Q3 2023 Socket Mobile Inc Earnings Call

Welcome to the socket Mobile Inc. Q3, 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 27, a of the Securities Act of 1933 as amended and section 21 E of the Securities and Exchange Act of 1934 as amended.

Such forward looking statements include but are not limited to <unk>.

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 manufacturer of sockets 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 and vertical application markets may not happen as anticipated as well as the other risks described in sockets. 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 the call with me today are Kevin Mills, Chief Executive Officer.

Dave Holmes, Chief business Officer, and Lynn Zhao Chief Financial Officer.

Now I'll turn the call over to Kevin Mills, Mr. Mills, you may begin.

Thank you very much operator, good afternoon, everyone and thank you for joining us today.

Our Q3 revenue was $3 2, million% to 14% decrease compared to the $3 7 million in Q3 2022.

In Q3, we had an operating loss of $1 4 million compared to an operating loss of 947000.

In Q3 2022.

Our Q2 revenues were much lower than expected primarily due to changes in our distributor partners inventory levels.

I'll begin by explaining how our sales delivery system works.

Socket mobile delivers most of its products to our end users via two tier distribution system.

We sell our products to our distribution partners, such as Ingram, which is the first year.

Our distribution partners sell our products to resellers like Amazon, which is the second tier.

The resellers deliver to end users.

Our Q3 revenues were significantly impacted because our distribution partners reduce their inventories.

In Q3.

Sure.

<unk> reduced our inventories by 50% by selling much more than they purchased.

The inventory reduction was driven by market uncertainties and higher interest rates.

And while it had a dramatic impact on our reported Q3 revenue. We believe it does not have a significant impact on the underlying demand for our products.

We believe that sales from distribution to resellers.

<unk> provide more accurate picture of the underlying demand in that business and this demand was significantly higher than the reported revenue and was in line with our expectations.

On the positive side in Q3, we did complete many of our longer term projects and we're able to launch.

Several significant 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 Q3.

Thanks, Kevin and good after.

Everyone.

As Kevin said today I would like to highlight the significant milestones that we achieved in Q3 can you talk a little bit about how our investments in innovation are helping transform mobile into a more comprehensive data capture company.

We launched several new products in Q3.

The extreme scan product line comprised of three different configurations scan exchange scan case extreme scan and extreme scan.

Our designs.

For iPhone and works with iPhone, 15, 14, 13 and 12.

This product family represents a significant milestone in our commitment to delivering high quality data capture solutions.

Customers in industrial manufacturing.

Warehousing oil and gas and airports.

Extreme Stan.

Zions to enable iphones to withstand harsh industrial conditions.

Operating robust scanning capabilities with military great durability.

It opens the door to new customers.

Segments.

The demand the ultimate performance and the most difficult environments.

They also love socket, <unk> 60, and advanced cameras based scanning solution Socgen.

<unk> as a follow on to our free camera based scanner Sofie Kashi in 'twenty that.

That we launched in Q2.

<unk> is tailored for users with more demanding scanning needs those working in challenging conditions for those dealing with poorly printed or damaged Marcos.

There are no licensing fees for providers to include Sofie came into their us they simply integrate our software SDK with Buckingham into their applications.

This enables them to service a wide range of end users with various data capture requirements.

This approach enables developers to service price sensitive end users with the free <unk>.

Dress performance sensitive needs.

60, or any of our hardware scanners.

And users can access the capabilities.

<unk> 60, with a monthly subscription fee.

Okay.

Dr. <unk> was also up greater than Q3.

With full compatibility.

2017.

It supports our complete range of barcode scanners, NFC reader writers across the entire socket mobile product line.

During the iOS and Android application developers can fully meet their data capture requirements and maximize performance for their end users.

Socket mobile capture SDK has been integrated into thousands of applications across various industries.

Our new products will extend our reach and diversify our customer base.

Rocket Campbell provide socket mobile with a recurring revenue stream each month.

Ultimately this will also make us a more diversified and sustainable.

Yes.

On retail.

We are becoming 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 then.

Okay.

Thanks, Dave and thank you everyone for joining today's call in Q3, our revenue was $3 $2 million.

Representing a 37% decline from Q2, and a 14% decrease compared to the same quarter last year as Kevin.

<unk> explained.

Our reported revenue is based on sales into the distribution channel.

Q3 revenue decline was primarily due to our distributors reducing their inventory.

Action, two persistent market uncertainty and the elevated interest rates.

Yes.

In contrast, it to the sales from our distribution partners to resellers and end users totaling $4 $9 million.

Our Q3 sales into distribution channel were only $3 two main dollars yes.

The figure includes $2 $8 million in shipments excluding returns.

And the $400000 adjustment for the reserve of channel inventory.

Our Q3 gross margin was 44, 2% representing a four 4% decrease compared to Q2 and <unk>, 2% decrease from Q3 of the previous year.

The decrease in gross margins in Q3.

Was it primarily due to their allocation of manufacturing overhead costs.

<unk> during the quarter.

Q3, operating expenses were $2 $8 million, reflecting a 4% decrease compared to prior quarter. The reduction was primarily due to certain G&A costs.

The annual audit, which were concentrated in the first half of the year.

However, their operating expenses were 8% higher than Q3, 2022, driven by the cost associated with new product development and the increase in headcount.

During Q3, we recorded a net loss of $1 $3 million or <unk> 16 per share compared to a net loss of $510000 or <unk> <unk> per share in Q2, and a net loss of $870000 or 11 cents per share in the same peer.

That off here.

Our Q3 EBITDA was net was a negative $870000 compared to a positive $230000 in the prior quarter and a negative $500000 in the same quarter last year.

Total noncash expenses, including depreciation and amortization after the basic compensation expenses and the income tax amounted to $460000 in Q3.

Moving onto our balance sheet, our cash balance was $3 $1 million as all September 30th dike.

Decreased $530000 compared to December 31st 2022.

Over the nine months.

Primary cash outflows included $1 $5 million in capital expenditure and.

And the $500000 for operating activities.

That all flows or partially offset by the $1 $6 million convertible notes financing.

We did in May.

In terms of inventory, we ended the quarter with $5 $5 million, a slight decrease from $5 $6 million at the end of 'twenty two.

This wraps up our.

Prepared remarks, now I will hand, the call over to the operator for questions.

Thank you operator.

Thank you if you would like to ask a question. Please press star one on your telephone keypad now.

You will be placed into the queue in the order received.

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 Chris Sakai with singular research.

Yes, hi.

Afternoon.

Can you talk about the sale to resellers and end users.

That you say were substantially higher.

And that can be a good estimate for for your demand how is that this quarter and how should we look at that in the coming quarters.

Okay, Hi, Chris.

So.

Our sales from distributors.

Two resellers and end users was $4 9 million.

Almost.

Our sales and were $3 two.

So the Delta of one six is really what was reduced in inventory in the distribution channel.

We would.

Intended that the $4 9 million is a fair balance of the underlying demand for the products.

The $3 two.

So historically.

Distributors.

I think had maybe two $5 million of inventory.

At the beginning of any quarter and our objective is that that inventory is relatively static.

They add and they subtracted approximately the same rate.

Today, they only have $1 $6 million in inventory, which we believe is.

Yes.

Possibly too low.

And this is the consequence of I think.

Combination of the pandemic, where people were concerned about supply and brought in more than they needed in the short term.

And interest rates, which were relatively low and they are now relatively high so.

Oh, hi, thank dash.

We've kind of reached the.

Lower part or the bottom of the barrel in terms of what's possible and we would expect inventory to be a little bit closer to maybe $2 million to $5 million.

Forward and we would work hard to keep that inventory stable.

So to answer your question.

We would contend that theme for a $4 nine number.

Is.

A better reflection of the underlying demand and that would be the number I would choose as a model for the demand we saw in the quarter.

Okay. Thanks, Thanks for that and then.

Can you talk about operating expenses.

Where do we where should we see them going in the future.

Go ahead.

Yeah just to yeah.

Yeah. There are management is aware of.

Sure Mark.

Uncertainty.

And the other challenges and while we continue focusing on investing in new products and we try.

Trying to manage their liquidity and expenses tightly so we expect other operating expenses.

For the rest of the year in Q4 to be similar.

The Q3 level.

Overall for next year.

We expect at least said that during the first half of the year will be at the same level as this year.

Okay, great. Thanks for your answers.

And once again, if you would like to ask a question. Please signal by pressing star one on your phone now.

Hello.

Okay.

Yeah.

And it appears there are no further questions at this time Mr Mill, So I'll turn the conference back to you for any additional or closing remarks.

Thank you very much operator, we just like to thank.

Thank you everyone for participating at participating in today's call and wish you all a good afternoon goodbye.

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

The host has ended this call goodbye.