Socket Mobile, Inc.

Welcome to the Socket Mobile, Inc. Q4 2023 earnings call. My name is Jen, and I will 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 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, 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 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 reports filed with the Securities and Exchange Commission. Socket does not undertake any obligation to update such forward-looking statements. On the call with me today 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. Mr. Mills, you may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. Our 2023 revenue was $17 million, a 20% decrease compared to $21.2 million in 2022. 2023, we had an operating loss of 3.1 million compared to an operating loss of 446,000 in 2022. Our 2023 financial performance was below our expectations. However, we believe that the 17 million in reported revenue does not accurately reflect the underlying demand for our products and services. In 2023, Our sales out, that is sales from our distribution partners to resellers and then customers, totaled 19.1 million, a 2.8% decrease from 2022 sales out, which were 19.7 million. We view sales out as the key metric in determining the underlying strength of the business. While demand did soften in 2023, The timing of shipments to distributors in LACE 2022, which had a positive impact on reported sales in 2022, also had a negative impact on reported sales in 2023 and made the year-over-year decline dramatic. Our 2023 revenue was also impacted by reductions in distributor inventory and reserve adjustments as our distribution partners rebalance their inventory levels based on the current demand and supply situation. On the positive side, in 2023, we did complete many of our longer-term projects and were able to launch several significant products, products that we believe will be major contributors to revenue in the coming quarters. I would now like to turn the call over to Dave Holmes, who will provide an update on the significant products and milestones achieved in 2023 and how they will impact our business moving forward. Dave.

Thank you, Kevin. Good afternoon, everyone. As Kevin said, today I'd like to highlight a few of the significant milestones that we achieved in 2023 and talk a little bit about how our investments and innovation are helping transform Socket Mobile into a more comprehensive data capture company. We launched several new products in 2023. At the end of the year, we launched SocketCam C860, an advanced camera-based scanning solution. SocketCam C860 is a follow-on to our free camera-based scanner, SocketCam C820, launched earlier in 2023. C860 offers an upgrade path for users on both iOS and Android platforms, and is tailored for users with more demanding scanning needs, those working in challenging conditions, or those dealing with poorly printed or damaged barcodes. There are no licensing fees for our app providers to include SocketCam into their apps. They simply integrate our capture SDK with SocketCam enabled into their applications. This enables them to service a wide variety of end users with various data capture requirements. from price sensitive end users with our free C820 and address performance sensitive needs with the C860 or any of our hardware scanners. App end users access the capabilities of SocketCam C860 via monthly subscription fee. Our XtremeScan product line was also introduced in 2023. It's comprised of three different configurations. Extreme Scan Case, Extreme Scan, and Extreme Scan Grip, all designed for iPhone, and work with iPhone 15, 14, 13, and 12. This product family represents a significant milestone in our commitment to delivering high-quality data capture solutions for our customers in industrial, manufacturing, warehousing, oil and gas, and airports. Extreme Scan is designed to enable iPhones to withstand harsh industrial conditions, offering robust scanning capabilities with military-grade durability. This opens the door to new customer segments that demand the ultimate performance in the most difficult conditions. Both socket cam and extreme scan are gaining traction with earlier adopters. Each has gone through extensive testing by our customers and app partners. We're getting a lot of good feedback and starting to see initial orders come in. We also made progress with our NFC products in 2023. Our SocketScan S550 NFC Mobile Wallet Reader is Apple certified to comply with Apple VAST protocol, enabling seamless integration with Apple Wallet. Additionally, it meets Sony's Felica standard and Cypress international security standards. Also, our SocketScan S370 Universal NFC and QR Code Mobile Wallet Reader received the certification from NFC Forum These certifications empower our NFC products to cater to a wide range of needs, including wallet passes, digital mobile driver's licenses, and non-traditional payments. Our new Socket products will extend our reach and diversify our customer base. Socket Cam will provide Socket Mobile with a recurring revenue stream each month. Ultimately, this will make us more diversified and sustainable and less dependent on retail. we become a more complete hardware and software data capture company. With that, I'll turn it over to Lynn for more details on our financial results. Lynn?

Thanks, Dave. Good afternoon, everyone. Thank you for joining today's call. In 2023, we experienced the softened demand and the reduced channel inventory as a result of actions taken by distributors. They scaled back their orders and returned products, causing a decline in channel inventory from $4 million at the beginning of the year to $2 million by year-end. These returns also prompted an increase in our reserve for returns, further impacting our revenue. As a result, our revenue for 2023 decreased 20% year-over-year to $17 million, down from $21 million in 2022. Growth margin was 49.7%, an increase from 48.8% in 2022. The rise is attributed to decreased component cost, which contrasts with 2022 when we faced elevated costs due to shortages and extended lead times. Operating expenses for the year reached $11.6 million, a 7% increase from $10.8 million in 2022. This increase is partially due to higher payroll-related expenses resulting from increases in headcount, salary adjustments, and increased benefits costs. Additionally, we accounted for increased amortization of software development costs associated with our launch products as we continue to invest in our business to fuel long-term growth. In 2023, the diluted loss per share was 27 cents compared to the diluted earnings per share of 1 cent in 2022. Both years saw the adoption of Section 174 of the Tax Cuts and Jobs Act of 2017 which requires the company to capitalize and amortize R&D expenditures. The adjusted EBITDA for 2023 was negative $1 million, a significant decrease from the positive $1.3 million in 2022. Our Q4 revenue decreased 15% to $4.4 million, compared to $5.2 million in prior year's quarter, but it increased 37% sequentially compared to $3.7 million in Q3 2023. Q4 growth margin was 52.8% compared to 49.3% in the prior year's quarter and 44.2% in the preceding quarter. Q4 operating expenses were $2.8 million, increased 3.6%, over the prior year's quarter, but decreased 0.7% sequentially over the preceding quarter. In Q4, we recorded an operating loss of $475,000, compared to $152,000 loss a year ago, and the 1.4 million loss in the preceding quarter. Q4 adjusted EBITDA was $52,000 versus the $335,000 loss a year ago and a loss of $866,000 in Q3. Q4 diluted earnings per share were 11 cents compared to 6 cents in Q4 2022. Both quarters' results included income tax benefits related to the adoption of Section 174 of the Tax Cuts and Jobs Act of 2017. Turning to our balance sheet. We concluded the year with a cash balance of $2.8 million. During 2023, we invested $2.1 million in capital expenditure and raised $1.6 million by issuing subordinated convertible notes. As of December 31, 2023, our inventory level net of reserve was at $5.4 million compared to $5.6 million a year ago. This wraps up our prepared remarks. Now I will hand the call over to the operator for questions.

Thank you. Jen? At this time, we will conduct the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad now. you will be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you have a question, please press star one on your phone now. And our first question will come from BJ Cook with Singular Research.

Hey, guys. Thanks for taking my questions here. You mentioned in the press release that you're going to aim to align your reported sales more closely with underlying demand. Is this issue kind of like break down to a accounting revenue recognition or you guys have a different plan going forward with that?

No, this is just to balance the inventory and the channel. We recognize revenue based on sales into distribution. We also measure sales out of distribution. We aim to have distribution to be a buffer, but a reasonably stable buffer in terms of the amount of inventory. I think as we pointed out during 2022, that buffer got much larger as people were concerned about the supply and reached $4 million. It reduced to $2 million by the end of 2023, which is why our sales out were $2 million higher than our sales in in 2023. It's something we manage and we will try and keep it as level as we can going forward. But we follow the gap reporting and nothing in the reporting will change. It'll always be based on sales in because that's our legal requirement.

Okay, thanks very much. Just one more. Given the sequential revenue growth, you mentioned inventory channels are down. Are you guys seeing that at the more normal level going forward, or is there further adjustments?

I think the reduced level is much more normal. Generally, through the pandemic, people were very concerned about supply, whether it be at home or in work, and added to their buffers, right? I think that as supply issues have resolved, people have burnt off that excess inventory, and the situation is now more normal, and we expect it to remain kind of in a much narrower range going forward.

That's fantastic. Thanks. I appreciate it, guys.

Okay. Once again, if you would like to ask a question, please signal by pressing star 1 at this time. And we'll move next to Steve Swanson, private investor.

Good afternoon. Kevin, back on that comment we were just making on aligning reported sales more closely with the underlying demand. Is the sales into the distributors a push from your company or is it a pull from the distributors?

It's a pull from the distributors.

So you're just going to be discussing, you're just going to be talking to them more frequently before they pull you and do what they did before, which is pull way too much because of COVID and then push it back once COVID was over and they didn't really need all that. Is that right?

Yes. I think there's a next one.

Yeah. you'll be chatting with them more frequently so that you're going to ask them a couple of times whether they're sure they want the product before you send it, I guess. Is that kind of what we're thinking of?

Correct. And when we see anomalies between what they're pulling in and what they're selling out, we will ask the harder questions, do you really need it in this timeframe? Okay.

That helps me a lot. So we're not changing revenue recognition, and it's not a push to the distributor. It's a pull from the distributor, but you're going to be monitoring that a bit more closely so that we don't get out of whack like we did.

Exactly.

Okay. The next question I got has to do with R&D and sales and marketing. Sales and marketing year over year was up about $500,000 in total in I'm sorry, that was research and development was up about half a million dollars. And the sales and marketing was up about 400,000. And on a percentage basis relative to revenue, they were up extremely high because the revenue for 2023 was lower than it was in 2022. I guess the questions I got are, are we going to continue with R&D spend at the same level overall that we've had in the last two years, about four and a half to five million dollars? And same for sales and marketing, or else are we going to trim those back as we see what the sales are during the year?

The current plan is we will hold those at that level. We've invested a lot of money into getting the Capture SDK updated to include the camera-based scanning and the enhanced camera-based scanning. And we've beefed up our SDK team to make that happen. And likewise, on the marketing side, We've added more resources to make sure that the web, which is our primary interface to the outside world, is more robust and more complete in terms of educating our partners, et cetera. So I think the levels we're currently at are more in line with what we want to have going forward. Obviously, with software, It's all front-end loaded. You really need to kind of completely bake the cake before you can sell it. And we've done most of the heavy lifting on that over the last two years. And obviously it looks a little bit heavy, but I assure you that people have worked extremely hard and we've a very small but dedicated team. And these are moving us into new areas where we feel there is a lot of long-term revenue. But we needed to make that investment now if we want to have a chance of being participants in this market going forward.

And we have a follow-up from Steve Swanson. Please go ahead, sir.

Thanks, Kevin. I guess one last one for you. Cash flow. We dropped cash total from year end 2022 from 3.6 to 2.8 million. How are we thinking about cash flow going forward with the losses we've had? Are we going to need to raise some more cash in 2024? Do we feel comfortable with the level of cash we have on hand?

I wouldn't say we feel comfortable with the level of cash we have on hand because it's low. We have no plans to raise cash. We feel cash will start to correct itself as we get into the second half of the year, and we'll monitor this closely. As you correctly point out, we don't have a lot of cash, but we can manage it and have a history of managing it very well. So it's a little bit tight, but now it's going to come.

Okay, thanks. That's it for me.

All right. Thanks, Steve.

Once again, if you would like to ask a question, please signal by pressing star 1 at this time. And it appears there are no further questions. Mr. Mills, I'd like to turn the conference back to you for any additional or closing remarks.

Thank you, Operator. So I'd just like to thank everyone for participating in today's call and wish you all a good afternoon.

Goodbye. This does conclude today's conference call. Thank you for attending. The host has ended this call. Goodbye.