did a day of investor calls, etc. So we have picked up on the IR side. But it's a process. And we basically are out there telling our story. And we hope that people will see the value as you see the value. And we can guests more recognition for the work we've done. But it's a process. It's not going to happen overnight, but we have picked up the pace of the outreach to investors. And to be honest, our investors do appreciate the fact that we are buying back our shares. So they go hand in hand here, frankly. So we keep at it and we appreciate your input on this.
spk06: Well, the other point is there are many, many institutions and funds that cannot buy your kind of stock or your type of company since you are on NASDAQ, which is fine, but you also qualify for the New York Stock Exchange. And I think with a specialist handling the stock, you could probably accomplish the same thing. So it's just another thought as far as becoming a New York Stock Exchange member. All right.
spk04: Take care.
spk01: And if anyone else has a question, it's 01 on your touchtone phone. And we have no more questions at this time. I'll turn it back to the speakers for closing comments.
spk04: Thank you, operator. In summary, in Q1 2022, we delivered solid results and made significant progress in a very challenging environment. We feel we are continuing to build a solid foundation that will help us grow our revenue and importance over the next few years. I'd like to thank everyone for your time and interest in Socket Mobile today and wish you all a good afternoon. Thank you.
spk01: And thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.
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