Welcome to the Socket Mobile Q3 2021 Management Conference Call. Today we have Kevin Mills, President and CEO; and Lynn Zhao, CFO. My name is Adrian, 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 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 manufacture of Socket 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, and 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 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 forward-looking statements. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note this conference is being recorded. I will now turn the call over to Kevin Mills, President and CEO.

Kevin Mills, you may begin..

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. Our third quarter revenue was $6.3 million, an increase of 54% compared to the $4.1 million for the same period in 2020. The growth was driven by the deployment of business applications in the retail industry.

Operating income for the third quarter of 2021 was $954,000 compared to an operating loss of $4 million in the prior year. Lynn will provide a more detailed breakdown of our results in a few minutes. In Q3, our revenue was driven by our retail centric customers led by Shopify.

Our retail centric business continues to benefit from both the reopening of the economy and the ongoing retail changes that require customers to be serviced in a more mobile friendly way. We also benefited from the deployment of an assisted selling app in Q3.

The solid retail demand we saw in Q3 continues as we enter Q4, so we expect it to taper as we enter the second half of Q4 as is traditional for retail centric businesses. Sales to the Commercial Services Application segment were more robust in Q3, and we expect to see further increases in Q4.

We believe the gains in this segment will offset the traditional Q4 retail seasonal slowdowns and allow us to deliver another solid revenue performance in Q4. On the supply situation, it is a very challenging environment and we continue to navigate industry-wide electronic component shortages and delay.

However, we took various strategic actions to increase our inventory in 2020 and throughout the past nine months, so we would be able to continue to supply to our application partners under many consumers. We remain focused on navigating the many delivery and supply issues. So we can continue to support our customers in 2022.

We anticipate the component shortages, lengthening lead times and inflationary costs will persist well into 2022. We need to invest in our NFC centric products which we expect to be a significant revenue driver in 2022 and beyond.

Apple continues to increase the emerging market for NFC readers as they expand the mobile wallets capabilities and functionalities. In iOS 15, Apple made it possible to carry digital identification, such as a mobile driver's license, as a mobile pass in your digital wallets, making it possible to integrate this functionality into many applications.

As outlined in our recent press release, we also see new opportunities in the Emerging Secure Supply Chain segment, which is possible by combining NFC and blockchain technologies. We believe that our S550 and D600 NFC products are ideal for these emerging markets.

So in summary, Q3 was another very good quarter and we expect to maintain our momentum into Q4 even though it's a seasonally weak quarter for us. And we look forward to further growth in 2022. With that said, I'd now like to turn the call over to Lynn Zhao, our CFO.

Lynn?.

Thanks, Kevin. Good afternoon, everyone. I'm pleased to be with you today to share our Q3 results, another quarter in which we delivered a strong financial and operating performance. The nine months of revenue was a $17.1 million, representing a 55% increase from the same period last year.

The revenue growth rate between nine months of 2019 and 2021 was a 17%. In Q3, we experienced the component costs and the freight increases, which reduced our gross margin slightly by 1%, compared with the both prior year and last quarter.

Although we currently are navigating the challenges while through supplier diversification and inventory management, the ongoing industry-wide electronic component shortages could result in future supply disruptions and higher production costs.

Our Q3 operating expenses increased to 35% compared with the prior year quarter is executing the non-cash goodwill impairment charge of $4.4 million in Q3, 2020 and the increase of 1% compared with last quarter.

The increase compared to the prior year reflects the cost associated with a higher headcount, investment in technology, consulting in the external professional services, and the increased compensation related to improve the company performance.

Moving to our capital position, we ended the quarter with a cash balance of $5.4 million compared with $2.1 million at the end of 2020.

Even with an increase in strategic investments in our inventory position, as well as an increase in receivables due to strong sales growth, our cash flow from operations increased in the third quarter, thanks to the increase in net profit. Our balance sheet has further strengthened with a current ratio of 3.54 as of September 30.

Through the first nine-month of the year, we've been very happy with our performance. The strong demand for our products is a testament to the underlying strength of our business, and our application driven business model, which we believe will drive long-term profitable growth. With that, I will turn things back to the operator for your questions.

Operator?.

Thank you. [Operator Instructions] And our first question comes to Frank [indiscernible] from Prudential. Your line is open..

Hello, I'm really hard hearing but I have it on speakerphone.

Can you guys hear me okay?.

Yes, we are good, Frank yes..

Okay. I have been investing in your company for well over 2,5 years and it is very, very nerve wrenching when one can see one minute you get a close all of a sudden stock is $30, next minute or hour later it's $3, $4 again, what is the problem.

Today over 1 million shares traded up to $9 something down to $7 something and now, I think that the street basically does not understand or your PR firm is not doing its job to get the word out. I think you have fantastic products. I think your growth factor for the size of your company is really great.

I've worked for [indiscernible] for five years [indiscernible] another one I had my own brokerage firm, and so forth and so on. I have not seen anything as good as this as far as your PR from the company, but it seems like it's all forgone steadies.

And is there any reason why [technical difficulty] this is horrible? Thank you, I am sorry to bother you..

Yes okay. So I can give you some color on why this is possibly happening, but this is just a theory. And so far as we - when we do our shareholder mailing, we do notice that we have a pretty large audience in what would be the Robin Hood or day trading, application driven trading situation.

And it has become exceedingly easy for people to buy and sell stocks and to let it run on emotions. I think from our point of view, we focus on the fundamentals of the business. And we don't really control stock price. And I don't think we should spend a lot of energy trying to do that.

We continue to tell our story to institutional investors and others. And I think the story continues to get better. But I think the biggest issue in today is that there's high volatility because of the availability of day trading apps like Robin Hood and others, which make it exceedingly easy for people to trade small amounts of stock on emotion..

Well, okay, I agree with some of the reasoning behind Robin Hood. But I was in the security long before Robin Hood started playing their games with a multitude of stocks. I agree with a partial end of it but I don't agree with the other side. Because number one, there is not a large shortage, look I'm in the market 60 years.

I had my own BD broker dealership. I had 21 brokers come to me. I had traders, I mean I understand the day trading aspect of it, but what their analogy of trading is and investing with their shareholders, it's going to backfire at them, but it's hurting a lot of companies.

And I'm sure the SEC is going to take notice, but I do not think that the gyrations like one day all of sudden stock has been $5, the next day it doesn't see daylight for six months all at $3, $4 maybe that kind of trading can be halted because the SEC is taking some steps.

But I really don't think that the Robin Hood people are that effective in a company like this?.

Well again, I think there is many theories here, and we certainly don't have the answer. I think from our point of view, the main thing we're focused on is to build the long-term value of the company, which I think we continue to do. And I think that for the long-term shareholder, we still represent a good opportunity..

Well, I have nothing but long-term shareholders. When I was on the bench, I had 600 shareholders and when I left the bench, a few of them followed me. I have picked some very good companies with growth, probably not as good as yours.

And my long term investors are just discouraged because they would love to add more to their positions, but they're afraid because every time - they buy on good news it, like I say it falls on deaf ears..

It's okay, okay..

I don't want to bother with my input, but I just want to make mention that maybe if it is the Robin Hood people and they should be investigated once again because I know they've damaged quite a few stocks, you know, Game Share $500 down to $10 it's ridiculous. So I thank you again..

All right..

Please don't follow my question, there's other people that want to talk in. Thank you..

Thank you..

And our next question comes from Chris Sakai from Singular Research. Your line is open..

Hi Kevin. Particularly it might be hard to hear I'm in the car. But I just had a question I guess on your headcount, you mentioned there's an increase in your headcount.

Where does that currently stand and what's going to backing up like in 2022?.

Okay. So I think we have increased our engineering headcount, primarily under marketing headcount. We feel we're a little understaffed in key areas and we're addressing that. I don't think it substantially changes the model unless we need to add a few more people. But it's not directly tied to revenue growth in the short-term, it's more long-term..

Okay..

We have to cover more platforms and stuff like this. So from a model point of view I think the model you have is still pretty good..

Okay, all right, great.

And then how is, is your inventory management growing you see a lot, are you seeing a lot of extra costs in your supply chain because of the disruptions? And are you passing that along to your customer?.

We are seeing increased costs in our supply chain, primarily on the costs associated with growth. We have made that decision not to pass it on in the short-term and we believe if it's reasonable, we won't pass it on because it will be very disruptive to our business model. So as I said, we took action starting in November - October/November of 2020.

So we increased our inventory. So we're not in a panic situation and we are able to deal with some delays in the markets, and not have to change everything from sea freight to air freight, which is terribly expensive. So it's a very difficult environment right now, we continue to work on those on daily basis.

But at the moment, the cost increases probably cost us 1% of gross margin. And it's not worth disrupting what we have going for that small margin in fact..

Okay. And then, I know you guys don't give any guidance, but you say quarter four is the worst quarter.

So how can you give us any color there as far as revenue growth goes?.

Well yes, I think revenue growth compared to 2020 will still be solid. The retail business basically you don't have any strong revenue in December and January. So those two months really are quite weak, but that's by design. People don't deploy new systems in December or January.

We would expect it may be should be slightly less than Q3, but not substantially. But I can't remember what we did last year, maybe 4.2. So I think that the growth over that could still be quite strong..

Okay..

Last year Q4 was 4.7, Kevin..

Okay 4.7. So it's still a strong growth over that..

Okay, all right, great. Well, thanks to the answer - question and answer..

Okay, very good and drive safely..

And our next question comes from Robert Maltbie with Singular Research. Your line is open..

Hello, Kevin and Lynn congratulations on the quarter..

Thank you very much..

I've got a comment, a comment to share with the first the caller and his frustrations which I 100% empathize with and also a question regarding the look ahead and some of the recent demand in the way of digital ID. So I entirely understand having been in the industry for over 30 years.

The one key effect is the point of distribution has gone from, let's say analog - brokers calling up their clients. And that takes time, and then they decide to immediate binary digital where an army of Reddit traders on Wall Street bet see the idea all at the same time, it can act in real time on it.

And so for a company with 7 million shares that can have quite an impact, it doesn't take a lot of capital. So I do want to mention that we recently picked up coverage on Socket media. And for the gentleman that called in if he'd like to visit us, we have a redacted version.

And this is what helps us is to try to understand the fundamental evaluation - in between these wild gyrations as kind of your anchor, your target, but for the gentleman and possibly any of his associates, if they want to visit us on Seeking Alpha for Singular Research Seeking Alpha, we can offer them a complimentary report, and we will have an update very soon on Socket media based on the recent quarter.

So I wanted to offer that out there if it's helpful.

The question I have is regarding, you mentioned our driver licenses in the digital wallet, is there a plan or and integration with [Wax IDs] in wallet 0.2 possibly?.

Yes I mean, so this is a very fast changing space. So Apple and Google for quite some time but Apple more recently have allowed people to carry digital wallets. They also have introduced the idea of a secure enclave for things like medical information on your phone. And that's the first step in the process.

Once you have your ID or vaccination status or any other secure information, verified secure information on your phone, then they can allow applications to use that information under certain conditions, including, you know verifying yourself with your fingerprint, your face print cetera. So this is a process that is taking some time.

And the digital wallet is the ideal place for this type of information to end up. And the world is pretty trained on using Apple Pay to tap to do a payment, you can use that same mechanism to tap for access or for identification or for health status, et cetera.

So it takes a while but I think we're part of this journey and as part of deploying it, you need readers. So there is a few elements you need, and more and more of them are coming into place. But ultimately the core elements have to be in place before someone of them can write an application to use all the capabilities.

And I think we're coming up on that point and we expect to be seeing these types of applications. I would say beginning, you know middle of 2022. So we've always been early in these markets. They take some time, but the time they take is actually getting shorter..

Terrific thank you very much..

Thanks, Robert..

And our next question comes from William Carroll from EMPOWER Sales. Your line is open..

Yes Kevin, congratulations on a good quarter. I'm an investor, shareholder long-term.

What revenue catalysts does the company have beyond 2022 in terms of maybe new products, anything you can share with us in that regard?.

Yes, so as I was just mentioning to previous caller Robert, we need to do the hardware that enables future applications. So we currently are doing a lot of work on NFC related products. And we have a growing developer community for these products.

So as those applications become available, they will drive the requirement for those readers and for reader writers. I know that it's not an instant ad sales overnight, but we continue to have more and more products. We've updated our products as well.

We recently introduced a version of our S740 that reads all barcodes, but also reads passports and other what's called MRZ machine readable zones on international licenses, et cetera.

And by doing this you open up the market for people to check using a scanner, somebody's ID, if they're in their port are using an international driving license or something like this. So we do actually believe that we have a lot of new hardware.

The other thing that we benefit from is that many of the applications continue to add more functionality, and therefore there's a greater audience for people who need the data capture elements. So because we don't have the complete solution, more the ingredient, it's not always easy to explain that in the short-term.

But there's plenty of new hardware coming that will drive sales in 2022 and beyond..

All right, very good. And then the first gentleman that commented, with some frustration about the stock price, I think the stock will take care of itself, as you guys continue to deliver. All right, so thank you..

Thank you very much..

[Operator Instructions] And we have Frank [indiscernible] from Prudential in the queue, one moment. Your line is open..

Okay. I'm sorry to jumped in again, I do have a question on your supply chain. Is or how much of your supply of your so called ingredients of your components are rate to China and or Taiwan because the CEO of Nucor was on CNBC today. And he is saying that 90% of U.S.

supply to get all qualified and to help to companies? How much of your components come from abroad meaning like China and can Vietnam and/or Japan take over part of that project?.

Okay, so it's a complicated question, I'll try and give you a reasonably simple answer. In terms of direct dealings with China or Taiwan, we currently have no direct dealings in terms of supply with either of those countries in terms of direct supply.

However, many of the components used by our subcontractors who are currently in Mexico or Malaysia get components from China, because that is the only place that's available. Whether it's good or bad, we didn't have enough volume to deal direct with many of the suppliers in China. And we've avoided China for the last number of years because of that.

So but there are many components at the lower level resistors, capacitors and other basic components that are only available through China. So I would say we don't have a huge exposure. But we do have an exposure. And I think the hardest part with the supply chain situations at the moment is that the shipping [Clickbait] doesn't work well.

And when you're shipping things like batteries, we were generally getting batteries 20 days after they shipped from China. Now those same batteries can be snuffing about for four to five months. And we've had that situation now because and this is the question that was asked previously.

We can make the decision to source those components or other places or and then pay additional freight costs to bring further so supply interruption. But today it's an everyday battle to make sure you have components and we're very confident that we have components through the beginning of 2022.

But we're working hard every day to make sure that - that's an ongoing situation. So there's no simple answer to your question Frank..

Well, I did see a segment on 60 minutes and I did see the shipping problem where these tankers are sitting out there for months and they just can't unload or upload or download or whatever they have to be. It's horrible and I empathize with you. Thank you for the answer..

You're very welcome, Frank..

And your next question comes from [Disney Karl]. Your line is open. This is the operator you queued up for question, I am - I just about to pick out the name on the recording. Your line is open. If you're mute, could you please unmute your phone.

Speakers, can you hear me?.

Yes, we can hear you..

Okay. [Operator Instructions] And we have nobody else in the queue right now..

All right okay. So I just like to thank everyone for participating in today's call. I wish you all a good afternoon. Thank you..

Thank you. Ladies and gentlemen this concludes today's conference call. Thank you for participating and you may now disconnect..