Socket Mobile CEO Discusses Q3 2010 Results - Earnings Call Transcript

| About: Socket Mobile, (SCKT)

Socket Mobile, Inc. (NASDAQ:SCKT)

Q3 2010 Earnings Conference Call

October 27, 2010 5 PM ET

Executives

Jim Byers

Kevin Mills

Dave Dunlap

Analysts

Paul Bernstein [ph] – Black Diamond

Sue Fidel [ph] – Private Investor

Steve Swanson [ph] – Private Investor

Presentation

Operator

Greetings and welcome to the Socket Mobile Third Quarter 2010 Management Conference Call. (Operator instructions)

It is now my pleasure to introduce your host, Jim Byers, MKR Group. Thank you, Mr. Byers, you may begin.

Jim Byers

Thank you, operator. Good afternoon and welcome to Socket’s conference call to review financial results for its 2010 third quarter and nine months ended September 30th, 2010. Online today are Kevin Mills, President and CEO of Socket; and Dave Dunlap, CFO of Socket.

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 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 have 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 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as 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, sales and market conditions and opportunities in the markets in which we sell our 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 our new products may be delayed or not rolled out as predicted, if ever, due to technological, market, or financial factors, including the availability of necessary working capital; the risk that market acceptance and sales opportunities may not happen as anticipated; the risk that our 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 our products in vertical application markets may not happen as anticipated; and other risks described in our 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 forward-looking statements.

With that said, I would now like to turn the call over to Socket’s CEO, Kevin Mills.

Kevin Mills

Thanks, Jim, and thank you for joining us today. Our third quarter revenue of $3.4 million reflects record quarterly sales of our SoMo handheld computer along with improve sales of our cordless scanning products, offset by reduced sales in our legacy businesses.

I’ll first provide an update on the market dynamics for our SoMo handheld and scanning products and how we see these two core elements of our business translating to growth going forward. I’ll then discuss the outlook for our current markets and the business for the rest of 2010, starting with our SoMo and SoMo-driven barcode scanning solutions.

In Q3, we generated quarterly SoMo sales of $1.67 million, slightly lower from the record $1.73 million we achieved in Q2. In Q3, we saw lower shipments to our customer app account as they transitioned during the quarter from our standard SoMo to a proprietary and customed Epoch branded SoMo. This process has completed and going forward, we will be delivering customized SoMo units to Epocal on a scheduled basis.

The rest of our SoMo business maintained a steady pace in Q3 driven by software applications developed by our developer partners over the past two years that are now deployed.

As we look to Q4, we are expecting record SoMo shipments in the quarter. With app calls transition to provide [inaudible] branded version of the SoMo accomplice. They are seeing a solid uptick of their business around the world.

As mentioned on our last call, Epocal launched their solution in Japan, Germany, Italy and the U.K. at the beginning of the summer. And the initial markets acceptance seems to be high and is driving good demand for their bedside blood analysis solution, which in turn drive sales for both our SoMo and plug-in scanners.

In addition to this very positive Epocal use and a steady demand from existing SoMo customers in Q3, we began initial deployments with SigmaCare software for long-term healthcare. [Inaudible] hospitals select us the combination solutions of SigmaCare software running on the SoMo as their solution and has begun a rollout to multiple locations.

We’ve discovered getting the first deployment is almost the most difficult and we are very pleased to be working with SigmaCare, which provides software solutions to over 150 long-term facilities in the U.S. We believe a successful deployment at Lancaster will serve as a validation to promote deployments with similar enterprises.

In addition to Lancaster and SigmaCare, we’ve been selected by our long-term care provider in Australia that supports more than 100 facilities. We will provide details about this win in early November.

Our SoMo handheld is gaining increasing acceptance and seems to be the ideal product within the long-term healthcare market and we’re focus on maximizing opportunities in this area. Hospitality is the secondary as we continue to see strong demand for the SoMo handheld, particularly with tableside ordering.

In Q3, we announce the partnership with ManuSoft, the provider of digital dining restaurant software. This relationship came about after working closely with digital dining and getting endorsements from some of their key resellers and customers who benefited from using the SoMo handheld and deploying a complete mobile solution. Digital dining through its network of resellers has over 30,000 installations in the U.S. and over 50,000 worldwide.

We believe this important endorsement will greatly benefit our increasing success in establishing the SoMo as the recommended waiter pad in the hospitality market. While it has taken time for us to establish strong foothold for the SoMo in our target markets, we are confident in the long-term prospects for continued growth in both healthcare and hospitality markets.

As we gain improve understanding and traction in the long-term healthcare and tableside ordering markets, we expect to see increasing deployments in the coming quarters and a very focus and establish the SoMo as the defector device in these market segments.

Turning to our barcode scanning products, this business was up sequentially in Q3 and we expect that trend to continue. We have made a lot of progress with our cordless products over the last two quarters starting with our support for the Apple IOS platform namely the iPhone, iPod and iPad touch devices. We began supporting the Apple devices with our cordless scanners, cordless scanning products. And in mid-September, we added Apple support for our less expensive laser-based scanners, which we believe will further increase our sales.

As we announced yesterday, we’ve also rewritten our core cordless barcode scanning software, SocketScan 10 representing extremely important milestone. This is the result of almost two years of work. Our previous version of SocketScan took several years to produce and it migrated overtime to encompass numerous plug-in and data collection technologies, which is great for developers implementing various types of technology based solutions.

However, since our target device are now using just Bluetooth as a connection scheme, we restructured and modulized the software to allow us to properly support the rapidly changing mobile phone landscape. This will allow us tremendous flexibility going forward, something we were not able to do with our previous version of software.

Our SocketScan software allows us to integrate commercial grade rapid and robust barcode scanning into mobile applications. Most of our customers are potential customers need updated database or corporate information like scanning and medication or an asset into a database. While they need to scan several items in less than a few seconds, in many cases, they require tools to confirm scan barcodes are populating the right fields, data checking needs confirmation or in some instances scan data characters need to be modified.

This requires sophisticated tools, which need to be written for small code space environments and made available from multiple operating systems. This week we launch SocketScan 10 for Windows 7 with support for the new craft of tablet computers hitting the market like the new HP 500 Slate as well as the BlackBerry devices.

This is our initial release and the software supports our complete line of both 1D and 2D cordless barcode scanners. We’ll be releasing SocketScan 10 for Android in late Q4 and a version that will support the Apple IOS platform devices in Q1 of next year.

Since the launch of the iPhone two years ago, one of our key goals has been to capture meaningful sales with smartphones and we believe we are now well-positioned to support the developer community with up-to-the-date tools and scanners that meet their needs.

We also announced our new developer compensation program with the release of SocketScan 10. This is truly a revolutionary program allowing developers to earn on the attachment of barcode scanners to devices running their application software. We’re extremely excited about this and are already receiving part of the feedback from developers that we’ve talked to about the program.

We built a mechanism to both work more closely with the developers, but also enabled a revenue sharing mechanism for our developers, which create applications that incorporates commercial grade, robust and rapid barcode scanning into their applications. A tremendous amount of work has been done in making all these happen and we expect we’ll have a meaningful impact on our cordless scanning sales beginning this quarter as well as future quarters.

Finally, on our Plug-in Scanning Business, today, we believe it is 70% driven by SoMo sales and by early 2011, it will be 100% SoMo driven and will grow in line with SoMo growth.

In conclusion, while this difficult economic market conditions have made the past two years especially challenging, we have made significant strides in right sizing our business, shedding a number of underperforming legacy sources of revenue and creating new generation solutions representing new sources of revenue.

Today, 72% of our revenue comes from SoMo related sources, when you include SoMo services, support and plug-in scanning and about 10% from cordless scanning. Total revenue will be driven by growth of this core products going forward. We expect to see a strong finish to Q4 and 2010 and we should be in good shape for 2011.

I would now like to turn the call over to Dave for his comments, Dave.

Dave Dunlap

Thank you, Kevin. Our third quarter 2010 revenue was $3.4 million, a decrease of approximately $250,000 over revenue of $3.7 million in the previous quarter. the decline was about equal to decline in sales of our legacy technology products and our OEM group that we are phasing out, especially compact flash wireless LAN card that are being phased out in favor of the smaller secured digital cards and the phase out of our older Bluetooth technology as final commitments to our OEM Bluetooth customers for those products are being satisfied.

As is typical for many of our third quarters, actual sales of our sales of handheld computer and barcode scanning products were essentially flat. With barcode scanning being slightly up and handheld computer sales being slightly down as reported by Kevin.

In the third quarter, handheld computer sales contributed 49% of our revenue, data collection product sales contributed 36% of our revenue and the balance of 15% was contributed by our connectivity products, OEM products and service revenue.

As Kevin has noted, the combination of the larger opportunities we continue to track in our pipeline that are moving toward deployment combined with a higher pace of orders already received for delivery in the fourth quarter are all signaling a much stronger fourth quarter.

Our operating expenses in the fourth quarter of 2010 were $2.1 million; it reflects the continuation of our cost reduction programs that have been in place for all of this year. These programs are designed to retain key sales, marketing service and product development program while reducing cost and expenses to achieve cash breakeven or better levels. We will maintain these programs during the fourth quarter until we are comfortable that the growth we are anticipating is sufficient to meet our fourth quarter objectives of achieving cash positive operating levels.

Net loss for the third quarter was $768,000 or $0.20 per share. Our cash balance at September 30th of a $1,450,000 declined from June 30th cash levels of $2 million reflecting the use of approximately $400,000 in cash to support operations and the reduction of bank line borrowings at the end of the quarter.

We are signing today and will announce later this after a definitive agreement for a $1 million convertible note financing. The 18-month note has an interest rate of 10% and is convertible into common stock at the option of the holder at an initial conversion price of $2 per share. We will also issue a five-year warrant to purchase $500,000 shares of common stock at a price of $2.41 per share.

The proceeds will be used to improve our working capital. This financing will in part replace our current bank line and will also reduce our overall borrowing cost. The shares that are reserved for issue when notes are converted and warrants are exercised will be registered during the next 90 days. Details of the financing will also be filed in the form 8-K, which we expect to file at the end of the day today.

We were asked a question on our last conference call on the status of the company’s application to the government for stimulus funding. We had submitted a funding proposal to accelerate the development of our next generation computer for the healthcare markets noting the productivity benefits and the need for the healthcare industry for accessing data and processing transactions will mobile. The category against which we were applying was a small one and we have been advice that our proposal will not be funded with stimulus funds.

Our CEO, Kevin Mills presented yesterday morning at the Financial Conference sponsored by Security Research Associates in San Francisco. The presentation included PowerPoint slide and is a good overview of Socket’s products, markets and direction. Both the slides and Kevin’s remarks are available on a link that can be accessed on the conference call and events page of the Investor Relations about Socket portion of our website at www.socketglobal.com and I encourage you to review the presentation.

Our priorities as we move through the fourth quarter and plan for 2011 are to grow our revenues while managing our cost to achieve near-term profitability and to maintain essential product development, sales and service programs. Our fourth quarter has started well.

We continue to receive strong support from our vendors, our customers and our application partners, and we are particularly appreciative of the dedicated work and continued and unwavering support we received from our employees and from our stockholders we share our vision of mobile opportunity in our key vertical market of healthcare and hospitality and the improved productivity that results from enabling the mobile workers to collect and process information while mobile.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Paul Bernstein [ph] with Black Diamond. Please proceed with your question.

Paul Bernstein – Black Diamond

Yes. I decided to join the conference call. I haven’t been on for a while, just to see the progress looks like you had some pretty good technology, but you’re still not cash flow positive. I know you’re addressing some of the cost issues and you’re right sizing your business.

But I’m wondering when you might estimate given that things are picking up, when you might need cash flow positive within the next two years or three years and you’re still borrowing money. And also, wondering if the senior management would take a dollar salary and get a huge bonus when you become cash flow positive since the shareholders really hasn’t benefit very much for all the good technology that you have since you really haven’t had many sale and your – hadn’t been cash flow positive for, I don’t even know how many years.

So, I – kind of two questions, you know trying to right size the business and you have a very small market to tap, so I haven’t seen that one through which you can leverage to this technology, which we haven’t seen yet.

Kevin Mills

Okay. Well, to answer your question. We believe we’ll be cash flow positive basically this quarter in Q4 and obviously, we’d been working towards that. But we believe that that is achievable this quarter and as Dave mentioned we are off to a good start and there is a bit more predictability in the business due to the fact that we have converted a key customer over to a contract with a custom version of our SoMo as oppose to going strictly to distribution where predictability has always been an issue.

As regards management taking a dollar salary, all I would say is that the management team here has reduced their compensation for almost two years by an average of over 35%. And that the current salary we’re paying are extremely small relative to what people could earn elsewhere and no bonuses and no variable compensation has been paid in over two years and base salaries have been reduced in addition by I would say over 20%, but for executives, the impact has been – again, I can speak for myself at over 50% or above 50% for two years.

So, there’s a high level of commitment. I don’t think that we are in a position to take a dollar a year salary. If I was, I would.

Paul Bernstein – Black Diamond

Okay.

Kevin Mills

Does that answer your question?

Paul Bernstein – Black Diamond

Yes. And none harming [ph], I’m glad you’re seeing your making a little progress. But if you’ve been a shareholder for years, you haven’t had any return, no cash flow, nothing, so you know …

Kevin Mills

We understand and …

Paul Bernstein – Black Diamond

No, you probably mean that was the point. It looks like you have some technology. Hopefully, you’ll get some critical mass otherwise you just might as well hang it up because you can’t keep doing this for years and years and years. You got to come to a head and show us what you can do.

Kevin Mills

Yes, we agree with your sentiments …

Paul Bernstein – Black Diamond

[Inaudible]. Okay …

Kevin Mills

We agree with your sentiments, but we have to show critical mass. I think that we have worked hard to, I would say, right size the business. It’s always difficult to predict when it will happen. I think we’re close and we actually have I would say a very good possibility to be cash positive in Q4 and that’s what we’re working hard to achieve.

I think once we achieve that we will be able to leverage ourselves going forward, but it’s been difficult for the past two years and we fully understand the shareholders have not got a return and we’re sensitive to the whole issues.

Paul Bernstein – Black Diamond

Okay. As long as you’re driven to do that and if you become cash flow positive and can sustain it, that’s your next goal. Then at least …

Kevin Mills

Yes.

Paul Bernstein – Black Diamond

They’re making a little progress because there hasn’t been any for, I don’t know, five or six years. So, hopefully, this is the year that you’ll start making some progress.

Kevin Mills

We appreciate your support and your comments, Paul.

Operator

Thank you. Our next question comes from the line of Sue Fidel [ph], who’s a private investor. Please proceed with your question.

Sue Fidel – Private Investor

Yes. Hi, there Kevin and Dave.

Kevin Mills

Hi.

Dave Dunlap

Hi, Dr. Fidel.

Sue Fidel – Private Investor

Yes. Okay. It was interesting you mentioned something about Australia.

Kevin Mills

Yes.

Sue Fidel – Private Investor

Is it a 100 nursing homes in Australia?

Kevin Mills

Yes, so let me just clarify, okay. What we’re discovering is that in many market segments, there is author of a piece of software, who will write an application or software solutions for a particular market and that software is then, I would say sold or used in a number of facilities.

What we have is that the author of the software, a company in Australia and we don’t want to release their name until next week because they’ve asked us not to because they’re upgrading their website and doing some other work – basically have selected the SoMo as a replacement for a Palm Pilot that they’ve been using for the last five years.

Currently, their software is used by over a 100 nursing home facilities in Australia and we’ve done a series of test with them. They have deployed about a 120 units prior to releasing the final package. They’re announcing that final package next week and then their customers will be able to switch over to the SoMo using the new improved software.

And we see this as a trend, you see also the same thing with SigmaCare. SigmaCare makes a pretty standard package that 150 plus hospitals your facilities use for long-term care. Once the author of the software endorses a solution, and selling it to the individual facilities is much easier. Each facility really makes their own decision, once they’ve selected the software and generally speaking they like to select something that has been recommended by the person who’s written the software at purely because in the event there’s above found our problem, they know they’ll get support.

Sue Fidel – Private Investor

Yes.

Kevin Mills

So, this is really how you create leverage. We have obviously supported customers like Good Smart [ph] who wrote their own software and currently we have in over 190 facilities. But unlike a good term, SigmaCare and the guys in Australia, they bring their own sales force to the party. So, in addition to getting the near-term business, you also get a sales force that’s selling it to other facilities, so that there’s a lot of leverage in the solution.

Sue Fidel – Private Investor

Right. Did you estimate how many SoMos would be sold from something like that?

Kevin Mills

It’s always hard to estimate. I mean what we know right now is that they have north of, I don’t know, 1,500 Palm Pilots and they basically would like to expand their market. And again, this is one software provider, and if you look at someone like SigmaCare …

Sue Fidel – Private Investor

Yes.

Kevin Mills

Again, they’re supporting a 150 plus facilities. It’s hard to know how many people will switch from key office based solutions to handheld base solutions …

Sue Fidel – Private Investor

Yes.

Kevin Mills

But these are the stones that get us across the river here because each of these steps has a multiplying effect.

Sue Fidel – Private Investor

Right. In the last conference you mentioned something about – there may be a deployment soon of a 5,000 or 6,000 whatever it was.

Kevin Mills

Yes. So, let me give you an update on that.

Sue Fidel – Private Investor

Yes.

Kevin Mills

The trial is still ongoing. The facility in question had told us prior to the last call that they needed to make a decision by late August and when late August arrived and went, they basically told us they had pushed the days to around Thanksgiving. We believe strongly that we will get this business. They have approximately 65 units purchase as part of the trial – for their trial and they’re simultaneously deploying in five facilities.

Without being overly confident, we are the primary solution there testing, but ultimately they will make their decision when they’re ready and we have to be patient. What we believe that deal is still very much alive and we are confident we will win that business, we just don’t know when.

Sue Fidel – Private Investor

Yes, okay. You mentioned Epocal – what is it called Epocal?

Kevin Mills

Epocal.

Sue Fidel – Private Investor

Epocal. That …

Kevin Mills

This is the company that has the blood analyzer.

Sue Fidel – Private Investor

Right, right. Were they affected by when we – when you transferred over to putting your name on it and all that. I’m sure that affect the third quarter, if it had [inaudible] in that way.

Kevin Mills

Well …

Sue Fidel – Private Investor

Well.

Kevin Mills

Essentially, it reduced our sales to them by about three to 400 units and that was the difference between not having a record quarter and having a record quarter.

Sue Fidel – Private Investor

Okay.

Kevin Mills

So, the issue would be – and now that we’re over on and the name of the company is Epocal, but the brand is Epoch, E-p-o-c-h.

Sue Fidel – Private Investor

Okay.

Kevin Mills

Now that they have got a more branded, it’ll roll out worldwide, and again now that they have a contract in place, we have greater visibility on their deployment and their commitments to inventory which is helpful from a planning and scaling point of view.

Sue Fidel – Private Investor

Okay. Let’s see. I remember about last year at this time there was a hospitality deal from Europe that was going to put over for one year or something.

Kevin Mills

Yes.

Sue Fidel – Private Investor

How is that doing?

Kevin Mills

We believe it is still on the table, this was a hospitality deal for festivals and events. Basically we need to stay in contact with these people. They have done a press announcement saying that they will be supporting and they have the contracts in place. We are expecting to see that business in 2011. We’re not expecting to see any of it in 2010 because everything got postponed.

If I was just to replicate the timing, it seems that most of these contracts for these events and the franchising of the food and alcohol services, seems to happen maybe Q1, and that’s one we got the ugly surprise last year that it didn’t happen. So I expect to get a definitive answer around that time based on their business practices.

The individual involved I know has been here in the U.S. negotiating contracts and other things. So we remain hopeful that that will happen also in Q1. And again if it happens in Q1, I think it would be an uptick Q2 business.

Sue Fidel – Private Investor

Okay. Now, could we – are there any big deals expected in the fourth quarter or something?

Kevin Mills

Well, I think that right now we feel that there is a good momentum from Epocal and thus I think we will have record sales of SoMo in Q4. So we’re looking for a strong finish to the year. I don’t think that there’s a blowout number, but I think, to Paul Bernstein’s earlier point, the first objective has to be cash positive operations, and I think that’s achievable in Q4. And I don’t think we need a Hail Mary to have a good Q4. I think we have a good start and we need to execute on that good start. So Q4 should be okay.

Sue Fidel – Private Investor

What type of sales do we need to be cash positive?

Kevin Mills

I would say to be cash positive, approximately 3.8, 3.9, and I’m going off the top of my head here, Dave could probably give you a more exact number.

Dave Dunlap

Yes, that’s about right. As you know, we’ve maintained our cost reduction programs and that has brought our, both our cash breakeven point and our bottom line breakeven point down considerably. So today we’re operating at levels that that cash breakeven point from operations is well below $4 million. I think 3.8 to 3.9 is a pretty good estimate right now. And then from there, you’d need another – at 4.4, 4.5, you’d actually hit profitability.

So as these increases are happening and as many of these deals start to kick in, we think the revenue growth that will come from those moves us up into that territory, and our intention is to move beyond cash breakeven on to profitability as quickly as we can. And we’ll continue to advise everybody on the progress on these various initiatives that were described earlier by Kevin, but most of those initiatives are expected to be yielding higher revenues quarter-over-quarter as we move through these next few quarters.

Sue Fidel – Private Investor

Right. Is there any chance that we could be profitable in the fourth quarter, or is that stretching it?

Kevin Mills

I think that’s stretching it. I mean I think that the issue that we have also and one of the things we’ve done exceptionally well is we have managed our inventory. Our inventory has fallen from almost 4.1 million to 1.4 million. We’ve generated $2.7 million of cash. So as you manage things, how quickly you can recover is also somewhat managed. I think we’ll take a good positive step in Q4, but it’s too big a risk, even if we had the orders, to go for a blowout at this stage.

So I think the issue would be you should look for us to be in that range, and I’d be happy to be, at the end of the quarter, in that range. It would be an extraordinary event that would get us profitable in Q4 and require us probably to take more risks than we could to make it happen.

Dave Dunlap

But our distribution model, Dr. Fidel, recognizes revenue on sales out from our general distribution channels. And the inventory in those channels today worldwide is somewhere approaching $2 million. So if customers want to buy products from the distributors, that can accelerate the revenue recognition and then those distributors replenish with us. However, it’s key for us to be forecasting the pace of that growth because we don’t want to wind up with a lot of inventory in too soon. So the channel acts as a wonderful buffer to our customers so that they can continue to get product, and then we work with the distributors to replenish that product as we go along.

So it’s really a function of customers’ decisions on when they want to buy, but – and with that buffer, we are able to support revenue growth faster than we would if we were just relying on our own ability to produce the product for unforecasted upside business.

Sue Fidel – Private Investor

Yes. I remember that in the past year we were talking about ring scanner. What has happened with that?

Kevin Mills

Essentially we have moved that to our OEM group for a number of reasons. The biggest one being is that through the distribution channel, it doesn’t really work well because many of the large customers who are interested in this have direct relationships with the Inframecs [ph] or the Scientek Logics [ph] or the Symbols [ph] of the world, and aren’t used to buying through a distribution channel. So we’ve moved that product over to our OEM group.

And again, we haven’t seen a lot of deployments. I mean I think a lot of companies, ourselves included, have been, basically for the last two years, avoiding all capital expense and minimizing wherever possible. So that product works great, it’s still sold, we have customers who continue to buy it, but we haven’t been aggressively promoting it because our sales channel doesn’t match up well with where the customer normally buys.

Sue Fidel – Private Investor

Okay. I just remembered that, that’s why. Now, this is one thing, the OEM, that used to be a big sales leader type of thing that we had in the past.

Kevin Mills

Yes.

Sue Fidel – Private Investor

[That gets] to about a million.

Kevin Mills

Yes, I mean, so the OEM business is driven by different dynamics. It’s a what we call design win business.

Sue Fidel – Private Investor

Yes.

Kevin Mills

And we won a number of designs in 2003, 2004, 2005, and all of those customers were running for three to four to five years, and we basically saw that business grow. We had two elements, Bluetooth and wireless LAN. But it was primarily Bluetooth. If you remember back to 2003, Bluetooth was a very complicated technology to get right, and we got it right early, and we were able to provide a working solution to people who couldn’t get a working solution otherwise. Over the last four or five years, with Microsoft improving their stock and the chips getting better, the level of complexity on Bluetooth is now much lower and it’s easier to buy something off-the-shelf that works. So that has largely gone away.

We have a similar situation in wireless LAN where we are now doing a design cycle. We’ve done a lot of work to deal with the complex environment out there. We have a number of customers looking at design wins – looking at our new designs to put into products. We’re now shipping samples to those customers. We’ve got our first I would say nibbles and we are delivering product beginning in Q4 to some customers. We expect to continue to, I would say, get design wins up until the middle of 2011. At that stage we’ll see that business come back.

The good thing about OEM business is once you get a design win, you typically get it for two to four years. And again it’s a very leveraged situation. Right now we’re between design wins, so the business looks pretty anemic, but it’s actually got more potential than it’s showing right now.

Dave Dunlap

But looking back in terms of the phasing out of the products that have been end-of-life, in 2008 we did over $9 million of business through our OEM team, heavily weighted, two-thirds of that to Bluetooth. 2009, as we finished up the phase-out of those products, we had dropped by about $6 million of revenue, so – and to a little over $3 million, and this year we’re on a pace to wind up with a little over $1 million of business in the OEM group.

Now that doesn’t count the contribution that our OEM customers are making to handheld computers and barcode scanning sales because that – but we’re talking about the unique Bluetooth and wireless LAN products, that’s been the substantial reason that you’ve seen an overall decline in the company’s revenues.

The good news is that we’re now at the – that phase-out is essentially completed and from this point forward we should just be experiencing growth in the OEM business as they continued to secure design wins with the focus this time being on wireless LAN.

Sue Fidel – Private Investor

But the OEM could be increased in the fourth quarter?

Kevin Mills

Yes. It would be up slightly. But again we’re really in a phase right now where we’re more sampling than selling. So the numbers will still be small, but it would be up Q4, but I wouldn’t get overly excited, it’s not materially up.

Sue Fidel – Private Investor

Yes. When would you expect that to be materially up then?

Kevin Mills

I think that what we know of this business, that I think that you should be looking at Q3 next year when the people who are currently evaluating and have made commitments, usually you’re talking about, after they signed, 120 days. I would expect to sign much of the business in Q1, Q2 next year and see improvements in Q3, Q4 next year. That would be in line with historical patterns.

And again it’s a type of business where you have to be patient. We all love the $9 million that we had in 2008, but that was the result of a lot of work while we were only earning $100 a quarter in 2003 and 2004. And we’re going through a similar situation right now and we’re pretty confident that that will add to our revenue. But it’s not an instant on because it requires someone else to design it into their products.

Dave Dunlap

But the OEM business does nicely leverage the technology we’re using in our own products, because our focus has always been to make use of this technology easy for our customers, it’s an attractive alternative for others to put into their third-party devices that are not competitive. And as Kevin notes, once you’re in a design win for a product, typically that product’s in the market for anywhere from three to five years, and so it becomes repetitive business based on the success of that product.

So it’s not a large incremental cost for us since we’re not putting any special time and attention in. If there is a special need of an OEM customer, typically we have them fund that special need. So it’s a good return on that investment as we see that business rebuild.

Sue Fidel – Private Investor

Okay. Just three more questions and I’ll get off, if anybody else have questions. How was the European business, particularly with the weak American dollar?

Kevin Mills

Certainly it’s helped, and the European business was stronger, well, again, in the summer. We had good European business. One of the things that I would say a challenge with a rapidly changing currency, which is independent, is that we have to price-protect the distribution channel. So if we lower our prices, we have to pay the difference to all our distributors. So we have been conservatively lowering our price, but certainly the weaker dollar has helped our business both in Europe and also we expect it to help our business in Japan where we recently launched the SoMo, and obviously the price of the SoMo is very attractive in Japan relative to the HP which continues to, I would say, be less and less available.

So, a weak dollar is helpful certainly, but it’s not an instant thing. But business was good in Europe.

Sue Fidel – Private Investor

Yes. The applications, in other words, are people developing applications for the Apple?

Kevin Mills

Yes. Again it’s a chicken and egg situation. No one develops an application until there’s hardware to support that application. So typically what happens is the hardware must be available for first, then people write applications. So –

Sue Fidel – Private Investor

Well, we have the hardware now, we developed that, didn’t we?

Kevin Mills

Correct. So the hardware has been available. We are seeing more and more applications.

One of the things that we’ve done with SocketScan 10 which we talked about is, because it’s ever-changing, we needed to have really more flexible and smaller software. And we rewrote our core software over the last two years so that we could address the mobile phone centric market. We’re now in that position. The hardware is available, the software tools are available. We are seeing requirements for applications. And then once the applications become available, hardware sales will start.

So we’re in that phase right now. I think the process has begun. So that’s where we’re at.

Sue Fidel – Private Investor

Okay. Last question, what do you see for next year?

Kevin Mills

I would say, a lot of improvement. I think one of the things you – we’ve struggled with in the last year in particular is that a lot of our legacy businesses, whether it be plug-in scanners, whether they be to HPs or Dells or other sources of revenue, has been declining. Right now 85% of our business is on – is coming from the SoMo and cordless scanning, two areas where we see growth. We have about 5%, maybe a bit more, 8%, coming from OEM, which is stable.

We have lost a lot of revenue because the market has changed and things have changed. There’s not a lot left to lose, and I don’t know if that sounds like a positive, but I think you’ll see a lot of the growth that we’ve had. And you have to remember, the SoMo has grown almost every quarter through this horrendous last two years, but often it’s replacing, just hold other revenue sources we’re leaving.

So I would say you’ll see a good 2011. And we’ll be able to give a lot more color on that on the next call.

Sue Fidel – Private Investor

Right. Do you look for profitability in 2011?

Kevin Mills

Absolutely. Absolutely.

Sue Fidel – Private Investor

Well, listen, as a stockholder, from a technology point of view, I’m trying to find something to criticize and I really can’t. It looks like everything is coming, just like a puzzle, everything seems to be falling into place at this point.

Kevin Mills

Well, we’ve worked very hard to make this happen. It hasn’t happened just yet, but I think you have pretty dedicated people here working hard to make it happen. And we appreciate your support in the process.

Sue Fidel – Private Investor

All right. There’s other persons who want to speak, I’m finished.

Operator

Thank you. Our next question comes from the line of Steve Swanson [ph] who’s a private investor. Please proceed with your question.

Steve Swanson – Private Investor

Did I hear right that the burn rate for the quarter was 400,000 in cash?

Dave Dunlap

From operating results, yes. I think it was, Steve, about $375,000. Again that’s a rough estimate; that’ll get fine-tuned as we get the Q out. But we again made up part of that with working capital changes and we also – but we used some of the, for example, we collected on our receivables because we had a more even set of sales throughout the quarter, so not as much at the end of the quarter as we had in Q2. But then the way we have our mechanism set up, a lot of that went to then bring down the balance, borrowing balance in the bank line. So, as you know, working capital is a revolving process. But the overall change in cash was $542,000, $375,000 of that though was the approximate amount from operating results. So the level of revenue is driving that.

Steve Swanson – Private Investor

Okay. And then, did I also understand that we’ve closed the line of credit with the bank and we’ve opened this 18-month convertible note with an individual or some kind?

Dave Dunlap

Yes. We’re just in the process of doing that. Those documents will get signed later today. And we will – that’s what I’ll be turning next, but the arrangements are in place.

The bank line for us is not as good a fit as we would have liked. First of all, as the banks are tending to do, there were some very tight financial covenants which, as you know from our history, we had measured on a quarterly basis, and some of them we were having difficulties in meeting, even though we were taking alternative steps to keep our cash balances where they needed to be. And we had some limited borrowing percentages and we also had a high, very high cash collateral requirement compared to the amounts we were actually borrowing.

Socket historically has funded its operations from equity financings, and at this point we concluded that we would be better to take that step, bring in a small amount of equity financing. And at this point we’ve set the bank line aside so that we could provide the first level of security for the notes. But these notes are convertible notes. The arrangements have been structured with the expectation that they will convert to common stock over that 18-month period. And as they do and effectively as they got fully converted, there would be nothing to keep us from resetting up alternative arrangements such as our bank line back with the bank.

We have a solid relationship with our bank which is Silicon Valley Bank. They’ve been very supportive. And we – I wouldn’t be surprised that you’ll see us reinstituting those – we’re maintaining our banking relationships there in any case. I wouldn’t be surprised if you’ll see us moving in the direction of reestablishing that type of line when it’s appropriate for us to do so.

Steve Swanson – Private Investor

Yes, I was a little disappointed that we aren’t able to continue with that line because we’re going to be diluting the shareholders a bit with this conversion, and I guess we have to do what we have to do, but that’s a little disappointing that we couldn’t maintain that bank line or credit. And to your point about brighter things in the future, we’re going to be sharing it more with this person who’s going to be doing the investing. So, a little bit disappointed in that, but I understand that you guys have to do what you have to do.

Dave Dunlap

I think it provides overall strengthening to the company’s working capital and we’ve understandably kept it lower than – I mean we didn’t try to do a large financing at these levels.

Steve Swanson – Private Investor

Sure.

Dave Dunlap

So it’s a balancing act.

Steve Swanson – Private Investor

Yes. And I guess the last question I had was, could you – I was a little surprised to see this launching developer’s compensation program the other day in a press release, and I’m, for the life of me, trying to figure out the value proposition for a developer in participating in this. So I was wondering if you could expand or expound a little bit upon what we’re trying to accomplish and what the value proposition both for the developer and for our firm is going to be.

Kevin Mills

Okay. I’ll be happy to do that. Essentially we have a lot of developers and they’re very agnostic about whose scanner they connect to. And we can just take a few examples.

Let’s just take someone who does an application, we’ll say just for the iPhone, for the sake of our discussion, and they’re doing it for dietary needs. So you can go to a supermarket, scan a particular item on the shelf and maybe this application goes and checks to see, does it contain peanut oil or something like that. Okay? People write those applications. And at the end of the day, they don’t care whose scanner is used. Okay?

What we’re essentially saying to the developer community is, we will provide you with the tools, but if your application is successful and you are selling a lot of scanners, we will provide a rebate mechanism so you can earn some money off the sales of the scanner, so we want you to care. That essentially is the program.

And we can do this because we’re really doing it over the mobile phone networks and we’re targeting iPhones, BlackBerrys, Android phones, Windows Mobile phones, Windows – yes, mobile phones, et cetera. And then basically because these devices are connected to the internet, you can basically say, that application sold that scanner, and give the developers a reason to care.

We’ve reached out to our developer community, and particularly on the Apple Store or the app store, often the applications are being sold for $1 or $2. We can basically incense people to care about the scanner and pay them some money for that referred business, if you will.

This we don’t believe has been done before. The tools haven’t been in place to make it possible before; now they are. So we’re basically saying, work with us. And the reaction so far has been very positive. I don’t know if that clarifies it for you.

Steve Swanson – Private Investor

So the target customer base for this is the consumer, not a business?

Kevin Mills

No. The target for the compensation is the developers. They are the target –

Steve Swanson – Private Investor

– but the application that you described, what I thought I heard you say was very similar to applications on an application on the iPhone or for the tablets. So they’re targeting, you know, they’re targeting individual consumers –?

Kevin Mills

That was just the example I gave, but we’ve talked to the likes of we’ll say Kelley Blue Book who would target people who are in the professional business of selling used cars, they were very excited about the opportunity, book resellers. So I just used – maybe I didn’t use the best example, but in each market there are people who target a group of customers. And then they will use a device, whether it’s a BlackBerry which would be more corporate and maybe Apple which would be more consumer. I could have used an example with the BlackBerry whether – for tracking inventory, et cetera.

And again, we kind of know this stuff works. Many years ago, as an example, we worked with a company that was servicing Coca-Cola fountain. Okay?

Steve Swanson – Private Investor

Yes.

Kevin Mills

And they had a similar program in place, is if you did maintenance on a Coca-Cola fountain and you sent the information off the Coca-Cola, there was a $1 if you scan the barcode of the soda fountain, and there was a bonus of $20 if it was not in their database. Okay? So at some point along the way, they had lost control of all soda fountains they had out there. So you can reach out to your developers and say, "Put this in, and there’s a mechanism." We’re essentially saying the same thing.

And we’re pretty agnostic about the application. You don’t know which application is going to be very successful. We continue to be surprised – we sell a lot of scanners to book resellers, to people selecting things like wines or CDs. We sell a lot into the automotive industry where everything is bar-coded, and they’re used to buy and sell cars, et cetera. We didn’t create these apps, but we need to service them.

Steve Swanson – Private Investor

Sure.

Kevin Mills

And basically we’re trying to give incentives to the people who are creating the apps to be more Socket-aware and to benefit by selecting us, not only for the tools and the good sides of the device, but to have an opinion. And that has always been a problem because at the end of the day a lot of software people don’t care too much about hardware, they only care about software.

Steve Swanson – Private Investor

Yes. Okay. Will you be able to share with us progress on this program at the next conference call?

Kevin Mills

We already launched it, we will share progress at the next conference call, yes.

Steve Swanson – Private Investor

Okay. That’s all I had. Thanks, man.

Kevin Mills

All right. Thank you very much.

Operator

There are no further questions at this time. I’d like to turn the floor back over to management for closing comments.

Kevin Mills

Well, we’d just like to thank everyone for participating in today’s call, and we look forward to updating you with our results early in the new year. Thank you all very much.

Operator

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

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