Socket Mobile, Inc.

Welcome to SAC and Mobile Inc's Q1 2024 earnings call. My name is Paul 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 market 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 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 sockets 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 sockets 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. On this 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, sir.

Thank you, Paul. Good afternoon, everyone, and thank you for joining us today. Our Q1 revenue was $5 million, a 15% increase compared to $4.3 million from Q1 2023. We had an operating loss of half a million dollars in Q1, an improvement compared to the $1 million operating loss we reported in Q1 2023. In Q1 2024, we were EBITDA positive. Overall, Q1 was in line with our expectations, and we were pleased with our operational performance during the quarter as we maintained our focus on promoting and demonstrating our newer products. Most of these newer products were launched in late 2023 and early 2024, and initial deliveries were made in Q1. As you know, after we make initial deliveries, our products are then subjected to a series of end user evaluations before a deployment decision is reached. Initial feedback has been positive. and we expect to see the first deployments in the second half of the year and expect these deployments to make a meaningful contribution to our revenue. I would now like to turn the call over to Dave Holmes, who will provide a more detailed update on our progress. Dave.

Thank you, Kevin, and good afternoon, everyone. As Kevin said, today I'd like to talk about the progress we are making with our newer products and strategic initiatives. and highlight a few of the significant milestones that we achieved in Q1. Our investments in innovation are helping transform Socket Mobile into a more comprehensive data capture company. We've made significant progress in promoting our camera-based scanning technology. Our early adopter app partners have integrated Socket Cam into their platforms, enabling their customers to scan barcodes directly into their apps using the mobile device camera. Now that we have fully released the pro version of Socket Cam, on all development platforms, we are advocating for the adoption of the advanced SocketCam C860. The free and subscription versions of SocketCam enable our app partners to serve all of their diverse end users needs, from the most cost conscious with our free SocketCam C820 to a more feature rich data capture requirements with our subscription based SocketCam C860. And the most intense users can still use use our array of handheld hardware scanners. All of these are made available to our AppPartners ecosystem with a simple, single, free integration of our Capture SDK. As adoption builds and end users upgrade to our SocketCam C860, this will generate recurring revenue streams for us each month. We also see traction with our XtremeScan military-grade industrial scanners. as well as our Durascan wearable products. These products were built for the industrial barcode scanning market, facilitating the use of iPhones and iOS applications in rugged work environments. These product families represent a significant milestone in our commitment to delivering high-quality data capture solutions for our customers in industrial, manufacturing, warehousing, energy, and airports. Extreme Scan is designed to enable iPhones to withstand harsh industrial conditions and offer robust scanning capabilities with the ultimate durability. It opens the door into new customer segments in the massive ruggedized computing space that demand the ultimate performance in the most difficult environments. In Q1, our initial customers were putting these products through rigorous testing, and reports back have been extremely encouraging. We've passed some of the most intense testing with flying colors, and expect to move into deployments which will begin to contribute to our revenue in Q3 and beyond. Our new Xtreme products will extend our reach and diversify our customer base. SocketCam will provide SocketMobile with a recurring revenue stream each month. And ultimately, these initiatives will make us a more diversified, sustainable, and less dependent on retail. We're becoming a more complete hardware and software data capture company. And with that, I'll turn it over to Lynn for more details on our financial results. Lynn?

Thank you, Dave, and thank you, everyone, for joining today's call. During Q1, our revenue increased by 15% to $5 million from $4.3 million in the prior year's quarter, and it also increased by 13% sequentially from $4.4 million for the preceding quarter. Alongside the growth in our run rate business, we also observed an increase in deployment business. In Q1, our growth margin reached 50.3%, up from 48.1% in the prior year's quarter, but down from 52.8% in the preceding quarter. The increase was primarily due to the allocation of manufacturing overhead costs across higher production volumes. While the decrease was attributed to fewer direct sales from our socket store compared to Q4 2023, which yielded a higher gross margin. Operating expenses for Q1 totaled $3 million, unchanged from prior year's quarter, but increased from $2.8 million in the preceding quarter. Our annual financial audit expenses typically occur in the first half of the year. During Q1, we recorded a net loss of $72,000, or 7 cents per share, compared to a net loss of $993,000, or 12 cents per share, in Q1 2023. Q1 EBITDA is $40,000, an improvement from the negative $459,000 in Q1 2023. Total non-cash expenses, including depreciation, amortization, and equity expenses, are $525,000 in Q1 2024. Our cash balance at the end of Q1 was similar to the balance on December 31, 2023 at around $2.8 million. We have maintained our inventory at a similar level at the end of the year at $5.4 million. Our board has approved extending the maturity date of the secured subordinated convertible note initially issued in 2020 from August 30, 2024 to August 30, 2025. Our annual shareholder meeting will take place on May 15, 2024 in a virtual format. We encourage all eligible shareholders to cast their votes and participate in the meeting. This wraps up our prepared remarks. Now I will hand the call over to the operator for questions. Paul.

Thank you. If you would like to ask a question, please press star one on your telephone keypad now. You'll 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 comes from William Carroll, a private investor. Your line is open.

Yeah, thank you. Okay, so I'm just trying to understand the business.

Sorry, you just wanted to understand?

I want to understand these new products. How does that displace previous revenue? So I'm trying to get what's the revenue. So with these new products, how does that help grow your business?

All right, so none of the new products or the newer products displace any of our current business. So our current business is primarily we provide scanning solutions to iPad-based retail point-of-sale systems, and you'll see a lot of our scanners in higher-end specialty retail stores using Shopify, Square, etc., What we have done over the last two years is using the same technology to expand into newer markets by A, supporting people who want to use the camera-based scanning, which we believe will primarily be in the commercial services area, and making the products more ruggedized and suitable for the industrial market. So, The newer products are complementary to the existing products, and we don't see a lot of cannibalization or downside. It's more an expansion of the capabilities into parallel markets.

Okay. Another question is, your market cap right now is about $8 million. What are your projected 12-month revenue?

We don't provide forecasts because small differences in whether you receive an order or not change it greatly. As you know, last year we did around $19 million, and we would expect to be north of $20 million this year. So that's the current plan.

Does the board of directors already share a repurchase program in place right now?

There is no repurchase plan in place right now. We did have one in 2021, 22. Our cash position isn't strong enough to have a repurchase plan. So at the moment, there is not.

And then if for some reason you need to raise more cash, would you do debt or would you do equity offers?

We have available bank lines that we're currently not using. So as the business grows, we believe we can self-fund or fund with debt or short-term debt. We have a $2.5 million revolving credit line. that we currently don't use. So we feel we have enough avenues to continue to grow without any more equity.

Are you able to share any possible quarter in the future where your cash flow even?

Well, we were cash positive. We were EBITDA positive in Q1. we would expect to basically stay around that level in Q2, and then we would expect in the second half of the year to move towards profitable operating levels, which would generate something in the region of $700 million of cash each quarter.

Okay, very good. Thanks for answering my question. Thank you.

You're very welcome. Our next question comes from Richard Grulich of RUG Capital Advisors. Your line is open.

Thank you for taking my question. What was the percent of revenue derived from the online store in Q1?

Approximately, in the U.S., approximately, I would say 17%, one-seventh.

OK, thank you. I'm still learning about the company. So this is kind of a basic question. Where do you provide the added value? Is it in the actual physical scanning device, or is the scanning capability inherent in that device?

No, where we provide the core value, if you if you boil us down to our essence, if you will, what we do better than anyone else is we capture data in the physical world and transport it to the application world, right? So we provide a lot of software that allows an app developer to, I would say, have automated data collection without caring a great deal about it. So from an application development point of view, They just get the data delivered and we look after all of the software required to get it through the various layers that you have to do. We talk to the physical device and then our scanner actually then collects the data. So really focus on data capture from the physical to the application layer. So somebody like Square or Shopify don't have to worry about pairing the scanner. They don't have to worry about formatting the data or any of those things. They just get a delivery service that basically the end result arrives at their doorstep, if you will, and they're able to focus on using the data. So we collect our revenue because we deliver a physical scanner but most of our value add is actually on the software side.

Okay. So when you provide with some of your newer camera scan products, how do you earn revenue from that? If you're providing this free to the app developer?

Yeah, what we've found over the years of selling hardware scanners is many of our app developer partners and their end users try out free camera scanning first. And when they try that out, oftentimes there's a fairly large percentage of them that find out that the capabilities in the free camera scanning aren't good enough for at least some percentage of their end users' needs. Those end users end up upgrading to an enhanced camera scanner, which provides more in-depth data decoding, or they end up buying a hardware scanner. That's where most of our customers have come to us ultimately to buy our hardware. And so the way that we would make money in this is inserting ourselves further up the value chain. So we provide the free scanners, and we're willing to provide those for free because we know that there's going to be some percentage of those that need to upgrade to the subscription-based version And then ultimately some of those customers will upgrade to a hardware scanner. So we make money when people do those upgrades to either the subscription based or to a hardware scanner.

And the process by which you bill invoice or however you want to call it with the subscription upgrade, is that directly to socket or how does that work?

Yeah, it's, it's, We use the mechanisms that are already in place in the market, which are basically through the app stores, the App Store and the Play Store. But the revenue does come directly to Socket.

OK. And that's very small, I'm assuming, right now. Is there any time frame in which you might think it could become at least moderately significant?

Yeah, we're just getting started with it now. We are seeing pretty positive signs. and we expect it to start contributing to our revenue in the second half of this year.

Okay. Expanding into the industrial world, how are you making the market participants there aware of what you're doing and offering?

Yeah, so we're spending a lot of time marketing directly to the customer segments that we're going after in the target market that, that we mentioned during the call. Um, so those are market segments that we traditionally haven't dealt with in the past. So we're, we're having to do a lot of new marketing efforts to reach those new audiences. Um, and, and, and we're essentially trying to try to communicate with them in the, in the pools where they play today. Um, and so we're making, we're making ourselves, um, you know, We're making ourselves known in those industries. They might know us as more of a retail player today, but we're making it known that we're now entering this industrial segment. And we have some exciting new products to show. And we've been out showcasing them with a lot of marquee customers.

So these are individual end user customers, companies. So you're not really, but you're distributing through distributors, are you not?

We have channel partners and we sell direct as well through our socket stores.

So the people you're actually marketing to, are these fairly large companies or large opportunities for you as opposed to just one or two little orders?

Yeah, that's correct. I mean, a lot of the folks that use these types of devices are large enterprise customers and But I would say, you know, there's everywhere from tier one all the way down to tier four, five, and six that we're addressing with these things.

Maybe I could add, maybe I could just add, one of the things that we see happening is that people are more willing to use apps on smartphones than they were in the past. And we're particularly strong if you're using an app and you need data capture. Most of our business comes from the lower, small, medium businesses because they were the first to embrace iPads and we'll say iPhones for business because in many ways they didn't have a choice. Now that it's been successful with the smaller companies, the larger companies are saying, well, what about us? And again, we understand it'll take time, but we have the data capture accessories that they need so they could use an application on an iPad or iPhone and have the same type of experience they would get with the more ruggedized dedicated device from Zebra or Honeywell at a lower price and also avoid the training that's associated with those more dedicated devices. So that's kind of what we're seeing and we're servicing. Obviously, before anyone can make that decision to go with the iPad, they need to test this and they need to know it's robust enough. And those are the things we've been making sure are in place so those trials will be successful.

I would think that going and expanding into the industrial market, it'd be tempting to spend a lot more on sales and marketing then. But how do you draw the line between in the fact you're unprofitable now, controlling costs while you continue to try to expand your sales and marketing in that area?

So our business model doesn't require sales in a traditional sense. We provide an SDK. and we work with the application provider. And the application provider, by integrating our SDK, enables all of the users of that application to try and use our products. If we don't have the SDK in the application, it's a zero. If we do, then they basically get a choice. And that really is what happened with Shopify, Square, Lightspeed, et cetera, is that Square integrated our devices, our SDK into their application, and then every Square end user, if they buy our product, it automatically works because it's already enabled, if you will. So the business model hasn't changed. It takes a little bit longer But at the end of the day, we are an accessory to the application. People don't buy our scanners. They buy Square and decide they need a scanner. And ours is the one that works. This is the same as true with Shopify. We're following the same, I would say, methodology. It'll take a little bit of time, but we are seeing interest from app providers to integrate our... to integrate our SDK because they're getting pressure from their end users to be allowed to use off-the-shelf iPhones and iPads. But we won't have a lot of traditional marketing or traditional sales expense. As you can see, we control our expenses quite tightly. We will spend a little bit more money on our SDK development and our marketing development but we feel there's a lot of leverage in that spent.

So just so I understand, so Square incorporated your capabilities, and do they do that with other people as well or no?

In the case of Square, you have two choices. If you want a cordless scanner, we are the only choice on Square iOS. If you want a... You can have a wired scanner, right? In the case of Shopify, we are the only scanner that Shopify support. So if you're using Shopify and you want to scan, then basically you'll end up with a socket scanner.

And forgive me, again, I'm new to the company, just trying to understand. So the fact that you're basically the only, provider of that service, for example, those two companies. And again, then you earn revenues based on people buying your accessory device, in a sense? Correct. Okay. So Square doesn't pay you anything?

No, actually, Square actually is a reseller for us. So if you go to the Square website, you can buy the Socket Mobile scanner direct from Square. If you go to the Shopify website, you can buy. And they buy... through distribution, right? And then some customers decide to buy directly from us or from Amazon or some other mechanism. But the key to all of this is that when the scanner arrives, regardless of the avenue you use to purchase it, when you take it out of the box, it works for a shopkeeper who has little interest in technology and they're off and running. And most of these people have no IT support. So it needs to be pretty user-friendly, robust, bulletproof. And we've achieved all of that in the retail space. And now what we're trying to do is expand that into other areas. Particularly, we would describe commercial services where people are asset tracking or doing kind of remote work, whether it be in nursing or things like fumigation delivery services, those type of areas, where they can use the barcode to augment and improve their process. A lot of them start with the camera-based scanning. And to the earlier question, we believe that you know, the free camera-based scanning covers 80% of the requirement. We're willing to provide the free camera-based scanning to the 80% to have a good position on the remaining 20%. And it becomes a very simple upgrade process, whether it is to an enhanced camera or a physical scanner at the end user level. And the application guide doesn't need to get involved because their business model is about selling subscriptions.

So. What is the monthly subscription fees for the upgrade then?

$5.99 a month.

That's a pretty hefty fee. I mean, for somebody who, unless somebody's actually using it in a fairly robust manner. Yeah. Okay.

Well, think of it this way. I don't know if you've ever tried to use a free camera-based scanner, but even if you go to a restaurant, there will be a day when, because of the light and the clouds and the shadow, you're sitting there trying to read the menu and your phone won't do it. And it takes an extra 30 seconds. Well, if you're doing hundreds of scans a month and 10% take an extra 30 seconds, you Basically, it's a no-brainer to upgrade because it saves you time. And again, you have to remember, we've been servicing the people who have given up with camera-based scanning. It's not like we believe anyone is using our physical scanners that hasn't already given up on the camera-based scanning. And whereas the subscription is $6 a month, to buy a physical scanner is $200 a month. So we sell 100,000 scanners to people who essentially have given up on camera-based scanning because it doesn't meet their needs. And we're trying to have an interim step that gives them the ability to have a better camera-based scanning, and they also will have the opportunity to have a physical scanner depending on their needs. Right?

So... Maybe I misunderstood you. When you said $5.99, that's $5.99 a month or $5.99? Oh, yes. Sorry. No, no, no. Okay. Well, that's why I said what I did.

We said $5.99. I thought, wow, $600 a month is a lot. No, no, no, no, $5.99.

If you can find us customers, then that will take them.

Thank you. And I appreciate you bearing with me. I just have two more questions. So your deferred tax asset on your balance sheet, you've taken no reserves against that. And yet you've been unprofitable for the last year to two.

Actually, at the end of the year, we had a professional who did the analysis of our position, of course, based on the management forecast for their in the next five years, et cetera. And then our auditors have reviewed their analysis, and then, you know, all three sides basically concurred that we currently don't need any reserve for the deferred tax assets.

Okay.

Well, thank you very much. I appreciate it. Yeah, just a quick comment. We take that practice, you know, on an ongoing basis as needed, as well as annually, you know, we'll do the analysis.

Thank you for taking my many questions. I appreciate it.

Sure, you're welcome. Thank you.

As a reminder, if you do have a question, please press star 1 on your phone now. And we have a question from William Carroll, a private investor. Your line is open.

Yeah, so explain a little bit about, so as you're getting into the industrial markets, what would that type of customer look like? Would that be a Graybar, Chexpro, or Rexel? Or what would be your path to market for industrial? Is it distribution, or do you have manufacturers, reps selling the product? How does that work?

In the case of the industrial market, where we're primarily targeting Apple premium resellers. So that would be where we think it would go. In most of the solutions we're proposing, we are a scanning element that works very well with an iPad, iPhone-based solution. And therefore, those customers would already have a preferred Apple reseller. And that Apple reseller, we would hope, would also sell our products to those customers.

Okay, that answers the question. Thank you.

And seeing no more questions, I'll turn the call back over to our moderators.

Okay, if we have no more questions, Then we'd just like to thank everyone for participating in today's call and wish you all a good afternoon. Goodbye.

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

Thank you, Paul. The host has ended this call. Goodbye.