Socket Mobile, Inc.

Welcome to Socket Mobile Inc. U1 2023 Earnings Call. My name is Erica 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 for 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 market in which Socket Mobile sells its products. Such statements involve risk and uncertainties, and actual results could differ materially from the results anticipated in such forward-looking statements because of the 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 might not happen as anticipated The risk that Socket's application partners and current distribution channels may choose not to distribute the products and 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-Q report filed with the Securities and Exchange Commission. Socket does not undertake any obligation to update any such forward-looking statement. On the call with me today are Kevin Mills, Chief Executive Officer, Dave Holmes, Chief Business Officer, and Lynn Zhao, Chief Financial Officer. I would now like to call over to Kevin Mills. Kevin Mills, you may begin.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us today. Our Q1 revenue was $4.3 million. a 31% decrease compared to the 6.2 million in Q1 2022. Our gross margins were 48.1% compared to the 49.7%, and we reported an operating loss of $993,000 compared to an operating income of $515,000 in Q1 2022. Our Q1 results were disappointing. Q1 revenues were impacted by distributor inventory balancing activities. Our distribution partners reduced their inventory levels in Q1 based on the ongoing changes in the supply chain as they rebalanced their inventory levels to better align with demand and lead times. And this impacted our revenue. In addition, overall demand in the US retail sector was lower than we expected. as the combination of inflation and higher interest rates caused a general slowdown and got the year off to a slow start. We did not see a similar slowdown in our internationally driven retail business. As we said on our last call, we expected the first half of 2023 to be challenging, as most of the new products were not expected to add to our revenue until the second half of 2023. The good news is our development efforts remain on track and we expect to launch many of these new products in Q2 and expect them to positively impact our revenue in the second half of the year, as previously outlined. As Dave Holmes will explain, many of these new products are targeted at non-retail sector markets, where we believe Socket Mobile has a large market opportunity. The introduction of these new products will better balance the company by reducing our dependencies and impact of the retail sector on our overall business. With that said, I would now like to turn the call over to Dave for his comments.

Thank you, Kevin, and good afternoon, everyone. Today, I'd like to highlight a few of the significant milestones that we achieved in Q1 and talk a little bit about some of the new products we have coming up. as we continue our journey of becoming a more comprehensive data capture company. We continue improving Capture SDK, our unified software development toolset that supports our entire data capture portfolio. One integration with Capture SDK gives our app provider partners access to all socket mobile data capture products. Capture SDK now includes camera-based scanning software. App providers typically had to integrate with multiple parties to support all of their end users. Now, with one integration with Socket Mobile, we can support all of their end users. For the ultimate data capture experience, our hardware scanners continue to deliver best-in-class performance. And now, cost-conscious end users can utilize Socket Cam's C820, our free camera-based scanning software that is built into the latest versions of Capture SDK. In Q1, we made significant progress promoting our free camera-based scanning technology. Our app partners are updating their apps with the latest version of Capture SDK to enable camera scanning with SocketCam. The first successful releases to the App Store happened in Q1, and thousands of end users now have access to SocketCam scanning in their apps. Building out an install base of users of our free version of SocketCam is critical, and we made great strides on that form in Q1. early adopter app partners have been extremely positive about the ease of implementation and the instant value it brings to their end users of their apps we're excited to announce that in the second quarter of 2023 these app users who need that these app users who need to read damaged or more complex barcodes will be able to upgrade from the free version to a more advanced version the socket cam ch60 on a monthly subscription basis to apple's app store and Google's Play Store. This upgrade will allow our app partners to support both cost-conscious and feature-conscious data capture requirements with the same application, enabling end users to select the best option based on their unique needs. As customers upgrade to the Socket Cam CH60, this will provide Socket Mobile with a recurring revenue stream each month. Socket Cam is being adopted in apps supporting a wide variety of industries and markets. delivery services, field order entry, and inventory apps, just to name a few. Our camera scanning opportunities continue to move forward, and we believe this is a critical step in the data capture journey. It will make us a more complete hardware and software data capture company. In Q1, we also released our DuraSled Bluetooth barcode scanner for the iPhone 14. Socket Mobile's DuraSled models combine 1D and 2D Bluetooth barcode scanning, into a handheld durable case for iPhones, creating a one-handed solution for mobile workers. Employers can now support workers using iPhone 14 in addition to older iPhones, all using the same chargers, accessories, and SDK. The engineering team has also been working hard to develop a new line of ultra-legged industrial products. In Q2, we will be introducing a new extreme scan product lineup. These products are targeted for harsh environments, which is manufacturing, construction, oil and gas, and airports. These new products will open new markets for Socket Mobile and also extend our reach within some of our current partner base. Ultimately, this will also make us more diversified, sustainable, and less dependent on retail. We feel that our camera scanning and industrial products create new opportunities 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?

Thanks, Dave. Thank you, everyone, for joining today's call. During Q1, our revenue decreased by 31% to $4.3 million, down from $6.3 million in the prior quarter. This was primarily due to inventory balancing activities among our distribution partners who have reduced their inventory levels to better align with demand and the lead time amid ongoing supply chain disruptions. As a result, our revenue has been impacted as our revenue is based on sales into distribution. Our Q1 growth margin was 48%, down from 49.7% in the prior year quarter. This decrease was primarily due to the allocation of manufacturing overhead costs across lower production volumes. In Q1, our operating expenses were $3 million, which is 13.7% increase from the prior quarter. This included an 18.3% increase in R&D expenses, driven by increased engineering services in the development of our new product, any salary increases, and new hires. We continue to invest in critical projects that drive the long-term growth of the company. During Q1, we recorded a net loss of $993,000, or 12 cents per share, compared to a net income of $340,000, or 4 cents per share, in Q1 2022. By the end of Q1 2023, We had a cash balance of $3 million. During the quarter, we invested $470,000 in capital expenditures. We purchased 93,000 shares for $210,000 and paid off $125,000 in outstanding loan balances. In terms of inventory, we ended the quarter with $5.7 million A slight increase from $5.6 million at the end of 2022. Despite ongoing supply chain disruption, we remain committed to managing our inventory levels effectively to deliver excellent customer service. Furthermore, we're taking proactive steps to maintain a healthy liquidity position in the current and the future business environment. Our annual shareholder meeting will take place online on June 7th. We invite all shareholders to cast their votes and to participate in the meeting. This wraps up our prepared remarks. Now I will hand the call over to the operator for questions.

Erica? Ladies and gentlemen, if you would like to ask a question, please press star 1 on your phone now. You'll be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, to ask a question, please press star 1 on your phone now. Once again, to ask a question, please press star 1 on your phone now. Our first question comes from Steve Swanson, an investor. Please get your question.

Can you give us an update on the share repurchase program? Thanks.

Okay, in total, the company repurchases 359,000 shares at the cost of slightly over a million dollars, and their program expired at the end of March. Currently, we don't have a new program in place.

At this time, we have no further questions. Okay, I would just like to thank everyone for participating in today's call and wish you all a good afternoon. Goodbye.

This concludes today's conference call. Thank you for attending.

The host has ended this call. Goodbye.