David Dunlap – Chief Financial Officer Kevin Mills – President and Chief Executive Officer James Lopez – Vice President-Marketing, Sales, and Developer Programs.

Hello and welcome to the Second Quarter 2018 Management Conference Call. My name is Michelle, and I will be your operator for today’s conference. [Operator Instructions]. Please note that this conference is being recorded. I will now turn the call over to David Dunlap. Sir, you may begin..

Thank you, operator. Good afternoon everybody, and welcome to Socket Mobile’s conference call today to review financial results for its second quarter and six months ended June 30, 2018.

On the call today from Socket Mobile are Kevin Mills, President and CEO; James Lopez, Socket’s Vice President of Marketing, Sales and Developer Programs; and myself Dave Dunlap, Chief Financial Officer to answer your questions. Socket Mobile distributed its earnings release over the wire service earlier today.

The release has also been posted on Socket’s website at socketmobile.com. In addition, a replay of today’s call will be available shortly after the call’s completion through the company’s website socketmobile.com, and a transcript of this call will be posted on the Socket website within a few days.

Before we begin, I would 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, and including details on timing, distribution and market acceptance of products and statements predicting the trends of sales and market conditions and opportunities in the markets, in which Socket 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 risks that manufacture 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 at market acceptance and sales opportunities may not happen as anticipated; the risks 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 and 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. Now with that said, I’d like to turn the call over to Socket’s President and CEO, Kevin Mills.

Kevin?.

Thanks, Dave. Good afternoon, everyone, and thank you for joining us today. We reported Q2 revenue of $4.2 million, a 28% decrease from revenue in Q2 2017 for the 5% increase from our Q1 2018 revenue. Our lower revenue resulted in a loss for the quarter of $138,000 or $0.02 per share. Q2 was a difficult quarter.

We had several things that impacted us, but we’re also able to accomplish several things that will help us going forward. On the positive side, we shift our new SocketScan product family in late April.

As we highlighted in our last call, our inability to deliver our new and improved products was hurting our revenue due to people racing for the new and improved products to ship. Once we delivered those customers could evaluate, verify and purchase.

We are very happy to report the feedback on the new products has been extremely positive, and we are already seeing customers change. It will take time, but we are off to a good, it’s still late start. To meet our late April shipping days, we incurred several one type – one-time expediting charges.

These charges which totaled about $100,000 for the quarter negatively impacted our margins in the quarter, as these were one-time charges, we don’t expect them to impact our margins going forward. The other item, which negatively impacted our sales in Q2, was Amazon.

Due to a random, but routine compliance check, Amazon temporarily removed a listing of our best-selling products for four weeks during Q2. The products were set up many years ago before much of the currently required paperwork was requested or needed. Upon notification of our paperwork’s efficiency, we provided the required paperwork within 24 hours.

Despite the speedy response, the impact was we were off Amazon for a total of six weeks, four of them in Q2. I’m happy to report that today, all of our products are now in good shape in Amazon, and we don’t expect this issue to reoccur. However, it did impact the Q2 sales.

We also completed and announced some new products like the D760 and S860 scanners, which will read passports and other identification standards. These products are very important long-term. So, it brings some additional short-term benefits particularly in the Japanese market.

While our participation in the Japanese market has been relatively small, there are a number of significant changes scheduled for 2019 that will create a bigger opportunity for us in Japan. The first is that the Japanese government is scheduled to roll out a split sales tax system, where some items will be taxed at 5%, others at 8%.

This will require a point-of-sale systems to tax at the item level and significantly increase the use of scanning especially in small businesses. Secondly, the Japanese government is providing an incentive for small businesses to upgrade a point-of-sale systems prior to September 2019.

The incentive is that you can earn a rebase on up to 66% of the hardware costs associated with a change to a new online system. The final driving force is the Japanese government’s initiative to make tax free shopping ubiquitously available in retail stores for the 20 million visitors expected for the 2020 Olympics.

We are already working with a number of Apple-centric point-of-sale providers in Japan, who believe this is a significant opportunity. We have launched the D760 and S860 early, so that it required software can be written, tested and deployed in 2019. We believe these actions will positively impact our revenue in 2019.

In summary, Q2 was difficult, but we believe the primary item that was retarding our business, the lateness of shipping, the barcode scan series is now behind us. We have begun the process of transitioning our customers and that is going very well. It will take time, but we are making daily progress.

Longer-term, the new products are meeting or exceeding the expectations of our customers and brought a lot of confidence about our ability to participate in the emerging and growing mobile data capture market. We believe Q3 will be better and we are confident, we will be able to be profitable in Q3.

With that said, I would now like to turn the call over to James..

Thank you, Kevin. In Q2, Socket’s retail and enterprise market dynamics remain unchanged from what we detailed last quarter.

We continue to see steady demand coming from retail application partners and scanning penetration rates are consistently at 20% of mobile point-of-sale users, deeper applications of scanning that is inventory and loyalty remain largely untapped opportunities for barcode scanning, but must work their way through the priority resource and ultimately, development process of our application partners.

Enterprise mobile barcode scanning seen in the form of scanning deployment is still incubating as the industry continues to engineer their past forward between legacy built purchase solution and mobile Android, iOS and new Windows options.

We saw from early solutions and deployments early last year, but the challenge of maintaining business continuity was trying to upgrade infrastructure and systems to support new mobile platforms is taking time for most of the industry to solve.

In both cases, the investment and preparation we’ve done by releasing our new capture SCK, SocketScan and DuraScan products has this ready as these market factors are sorted out. Where we see growth starting to emerge and gain momentum are in commercial services applications for best control, utility monitoring, and safety equipment management.

These applications are behind steady quarter-over-quarter gains by our non-retail segments, pushing non-retail demand to 28% of our total units in the quarter. Non-retail segments consist of commercial services, industrial manufacturing, transportation, logistics along with healthcare.

These segments starting to grow for Socket with the introduction of our DuraScan series, IP54-rated scanners last year and have further gravitated in the last couple of quarters to our 800 series attachable scanners with and without our DuraCase lead options.

We’re also seeing growth opportunity in the marijuana point-of-sale industry, where barcode scanning is an integral part of maintaining state-by-state compliance.

Current application partner servicing this market in the U.S., so strong growth and new opportunities resulting from Canada’s legalization efforts look very promising, particularly among one of our larger partners Shopify.

Finally, all of our new SocketScan 700 series scanners S700, S730 and S740 were released in Q2 and feedback from resellers had been stellar. Our SocketScan series is our best yet and features improved price performance, redesign ergonomics, intuitive performance indicators, better serviceability and extended battery life.

We’re particularly proud of the new S740, which creates a new price point for a universal 2D scanner and has shown strong early orders.

Our application partner resellers that have designed in our Classic 7Ci, 7Mi and 7Qi scanners are all in the process of qualifying our SocketScan series and we expect many to begin order switching, customer support adjustments and marketing within the quarter. The process does take time, but it’s going very well.

And we’re already – and we’ve already seen one of our largest application partners begin to switch and two more signal their approval within just the last couple of days. Now, I’d like to hand things over to Dave..

Thank you, James. Revenue for the second quarter of $4.2 million, was up sequentially over the first quarter by 5.3% and the quarter’s barcode scanning revenue component was up sequentially 6.4%. Out total barcode scanning revenue has grown year-over-year for the past three years at a compounded annual growth rate of 15%.

We expect our revenue to resume its growth trend and for larger deployments to return as transitioning to our new SocketScan product line by our application partners, distribution channel partners, and users and suppliers, wraps up over the next several quarters.

In addition, our base of application partners continues to grow at a healthy pace and the mobile applications created by our application partners for use with smartphones and tablets, will benefit us as those applications are completed and released.

Our second quarter costs and expenses included several [Technical Difficulty] non-recurring costs affecting margins and operating expenses that will bring our recurring break-even revenue point in Q3 and Q4 to $4.2 million.

With the SocketScan products released, we are now able to moderate our recurring costs, improve our margins and hold staffing costs and operating expenses level in order to pass the benefits of future revenue growth through to the bottom line.

As product transitioning to our new SocketScan products continues, we expect orders to increase, margins to improve and operating costs to hold steady or to decline all benefiting the bottom line. During the second quarter, we’ve repaid $3 million of the $4 million dollar term loan with our bank from existing cash and credit resources.

The remaining term loan balance of $1 million will amortize over 24 months. Our revolving bank line of up to $2.5 million remains in place with $1.5 million outstanding as of June 30, 2018.

In the second quarter, we generated some $700,000 of free cash flow consisting of gas from operations, working capital fluctuations and investment in property and equipment, which we applied along with other cash on hand and our revolving credit line to pay down the term loan. Our cash balance at June 30, 2018, was $1.3 million.

Our financial goals remain to grow our revenue, manage our costs and to operate profitably. Now, let me turn the call back to the operator for your questions.

Operator?.

Thank you, sir. [Operator Instructions]. And so we have no questions in the queue..

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Okay. Well, we would just like to wish everyone – I would just like to thank everyone for participating in today’s call and wish everyone a good afternoon. Thank you..

Thank you, ladies and gentlemen. This concludes today’s teleconference. Thank you for participating. You may now disconnect..