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Executives

Jim Byers - MKR Group, Investor Relations

Kevin Mills - President & Chief Executive Officer

David Dunlap - Chief Financial Officer

Analysts

Brian Swift - Security Research Associates

William Smart - Cardinal Value

Paul Bornstein - Black Diamond

Dominic DiSanti - Private Investor

Steve Swanson - Private Investor

David Savory - Private Investor

Socket Mobile, Inc. (OTCQB:SCKT) Q4 2013 Results Earnings Conference Call February 26, 2014 5:00 PM ET

Operator

Greetings and welcome to the Socket Mobile Fourth Quarter and Full Year 2013 Management Conference Call. At this time all, participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your, Jim Byers of MKR Group. Thank you, Mr. Byers. You may begin.

Jim Byers

Thank you, operator. Good afternoon. And welcome to Socket’s conference call today to review financial results for its 2013 fourth quarter and year ended December 31, 2013. On the call today from Socket are Kevin Mills, President and CEO; and Dave Dunlap, Chief Financial Officer.

Socket Mobile distributed its earnings release over the wire service earlier today. The release has also been posted on Socket’s website at www.socketmobile.com. And in addition, a replay of today’s call will be available at 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.

Now 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 computer data collection and handheld computer 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 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 risks 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 would like to turn the call over to Socket’s President and CEO, Kevin Mills.

Kevin Mills

Thank you, Jim. Good afternoon, everyone, and thank you for joining us today. In today’s call, I will begin with a review of our results for the past year and then discuss the business opportunities we see ahead in 2014.

Today we reported revenue for the 2013 full year of $15.7 million, an increase of 15% over 2012. We also just decreased our expenses for the year by 20% to $6.4 million. As a result, we achieved a positive EBITDA of $400,000 for 2013, a significant improvement over the $2.1 million EBITDA loss we reported in 2012.

The growth in our full year revenue was primarily driven by the strength of our cordless barcode scanning sales, which grew 69% over last year and represented 61% of our total sales in 2013.

Our SoMo handhelds represented 30% of annual sales with the remaining 9% coming from OEM legacy and service.

Overall, 2013 was a good year for Socket and a very positive step in the right direction. While we did not achieve our goal of a profitable year, we returned to growth in our revenue, reduced our expenses, and saw other positives in our business, especially, for the barcode scanning.

Let me discuss the dynamics of our business in 2013 and then outline our strategy and expectations for 2014, starting with our cordless barcode scanning business.

Revenue from our cordless scanning business in 2013 grew 69% over last year to $10 million. This past year, Socket shipped over 35,000 scanners, an 84% increase over the 19,000 shipped in 2012.

To gain further insights into the overall markets for these products, Socket reached out to Venture Development Corporation or VDC, a market expert on barcode scanning-related products to compare operator experience with their findings.

According to VDC, there is a strong market for highly portable Bluetooth scanners, which is a subset of the overall Bluetooth scanning market. When viewed against the total world-wide market number for this segment provided by VDC, Socket’s market share in 2013 increased to approximately 16%, approaching a double of our market share of 9% in 2012.

So, we’re pleased to have generated both market’s growth and increased market share last year within that market share. So, where are all these scanners going and what is driving the market share?

We strongly believe the handheld Bluetooth scanning market is being driven by an increasing number of mobile applications that continue to be delivered and deployed on Android and iPad tablets.

Scanning is a required ingredient in the substantial percent of these mobile solutions with the percentage being dependent on the actual activity. I’ll detail some of the applications with higher barcode scanning requirements in a few minutes, but first I’d like to describe the overall process which seems to be similar for all categories of application.

What we typically see is the applications developed for an Android or Apple tablet to solve a specific business problem. The process seems to be build prototype, do some preliminary field trials, verify ROI or improvement goals, make the solution robust, and then deploy. The process seems to take about a year and is developer-driven.

In 2013, Socket saw its developer community grow from 235 developers on January 1st to 763 at the end of the year, an increase of 528 developers. We believe this increase in our developer community bodes well for the future. The application drives scanning sales and the developers build the application. So, everything starts with the developer.

Not all developers are equal. Some will have a large impact on revenue overtime, while others are simply investigating options and would have little to no impact. The category of developers we believe will benefit Socket the most are application provider developers who develop an application that is then sold to a third-party.

Today, we believe we have about 300 applications with approximately 200 applications available in the Apple App Store. We have very good visibility on the Apple App Store, due to Apple’s unique process.

In the Android store, we were estimating the number to be a 100 plus. In each case, application that support barcode scanning and support Socket scanners are downloadable from the app stores; some for free, others for a price.

There are many examples and they vary from NTR setting mobile point of sales offer to Win 69 selling a wide cataloging application. The sale of the application with barcode support opens up the possibility of scanner sales.

The requirement for the scanner depends on the activity being done. A customer selling coffee and cupcake may never use a scanner, someone selling clothes, probably could not survive a long time without barcode scanning.

We’re very focused on gaining further understanding of which applications are really driving our sales in order to maximize our opportunities. And we will be launching a program in the coming weeks to help us better understand the key applications and how we can better support these customers.

The second developer category that we believe drive sales is application users. These applications are usually developed in-house and will be used by the employees or associates of a company to perform a specific task. There’s no selling involved, usually just deployment once everyone is happy with the solution.

These solutions are easier to forecast and predict as there is no selling involved, but they are subject to budgeting and deployment issue. While Socket sales drew a two-tier distribution channel, we often have direct contact with these customers.

Now with over 800 developers in our community, we’re seeing more and more applications entering the market which in turn increased our sales opportunities. To come back to the applications that drove our sales in 2013, we believe mobile point of sales was the leading category.

While we didn’t see many large deployments, we did see many small deployments and many successful trials and believe this category will again be our largest contributor in 2014. Mobile point of sale is more than simply replacement cash registry in the store. It’s really about enabling your sales team to assist shoppers provide relevant information to the customer at the time of purchase.

There may just happen a great deal of software needs to be written and tested and new features like support from mobile coupons from a mobile phone may also have to be supported. So, while this can take longer than we typically expect, we see significant opportunity and are truly excited to be in the forefront of this new emerging market as a leading provider of handheld scanners.

In addition to the strong growth of our handheld Bluetooth scanning business in 2013, we also expanded the product family last year by adding both the laser-based scanner and a low cost 2D scanner to our colorful series of scanners that have been targeted to the mobile point of sales market segment, which we believe will help us grow our market share further in 2014.

To give more color on our scanning business, 97% of all handheld scanner sold in 2013, were our seven series. In addition, we believe more than 80% were used with iPads or tablet-based devices and we expect this growth and positive market dynamic to continue.

At the end of 2013, we introduced our eight series, which are attachable to a mobile phone. We’re seeing very good initial market acceptance of this new eight series scanner and that it actually been used with mobile phones, which we view as complimentary to our seven series scanner business.

In summary, our scanning business has seen strong growth and we expect this upward trend to continue, driven by an increasing developer community and an increasing number of mobile applications coming to market.

We believe the market for these solutions is still in the early stages, but has excellent growth potential and Socket is strongly positioned to capitalize on this growth with our broad range of products and excellent software developer’s kit.

Turning to SoMo business, this business continue to struggle and we saw revenues declined by 36% year-over-year. While the SoMo sales remained the solid product, with a number of core customers that we will continue to support and who need the product for their business, we expect the decline we have seen to continue in 2014.

We believe the main reasons for the declines are market-driven. The fundamental problem is that Windows Mobile 6.5 is no longer a platform that attracts developers. And as a result there are very few new applications being developed for the platform.

In fact, in talking with many of our customers, we heard that most have tried to move to Apple or Android. So, some find the pace of change associated with Apple or Android who possible to implement in their businesses.

As a result, the Windows Mobile 5 market share is destined to decline through a few niche markets whose needs are truly driven by stability and longevity. Windows Mobile 6.5 will continue to be supported by Microsoft until 2020. While without developers and new applications, it is impossible to make progress.

As long as we continue to see specific applications, especially in healthcare and hospitality, both Windows Mobile and the SoMo remain the best solution. We will continue to support these customers going forward.

We’re addressing some of our existing customers’ concerns regarding RFID and will launch a new improved RIFD reader in the near future. We think it is prudent to plan for a lower revenue number for the SoMo in 2014 until we have clear evidence to the contrary.

Going forward, with our outlook for continued strong growth in our mobile scanning business, we expect this segment to represent 80% of our revenue by the end of 2014. The vast majority of our sales and marketing efforts will focus in driving further growth in scanning and we believe this growth will enable us to be profitable for 2014.

At the same time, we remain committed and dependent on the SoMo, but expect to see that dependence significantly reduced over the course of the year.

With that said, I will now like to turn the call over to Dave for his review of the financials. Dave?

David Dunlap

Thank you, Kevin. 2013 was the year of excellent progress and a building year for 2014. Revenue for the year totaled $15.7 million, up 15% year-over-year. Within those total, our cordless barcode scanning product family revenues grew 69% year-over-year from $5.5 million in 2012 to $9.2 million in 2013 and grew 61% in the fourth quarter over the same quarter a year earlier.

Cordless barcode scanning became our largest revenue generator in 2013, totaling 69% of our annual revenue and 64% of our revenue in the fourth quarter. As noted by Kevin, Socket is becoming a significant world-wide supplier of professional barcode scanners for use with mobile business applications running on smartphones and tablets.

We have more than 800 registered developers developing mobile business applications in retail point of sale, commercial services, and healthcare. And as these developers build our barcode scanning software capabilities into their applications, and recommend our products for use for their applications, our entire cordless barcode scanning product line becomes available for application users.

Our 69% annual revenue growth in barcode scanning reflects increases in deployed developer applications and increases in the breadth of our barcode scanning product offerings. Today we offer imagers, linear laser barcode scanners, and 2D barcode scanners. We offer standard cases in a choice of colors and rugged cases.

And we introduced late in the third quarter of 2013, a new smartphone attachable format, our model 8Ci. We experienced revenue growth in all of our product models in 2013, with our most popular models being our model 7Ci entry-level imager scanner and our model 7Xi 2D barcode scanner.

Revenue from our SoMo handheld computer family was $3.9 million in 2013, compared to $6.1 million in 2012. SoMo revenue benefited in the first half of 2012 from last time buys of our first-generation handheld computer, the SoMo 650, which was upgraded and replaced by the SoMo 655 mid-year in 2012.

SoMo revenue in the fourth quarter of 2013 was $0.9 million, last compared to SoMo revenue in the fourth quarter of 2012 also of $0.9 million. Today the SoMo 655 is the steady producer of revenue and cash from customers needing a classic PDA device in the Windows Mobile environment.

We achieved excellent bottom-line improvement in 2013 over 2012, resulting from gross margin improvements and operating expense reductions. Our gross margins increased in 2013 by 3% to 40.3%, up from 37.2% in 2012 as we reduced our fixed cost and benefited from higher product sales volumes.

We reduced our 2013 operating expense by $1.6 million, or 20% from $8.1 million in 2012 to $6.4 million in 2013. 2012 engineering expense included the cost to complete the SoMo 655 in the first half of that year. We also streamlined our sales and service models in the second half of 2012 to reduce the number of personnel needed for these functions without sacrificing the quality of service or sales support that we offer.

As a result, we reduced our GAAP losses from $3.3 million or $0.68 per share in 2012 to $619,000 or $0.13 per share in 2013. And our EBITDA results, earnings before interest, taxes, depreciation, and amortization, improved from an EBITDA loss of $2.1 million in 2012 to an EBITDA profit of over $400,000 in 2013.

In 2014, we expect developer application deployments to generate additional revenue growth in 2014 as more of our registered application developers released and promote applications supporting our barcode scanning products.

Since we rely on contract manufacturing for our component production and sell through two-tier distribution channels, growth can be achieved effectively without the cost of major increases in personnel, enabling the benefit growth to also benefit the bottom-line.

Our objectives remain to achieve sustainable, profitable operating results through sales growth and expense control.

During 2012 and 2013, we financed our operation through the issuance of convertible notes and a supplemental line of credit subordinated through our bank line along with the use of our bank working capital revolving credit line.

Our bank working capital bank line of credit is in the final stages of being transferred to a new bank. Socket has a number of potential sources of capital that may become available during 2014 if we continue to improve our operating results.

Profitable operations are my favorite source of capital. We also have approximately 5 million of outstanding stock options and warrants ranging between $1 and $3 per share, which may be exercised if the market price of company current stock increases.

Higher market prices driven by improving operations and outlook may also make it possible to complete an equity financing on reasonable terms. Our longer term goals are to improve the capital structure of the company, to increase equity sufficient to qualify Socket to returning to NASDQ and in the process, to replace more expensive short-term financing alternative thus as our supplemental subordinated credit facility.

On the litigation front, during 2013, we settled two patent infringement lawsuits and a lawsuit filed by a major warrant holder alleging dilution of their warrant. The company today is litigation-free.

Our stockholder meeting this year has been scheduled for Thursday, May 15th, 2014 for the record date of March 17th, 2014. The items to be voted on this year are the annual election of Directors, the annual Advisory vote on the compensation practices referred to as stay-on-pay and ratification of the selection of our outside audit firm for the 2014 fiscal year.

Our Form 10-K and proxy material should be filed during the third week in March with proxy materials distributed about a week later. I want to note that our earnings release hit the wires today about three hours earlier than scheduled due to a miscommunication with the wire service. No harm done, but please accept my apologies with the timing took any one by surprise. We expect our next earnings release will stay on our scheduled timing at the close of the market.

Now, let me turn the call back to operator for your questions. Operator?

Question-and-Answer Session

Operator

Thank you. We’ll now be conducting a question-and-answer session. (Operator instructions) Our first question comes from the line of Brian Swift from Security Research Associates.

Brian Swift - Security Research Associates

Hi. Can you give us a little color on what the March quarter is shaping up to be relative to a year ago and the fourth quarter? Year ago you were around 4, 2 or something like that, so could you give any idea how you’re doing? And what's -- maybe some of the customer trials that you had talked about over the course of the year, whether any of those are beginning to roll out or do you have a visibility on those rollouts?

Kevin Mills

Yeah. Okay, so I think in general what we typically see in the first quarter is that we have a very weak January and things pickup in February and March. I would say this year we’ve seen a more robust January and February, and -- which has been quite good. We are not -- we haven’t had any large deals so far this quarter, but our run rate certainly seems to be picking up driven by the many applications that are in the market.

We look at our sales out reports and we can see where all of the scanners are going. And I think what has surprised us is that we’ve seen a large increase in the number of customers buying scanners However, many are buying small quantity. So the business continues to seeing quite robust on the scanning side and continues to be driven by the applications that are in the market.

I would say, we’re on track to have a solid first quarter. Last year if you remember, we did have a single deal with a Japanese customer for 3,200 units, which we won’t have such a similar deal this quarter. But I think that we will be able to pick up most of that 3,200 from other customers during the course of this quarter.

So, I would say we’re on track for a solid first quarter and our scanning growth should be quite robust if you exclude 3,200 and it should be quite acceptable if you include the 3,200. On the SoMo side and we see it still struggling along and we do expect a lower number. So that will impact us a little bit. But I would say, we’re quite pleased with the quarter so far and I would expect to report a good quarter -- solid quarter in April.

Brian Swift - Security Research Associates

Okay. And anything, any color on what’s happening with some of these like NCRs program, bakery outfit...

Kevin Mills

Yeah. So, in general I would say that we went to NRF and we actually had a very good NRF show. We saw a lot of customers displaying Apple-based mobile point-of-sale systems including NCR, including Epicor, including Vend and Shopkeep etcetera.

We can see that they are driving our sales and enjoying a review of the year, I recon more than 60% of all our sales are coming from those type of applications. I think one of the things we learned at the show was that some of the mobile point-of-sale solutions particularly that are being successful in restaurants and bars don’t use scanners and one of the reasons is that not everyone has completed their inventory-based applications.

But in talking with a number of customers, most expect to do that this year, which would drive a scanning requirement in those areas. As regards to customer deployed, the 3200 units -- purchased 3200 units in Japan. We have been able to confirm that they are now in the process of deploying them. They started in early January and they expect to finish the deployment of all units by the end of Q1 and there will be a follow-on meeting in early Q2 to determine the next step.

I think as I outlined before that particular customer has around 3400 -- they bought some more scanners around that number of their larger stores, but they have 27,000 plus of the smaller stores and I think the discussion in April will be to know if we will deploy to the smaller stores, which obviously would be very good for us. But the deployments of the larger store should be complete by the end of this quarter and that’s what we've heard from Japan.

Brian Swift - Security Research Associates

And lastly, how about that moving outfit something [WAN] lines?

Kevin Mills

We haven’t really seen any increase in sales distributed for this yet. But they have their sales conference and they are -- I think last week, last weekend, but right now, we haven’t actually seen any pick up. We remain hopeful, but I think we will have a solid quarter with or without them.

Brian Swift - Security Research Associates

Okay. And can you remind us what that will last close to be, when it happened?

Kevin Mills

The company in question from what we know has 700 franchisees and their full deployment is about 6,000 to 7000 scanners if everyone wins and our understanding is that they paid for the application to be customized to their brand. They expect all their franchises to use us and we do too. I am pretty confident that thing will happen this year and we can't exactly nail down the time, but our understanding from the conference is that they are planning to go forward and the sooner the better as far as we are concerned.

Brian Swift - Security Research Associates

Okay.

Kevin Mills

All right. Thanks.

Brian Swift - Security Research Associates

I will come back if nobody...

Operator

Thank you. Our next question comes from Paul Bornstein from Black Diamond.

Paul Bornstein - Black Diamond

Yes. Thank you. I just have a question. I was on the call about two years ago and looks like you guys are still trying to become cash flow positive. So I don’t understand how management can still be in place after eight to nine years without ever being cash flow positive. So I don’t understand how the market has changed and you guys haven’t changed with it to be profitable because it looks like you are only looking at growth and losses going down, but you are never cash flow positive. Salaries of management is very high given the form the market has, so and they are non-performing. So I guess what you are saying -- so my question is whether you are going to be cash flow positive, so you'll start earning your money that’s my question.

Kevin Mills

Okay.

Paul Bornstein - Black Diamond

I mean you were supposed to be cash flow positive a year ago and you are still not.

Kevin Mills

Okay. So would like me to answer?

Paul Bornstein - Black Diamond

Yes.

Kevin Mills

Okay. So I believe we were cash flow positive. First of all we were profitable two quarters last year and we were cash flow positive in both of those quarters plus I believe we are cash flow positive in the third quarter. I don’t know if we are cash flow positive for the fourth quarter. Dave?

David Dunlap

We are probably slightly down, but for the year with EBITDA profit to $400,000 there is probably 200,000 to 300,000 cash positive even in that total number.

Kevin Mills

Okay. As regards salaries, there has been no salary increases and perhaps if you look at our earnings in 2013 you will see that they were less than they were and they were less in 2012 than they were in 2011. We reduced $1.6 million of expenses last year, but that came out of the pockets of management as well as other members of the team here, coupled with a reduction in the work force. So...

Paul Bornstein - Black Diamond

All right. Well it was a good job, you need to operate. I am just telling you that when you started out years ago, you were making a lot of money, but now it’s coming down because you haven't performed.

Kevin Mills

Yes. So we haven’t given ourselves any raises and we don’t intend to give ourselves raises until we are in a position to do so.

Paul Bornstein - Black Diamond

When you get a $10 million to $12 million market cap or $15 million or $20 million where you should be, instead of four, then you maybe can look at given yourselves stock, no raises. So you are in the same game plan as the investors are who have got no returns from your cash flow. So that’s reality.

Kevin Mills

We cannot argue with the fact that the stock price has fallen and...

Paul Bornstein - Black Diamond

Right. So I think you should take -- and I think you take your whole salary and stock, then I have confidence you might actually do something that will have the benefit to investors. Taking all in stock, then I know you have confidence you will do something. You can spend all you won on expenses and I’ll give you that.

Kevin Mills

Okay. That’s not a question that’s a suggestion, but we hear you.

Paul Bornstein - Black Diamond

Well, the question is what I told you is when you are going to be on a continual cash flow basis, now one quarter up, one quarter down, that’s not reality and it's been going on for years. So that’s the reality. You have hardly anybody on the call because you have no market cap, because your performance has been horrible. So hopefully this is a lighting run and you'll start seeing performance oriented. I am talking about $20 million, $30 million in sales a quarter.

Kevin Mills

We look forward to getting there.

Operator

Thank you. Our next question comes from William Smart from Cardinal Value.

William Smart - Cardinal Value

Yes. Good afternoon. I noticed in one of your filings that Micheal Gifford is leaving the company. I was just wondering what kind of impact that might have on your R&D effort and where his loss is going to served?

Dave Dunlap

Okay. Well Mike was primarily in the marketing side and has been on thus far several months and it was a decision that certainly wasn't easy. We reduced our expenses by $1.6 million and obviously we lost a lot of good people in that. However, the reality is that we just couldn’t afford to keep salaries at certain levels and had to make some difficult choices.

Certainly our marketing efforts have diminished. We not only lost Mike, we lost some other people, some who voluntarily resigned. We have hired a new Marketing -- Director of Marketing and Communication. We started earlier this week and we should be able to get back communicating more with our shareholders and with our customers going forward.

And so I think as regard their R&D, we've continued to invest heavily in R&D and I think that has enabled us to grow at 70% last year. The scanning product in particular, the benefit of our investments in 2010 and '11, we reaped in 2012, '13 and will reap more in 2014. And we continue to invest.

Right now we are investing I would say 30% -- close to 30% of all our expenses go into R&D and that's the only way that we believe we will get out of this is to have products that people truly want and have a value proposition that makes it work for us. So we are very committed to the R&D and have maintained our investment in that area. Obviously in the shorter term, both sales and marketing expense have come down substantially, which has allowed us to reduce our overall expenses.

William Smart - Cardinal Value

Thank you very much. Good luck for the future.

Dave Dunlap

Thanks Bill.

Operator

Thank you. (Operator instructions) Our next question comes from Dominic DiSanti from -- a private investor.

Dominic DiSanti - Private Investor

Hi Kevin and David. How are you guys?

Kevin Mills

Good Dominic.

Dominic DiSanti - Private Investor

It was nice meeting you last month, Kevin. Let me ask you about the market. What percentage of all the other scanning companies that makes scanners, what percentage of the market do you have currently?

Kevin Mills

Well, okay. Okay, well it depends on how you define the market. If you define all of scanning, okay, the market is probably on an annual basis, somewhere in the region of I would say $45 million, okay and that would include every type of scanner at Home Depot etcetera, cable centers. We are not in the cables scanner business. We are in this new category what we call Bluetooth scanners and in particular...

Dominic DiSanti - Private Investor

What was that new category?

Kevin Mills

The new category.

Dominic DiSanti - Private Investor

And that's directly talking about the new category, I am sorry to interrupt you.

Kevin Mills

Well we basically said that we believe we have about 10% -- 16% of the market for this new category, which are highly portable Bluetooth scanners. We are having $10 million of revenue. So the total market available in 2013 according to BBC was somewhere in the $16 million and we had a smaller percent about 9% in 2012. So we've done two things in 2013. One is we've seen the market increase a little bit and we've increased our market share within that.

And there pretty bullish on the growth going forward are the 2D scanning, which was an area we will be focused on and we believe we can increase our market share going forward.

I think part of the difficulty of all the forecast is determining what people are actually going to do and we've seen much of our growth driven by the deployment of mobile point-of-sale system and that seems to be an up and coming trend. But predicting how big and how quick that trend happens, I think is always a challenge.

Dominic DiSanti - Private Investor

Okay. So $60 million market right now, do you have the service that provide you with marketing data that gives you some anticipation for the next year or two, or three?

Kevin Mills

We do. We have forecast, but like all forecasts, they are subject to change. But I believe there is plenty of headroom in this market for the area that we’re focused on.

Dominic DiSanti - Private Investor

And it’s good to see that you actually increased your percent in that market in 2012 to ’13 albeit in small and growing, that's a positive to see that?

Kevin Mills

Yeah. And again that’s a good positive and we’re happy that this is a market that we believe has a lot of upside potential.

Dominic DiSanti - Private Investor

Okay. How much of competition there? What larger put – I mean, I assume the larger player is also in there competing with you a lot of competitors involved in that?

Kevin Mills

Well, I think this is one of things that's very important is traditionally all scanners particularly cable scanner look and behaves the same and were controlled by the operating system. One of things we’ve pointed out a number of times is that in the mobile and particularly in the Apple world, the actual application owns the scanner, which is why it's so important to have a large group of application developers and it’s that, that provides us protection.

Once somebody designs your scanner into an Apple-based solution, than you can see that you've been designed in and then we will track to see how many scanners are being built.

Once we get more competition, you don’t have to -- you can’t just say, I’ll provide a cheaper scanner. You have to go back to the developer to get your scanner qualify for that application, which is not attributable process. And ultimately that is a barrier to entry. And by better serving the developers with better tools and easier tools to make it easier to integrate our stuff in, that's what we see is our long-term competitive advantage.

Dominic DiSanti - Private Investor

Okay. So some of them get into the market, not so easy, it becomes almost that to get into a market, it needs to begin to acquire companies that are in the market already, so you need to get a foothold to that?

Kevin Mills

Yeah. It's not -- correct, it's not that easy because of the way it's structured and particularly with mobile stuff you need a tight integration between the application and the peripherals.

Dominic DiSanti - Private Investor

Right. And is there any new companies enter the market in the past, let’s say, year or so?

Kevin Mills

With scanners or…

Dominic DiSanti - Private Investor

Yes. Scanners, yeah. The ones that you guys have released yes.

Kevin Mills

We would -- we expect and continue to expect to see people enter the market. I would say, we haven’t seen any of what we call the large scanner guys enter into our space the likes of Motorola or Honeywell. We’ve seen more smaller Chinese, Taiwanese companies, Korean companies. But as this market grows, if you don’t get competition, you’re not doing something right, right? So part of it is that you need to be strong enough to deal with the competition and as we grow our market share here, we believe we'll be in that position.

So, it's not that at the end of the day, it won’t be a big market and everyone else is afraid to go after it. You have to – if it’s a worthwhile market other people will come looking for us and we’ve got to be in a position to be the best otherwise you won’t succeed.

Dominic DiSanti - Private Investor

Can you share with us what the market people have anticipated the market to grow to and can you share with us?

Kevin Mills

I would -- not really. We pay for the services and they’re really not for public consumption. But I would say that solid growth particularly driven by 2D scanning is what's predicted. But we’re not in a position to share that at this stage.

Dominic DiSanti - Private Investor

Understood. The largest competitive you have, do you know what percentage of the market they have?

Kevin Mills

Well, there's obviously -- we don’t have 84% of the market, so we have larger competitors. There are certain segments of the market, particularly healthcare that seems to be dominated by companies like [Cold] Corporation and we would give them as probably the largest market share at this stage. They are a private company.

We also would view both Honeywell have a Bluetooth product that does well in certain segments, but not necessarily in our segment. We believe we probably have the largest market share in mobile point of sale at this stage as well what's called commercial service.

And mobile point of sale is probably the category that is expected to grow faster.

Dominic DiSanti - Private Investor

Okay, sounds good. You know Mike I’m going to see what I’m seeing so far. It’s like you guys have started -- hopefully 2014 turns out to be a great year for you guys, but it looks like you’re starting off the right foot.

Kevin Mills

All right. Thank you very much Dominic.

Dominic DiSanti - Private Investor

Yeah. You take care.

Kevin Mills

Bye-bye.

Dominic DiSanti - Private Investor

Bye now.

Operator

Thank you. Our next question is a follow-up from Brian Swift from SRA.

Brian Swift - Security Research Associates

Yeah, on the SoMo, you had mentioned that some customers have explored the idea of abusing Android type of software as oppose to the Microsoft Windows Mobile. Have you considered switching over or at least putting out a model that would have--?

Kevin Mills

I think that certainly last year, we didn’t have a lot of resources and any resource we did have and phones we did have, we invested in the scanning side of the business. So, we did not really I would say invest the last in the SoMo in 2013.

To build a hand-held computer regardless of the operating system is really a $2 million investment and right now, we would do much better focusing on the area that's growing at 69%. So, we haven’t. It would be within our scope to do this, but the level of competition in the Android market space is pretty fierce.

So, I think we’re better off staying with Windows Mobile, servicing the customers that want us. And I would say -- I wouldn’t say turning the SoMo more into a cash cow, but it doesn’t seem wanted right now to do a large investment in this market due to the instability of the market. So, short answer is we could do it, but we don't intend to.

Brian Swift - Security Research Associates

Okay. Thanks

Kevin Mills

Thanks.

Operator

Thank you. Our next question comes from Steve Swanson, a Private Investor.

Steve Swanson - Private Investor

Hi. While I appreciate management’s focus on cost, a little bit alarmed to hear that with the exit of Gifford there are some other marketing folks that are gone, are you guys just leaving the market to run your business or are you -- what plans do you have or what are intentions for the first quarter specifically this year to push the product and get the revenues? We cannot save our self to prosperity, so I’m wondering how you’re focusing on the revenue side of things? Thanks.

Kevin Mills

Okay. So, first of all, the -- I don't talk in great detail about personnel issues, but certainly because we hadn’t done salary increases for quite some time and we’re in the bay area and competitive markets, we run the risk of losing people and we did lose some people. And we’ve now replaced those people, so we will see more marketing activity.

On the sales side, the vast majority of the selling is happening by the application providers. And who I mean by the application providers are people who have built and let's just take the example of mobile point of sale. If you go to let's say [Shopify’s] web page, and you want to buy the hardware for a mobile point of sale solution, they will offer you cash drawer, stands, a printer, a scanner. And when you click on that and you buy it, and that gets delivered to you via distribution.

Today, based on the fact that we’re designed into I would say something close to 40 different point-of-sale systems all of those point-of-sale providers are either selling or recommending our scanners directly to their customers.

One of the things that has changed certainly over the last two years has been that for applications like mobile point-of-ales, you can download the application direct from the Apple App Store or the Play Store and you don’t go anymore to the likes of a cash register retailer and if I look at our sales in 2013, our top three retailers were all online and include the people like Amazon and our top three stores 25% of all of our product and our top seven all online, so almost 40% of all of our products.

So the selling activity is being driven by the developers who have designed and we are continuing to see that happen right going forward. I think where we need to continue to focus is on marketing to developers as well as to the end users and that’s within our scope this year. We will be launching a program specifically targeted at developers later this week and to make it even more attractive to build our scanners in for their customers.

So yes we've had a little bit of disruption, but there has been no impact in the short term in terms of sales and Q4 and actually beginning of the year quite quiet in terms of mobile point-of-sales as people generally don’t change their cash registers during the busy selling season. We generally see NRF in mid January and we've seen a solid pick-up based on the referrals in February and we expect that to trend to continue all the way to June.

Steve Swanson - Private Investor

Okay. And then the other last question I have. I've been a long time shareholder and I was just wondering if trip out there to the shareholders meeting would actually be worthwhile or whether these are perfunctory 20-minute meetings that you have on an annual basis.

Kevin Mills

Well we don’t have a lot of shareholders and we certainly welcome you. What we generally do is we do a presentation to the company, shareholders included, outlining our strategy and taking questions. We view it both as an opportunity to educate all our employees on our strategy, our markets, what’s working and what’s not working. Generally the presentation lasts about 40 minutes and there is question-and-answer session afterwards and we will be happy if you would make the trip.

Steve Swanson - Private Investor

Does Charlie attend -- Charlie Bass and is he available for discussion with shareholders at that day?

Kevin Mills

I don’t believe Charlie will be at this meeting, but I can check.

Steve Swanson - Private Investor

Okay. That would be -- if he was there, I might seriously make the trip because a decision with him would be good as the Chairman as one of the founders and long time shareholder will be good to kind of get his thoughts as well. But I will check back with you later on in March to see kind of if you guys believe he will be there.

Kevin Mills

Okay.

Steve Swanson - Private Investor

Thank you.

Kevin Mills

Thank you for your questions.

Operator

Thank you. Our last question comes from David Savory, a Private Investor.

David Savory - Private Investor

Hi, good afternoon, gentlemen.

Kevin Mills

Hi, David.

David Savory - Private Investor

I got couple of things that surprised me in your quarterly numbers. The first one is a positive. I saw where your profit margins were 41% and does that -- should we see that going forward because I know you guys dropped the price with your scanners.

Kevin Mills

Yes. I mean -- I think on the scanning pricing we were anxious to make it attractive to get under a price of $1.99, which we achieved. And I think that will benefit us in the long term and we have reduced our cost and we are passing on those cost savings to customers. So I don’t think it will have a negative impact on our margins.

The other thing is by reducing the price of some of our more expensive products, we have seen more uptick in those products for the balance as a little bit better. So we are not anticipating any margin impact with the lower prices at this stage.

David Savory - Private Investor

Okay. Well, I was just anxious, saw it as a positive, because I know historically your SoMo was a higher profit margin item and so even though you’re selling more of them, I was actually glad to see this 41% profit margin on this $3.7 million.

Kevin Mills

Okay.

David Savory - Private Investor

On expenses, I saw comparing third quarter numbers to fourth quarter numbers, you were up about 315,000. How much of that was legal cost to the [Hudson] lawsuit and what was the other expense about. I saw Sales and marketing went up about $185.

Kevin Mills

Okay. So I would say there was 200,000 that’s nonrecurring and I don’t want to get into detail.

David Savory - Private Investor

Okay. So looking for first quarter about what numbers should we be looking for?

Kevin Mills

Approximately I think that we should be not quite as high as -- yeah, we should be not quite as high as Q4 and so I would expect to see lower expenses in Q1 and Q4.

David Savory - Private Investor

Okay. Okay. And my last question is the...

Kevin Mills

And bear in mind, bear in mind, we do have audit expense in Q1. So generally speaking it tends to be more – one of our more expensive quarters, but even with that, we don’t expect it to be as high as Q4.

David Savory - Private Investor

Okay. Okay. And the last question I have is on your supplemental loan that you took on for working capital last year? Do you have -- obviously, it's a high interest rate. Do you have a plan or timetable you can line up for shareholders and how you’re trying to get rid of it or pay it down or find a cheap resource of capital?

Kevin Mills

All of the above, right.

David Savory - Private Investor

Okay.

Kevin Mills

So, we would like to get rid of it as soon as it's possible. But one of – yeah, we’d like to get rid of it as soon as possible and we’re working on a number of ways to do that.

David Savory - Private Investor

Okay.

Kevin Mills

But it is not a good -- it’s a high interest loan, but the only thing that we could get available.

David Savory - Private Investor

Yes. And just one last quick question. Should we see the new bank line of credit closing and will there be a press release about it?

Dave Dunlap

We’ll file as an 8-k when all the documentation and I just completed, yes.

David Savory - Private Investor

Okay. That sounds good. All right. Thank you very much.

Operator

Thank you. At this time we have no further questions. I would like to turn the call back over to our speakers for closing comments.

Kevin Mills

Okay. Thank you very much operator. We would just like to thank everyone for participating in today’s call. And we look forward to report of April -- Q1 in April. Thank you all very much. Good day.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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