Greetings and welcome to the Socket Mobile Q1 2011 Management Conference Call. (Operator Instructions). It is now my pleasure to introduce your host, Jim Byers of MKR Group. Thank you Mr. Byers. You may now begin.

Thank you operator. Good afternoon and welcome to Socket’s Q1 Management Conference Call to review financial results for 2011 Q1. On the call today from Socket Mobile are Kevin Mills, President and CEO and Dave Dunlap, CFO. Socket Mobile distributed its earnings release over the wire service at the close of the market today. The release has also been posted on Socket’s website at www.socketmobile.com. In addition a replay of today’s call will be available at www.Vcall.com shortly after the call’s completion. And a transcript of this call will be posted on the Socket website within a few days. We’ve also posted replay numbers in today’s press release for those wishing to replay this call by phone. The phone replays will be available for one week. Before we begin I would like to remind everyone that this conference call may contain forward-looking statements within the meaning of section 27-A and the Securities Act of 1933 as amended in section 21-E of the Securities and Exchange Act 1934 is amended. Such forward looking statements include, but are not limited to, statements regarding mobile computer data collection and OEM products including details on timing, distribution and market acceptance of products and statements predicting trends of sales and market conditions and opportunities in the markets in which Socket sells its products. Such statements involve risks and uncertainties and actual results could differ materially from the results anticipated in such forward-looking statements as a result of a number factors including, but not limited to, the risk that manufacture of Socket’s products may be delayed or not rolled out as projected 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 risks that acceptance of the company’s products and vertical application markets may not happen as anticipated and other risks described in Socket’s most recent form 10-K and 10-Q reports with the Securities and Exchange Commission. Socket does not undertake any obligation to update any such forward-looking statements. Now with that said I would like to turn the call over to Socket’s President and CEO, Kevin Mills.

Thanks, Jim, and thank you for joining us today. In today’s call we will begin with a short review of Q1 and then outline the business opportunity we see for the rest of 2011. On a very positive note we generated Q1 revenue of $4 million, a 54% sequential increase over the $2.6 million we reported in the preceding quarter. This solid increase was driven by significant sales increases in both our cordless scanning and handheld computing products. At the same time we further reduced our expenses during the quarter, which enables us to move within $300,000 of positive EBITDA. So we achieved both increased sales and bottom line improvement during Q1; a very positive step in the right direction. I’ll begin with a review of our current handheld computing business and then provide a going forward outlook. Our handheld computing (inaudible) sales grew to $2.1 million in Q1, a 40% sequential increase over the preceding quarter. This is a significant increase but it doesn’t tell us much about the business since the revenue number was primarily driven by improved supply. You may remember we reported significant back orders enter Q1 due to the lack of LCD screens. However, what is much more significant in Q1 are the new booking we received for the SoMo totaling $2.7 million. With these bookings we enter Q2 with an even larger backlog then we entered Q1. So demand for the Thermal continues to be very strong even though the related LCD supply problem has made it challenging to meet demand. As a result, in Q1, we shipped a total of 2945 SoMos, which was well below the demand level. The LCD supply situation continues to improve and we have already received over 1000 units this quarter with an additional 3000 units plus expected…

Thank you Kevin. Our Q1 revenue was $4 million, a 54% increase over revenues of $2.6 million in the previous quarter. Sales of our cordless barcode scanning products increased from $457,000 to $1.2 million, representing 30% of total Q1 revenue consisting of $486,000 in sales of our 2D cordless barcode scanners introduces last year, sales of our linear cordless barcode scanners of $259,000 and sales of our cordless ring scanner of $464,000. In addition our handheld computer sales increased from $1.5 million in Q4 to $2.1 million in Q1 representing 52% of our Q1 revenue. As our LCD screen supplier increased shipment, enabling more unites to be manufactured and shipped. Total orders received during Q1 for all of our products were $5 million resulting in an increase in our backlog of due orders from $2.4 million at the beginning of Q1 to $3.2 million at the end of the quarter. $2.5 million of this order backlog entering Q2 is for handheld computers. As Kevin mentioned, handheld computer revenue continues to be determined by the availability of the LCD screens and our supplier is making progress in catching up on screen shortages. The due orders in Q2 for both handheld computers and cordless barcode scanning products continuing at sustainable breakeven or better levels. We anticipate additional sequential growth in Q2 with the expectation of achieving positive EBITDA results for the quarter. That growth will drive higher margins as we spread our fixed manufacturing costs over a larger number of units sold. Our margins of 37.5% in Q1 improved from margins of 35.4% in the previous quarter due to the higher Q1 revenue volume partially offset by a non-recurring charge of $60,000 or 1.5 percentage points in Q1. We’ve set margins to continue to improve as our revenues increase. Our operating expenses…

Thank you. We’ll now be conducting the Question & Answer session. (Operator Instructions.) Our first question comes from Brian Swift from Security Research Associates. Brian Swift – Security Research Associates: Thank you. Can you elaborate a little bit on addressing your display shortage issue in terms of how you’re progressing against working off your backlog and kind of related to when you’re going to be able to more aggressively pursue some of these soon-to-be former HP clients? Can you give us a little color on that?

The situation has continued to improve. Obviously in Q4 we had very limited supply. It improved quickly right after Chinese New Year which basically ended middle of February. We received then probably something in the 3500 range. We recognized revenue around $2945 I think as I said in my comments. And the supply continues to come in. We also have a replacement screen or second source, if you will, lined up that we hope to bring online in Q2, towards the end of Q2. So right now today we have enough supply, well we don’t have enough supply, we have sufficient supply from the existing manufacturer and we have a high level of confidence that those screens are manufactured or in manufacturing. And that they will be delivered largely on time and we’ve done the software work etcetera to bring on a second source which we expect to bring on in June. And then once we have that I think we’ll be out of the woods in regard to the LCD situation. Brian Swift – Security Research Associates: Okay. And again here being able to a little bit more aggressively market to the soon-to-be former HP clients.

Right. I mean we highlighted Japan as an area that we had a good relationship, a special relationship with HP. We went there, we’ve been doing our best to support all the customers we’re not receiving in the Japanese market. Unless we can provide samples to potential new customers, it’s very difficult to move forward. And we will be in a position, I think, to provide samples I would say towards the end of May or early June and most people will take 60 days to evaluate and ensure that the SoMo is in fact 100% HP compatible and then we’ll be in a position to service those orders as we get into the summer months.

You can see the strength of the activities that we did just in Japan, Brian. In Q1 we received close to half a million dollars in orders for SoMos, most of it for delivery in Q2 to former HP customers and as Kevin mentioned, we’d like to think that’s indicative of the type of response that we’ll get as we see HP pulling back their 200 series handheld in other locations of the world. And they are doing that systematically but obviously over an extended period of time. Our current supplier has already promised to ship about 4500 units just from that supplier and most of that will be in by the end of May. So we’re looking to see if we can add to that from either our current supplier or bring our second source into line by the end of Q2. But even if we just do the 4500 units, that again is a 50% increase over what we were able to do in the SoMo category in Q1. Brian Swift – Security Research Associates: And what was the backlog that you’re trying to fill (inaudible)?

We currently have a little over 5000 units in backlog.

There’s about $2.6 million at the end of Q1. So what that would do is it would bring our revenues in Q2, essentially we’d be able to ship most of the, if not all of the backlog we have on hand as of today and move forward into the backlog that is coming in in April and beyond. Again, we’re anxious to pick up the pace as quickly as our suppliers are able so we’re paying a lot of attention to both sources of supply to see what we can do.

And we have (inaudible) one of the Taiwan and back basically meeting with both of our manufactures as well as suppliers to make sure everything stays on track. Brian Swift – Security Research Associates: Okay. And I guess lastly all this is obviously catching up with backlog but what’s your comfort level of continuing to see the demand side grow to Q2 and Q3?

Well I think we’re reasonably comfortable in that score also. First of all the bookings that come in were higher, I think we booked $2.6 million in the quarter even though we only shipped our service to $2.1. The other thing is we probably have a high degree of visibility on 75% of the business in that we know who the reseller is and what the end user, the type of application, that they’re using the device for. And we have made a conscious effort to track when we’re doing HP replacement business as opposed to new business. Certainly in the US right now (inaudible) new business. I would say and the majority in Europe is new business whereas Asia quickly driven by Japan a lot of its replacement business. So we have a good feeling of the, I would say, depth of the business. In addition we are seeing a lot of people whose projects were sidelined for the last two years coming back with the same requirements. They were happy that we were able to service them with the SoMo previously. They were limited by (inaudible) and the general uncertainty of the economy. So I think that there is a good opportunity here to build the company and that we’re not just relying on the HP departure. I think the business will be growing even if HP stayed in. I think HP is just adding some winds to our backs in terms of moving the business forward.

But the order phase has continued robustly in April for 4 consecutive months, since the beginning of January that we’ve seen that high order phase. We’ve already received over $1.4 million in new orders since the beginning of April and that doesn’t include the orders from our largest customer, which we anticipate will be coming in shortly which could easily add another million dollars to that total for shipment between now and the end of the quarter and the beginning of next quarter. So as long as we continue to see that robust pace, so far that pace has been a sustainable breakeven or better level. Brian Swift – Security Research Associates: And I guess lastly $5 million, roughly, is still the breakeven level as far as from earnings standpoint as opposed to cash standpoint.

Yes. If you just go forward and we’re using the EBITDA measurement because while we have these notes outstanding you have this debt discount amortization and a few other amortization that have no impact on cash and they will vary based on when we convert notes and other things. But if you pull those away from an EBITDA type of calculation, we would have hit breakeven at about $4.7 million bottom line break even and that’s pretty close to the cash number as well.

If we convert some of these notes in Q2 it will add a charge that would reduce our earnings with a (inaudible) point of the non-cash charge. And that’s why we’re reporting EBITDA because it keeps it more consistent and people can see the improvement over the various quarters. Brian Swift – Security Research Associates: Okay. All right, thanks.

Thank you. (Operator Instructions). Our next question comes from Bernard Fidel who’s a private investor. Bernard Fidel – Private Investor: It seems like this is the best news we’ve heard in a couple of years.

I would second that. It’s certainly been a while since we’ve had such positive news. Bernard Fidel – Private Investor: You answered a lot of my questions already so I crossed those out. In Q1 if it weren’t for the fact about the supply problem, what would the sales have been, a rough figure I know.

Well I would say we would have been north of $5 million and roughly. So we would have been positive in Q1 if we had supplies.

We have $1.5 million dollars in shippable orders that the dates were such that we could have shipped them had we had supplies which we couldn’t ship. Bernard Fidel – Private Investor: (Inaudible)

Well yeah but you’re not going to see all of it recognized. So I think, you know, we would have been north of $5 million I think is a fair assessment of where we would be. But that would have been profitable operating level.

Sure because you had some backlog coming into the quarter as well that was in the same category. But $5 million is sufficient for us to be at a profitable level. So we’re looking to of course surpass that and sustain that as we move through the rest of the year. Bernard Fidel – Private Investor: And for Q2, assuming you get all the materials for that SoMo etcetera, what could that add up to? What’s the potential for sales in Q2?

Well in our planning we are not assuming we get all of the backlog cleared because we don’t have a firm commitment from our manufactures that that’s possible at this time. So we’re assuming we get about 4500 units, which we’re comfortable we can get in Q2. If we had unlimited supply I think we would have the potential to ship probably close to 7000 units. We are backlogged a little over 5000 and we have 2 ½ months to go. And as Dave mentioned, the order pace has remained strong. But I think to expect that number is just unrealistically optimistic when we know that we need to make sure we have a secure supply of screens and other components and today we’re highly confident on 4500 with some upside potential but it would be a stretch to go beyond that. Bernard Fidel – Private Investor: If you shipped 4500 what would that do for sales for the quarter?

Well essentially the extra 1500 units would be an additional, let’s say, $750,000 or thereabout.

Yeah and what it would do is it would move itself into the $5 million range which is the range we’ve been talking about as hitting EBITDA positive results. Bernard Fidel – Private Investor: Okay, in other words, if you had all the supply you’d be able to ship 7000. What’s the highest number of SoMos you shipped so far; record?

Any given quarter I don’t think we’ve ever broken 4000. I think we’ve gone into the high threes but so Q2 we would expect to be a record in terms of SoMos shipped. Bernard Fidel – Private Investor: And you’re saying that if we had the equipment it would be like 7000?

Well yeah but you have to be a little bit careful because you’re carrying a backlog that you built up over basically two and a half quarters. So yes there seems to be stronger demand than we’ve ever seen in the past coupled with we’re carrying backlog. If we could instantly have 7000 units I believe you’d be able to ship them all this quarter. But we’re not going to have that so, you know, we’re getting a little bit ahead of ourselves here. Bernard Fidel – Private Investor: Okay, no, that sounds good. Remember the contract that was the potential contract from last summer about the nursing home contract with (inaudible), how is that getting along?

I’m sorry, which one? Bernard Fidel – Private Investor: There’s a nursing home contract.

Oh yeah, actually I would say interestingly and thankfully it’s actually a little bit on hold right now. The company acquired another company and they’re in the process of digesting it so they put the project on hold for, we believe, about three months, which actually suits us much better because if they needed to go forward right now, we couldn’t service their requirement. So the deal, we believe, is still available to us but it’s on hold because they acquired another company and in the process of, I would say, digesting that. So the project is still very much there but it’s not an imminent project which suites us just fine because we’re not in a position to support it in the short term. We believe, as we get into the second half of the year, we won’t be constrained by a supplier like we are now and we’re looking forward for those types of deals to drive us to the next level. Bernard Fidel – Private Investor: Right. Well if they purchase another company, that contract would even expand because they would probably want to put it in their other facilities too.

And that’s exactly where they are. They have the parent company, if you will, is pretty bullish on a SoMo based solution and they’re now working with their other company to get them all on the same system, which we believe will be SoMo based but they called us up and said they have to do their own work for the next two months so they actually put the project on hold for three months and will get back to us, I would say, towards the end of this quarter. Bernard Fidel – Private Investor: But it’s quite active though. I mean it’s–

Yeah, they’re actively testing and they have a good number of units in daily use that they did have while the project was going forward. Again, for a project of this scale it is typical that they take 100 or so units and put them into one facility and run them for three to six months. We were well down that process when they put it on hold. Bernard Fidel – Private Investor: All right. Remember there was a contract more than a year ago in England for hospitality?

Yeah, for the festival. Bernard Fidel – Private Investor: Yeah. How’s that getting (inaudible)

Again I got (inaudible) call as well. Again, I haven’t really reached out and chased them. We haven’t had a lot of interaction with them. We believe they’re still doing well but it’s very difficult for us to go chasing new business when we can’t service the existing business we have. So my short answer is I don’t know exactly where they are. We have increased our resources in the UK beginning in Q2 and we will have more of an answer, I think, for you on that one at the next call. Bernard Fidel – Private Investor: And with Hewlett Packard is there any rumor or something like that which country is next that they will be going out of like Japan?

No, I mean they’re a huge organization, they’re driven by many things. The regional sales people do have some discretion. They also run out of inventory. Though depending on what level of business you’re doing with HP, the information is likely different. We would expect the consumer has agreed to be where the last of the inventory is sold but the business organizations are being told in different countries that they’re out or going out. But I would expect that most of it will get resolved in the next 60 to 90 days and will be in a good position. And what we do is we track HP on the websites. When they publish you can go to different websites like Brazil or India or the UK or whatever and you can see the availability of different products. It’s ever changing but certainly the devices are systematically going away based on the information they’re hosting on the web pages. Bernard Fidel – Private Investor: All right, two more questions. The shipment for scanners in Q2, is that strong or is it an improvement as per Q1 would say?

Yeah, we are seeing a lot of people beginning to use iPhones and iPads to do business process. And we have seen a systematic up tick. I think that we would expect to see this continue through the end of the year. I mentioned that we will be shipping SDKs which will make it even easier for people to embed our solutions into their applications. I think this is a category is now coming into its own and I think we’ve established a foothold and we think this is a big business so we’re expecting our cordless scanning to continue to rise in Q2 and through the rest of the year. Bernard Fidel – Private Investor: Okay, one last one. I think this would be more for the CFO, Dave Dunlap, (inaudible). You know it’s always difficult to equate sales to profitability but let’s assume, and I’m not that far off, you had a sales quarter, which is a potential if not a probability in the near term of, we’ll say, $8 million to $9 million. What would that translate into earnings?

Sure, let me build a simple model for you. Our product contributions before we apply our fixed overhead costs are about 50%. So with $8 million, which is twice what we did this quarter, assume your product cost of about $4 million, and our fixed cost including all the people that we use in the manufacturing area and the like, about half a million. So that would give you a contribution of $3.5 million at $8 million and at $9 million about $4 million. Our operating expenses which were $2.1 million, we would probably spend a little more on operations because we would look to increase some of the things we curtailed that would help drive additional business and there’s always additional support costs. But let’s say the $3.5 million at the $8 million revenue level, say our operating expenses were $2.3 to $2.5 million, that would leave you earnings, before tax, of $1 million to $1.2 million. $1.2 million with, let’s assume 4.5 million shares outstanding, assuming more note conversions, about $.25 to $.26 per share. And if you take a higher level, the $9 million, maybe you spend a little more in expenses. Say you have $1.5 million in profit, 4.5 million shares it’s about $.33. So that might be the type of expectation that you would get based on achieving those types of numbers. But, as you know, there are lots of variables including the pricing and cost of the products. Volume generally means we can bring some product costs down but larger deals sometimes get better pricing and so it’s an ongoing process mixed with the factor. But we certainly can grow the bottom line rapidly because we are highly leveraged to go to these higher revenue levels we just simply run the lines with our contract manufactures a few days longer and a worldwide distribution channel, again, in all variable costs. So nothing that causes us to spend a lot of money on sales force or spend a lot of money on capital equipment or anything else to achieve these higher levels. So we’ve actually looked forward to moving these revenues up, we should be able to handle it just fine. Bernard Fidel – Private Investor: That adds up to over $1 a share very easily if we get to those levels in profits. I wanted to ask Kevin one last thing. This is the last question; I’ll let someone else go. What do you see, the way things are going now, would be a normal or a good sales quarter, what would you expect in revenue; in gross sales I should say? I’m sorry.

Well again I think there’s two parts to the question. I think what’s achievable in the short term I will be happy if we could start with a five on the number on the next quarter that would be, I think, a big step forward. But ultimately I think we have to get up into the eight to ten for quarter range if we want to pay back our shareholders, etcetera. So I think that this year I would be very happy if we could do four, five, six, and then grow from there over the next three quarters. But it’s early in the year, we’re off to a good start, we’re still limited by supply. So I would just say stay tuned. No matter what number you do, the next quarter will have to be higher, that’s what makes companies work. So I don’t think you ever get to a satisfied number but you make progress along a track. Bernard Fidel – Private Investor: Yeah, I told you about the second half of the year when your supply is normal, shall we say.

Yeah again I think we have to get back into the $20 million plus range this year as a goal. Our organization really needs that level to get, I would think, to stage one in terms of sustainable business. And if you get to the $40 million a year run race, you would have a sustainable highly profitable business.

And before we get to a sustainable highly profitable business, I’d like to get to a sustainable business. Although I think we’re well on our way based on what we have in Q1 and what we see in Q2 and I’m sure we’ll be able to give you more color on your answer at the next call. Bernard Fidel – Private Investor: Okay, that’s good. You get someone else now. Thank you.

Thank you very much Mr. Fidel.

Thank you. Our next question comes from Steve Swanson who’s a private investor. Steve Swanson – Private Investor: Gentleman what drove the gross profit margin down five points relative to 2010 Q1, it took a drop off.

Well I’ll let Dave look at it. Those are a few things. Obviously there’s product make. We had a 2% hit for a onetime charge and in terms of I don’t know what else, Dave, we have.

Yeah well I think our margins, some of our newer products like our 2D scanner are currently selling at lower product margins because it’s really the first edition of that device and we do have scheduled for later this year a cost reduction version that will bring it up to our more traditional margins. You know our margins for barcode a year ago were in, product margins now, without the overhead, were in the 56% – 57% range and they’ve averaged down now to around 51%. So most of that change is in the product mix.

The other thing is that we did have a bigger percent of legacy business and the legacy stuff tends to have a higher margin. I think we’re down to 7% of our business how it would relate to this category of legacy and gross 3% next quarter.

Yeah, we, our OEM wireless business which is just selling our wireless technologies into their party devices was over half a million dollars in Q1 a year ago down to about $150,000 Q1 of this year. And again those margins tend to be higher than the margin. So again it was a mix of what we were selling but we constantly have an ongoing program by which we look to cost reduce products that are doing well and I think you’ll see those margins plus volume (inaudible). So I think you’ll see a return of several percentage points with the growth that we’re talking about in Q2 and it should continue upwards from there.

Yeah and we would expect Q2 margins to be, I would say, inline or better than the Q1 margins you’re looking at right now as we move forward through the year. Steve Swanson – Private Investor: As we move forward we should expect margins above 40%?

Yeah. Steve Swanson – Private Investor: I guess the other question I had, and apologies if this has been asked already, but on the P&L you got a debt discount amortization of $316,000 for the quarter, is this a onetime event or is this going to be a recurring charge going forward?

We have a conversion of an (inaudible) and so we don’t have control over when the note gets converted. So some of it is one time (inaudible) conversion and some of it is just amortization.

So the accounting rules, if you- you probably want to painfully avoid this but the accounting rules require when you do something other than a straight common stock offering to use fair market value accounting and the warrants are treated as if they were valued at fair market value and they’re treated as a discount from the note. And then in addition any resetting of the conversion pricing below market price at the time you issued the notes is treated as an additional debt discount. So with that combination, for a million dollar note offering, we actually had $1 million in debt discount that will be amortized along with the notes over an 18-month period. And then the other rule is that if the notes get converted you pick up any remaining unamortized discount on those notes that were converted. So if we were to convert all the remaining notes, the $800,000 of remaining notes, there would be $628,000 of remaining debt discount that would be taken in. that’s your remainder and if it turns out that they’re not converting then that number turns out to be, you know, somewhere in the range of $150,000 a quarter. But the reason it’s larger in Q1 is that there was $200,000 in notes converted and we have you recognize the debt discount associated with that. So hopefully I’ve been clear on the accounting approach but there’s no cash implication of that charge but it’s still one, that for accounting rules, we have to take. Steve Swanson – Private Investor: Yeah I understand that. So if things go as well as we all hope they will go, we’re going to take that whole hit over the next several months.

We would love to do that. Obviously the benefit to us is that it would, these were initially notes that were secured with the assets of the company. It would free up that security which then would enable us to move onto a more normal bank line arrangement. And that is really what’s needed to finance growth because it grows right along with the growth of the business. Steve Swanson – Private Investor: Okay. The other question I had was are we going to convert any of our other tables into stock like we did that one (inaudible).

We have no current plans to do so. Steve Swanson – Private Investor: Okay thanks.

At this time we have no further questions. I’d like to turn the call back over to management for any closing comments.

Okay thank you very much. We would just like to wish everyone a good afternoon and appreciate your continued support and look forward to reporting to you in July. Thanks again.