Welcome to Socket 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 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 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. On this call with me today are Kevin Mills, Chief Executive Officer; Dave Holmes, Chief Business Officer; and Lynn 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 $0.5 million 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 SocketCam 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 SocketCam 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 requirement with our subscription-based SocketCam C860. And the most intense users can still use our array of handheld hardware scanners. All of these are made available to our app partners' 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. XtremeScan is designed to enable iPhones to withstand harsh industrial conditions and offer robust scanning capabilities with ultimate durability. It opens the door into new customer segments in the massive ruggedized computing space that demand the utmost 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 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 Socket Mobile 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 gross 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 the 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 $0.07 per share compared to a net loss of $993,000 or $0.12 per share in Q1 2023. Q1 EBITDA is $40,000, an improvement from the negative $459,000 in Q1 2023. Total noncash 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?

So I'm just trying to understand the business...

Sorry, you just want 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 with these new products? And 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 2 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. Are you able to share your projected 12-month revenue?

We don't provide forecasts because small differences in whether you receive an order 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 share 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 none.

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

We have available bank lines that we're currently not using. So as the business grows, we believe we can self-fund our fund with debt, our 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 or 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.

What was the percent of revenue derived from the online store in Q1?

Approximately. In the U.S., approximately, I would say, 17%.

I'm still learning about the company so this is kind of a basic question. Where do you provide 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 boil us down to our essence, if you will, but 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 focused 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's 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 scanned products, how do you earn revenue from that if you're providing the stream to the app developer?

Yes. What we 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?

Yes. We utilize the existing mechanisms in the market, which are primarily the app stores, the App Store and the Play Store, but the revenue goes directly to Socket.

Okay. 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?

Yes. 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?

Yes. So we're spending a lot of time marketing directly to the customer segments that we're going after in the target market that we mentioned during the call. So those are market segments that we traditionally haven't dealt with in the past, so we're having to do a lot of new marketing efforts to reach those new audiences. And we're essentially trying to communicate with them in the pools where they play today. And so 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, which are companies. But you're distributing through distributors, aren't you?

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 1 or 2 little orders?

Yes, that's correct. I mean, a lot of the folks that use these types of devices are large enterprise customers. But I would say there's everywhere from Tier 1 all the way down to Tier 4, 5, and 6 that we're addressing with these things.

One of the things we observe is that people are more inclined to use smartphone apps than in the past. We excel particularly in situations where data capture is needed through an app. Most of our business comes from small and medium-sized enterprises, as they were among the first to adopt iPads and iPhones for business purposes, often because they had no other option. Now that success has been established with smaller companies, larger enterprises are starting to ask about our solutions. We recognize that this transition will require time, but we have the necessary data capture accessories that allow these companies to use applications on iPads or iPhones, providing a similar experience to more rugged and specialized devices from companies like Zebra or Honeywell, but at a lower cost and without the training typically associated with such dedicated devices. This is the trend we are observing and addressing. However, before making a decision to use iPads, these companies must test our offerings and ensure they meet robustness standards. We've been focused on ensuring that the essential elements are in place for successful trials.

I would think that as you expand into the industrial market, it might be tempting to increase spending on sales and marketing. However, how do you balance that with the fact that you're currently unprofitable while still trying to manage costs as you look to expand your sales and marketing efforts in that area?

Our business model does not rely on traditional sales methods. We offer an SDK and collaborate with application providers. By integrating our SDK, these providers allow their users to try and use our products. If the SDK is not included in an application, we have no sales. However, if it is included, users have a choice. This is evident with companies like Shopify, Square, and LightSpeed, where Square integrated our SDK into their application. Consequently, every Square user who purchases our product finds that it automatically functions because it is already enabled. The business model remains unchanged; it may take longer, but we are an accessory to the application. Customers typically do not purchase our scanners directly; instead, they choose Square and realize they need a scanner, with ours being the compatible option. This is also true for Shopify. We are applying the same methodology, which might take some time, but we are noticing increased interest from application providers to integrate our SDK as their end users demand the ability to use standard iPhones and iPads. We will not engage in extensive traditional marketing or incur significant sales costs. We manage our expenses carefully. While we will invest a bit more in developing our SDK and marketing, we believe there is substantial leverage in that expenditure.

So just to clarify, has Square incorporated your capabilities, and do they also work with other companies in a similar way?

In the case of Square, you have two options. If you want a cordless scanner, we are the only choice for Square iOS. If you prefer a wired scanner, that option is available as well. For Shopify, we are the only scanner that is supported. So if you're using Shopify and need to scan, you will end up with the 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 2 companies. And again, then you earn revenues based on people buying your accessory device in a sense?

Correct.

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 used to purchase it, when you take it out of the box, it works for the shopkeeper who has a 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 types 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 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 guy doesn't need to get involved because their business model is about selling subscriptions.

What is the monthly subscription fees for the upgrade then?

$5.99 a month.

That's a pretty hefty fee for someone unless they are actually using it in a fairly robust manner.

Well, consider this perspective. If you've ever used a free camera-based scanner, you've likely faced situations where poor lighting or shadows make it difficult to read a menu at a restaurant. This might take an additional 30 seconds of your time. If you are making hundreds of scans each month, and about 10% of those take longer due to such issues, upgrading becomes an obvious choice because it saves valuable time. It's important to note that we cater to customers who have already given up on camera-based scanning. Our customers are not those who are satisfied with their camera-based scanners. While our subscription costs $6 a month, purchasing a physical scanner is $200. We have sold 100,000 scanners to individuals who have essentially moved on from camera-based solutions that fail to meet their needs. We aim to provide an improved camera-based experience, along with the option for a physical scanner when necessary.

Maybe I misunderstood you. When you said 5 99, that's $5.99 a month or $599?

Sorry. No, no, no, $5.99.

If you can find us customers that are willing to spend that, we'll take them.

I appreciate you bearing with me. I just have 2 more questions. So 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 2.

Yes, I'll answer that question. At the end of the year, we had a professional analyze our position based on management's forecast for the next five years. Our auditors reviewed this analysis, and all three parties agreed that we currently do not need to reserve for the deferred tax assets.

Okay. Appreciate it.

Yes, just a quick comment. We take that practice on an ongoing basis so as needed as well as annually, we do the analysis.

Yes. 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, or what would be your path to market for those distributors where you have manufacturer's reps selling the product? How does that work?

In the case of the industrial, 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 scanning elements that work 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.

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.