Welcome to the Q2 2020 Management Conference Call. My name is Daryl, and I will be your operator for today's call.

Before we begin, I'd like to remind everyone that this conference may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1993 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended.

Certain 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 manufacturing 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 any such forward-looking statements. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Kevin Mills. Kevin, you may begin..

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. Our Q2 revenue was $2.7 million, a decrease of 46% compared to the Q2 2019, which resulted in a loss of $768,000 for the quarter compared to a profit of $120,000 in Q2 2019. Our Q2 revenues were adversely impacted by the COVID-19 pandemic, which was anticipated.

Over 70% of our business is driven by retail-centric applications, a business segment which we predicted would see more than a 40% reduction in Q2. We are not surprised by these results.

While we continue to live in extremely unpredictable times and there is a high degree of uncertainty today, we would like to share what actions we are taking to ensure we both survive the current environment and are in a position to recover as the economic situation improves.

We believe our retail-related business will continue to be impacted, but that we will continue to capture a large share of the available sales. The business equivalent of racing under a caution flag will all hold our current positions, but we'll be doing so at 60 miles an hour instead of 200 miles an hour.

Therefore, our focus will be on increasing our revenue in the Transportation and Logistics segment for the rest of the year. We believe this market will be less impacted during these times as food deliveries and online shopping are activities that continue to be needed.

The transportation and logistics market for our type of products is significant and is estimated to be about $35 million annually by BDC in a recent report. Currently, we believe we have a 4% share and believe we can grow this share in the coming quarters.

Even though the underlying technology is the same, both the hardware configuration and software requirements in transportation and logistics are different than in retail. And we need to make the necessary adjustments in order to be a meaningful player in this market segment.

Our DuraSled for the XCover Pro, coupled with our family of Apple iPhone DuraSleds, enables us to deliver the single-handed DuraSled solutions these customers require. However, the hardware is just one element of the required solution. They also need the appropriate software components.

Unlike in the retail market, which is very application-centric, the transport and logistics market is very cloud-centric. Therefore, we need to fully support the cloud-centric interfaces used by this developer community. We have completed our development of Javascript, and our React Native will be completed shortly.

We also announced a new medical-grade scanner, the D-755, which was designed to meet the requirements of the medical market. We decided to make this product in late Q4 prior to the COVID-19 pandemic. While the market for Bluetooth scanning in health care is currently small in today's strange world, requirements can change quickly.

On the expense side, we have taken action to reduce our expenses, and we'll continue to minimize them going forward. While the situation is extremely challenging and there remains a great deal of uncertainty, we believe Socket Mobile is better suited than most to survive in today's new reality.

With that said, I'd now like to turn the call over to Lynn Zhao, Socket's CFO.

Lynn?.

Thank you, Kevin. Revenue for the second quarter of $2.7 million was down sequentially over the first quarter by 36% and over the same quarter a year ago by 46%. Net loss for Q2 was $768,000 compared to a net loss of $90,000 in the immediately preceding quarter and a net income of $120,000 in the second quarter of 2019.

Gross margins on revenue for the three and six-month period ended at June 30, 2020, was 50% and 52%, respectively, compared to gross margins on revenue of 52% for the corresponding period in 2019. Operating expenses for Q2 were $2.2 million, a decrease of 10% compared to the same quarter a year ago and an decrease of 6% sequentially from Q1.

Operating expenses for the six months were $4.5 million, a decrease of 6% compared to the same period a year ago. We continue monitoring our cash flow closely. In April, we received a loan proceeds of $1.06 million under the FDA Paycheck Protection Program.

The loan was the primary usage to cover payroll costs, rent and utility costs during the eight-week period from April 20 through June 12. The PPP loan enabled us to maintain our staffing levels. We believe we qualify for loan forgiveness and that more than 80% of the loan is likely to be forgiven.

The mechanism to apply for loan forgiveness was not available to us in Q2, and therefore, we included the entire loan amount as debt. We will apply for loan forgiveness once the application process is available, which is likely in Q3. Whatever amount is forgiven will be treated as other income in that period.

The remaining portion of the loan will carry a two-year maturity date at a fixed rate – fixed annual rate of 1%. We also received $150,000 economic injury disaster loan from the SBA in June. The annual interest rate is 3.7%, and the loan term can be extended for up to 30 years.

In addition to continuing to leverage our revolving bank credit facilities, we continue to use available government loan programs to meet our working capital needs. At the end of June, the balance of our cash was $29 million, and our total debt was $1.73 million, consisting of $530,000 bank debt and $1.2 million SBA loans.

Now I will turn the call over to the operator for your questions.

Daryl?.

[Operator Instructions] Mr. Hanbocken [ph], if you have a question, you can go ahead with your question..

I was just wondering, maybe to start, if you could give us an update as to how July has gone as a lot of states have reopened [indiscernible]..

Yes, I'd be happy to do that. Certainly, we saw April and May being extremely weak, and we've seen a marked improvement in the situation in June and July. So I think our revenue is very much tied to the level of openness of the economy. And yes, we were quite pleased with June. And we've been very pleased with July.

I think our concern remains – if the economy stays open, I think we'll hold and have a good Q3. But I think in the current environment, it's difficult to see us making it all the way through September without some type of lockdown based on the pandemic numbers we're seeing across the country..

Right. Yes. And just a question in terms of the transportation and logistics market. Is any of what you're addressing there related to like sort of the e-commerce last mile, which is fixed....

Yes, a lot of it is actually. A lot of it is. So I think that we have focused and we have a very strong market position in retail and in some of the commercial services-related activities. But our focus has been very much on people who are going to develop a full-blown application, and we provided all of the tools for those people.

A lot of people are essentially using the cloud and then using just a browser or some – what we call light PCell client software. Historically, we haven't provided the best solution for those types of customers.

And over the last 60 days, we both got better products to suit their requirements, but more importantly, we've got the software elements in place so that they can adopt our technology more easily. So yes, I think that's exactly the type of last mile as a good way to describe it as we will be involved..

Okay. And related to that, just give an update as to what your relationship is like with Shopify, which has sort of obviously experienced enormous growth. And they've been expanding their solutions as well. So has your relationship with them evolved? I know historically, you provided hardware for their POS server..

Yes. So we continue to fully support Shopify, and they continue to sell our Bluetooth scanner as the primary scanning solution. I think there's two elements to the Shopify business. There's the online element and the physical element. I think that many people rushed to get online when the pandemic struck.

And as a result, Shopify's online business has gone through the roof in terms of numbers. We don't necessarily benefit from that portion. We benefit from the physical portion when somebody has both an online shop and a physical store.

What we believe is licensed to happen is that as the economy opens up again, many people who are using Shopify for their online store will have to make a decision of whether they want to have one system that covers both online and physical stores and then upgrade their in-store solutions to the Shopify equivalent or Shopify portion, I should say, which we believe will be the case.

But I don't believe we have benefited from that. Yes, that will happen as the economy opens up. So I think that today, many people have essentially two systems. They have their in-store system, which they had for some time, and then now they have a Shopify online. And those people will have to either consolidate along two systems going forward.

We will guess many would consolidate, but we haven't really benefited from that yet, except to the point as the economy opens, those customers are opening. But the full force of it hasn't been realized yet. But we expect that to be a good source of revenue as the economy opens..

Okay.

One last one for me, just on the medical-grade scanner, what's going to be the price point for that? And how do you anticipate selling that? Is it through one of the distributor or wholesaler?.

Well, again, our model will be very application-driven. We have a number of application providers in the medical space, but we didn't have a good medical-grade scanner. They were using what we call just our standard scanners.

The medical community last – maybe 18 months ago authorized or decided on a medical-grade plastic that has a number of properties that the medical people want. And therefore, we had to redo the scanner in that make a great plastic and go through all the certifications. We started that late last year.

And obviously, the timing looks a bit fortuitous now. But our focus would be to enable application providers to use that device in conjunction with an application.

So from a business model point of view, that's identical, and obviously, as some of this will be also web-centric or cloud-centric so that the tools we're doing would be across both categories. The reason – if you look at how our market segments today, healthcare is much smaller than transportation and logistics.

And that's why our initial focus will be on getting more market share in the bigger section first, which we believe we can do. But we want to open up in health care.

And we think there's a lot of things that may change Q2, the current economic situation, the pandemic where there might be a lot of people using mobile devices, whether it is to take blood samples, do tests, give out vaccines over time, and having a product in that market space seems very prudent at this time..

Thanks..

And our next question comes from Alan Lyons [ph]. Go ahead, Alan..

Yes. Hi, Kevin. I had a question in reference to foreign sales versus U.S. in terms of the downturn.

Were they pretty much equal? Or is it worse overseas versus here?.

I would say that the – overall, they were pretty equal, but we did see some timing differences. Certainly, we saw the impact, I think, sooner in Europe than in the U.S. However, we are seeing more of a recovery in Europe than we are seeing in the U.S.

So I do think that as the economies open, we will see better numbers from those sections of the world? And The Europeans, I think, suffered in general sooner. Their lockdown was much more severe, but they have been much better able to reopen. Now at the moment, I think they're back in a cautious environment.

So I think it's still too early, but we can definitely see a high correlation between the level of economic activity in a region and our associated sales?.

Okay.

What about your developer count? Has that decreased since the end of March? Or are you holding your own there as far as developers?.

No. We are still doing quite well with the developers. So we continue to have a lot of apps going through the App Store. I think software is one of these areas where having people work remotely works well, and people do seem to get a lot more done. There's also a greater sense of urgency.

Obviously, we're not seeing as many retail-related sales activities. We are seeing more in areas like transportation, commercial services and health care. So again, I think people are trying to give themselves options to use mobile devices to solve some of these problems in different areas..

Okay. Have you extended or got additional renewal of your line of credit? Or is that – they're not on hold because what's....

No. No. So that was all renewed in January. So we signed, Lynn can correct me here, I believe, a two-year extension to our line of credits. It comes up every two years. We renewed that January as normal. So we have our line of credit in place, and we've also obviously added the various government programs to mature....

Yes.

How much was the line renewed for?.

$2.5 million..

Okay.

And what have you borrowed on that?.

Do you want to add to that, Lynn?.

Yes. We borrowed $450,000 at the end of June. And then we still have some drawing capacity on the line about another $800,000..

Okay. So based on your best visibility and if you don't get shut down again in the areas, you think the figure financially able to weather the storm between the government lending and line of credit.

Is that a fair statement?.

I think that's a fair statement, I guess so..

Okay.

Have you found any larger – you have last-mile businesses that have – in terms of them going under, has that affected you at all? Or is it just because they're closed up and they're just not buying?.

I mean we monitor our sales pretty closely on a weekly basis. I think what we're seeing is certainly – from our bigger customers, we are seeing the same customers just at lower volumes. The smaller customers are harder because they're not everyday customers. But I would say many of them have either stopped buying or buying much smaller quantities.

Whether they are out of business or not, we really can't tell at this stage..

All right.

Your larger sales through Ingram Micro still?.

Correct. And we are still selling well on Amazon and CDW and both type of platforms. So that all is happening, and we can see us. And obviously, we have data over long periods of time, so we can see that the percentages have fallen in most categories somewhat in line. It's not us.

And the other thing is we're very diverse in that we have somewhat 1,000 applications that have gone through the MFi process, all of which are adding to our numbers. So even if we lost a few, we're not highly dependent on one or two applications..

All right. Okay. Well, that’s all I have. Good luck and hope things start turning the right way again..

All right. Thank you very much, Al..

Our next question comes from Travis [ph]. We don’t have his last name. Travis, if you are online, you can ask your question..

I was basically just wanting to know more about the opportunities in health care and using this product as a way to track like at a distance more and if there's anything being done to open up some of those opportunities with COVID and et cetera?.

Yes. I think we are an enabling technology. Ultimately, for a hospital or for somebody who's doing track and trace, they need a piece of software that allows them to scan and bring that information associated with the patient record, et cetera.

We are seeing a move where people want to use more mobile devices, especially as there's a lot more work being done outside today than inside. And iPads and iPhones have long battery life, gives you a lot of computing power in your hand, particularly in an outdoor environment.

What we're adding is the ability to add, I would say, acceptable barcode, medical-grade barcoding scannings to those applications. And then we provide the tools to allow people to do that. But ultimately, the application is what people purchase and the application is what is deployed. Today, we do not have a lot of applications in the medical space.

We probably have 15 to 20 that have gone through the MFi process. By enabling them to use medical-grade scanners, we would expect to see more applications, which in turn will lead to more sales, but it's not a short process. Now the processes these days are compressed because there is a war going on, if you will.

So we're an enabler, and we will give you more color on that at the next call. But we've just started that process to make sure that they can have the tools they need to build these applications..

Very good. So basically, the – you have the product available, I read, in August, starting into August 12 or something..

Yes. 12th it is..

That's not – that's basically a new product that's available. And are there several competitors that have the same approved product? Or did you guys – you said last year you had – you kind of have a head start on a lot of folks. Or....

Yes. So, again our product will be Apple certified, which makes it – it's one of the few Apple-certified products.

I believe it's the only medical-grade Apple-certified product now, which means that for someone doing a medical application on an Apple device, they can add medically grade – medically approved or medically compliant barcode scanning to that application, which would be a requirement for the nursing or clinical staff that they would be selling to.

So yes, we believe that we, again, have done this early, we've enabled the markets, but we only enable – someone actually has to complete the application before sales are generated..

So you're currently the only one that Apple can utilize medical grade?.

Correct. Yes. We basically are – we believe we're the only people that are making a medical-grade scanner that's iOS certified in the market today. That is – we believe that is the case..

And that product has not been selling up to this day. It's about to come online in August. What....

Correct. But bear in mind that nobody writes software for hardware that doesn't exist. So you have to produce the hardware before someone will write the software. And we've produced the hardware, which makes it possible for people to produce the software using this.

And that process usually takes – I would say, under normal circumstances, it would take probably 12 months. In today's situation, as people scramble to get solutions in the market, maybe it's compressed to 90 days..

But if competitors started today to compete with you, how long would it take them to get it, I guess, certified medically?.

No. We don't know. But we can tell you, and that's one of the reasons we mentioned – we started this process in probably December of last year. So it took us essentially seven months to get the product in the market. So it's not a five-minute process. Maybe a competitor is better or worse.

So somewhere in the region of probably, let's say, five to nine months, if we say seven months plus and minus two months. So five to seven months, I think would be a reasonable estimate of how long it would take for a competitive product to be in the market.

I don't know if someone has been working on something like this and we tipped them to the post, but if they started now, I reckon five to seven – five to nine months..

Okay. Thank you very much..

[Operator Instructions] And we have no more questions at this time..

Thank you, operator. So I'd just like to thank everyone for participating in today's call. Wish you all a good afternoon, and hope everyone is staying safe. Thank you. Bye-bye..

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect..