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spk03: Welcome to the Socket Mobile 2022 Third Quarter Financial Results Conference Call. My name is Darrell 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 and 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 materially 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 sockets 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 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 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 today with me are 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.
spk01: Thank you, Operator. Good afternoon, everyone, and thank you for joining us today. In Q3, our revenue decreased to $3.7 million from $6.3 million for the same period in 2021. Our gross margins were 44.4% compared to 54.2% in Q3 2021. Our expenses were 2.6 million compared to 2.5 million in Q3 2021, resulting in a net loss of 874,000 for the quarter. Obviously, we are disappointed with these results. However, while you may initially interpret the dramatic drop in revenue as a sign our business is stagnating, a closer look at the details would assure you that that is not the case and that our Q3 results do not fully reflect the underlying demand for our products or the exciting opportunity we have ahead. In Q3, our results were significantly impacted by inventory reductions in our distribution channel. Our sales to our distribution channel partners were approximately 30% lower than the sales from our distribution partners to our end customers. We believe the sales from our distribution partners to the end customers are a truer reflection of the underlying demand, and that number in Q3 was 4.8 million. A lower number than expected due to the strong headwinds and market uncertainties, but a number that would have kept us EBITDA positive. Our distribution partners increased their inventory in the first half of the year. as lead times grew and supply was uncertain, especially for printers and cash drawers, which are required to deliver mobile point-to-sale solutions. In Q3, they rebalanced their inventory levels based on demand and current supply conditions, resulting in a dramatic decrease in our sales into distribution, which is how we recognize revenue. We believe this is a one-time adjustment and we expect our sales into distribution and out of distribution will be approximately equal in Q4 as they have been for many years. As an aside, Socket Mobile has not experienced any supply issues and has maintained a six-week lead time during these difficult times as we took a strategic stock position in 2020 on many critical components. Our sales continue to be driven by our many application partners, with Shopify and Square leading the way, and we expect this trend to continue. During Q3, we made significant progress on delivering our next-generation products and services, and I'd now like to turn the call over to Dave Holmes, who will discuss these developments in detail. Dave.
spk00: Thank you, Kevin, and good afternoon, everyone. Today, I'd like to highlight a couple of key milestones that we achieved in Q3 as we continue our journey of becoming a more comprehensive data capture company. We made significant strides with our Capture SDK software tools as we continue to provide the best-in-class development tools for our application partners. We support all the major development environments in the market today. And in Q3, we announced that our Capture SDK an entire line of barcode scanners and NFC reader writers achieve full compatibility with the iOS 16. iOS 16 compatibility across the entire Socket Mobile product line ensures that Apple apps and their end users can maximize the performance of both their Socket Mobile data reader and Bluetooth paired Apple device. Socket Mobile Capture SDK has been integrated into thousands of applications across a variety of industries. helping create easy to use software tools for optimal performance and efficiency. We're very proud of the work the software team has been delivering. Also, Capture SDK now includes SocketCam C820, our free camera-based scanning software that turns any mobile device into a high performance barcode scanner. Our app development partners can now begin offering free scanning to their customers Capture SDK with C820 allows our development partners to serve all of their end users from price sensitive to performance sensitive with one integration. This approach is really resonating with our key application partners. The addition of the C820 will allow our development partners to bring socket scanning expertise and capabilities to a much wider audience. With the completion of phase one by adding free camera scanning to Capture SDK, the team is now working hard to deliver enhanced camera scanning through the SDK, which we will offer on a monthly subscription basis in 2023. We think this is a critical piece in the data capture journey, and it will make us a more complete hardware and software data capture company heading into 2023. Our continuous effort to innovate and advance new opportunities resulted in several new products being announced in Q3, We announced the launch of our new linear and barcode and QR code readers, SocketScan S720 Companion Scanner, S820 Attachable Scanner, DuraScan D820, and a DuraSled DS820. These new 1D, 2D barcode scanning models will meet the needs of users within various industries who want to get ahead of the transition from 1D to 2D barcode scanning. The new models enable a different level of transparency and versatility for users by providing the capabilities to support services like QR code payments and loyalty, digital identification verification, and real-time supply chain tracking. Also, we're seeing positive signs with our NFC business as more developers begin embracing contactless technology. Initial commercial deployments of our S550 NFC reader rider for mobile ticketing, e-money, and loyalty applications are resulting in exceptional customer experiences and follow-on projects. Our new SocketScan S370, a universal NFC and QR code mobile wallet reader, gives app partners the flexibility to accept multiple formats with one device. With the myriad of credential types out there, S370 provides our partners with peace of mind that they can implement one device and not have to worry about choosing the wrong technology. The S370 can read credentials following the ISO 18013-5 standard as well. This is being adopted for mobile driver's license, or MDL, in most states and countries. We're seeing positive signs all around. We continue to invest in digital ID and the MDL space. We feel that our camera scanning and digital ID products create a new and big opportunity for Socket Mobile. We can reach a larger and more diverse set of application providers and their end users. With that, I'll turn it over to Lynn for more details on our financial results. Lynn?
spk02: Thanks, Dave. Thank you everyone for joining today's call. In Q3, our revenue decreased 41% to $3.7 million. compared to $6.3 million in the prior year quarter, and it decreased 38% sequentially compared to $6.1 million in Q2 2022. The weaker end user demand combined with the reduction of inventory in our distribution channel affected our reported revenue, even though the sales from our distribution partners to end users were $4.8 million compared to our reported revenue of $3.7 million. The third quarter growth margin was 44% compared to 54% for the prior year's quarter and 50% in the preceding quarter. The decrease in growth margin was driven by persistent higher component and freight costs, as well as the allocation of manufacturing overhead costs across lower production volumes. Q3 operating expenses were $2.6 million, increased 5% over the prior year quarter, but decreased 9% sequentially over the preceding quarter. We managed the expenses tightly while continuing to invest in critical projects. In Q3, we recorded a net loss of $874,000, or 11 cents per share, versus a net income of $644,000 or 7 cents per share in the prior year quarter and a net income of $104,000 in the preceding quarter. The cash balance at the end of Q3 was $4.2 million. In Q3, we invested $350,000 in capital expenditure, repurchased 90,000 shares for $276,000 and the repaid $125,000 loan balance. The company will continue executing the share buyback program and purchase 1.25% of outstanding shares during the open window. As of September 30th, our inventory level net of reserve was at $6.2 million compared to $5.9 million on June 30th and $5.2 million at the end of 2021. A sufficient inventory enables us to navigate the supply chain disruptions and better serve our customers. We continue managing the inventory and expect a lower inventory level at the end of the year. We believe our balance sheet and the liquidity continue to be in a healthy position to meet the current environment. This wraps up our prepared remarks. Now I'll hand the call over to the operator for questions.
spk03: If anyone has a question, it's 01 on your touchtone phone. Once again, if you have a question, it's 01 on your touchtone phone. And we do have a question from Chris Sakai from Singular Research. Go ahead, Chris.
spk05: Yes. Hi. I just had a question on the gross margin decline, what were the main drivers there? I didn't quite get that.
spk02: Hi, Chris. Yeah, compared to Q2, the preceding quarter, the main driver is the lower volumes. Our manufacturing overhead is around the 600K level, and it was allocated across over the lower volume.
spk05: Okay, and then as far as your inventory levels are concerned, are you concerned about any of your inventory going obsolete?
spk02: No, no. We go through their access and obsolete analysis every quarter at the end of each quarter, and that part is reviewed by our auditors. and we have sufficient reserve for any components if considered obsolete.
spk05: Okay. Thanks for that. And then any sort of idea on future, you know, future revenue, future margins, you know, how should we be thinking of this environment?
spk01: Hi, Chris. This is Kevin. I think that we view the 4.8 as the run race, and we don't expect to see a substantial change in distribution levels, so the in and the out should be equal. We believe that we'll be a little bit stronger in Q4, even though the market is still, I would say, struggling. And I would say that we're comfortable we will be back at EBITDA positive levels in Q4.
spk05: Okay. Thanks for that.
spk03: And our next question comes from John Harrington from Wells Fargo. Go ahead, John.
spk04: Question is, how much money is left in the buyback fund and what does the company feel that is a good level? And I, again, don't have any shareholder friends that even know about the buyback. Could you reiterate exactly what the funds, like your reserve for 1.8 million and the third quarter of Okay, we understand what has happened. But now, looking at the fourth quarter versus Q4 of 2021, is that what we're going to compare to? And that would be closer to those levels. Those are my two questions.
spk02: We, our board approved their shared buyback program, you know, back in Q1 this year. And they are going to insert We entered a 10B51 plan. So the board approved $1.8 million. You know, spread out across four quarters, 1.5% of our outstanding shares. 1.25% of our outstanding shares. And we have purchased in April-May timeframe and again in July-August timeframe. And the board has decided to continue executing their buyback program. So we will resume their buyback during the open window.
spk01: And maybe just to add, the buyback program is set to expire. It was a one-year program. So the authorization was to buy. up to a maximum of $1.8 million over four quarters, not to exceed 1.25% in any given quarter, and it expires at the end of March 2023. The board may decide to extend or put in a new program, but the current program will expire in March 31st, 2023. Okay, thank you.
spk03: If anyone else has a question, it's 01 on your touchtone phone. Standing by for questions. And we have no more questions at this time. I'll turn it back to the speakers for final comments.
spk01: Thank you, Operator. So we'd just like to thank everyone for participating in today's call, for their interest in Socket Mobile, and we wish you all a good afternoon. Thank you.
spk03: This concludes today's presentation. Thank you for participating. You may now exit the webcast.
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