Welcome to the Socket Mobile Q1 Management Conference Call. My name is Ellen, and I will be your operator for today's call. [Operator Instructions]. Please note that this conference is being recorded. I will now turn the call over to David Dunlap. Sir, you may begin.

Thank you, Operator. Good afternoon, and welcome to Socket's conference call today to review financial results for its first quarter ended March 31, 2018. On the call today from Socket are Kevin Mills, President and CEO; James Lopez, Socket's Vice President of Marketing, Sales and Developer Programs; and Dave Dunlap, Chief Financial Officer to answer your questions. Socket Mobile distributed its earnings release over the wire service earlier today. The release has also been posted on Socket's website at socketmobile.com. In addition, a replay of today's call will be available shortly after the call's completion through the company's website socketmobile.com, and a transcript of this call will be posted on the Socket website within a few days. Before we begin, I would 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 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. Because of a number of factors including, but not limited to; the risks 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 at market acceptance and sales opportunities may not happen as anticipated; the risks 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 such forward-looking statements. Now with that said, I'd like to turn the call over to Socket's President and CEO, Kevin Mills. Kevin?

Thanks, Dave. Good afternoon, everyone, and thank you for joining us today. We reported a disappointing Q1 with the revenue of $4 million, a 29% decrease from revenue in Q1 2017. Our lower revenue resulted in a loss for the quarter of $225,000 or $0.03 per share. There were several results behind the lower unexpected Q1 revenue, which I'd like to highlight. The first being our delays in shipping our new SocketScan products. We started the year expecting to launch our newest product line made Q1. However, delays in the development process, we discovered a few technical issues that prevented us from fully qualifying the product and required some design improvements. These design improvements have been completed. They solved all our concerns, and we are now shipping what we believe is our best product to date. The impact of the delay was not inconsequential. The delay impacted our revenue in Q1 in the following way, we were unable to fulfill about $200,000 of SocketScan orders scheduled to ship in the quarter. In addition, it caused our distributors to lower their inventory of their current products in anticipation of the arrival of the new products. In measuring the impact of this, we had about $400,000 between sales out of distribution and sales into distribution in Q1. The demand for our current products in Q1 was slightly better than demand in Q4 despite the pending availability of our new SocketScan product, scanners. We have also -- we have always viewed sales out of distribution to be a better reflection of demand, and reported our revenue based on sales out of distribution for many years. Today, we reported our revenue based on sales into distribution. That being said, our delays are behind us now and we are truly happy with the SocketScan product…

Thank you, Kevin. As Kevin noted earlier, in our analysis of Q1 sell-through, which represents end-consumer purchases, we see that overall companion scanner demand was slightly better to flat for the quarter compared with Q4 2017. We achieved this flat demand impact in part, perhaps in large part, to the fact that our new SocketScan Series of scanners did not ship as expected in the quarter. In part to lingering seasonality, which we -- which continued through February, and in part to some new dynamics playing out in our markets that I would like to walk through. The first dynamic of note involved enterprise-level customers, which projects typically are -- take year-long development cycles testing and field trials. These projects can usually yield an average number of deployment scanner sales every quarter. Unfortunately, in the last couple of quarters, and particularly in Q1, enterprise-level project activity has been quiet, and we haven't seen many reach the deployment stage. This contrasts with the same period last year where we had unusually large activity. Enterprise projects are very convoluted and hard to time and we expect continued difficulty forecasting them. The second dynamic involves the expected timing of a new scanner-enabled applications from development partners to manage inventory and end-customer loyalty for small merchants. We see our point-of-sale application partners continue to bring new customers into the market at a steady pace and with constant companions scanner connect rates. But we're also seeing some focus shift to service their growing customer base and customer retention efforts. This has had the net effect of slowing the development and release of deeper applications of scanning, such as Socket SDK and companion scanner-enabled inventory and loyalty apps. We see applications like these, when available, as having the potential to drive higher connect rates, secondary scanner…

Thank you, James. Our first quarter 2018 revenue was just under $4 million, almost entirely from the sale of cordless barcode scanners. We describe our revenues in three segments. The first segment, enterprise deployments, reflects enterprise decisions to purchase for deployment, larger quantities of our products and often are associated with new mobile applications or the transfer of applications from special-purpose devices to smartphones and tablets, which our products are designed to work with. Enterprise deployments were about 11% of our total revenue in 2017, but heavily weighted into the first two quarters of the prior year. For the first quarter of 2018, deployments were $317,000 compared to $1,257 million in the same quarter a year ago, a year-over-year reduction of $940,000. The second segment of our revenue is the majority of products we sell through two-tier distribution, usually in small quantities to many customers, which we refer to as run rate sales. Many of our products are purchased from our resellers by small retailers, running point-of-sale applications. Our resellers number in the hundreds worldwide, with our largest resellers being Amazon and CDW. For the first quarter of 2017, our run rate sales were $3.6 million, down 17% or $722,000 from the first quarter of 2017, that was -- 2018 was $3.6 million. Together the first two segments represent total sales for cordless data-capture products and represented 98% of total revenue in the first quarter of both years. The last 2% of revenue relates to service and sale of legacy products. As noted by Kevin and James, we brought some of the first revenue declines on ourselves when we announced to our distribution channel in January, our plans to ship our new SocketScan in the first quarter. But didn't commence shipping until April 20, until our development team was fully…

Thanks, Dave. In summary, I would describe Q1 as a bittersweet. We missed our revenue expectations but completed some fundamentally important work that makes Socket Mobile a substantially better company moving forward. The SocketScan Series and Capture SDK projects took much of our R&D investment over the past two years. They both incorporate years of experience, customer feedback and truly set a new level of ease of use for both our developer and end-user communities. These new products form the foundation for Socket Mobile going forward and will enable us to be a much stronger company. We look forward to their impact and believe it will enable us to return to profitable operating levels in the coming quarters. With that said, I will turn the call over to the operator for your questions. Operator?

[Operator Instructions]. Our first question is from Matthew Galinko with Sidoti.

First one is around the enterprise business. It sounds like you mentioned there was a little -- it can go murkier to predict closure of some of those deals. I'm wondering if there's anything on the competitive front that could be impeding your ability to get business to the finish line there or just wondering if you could elaborate any more on why you think things are a little bit more difficult there now than they were a year ago?

Hey, Matt, this is James. So on the enterprise front, typically we have pretty good visibility when projects are in deployment because there's usually a process of bidding for the equipment and you see the competitive bids, you see the primary bids and the secondary bids. The only thing we can see there from a competitive standpoint would be some competitor that's preventing a bid from ever hitting the market. And of course, we don't have a lot of visibility into those, those would be high-level account-based relationships, but usually for the things that are going after equipment of our type, we see the bids in the request for proposals going out, even if they're just for competitive purposes.

And maybe to add, we've seen a decline in those number of requests as well. So it's not that we believe that the bids happened and we lost out. It's largely that we're seeing the bids not happening at this moment in time.

The activity in general is just very quiet.

Got you. Okay. I guess, you've -- compared to '17, I guess, I understand that it's down, but if you go back a little bit further, in terms of the time you've been in the scanner business, is -- for those who are a little bit newer to the story, is there kind of a longer seasonal cycle to these sorts of things? Is this really atypical, over your history in the market? Just anything that could kind of color it in a little bit more.

Well, from a historical point of view, we view, I would say, from mid-November to mid-February as the deadest part of our year, particularly as we become so retail-centric over the last few years. So generally speaking, that is a very weak period. People don't buy a lot of retail equipment in that period because it's their busiest selling season. I would say that we saw a weakness in January, probably extended a little bit more into February than we saw in the past, but then recovered reasonably well in March. When we look back at the last few years, I don't have the exact numbers in front of me, but certainly last year, we had a lot of scanning related to the deployments, which we did with a large firm we've talked about called American Greetings. And their numbers, I would say, augmented our numbers substantially. So if I go back to 2016 or whatever, I would say, again, it was reasonably flat. I don't really have those numbers in front of me. So I don't know if that gives you enough color, but...

Maybe more along the lines of the RFPs you're seeing, not even necessarily revenue but just -- it sounds like the -- just the pace of increase is down. Is this just a -- really unusual or is it something that you've seen before? I guess that's really what I'm getting at.

I would say it's a little bit unusual. We have not seen this quiet -- this level of lack of deployments, whether it be to us or other people, in periods for a quarter or longer in the past. So I would say it is unusually quiet, if that does answers your question.

It does. One more for you and then I'll jump back in the queue. We talked last quarter, I guess, it was in February. You seemed a little more optimistic, I guess, on the growth rate in the retail point-of-sale market and the kind of the run rate business there. It sounds like your expectations have changed. I know you were kind of downstream little bit. But is that -- do you see that as sort of a sudden -- the changing priorities of your partners, is that something that you think can shift back over the course of 2018 or you think it's something that's relatively fixed and just kind of a new normal?

Okay. Well, I'll let James start and then maybe I'll add something fresh.

So Matt, we do hope to kick-start a little bit because it is a little bit of a surprise that some of the applications that have been promised continue to be in the works. They're kind of perpetually in development, always on the back seat, and we think that they're important. The Loyalty programs and the inventory applications are looked for by customers. They drive applications of scanning, but they're de-prioritized to customer retention efforts. And so what we've tried to do ourselves is to move those forward by doing some of the work in our SDK to help our partners move these things forward, and we're going to continue to do that. But we still require them to do the integration and to do the promotion and to push these applications to their end customers. So that's a little frustrating but we're certainly going to continue to help, and we know the moment that they do, they open the customer base that we've established. So that's certainly an exciting proposal. And we're just going to continue to pursue that.

Maybe I can add that with the benefit of hindsight, certainly as we look back, one of the things I think that we didn't focus on was that we were benefiting from the rates of growth from our install base and not just their growth itself. So if we have a large customer, and I can just take one as an example, say Square, and they sell 1,000 scanners in Q1. And they sell 1,000 scanners in Q2. They've probably added 5,000 new customers, but we haven't seen a lot of growth because they've just gone from 1,000 scanners to a 1,000 scanners. I think one of the things that has happened is that as these companies have matured, they have stopped aggressively going after sign-ups and new acquisitions, which had slowed our rates of growth, as they've become profitable and they're really focused on their monthly revenue stream. So yes, we have seen a slower rate of growth with our larger customers. And we don't have enough of the smaller customers who are growing quicker at the moment to really change that, okay. So I would say, you are sensing that there is a realization that we don't benefit from their growth, we benefit from the rates of growth and the rates of growth have slowed, certainly, as they become profitable and more focused on their feature sets and they passed their critical mass number.

The next question is from Al Troy [ph],who is a Private Investor.

I just have a few questions on the Dutch auction. I don't know what the purpose was of doing it, under these circumstances, when you knew that the first quarter was not going to be good and to pay $3.90 a share when you could have brought it back for much less of a price. And besides, there's not that many shares outstanding and volume as well and the flow is small, so I don't know what the purpose was. Could you please explain it?

Yes, in general, Al, and as we explained in the tender offer, we have added shares year-over-year. And there were a bit close to 1.1 million in shares that were added in 2017 and those were continuing to be a drag on the per share value of the company. As you know, we also had been accumulating and growing cash and getting lots of questions from our investors as to how could you put that cash to use. So the conclusion was that taking some of the shares off the market would be effectively returning some of that cash to our shareholders, and that was what was the genesis of that decision. In terms of pricing and timing, the pricing was set based on market conditions at the time that the tender offer was entered into, which was the early February time period. And the offer was successful. It was oversubscribed, which means that the price we paid in that Dutch auction range was well below the maximum. It was $3.90 versus a maximum of $4.25. So that saved the company a better part of $450,000. But because it was oversubscribed, we also saw that the price would shot up into the $4 range during the tender offer, it wound up with a lot of selling. Our average shares moved up from the 30,000 level to 60,000 level. And a lot of that, we think, was people who had decided to tender shares that got them back because they were looking for more than $3.90 and they were selling. So that became an opportunity for them and for other shareholders to pick up the stock at a reduced price. We think those are not long-term events, it went for about two weeks. We would like to see that, I guess, as company moves past the shipping delays and the effect on the first quarter, we would hope that, that will be recognized by investor community, and the pricing will obviously increase.

Okay. I just don't understand why you did that with such a low amount of shares outstanding. And I think it would have been better to pay dividends to the shareholders who've been around for a long time and let them get some cash back on their investments.

And Troy, we appreciate your inputs. We received inputs like that. We've received many other inputs. There was a long period of deliberation and determination of the best way to proceed, and in this case, the pricing and the like, all of that was very carefully reviewed at all levels of the company.

Okay. I'm not happy with that, but to pay $3.90 a share when the stock's going to down for about $2.50 tomorrow, I mean, it seems kind of ridiculous.

Troy, did you have any other question? I'm sorry.

No. Do you, guys, have any revenue projections for the second quarter at all?

As you know, we don't provide revenue projections. We believe we will bounce back in Q2, and we're working hard to make sure we're back at profitable operating levels in Q2.

The next question is from Steve Swanson, Private Investor.

Dave, did we have any revenue growth in Europe and Asia? And if so, what was that in the first quarter?

We had revenue growth in both Asia and Europe in the first quarter. I don't -- well -- and so both -- Europe did better in both -- in Q1 and Asia did better in Q1 than in Q4. And I would say it was up substantially year-over-year. I don't have the exact number in front of me. But I think we are seeing Europe being -- what I would describe as about a year behind what we saw in the U.S, we have a lot of new applications coming to the markets in various countries. We're seeing a lot of companies acquiring new users. So we feel actually our business in Europe is -- has never been healthier. In Asia, I think, we really focused on Japan. I think we're making some very solid traction in the Japanese markets. Today, we have -- there is three application providers who, I would say, owned the iOS-based point-of-sale solutions. We're already being sold by two of them and we're in testing and believe we'll be sold by the third one over the next coming quarters. Our products are ideally suited to Japanese market and they have a lot of small retailers. They tend to move slowly, but when they move, they move. So I think we're doing very well. We had expected to do better in China. We ran into a number of difficulties, many of which have been resolved. The biggest one being we discovered there was a dispute over our name and trademark, which took some time to resolve. That's all resolved and behind us, but we do expect overseas to be much stronger going forward. And in Q1, 25% of our revenue was from outside the U.S. In Q4, it was 20%.

Yes, I guess, what I'm just trying to understand was if you had the -- if you've done the math yet on the revenue growth relative to 1Q last year to 1Q this year, both in -- last year, I think, is when you really started to breaking out the regions in the Qs and I was wondering if you had done the math yet to see what the growth was on revenue for Europe and for Asia. I'm trying to understand what the big drop -- I mean, I realized where that 30% drop-off in revenue will go out for the quarter. I was hoping that all of that was in the U.S. and at least we were growing double digit in Asia and Europe. And that's why I was asking.

We can come back to give you the exact number on Asia and Europe. I don't -- I would actually -- I would guess it was more than 10%, that would be a guess.

And we'll be filing the Q by the middle of May, probably in about two weeks from now, but I'll go ahead and get that information, and I'd be happy to send it to you.

Okay. Another question I had is, how much are we paying interest? It looked like we paid $20k interest in the first quarter on what I'm presuming is the $4 million loan. Was that for two months or just the one month?

Well, the interest is a combination, but it was -- we drew the term loan on the 1st of March. And so that was the largest piece, but we also include interest in there from -- include some bank service charges. And we have a little bit of lease debt, so it's a combination of things.

Okay. Let me ask in a different way then, I guess. We -- I think you said that you've actually started since the quarter was over. I mean, looking on the release you had, a $4 million note on the -- or at the end of the 31st of March, I think you said you've already begun to pay off the principal on that. Is that right, Dave?

That's correct. We've already taken the term loan down to $2 million, and we do expect it'll come down in increments between now and the end of the second quarter to probably about the million dollar level.

Okay. And then I presume on a quarterly basis for the -- even though you've taken it down a substantial amount, 50% it sounds like, we'll still be paying the excess cash flow off on that on a quarterly basis until that's gone?

No, I think we've worked out -- we've fine-tuned now that we've completed that with the bank. And once we get it down to the million dollar level, then it'll be amortized to probably over a 24-month period. So it'll be a steady flow from there.

So your intent is to try to get it down from a $4 million to about $1 million and then to pay it off on a nominal basis through the term of the loan?

That's correct. And we're doing that from the combination of our own cash and an unused revolving line of credit, which we've also had with the bank.

Okay. I guess, one other question then I'll get back in the queue. Do we have a guesstimate as to how much money we "wasted" or spent again trying to fix this technical issue with the scanners? Was that over $100,000? Was it a $0.25 million? Or was it just the -- was it the timing? Was it just a timing thing and there really wasn't a whole lot of money to fix this?

Well, I would say it was a lot of efforts. And certainly, if you have your engineers working on fixing something, they're not working on the next thing they should be working on. But it wasn't a substantial amount of money. We need to relay our boards and get them recertified. I would say it was less than $100k.

Okay. It costs about four weeks in delivery, it sounded like?

At least, yes.

At least.

[Operator Instructions]. And we have a few more questions. We have [indiscernible].

I've got a few questions. The first one on the new 1D and 2D scanners, it sounds like you wanted to get people off just buying the 1D scanner. Does that mean that you're going to have lower gross margins on these, if you're trying to incentivize people to buy them at a lower price point?

Well, we will have the similar gross margin but there'll be less gross margin dollars. So it depends. Obviously, for people who are currently buying a 2D, that will go to the lower cost 2D, we would lose gross margin dollars. For people who are currently buying a 1D and upgrade to a 2D, we would gain gross margin dollars. Today, as we have probably 90% of people -- high 80s anyway, buying 1D scanners, the net effect is expected to be an increase in gross margin dollars at around the same percentage, right. I think it also brings a more fundamental change to our markets. And I think as James pointed out, you somewhat get trapped. If you only sell 1D scanners, then your development partners can only provide solutions around 1D scanners because none of them want to tell their end-users that they brought the wrong scanner. So part of it is that to enable some of the better features, whether it is couponing or other things, you need to have a 2D scanner in the first place. And the fact that we would have a higher percent of 2D scanners would further encourage people to raise applications knowing that those 2D scanners are available. So it's part of a longer-term plan.

Yes, yes, got it. I didn't know if you're going to subsidize that in time by lower prices, but I'm not...

No.

No, we're not subsidizing that longer term.

That product was redesigned.

Yes.

Got it. And the two-month delay on shipping these, I guess, at the eleventh hour. When was the last time you had some sort of delay like this?

Well, I would say -- well, we don't introduce new products very often. But I would say, it's been probably at least two years since we had such a similar delay.

Okay, okay. So not every year but about once in every 10 years?

Yes.

And the last question. I like the share purchase, you make the decision based on the information you had at the time. Especially since you're issuing -- you're diluting 4% every year, are you precluded from making any share repurchases as long as the term loan is still outstanding? Can you -- are you prevented? You can still repurchase shares?

We can. But part of the -- one of the reasons that we did not purchase shares off the open market is that we are limited to 25% of the daily volume. So we can't do a lot, right. This is why we did a tender offer in the first place. But we're not precluded from doing stuff like that.

Okay. So if you chose to, you could do another tender offer?

If we choose to, we could do another tender offer, yes.

The next question is a follow-up from Matthew Galinko with Sidoti.

You mentioned it being a pretty substantial offer to get the new product line out the door. I think you mentioned about two years of labor there on your engineering department. So just curious, now that, that's behind you, where do the priority shift now and where is the focus for your R&D?

Well, I think certainly on the -- let's start with the SDK portion. The fact that we're going to support a much bigger community of developers, we will have more work to do because there will be more to do in the SDK. So to me, the investment in the SDK, we were stepping up. Historically, we supported the Apple community, the -- who were primarily writing in iOS or the Android community were probably writing in native Android. So a lot of it will go into enhancing for the bigger community, right. So I would expect that we will continue to invest heavily in the SDKs going forward. As regards to our hardware guys, we do have follow-on products, particularly in our 800 Series, where we will switch our focus to them. Today, our 800 Series that we still have the same problem between our 1D, 2D, where the step is too big for many customers and we need to fix that. And that's next on the agenda.

Got you. So the work you put into the 700 Series, does it lend itself to the 800 Series improvements being little bit shorter or easier?

Absolutely. I mean, yes, one of the things that we maybe didn't highlight is that we have used this opportunity to consolidate a lot of our designs, so that as we move forward, we can bring improvements across the product line with one step. Historically, because of the way the products were added over time. If we wanted to change a feature in our 7Ci or 7Xi, it really was two developments. We had to do it once on the 7Ci because that was slightly different, and then do it, again, on the 7Xi before we could expose it to the market. Going forward, we will use the common core, if you will, so that we can be much more responsive to the markets and make adjustments quicker. And those adjustments will be leverageable across the whole product line.

Yes, Matt, it's been fully redesigned as a platform, very similar to the approach we took on our DuraScan. And there are a lot of efficiencies that we've designed into it. So we hope to reap the benefits of that moving forward.

And the last thing is that products have been designed. So we're now in a position where we can really increase volume and cost reduce, as the volume merits. Historically, we were not in that position. So these are substantially better products, not that the other products weren't good, but these really have some leg underneath it.

Just to add one last bit flavor on that. One of the difficulties we had with some of the old designs was their ability to ship worldwide. And one of the things that we've changed with this product is the whole battery architecture, so that shipping it worldwide is a nonissue. And that's just one of the subtle advantages that we've kind of designed into the platform.

And we have no further questions at this time.

Okay. I would like to just close by thanking everyone for participating in today's call, and wish you all a good afternoon. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. And you may now disconnect.