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Operator: 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 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 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 the 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.

Kevin Mills: Thank you very much, operator. Good afternoon, everyone, and thank you for joining us today. Our Q2 (ph) revenue was $3.2 million, a 14% decrease compared to $3.7 million in Q3 2022. In Q3, we had an operating loss of $1.4 million compared to an operating loss of $947,000 in Q3 2022. Our Q3 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 2-tier distribution system. We sell our products to our distribution partners, such as Ingram, which is the first tier. Our distribution partners sell the 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 reduced their inventories. In Q3, our distributors reduced their 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 and end users provide a 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, 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. Dave?

David Holmes: Thank you, Kevin, and good afternoon, everyone. As Kevin said today, I’d like to highlight a few of the significant milestones that we achieved in Q3 and talk a little bit about how our investments in innovation are helping transform Socket Mobile into a more comprehensive data capture company. We launched several new products in Q3. The XtremeScan product line comprised of THREE different configurations, XtremeScan Case, XtremeScan and XtremeScan Grip are designed 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 for our customers in industrial, manufacturing, warehousing, oil and gas and airports.

XtremeScan is designed to enable iPhones to withstand harsh industrial conditions, offering robust scanning capabilities with military-grade durability. It opens the door into new customer segments that demand the ultimate performance in the most difficult environments. We also launched SocketCam C860, an advanced cameras based scanning solution. SocketCam C860 is a follow-on to our free camera-based scanner, SocketCam C820 that we launched in Q2. C860 is tailored for users with more demanding scanning needs, those working in challenging conditions or those dealing with poorly printed or damaged barcodes. There are no licensing fees for app providers to include SocketCam into their apps. They simply integrate our Capture SDK with SocketCam into their applications.

A close-up of a healthcare professional studying a computer screen with data while consulting with a patient.

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 C820 and address performance-sensitive needs with the C860 or any of our hardware scanners. App end users can access the capabilities of SocketCam C860 with a monthly subscription fee. Capture SDK was also upgraded in Q3 and is fully — with full compatibility to IOS 17. It supports our complete range of barcode scanners and NFC reader writers across the entire Socket Mobile product line. Ensuring that 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. SocketCam will provide Socket Mobile with a recurring revenue stream each month. Ultimately, this will also make us a more diversified and sustainable and less dependent 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. Lynn.

Lynn Zhao: 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 explained, our reported revenue is based on sales into distribution channel. The Q3 revenue decline was primarily due to our distributors reducing their inventory in reaction to persistent market uncertainty and elevated interest rates. In contrast to the sales from our distribution partners to resellers and end users totaling $4.9 million. Our Q3 sales into distribution channel were only $3.2 million. This figure includes $2.8 million in shipments, excluding returns and a $400,000 adjustment for the reserve of channel inventory.

Our Q3 gross margin was 44.2%, representing a 4.4% decrease compared to Q2 and a 0.2% decrease from Q3 of the previous year. The decrease in gross margins in Q3 was primarily due to the allocation of manufacturing overhead costs across lower shipments 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, such as 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 costs associated with the new product development and the increase in head count. During Q3, we recorded a net loss of $1.3 million or $0.16 per share compared to a net loss of $510,000 or $0.06 per share in Q2 and a net loss of $870,000 or $0.11 per share in the same period last year.

Our Q3 EBITDA was a negative $817,000 (ph) compared to a positive $230,000 in the prior quarter and a negative $500,000 in the same quarter last year. The total non-cash expenses, including depreciation, amortization, asset base compensation expenses and income tax amounted to $460,000 in Q3. Moving on to our balance sheet. Our cash balance was $3.1 million as of September 30, decreased $530,000 compared to December 31, 2022. Over the 9 months, the primary cash outflows included $1.5 million in capital expenditures and $500,000 for operating activities. The outflows were partially offset by the $1.6 million convertible note financing completed 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 2022.

This wraps up our prepared remarks. Now I will hand the call over to the operator for questions. Operator?

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Operator: [Operator Instructions]. And our first question will come from Chris Sakai with Singular Research.

Chris Sakai: Yes. Hi. Good afternoon. Can you talk about the sales to resellers and end users that you say were substantially higher and that could be a good estimate for your demand. How is that this quarter and how should we look at that in the coming quarters?

Kevin Mills: Okay. Hi, Chris. So our sales from distributors to resellers and end users was $4.9 million. So almost our sales in were 3.2%. So the delta of $1.6 billion is really what was reduced in inventory in the distribution channel. We would contend that the $4.9 million is a fair balance of the underlying demand for the products than the $3.2 million. So historically, distributors, I think, had maybe $2.5 million of inventory at the beginning of any quarter. And our objective is that, that inventory is relatively static. They add and they subtract approximately the same rate. Today, they only have $1.6 million in inventory, which we believe is possibly too low. And this is the consequence of, I think, a 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’re now relatively high. So I think that’s we’ve kind of reached the low part of 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, $2.5 million going forward, and we would work hard to keep that inventory stable. So to answer your question, we would contend that the 4.8%, 4.9% number is a better reflection of the underlying demand, and that would be the number I would use as a model for the demand we saw in the quarter.

Chris Sakai: Okay. Thanks for that. And then can you talk about operating expenses? Where do we — where should we see them going in the future?

Kevin Mills: Go ahead.

Lynn Zhao: Yes. Just — yes, the management is aware of their market uncertainty and other challenges while we continue focusing on investing in their new products, we try to manage their liquidity and expenses tightly. So we expect that the operating expenses for the rest of the year in Q4 to be similar at the Q3 level. And overall for next year, we expect, I think said that during the first half of the year will be at the same level as this year.

Chris Sakai: Okay. Great. Thanks for your answers.

Operator: [Operator Instructions]. And it appears there are no further questions at this time. Mr. Mills, I’ll turn the conference back to you for any additional or closing remarks.

Kevin Mills: Thank you very much, operator. We’d just like to thank everyone for participating in today’s call, and wish you all a good afternoon. Goodbye.

Operator: This concludes today’s conference call. Thank you for attending.