Socket Mobile CEO Discusses Q2 2011 Results - Earnings Call Transcript

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 |  Includes: SCKT
by: SA Transcripts

Socket Mobile, Inc. (OTCQB:SCKT) Q2 2011 Earnings Call July 26, 2011 5:00 PM ET

Executives

Jim Byers – SVP, MKR Group

Kevin Mills – President and CEO

Dave Dunlap – CFO, VP - Finance and Administration and Secretary

Analysts

Marco Rodriguez – Stonegate Securities

Bernard Fidel – Private Investor

Operator

Greetings, and welcome to the Socket Mobile’s second quarter 2011 results conference call. At this time, all participants are in a listen-only mode. A question-and-answer will follow the formal presentation. (Operator Instructions).

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, 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 to review financial results for its 2011 second quarter. On the call today from Socket Mobile are Kevin Mills, President and CEO, and Dave Dunlap, CFO.

Socket Mobile distributed its earnings release over the wire service at the close of the market today. The release has also been posted on Socket’s website at www.socketmobile.com. In addition, a replay of today’s call will be available at www.Vcall.com shortly after the call’s completion. And a transcript of this call will be posted on the Socket website within a few days.

We’ve also posted replay numbers in today’s press release for those wishing to replay this call by phone. The phone replays will be available for one week.

Before we begin, I would like to remind everyone that this conference call may contain forward-looking statements within the meaning of section 27-A of the Securities Act of 1933, as amended in section 21-E of the Securities and Exchange Act 1934 is amended. Such forward looking statements include, but are not limited to, statements regarding mobile computer, data collection and OEM products including details on timing, distribution and market acceptance of products and statements predicting trends of sales and market conditions and opportunities in the markets in which Socket sells its products.

Such statements involve risks and uncertainties and actual results could differ materially from the results anticipated in such forward-looking statements as a result of a number factors including, but not limited to, the risk that manufacture of Socket’s products may be delayed or not rolled out as projected due to technological, market or financial factors, including the availability of product components and necessary working capital. The risk of that market acceptance and sales opportunities may not happen as anticipated, the risk that Socket’s application partners and current distribution channels may choose not to distribute the products or may not be successful in doing so. The risks that acceptance of the company’s products and vertical application markets may not happen as anticipated and other risks described in Socket’s most recent form 10-K and 10-Q reports with the Securities and Exchange Commission. Socket does not undertake any obligation to update any such forward-looking statements.

Now with that said, I would like to turn the call over to Socket’s President and CEO, Kevin Mills.

Kevin Mills

Thanks, Jim. Thank you for joining us today. Today’s call will begin with a short review of Q2, and then I’ll outline the business opportunities we see for the rest of this year.

We are very pleased to be reporting a positive EBITDA result for Q2. This was achieved through a combination of increased revenue, increased margins and reduced expenses. Reaching positive EBITDA is an important milestone on the road to profitability, and is an important step forward for Socket.

Pause again with a review of our current handheld computing business, then provide a going forward outlook.

Our handheld computing related sales, which include our hand held computers and plug-in barcode scanners, grew to 2.6 million for the second quarter, a 24% sequential increase over the preceding quarter. While this is a significant increase, it was primarily driven by improved supply.

As we entered Q2, we reported significant backorders due to an industry-wide lack of LCD screens. During the second quarter, we improved our supply and shipped an additional 1,000 units of our handheld computers.

We believe that the supply situation will continue improve this quarter. At the same time, our backlog has continued to grow, reflecting the strong demand we continue to see for the SoMo.

Demand continues to be driven by several factors. The improving economy is helping. We are definitely seeing a return of deals that went dormant over the past two years and lead us to reengage with numerous customers, always a good and positive event.

We are also seeing increasing benefit from HP’s exit with classic PDA market. We are experiencing a significant increase in calls from current HP, iPAQ customers and resellers looking for an alternative as supplies of the HP iPAQ diminish. We believe we have not yet seen the full positive impact of HP’s departure.

We have established the SoMo as the default replacement in some markets, like Japan, where HP exited late last year. In many other markets, including in the U.S. we are currently in the evaluation phase, and hope to see these inquires convert into orders in the coming quarters.

So to summarize on our SoMo, demand remains strong. And while supply continues to be somewhat constraint, we can expect to make further significant dents in our backlog during Q3.

We expect to enter the fourth quarter with a manageable backlog and an improved supply situation, and be well positioned to take advantage of the HP iPAQ opportunity as it materializes.

Turning to the Cordless Scanning business. Sales in the second quarter of our cordless barcode scanning products which include sales of both our cordless handscanners and cordless ring scanners, was down 16% from the first quarter. This was anticipated as we saw the majority of a major roll off of our cordless ring scanner take place in Q1.

Remembering that Q1 revenue had increased over fourth quarter revenue by 265%, the lower revenue in Q2 is not too surprising. Our cordless scanning revenue for the first six months of 2011 was up 240% over revenue for the same six-month period a year ago.

Our cordless handscanner business continues to be driver by companies collecting data using a combination of mobile phones, tablets, notebooks and desktops while reading barcodes. And we see this as a primary driver of the cordless scanning business going forward.

In this mobile phone centric markets, we are serving customers who require commercial grade barcode scanning capabilities. Users are generally running business-critical functions with a softer application, running on a mobile device.

As we noted in our last call, we are seeing strong interest from both Apple and Android customers from many different markets. In all cases, customers are using an application on their device to collect and process the collected data.

Our initial cordless scanning report for Apple devices was done via keyboard and relation, for the data from the item scanned was entered as if you had typed it very quickly and very accurately on a keyboard. This is a great way to introduce scanning, as there is no development time. All applications already support a keyboard. However, it also has drawbacks, as the application cannot ensure the integrity of the data or manipulate the data prior to being processed.

Recently, we announced and began shipping our Apple Software Developers Kit, or SDK for SocketScan Test. Our SDK allows application developers to control both the scanner and the data it collects. A vitally important requirement for customers who are collecting critical information.

With our SDK, we enabled developers and their respective customers to achieve the robust dependable scanning solutions they demand and we believe it will believe it will drive our scanning volumes going forward.

As we developed the SDK,we worked closely and received feedback from several developers, and they now have incorporated the scanning controls into their applications and intend to deploy several hundred scanners in Q3.

It took them about four weeks to integrate and test their scanning-enabled applications. We hope this is typical of developer cycle, but suspect it may be a bit longer.

We expect our cordless scanning sales to be up sequentially in both Q3 and Q4, and to continue to build momentum as more and more apps are developed and deployed.

As I noted earlier, in Q1 we began a major deployment of our cordless ring scanners. This was to a large soft drink manufacturer. The majority of this deployment took place in Q1, which had a positive impact on our Q1 revenue. The deployment had less impact on Q2 and we expect it to complete in Q3.

The cordless ring scanner is an excellent product from a technical point of view, where the sales effort for this product tend to be very involved before culminating in a revenue-generating deal. We have seen renewed interest in the product, but will remain cautious through the long sale cycle and different business dynamic.

The bottom line in our cordless scanning business is we are very encouraged with the progress we made in Q2, particularly on SDK side, and we expect this to be a solid growth driver in both Q3 and Q4.

We are excited about the growth of both our handheld and cordless scanning business, which combined represented 83% of our total Q2 revenue. Going forward, we believe the growth of these two businesses will drive the growth of the company. The remaining 17% of our revenue is made up of service, legacy products, and OEM.

On the expense side, we remain extremely cost conscience and continue to lower our overall cost of operating the business. We further reduced our expenses by $55,000 in Q2 and combined with our increased revenue, we achieved positive EBITDA results for Q2.

In summary, over the past two quarters we have seen significant sales improvements on the back of an improving economy and growing opportunities from an increased demand from HP iPAQ customers, and we have maintained very tight expense managements. We have significantly reduced our net loss, improving from a net loss of 1.6 million in Q4 2010 to a net loss of 900,000 in Q1 and now down to a $300,000 net loss in Q2.

We are very focused on continuing this positive trend, and we are targeting bottom line possibility of the current third quarter.

We believe this is a realistic target for Q3 based on the solid backlog we already have in place and a much-improved business environment as well as increasing benefits from HP’s departure, increasing demand for our cordless scanning product, and improved availability of handheld computers as our suppliers increase their production of computer screens.

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

Dave Dunlap

Thank you, Kevin. Our second quarter 2011 revenue was $4.4 million, a 19% increase over second quarter revenue a year ago and a 8% increase over first quarter of $4 million. We entered the quarter with an order backlog of 3.2 million and exited the quarter with an order backlog of 3.4 million.

Shipments of our handheld computers for the past several quarters have been limited by the availability of computer screens as the factory producing our screens was acquired last fall for production of Apple screens.

We noted on our last management call that screen production would continue to be limited although improving in the second quarter with the shortage significantly clearing up in the third quarter.

As Kevin noted, we now have the delivery commitments from our screen supplier to significantly reduce the shortage this quarter and enable us to produce handheld computers in line with customer demand, which has been growing.

The increase in revenue to 4.4 million from 4 million in the first quarter and 2.6 million in Q4 of last year, combined with an improvement in margin to 42%, up from 37.5% in Q1, and a reduction in operating cost to 2 million from 2.1 million in the first quarter, all moved in the right direction for us to achieve an EBITDA positive bottom line result of $73,000 for the second quarter.

For the non-accountants in the call, EBITDA is earnings before interest, taxes, depreciation and amortization, and is a traditional measure of operating profitability.

Additionally, growth typically improved our bottom line results. Because Socket builds most of its products through contract manufacturers, higher volumes of shipments can be accommodated by running their lines a bit longer, and the additional contributions generated by higher sales reduces our fixed manufacturing cost as a percentage cost of sales, benefiting our overall margins and increases the overall contributions of the bottom line.

On the sales side, since Socket distributes its products through worldwide general distribution channels and has in place the infrastructure to manage its channels, a large percentage of the higher contributions from higher volumes of sales will pass through to the bottom line.

So as we look forward to our screen deliveries catching up this quarter, we expect higher shipments and revenues to further improve our bottom line and to improve the cash flow generated from operations.

Kevin has discussed the dynamics of our products in the business mobility markets that we serve. Revenue for our handheld computers products and related plug-in barcode scanners in the second quarter, increased 24% over the first quarter as we were able to ship an additional 1,000 computers over first quarter levels.

2.6 million of the total 3.4 million in backlog at the end of the second quarter is for SoMo-related products. As Kevin noted, demand for our handheld computers has been rising, assisted by Hewlett Packard’s decision, to discontinue its 200 series iPAQ.

The SoMo 650 is fully compatible with the discontinued HP units and enables businesses to substitute the SoMo 650 into their applications without needing to make changes to their software or how they use the hardware.

Shipments from handheld computers for the past three quarters have been supply limited, and we are looking forward to removing these limitations in the third quarter.

Improvements in margins from 37.5% in the first quarter to 42% in the second quarter reflected a combination of higher shipments, changes in the mix of products sold, and the absence of a nonrecurring charge we incurred in the first quarter for license fees.

Our operating cost in the second quarter were lower by 3% as we incur most of our annual audit cost in the first quarter. Our G&A expense was lower by 10% in the second quarter, partially offset by increased sales in marketing expenses we elected to make in the second quarter.

Our convertible note balance at June 30, 2011, was $775,000, down $25,000 from the balance at March 2011. We received an additional $75,000 in note conversions in July, bringing the balance today to $700,000. The notes mature in May 2012, and we expect them to be fully converted prior to that time.

Our balance sheet at June 30, 2011 reflects a number of working capital improvements since the end of last year, including higher unrestricted cash balances of $1 million compared to half a million at year-end, higher accounts receivable balances of 1.5 million compared to $800,000 at the end of the year, less cash invested in inventory at 1.2 million compared to 1.7 million at the end of last year, and slightly improving accounts payable balances of 3.6 million compared to 3.8 million at the end of last year.

We are working with our bank to restore our working capital bank line of credit to further assist us in financing our growth.

For the past two years, Socket has operated as a significantly leaner organization, including few employees and extensive cost reduction programs that reduced salaries and discretionary spending. At the same time, we retained key employees and funded the essential development programs that are benefiting today and will benefit us in the future.

We remain firmly committed to serving the business mobility market with our mobile handheld computers and data collection devices. We support Windows Mobile applications on our SoMo 650 handheld computer. Our linear and 2D barcode scanners and our RFID readers with our extensive SocketScan software are compatible with Windows Mobile, Windows, Blackberry, Android, and Apple operating systems running on a wide range of smart phones, tablets, notebooks, and other mobile computing devices.

Our software developers kit has received many favorable comments from developers, noting the sophistication and the ease of use. And we will continue to work closely with developers who wish to incorporate barcode scanning into their applications.

Socket continues to be highly leverage, both on the supply side with its contract manufacturers who have plenty capacity to support growth and on the distribution side for our many distribution partners and application partners, that are interacting with customers around the world.

Our goal remains to grow our revenue and bring growing sustained profitability to the bottom line.

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

Question-and-Answer Session

Operator

(Operator instructions). Our first question comes from the line of Marco Rodriguez from Stonegate Securities. Please proceed with your question.

Marco Rodriguez – Stonegate Securities

Good afternoon, guys. Thanks for taking my questions.

Kevin Mills

Thank you, Marco.

Marco Rodriguez – Stonegate Securities

Hey, I was wondering if you could discuss a little bit more in regards to your unit shipments this quarter, an additional in [inaudible], just shy of 4,000.

Kevin Mills

That’s correct. Yes.

Marco Rodriguez – Stonegate Securities

I believe last quarter you guys were talking about unit shipments of 4,500, that was your supplier – and revenues in the 5 million range. Can you talk a little bit about the dynamics that happened there?

Kevin Mills

Absolutely. So your memory is pretty good there. So we shipped last quarter, 2,900 units and we shipped 3,900 units approximately, say 4,000 units this quarter. And we had targeted to ship and recognize revenue of around 4,500. Due to the late arrival and I would say our continued, you know, delays and deliveries, even by a few days or a week, that last 100 units essentially fell into Q3.

So it’s always very difficult because we recognize revenue based on sales out, and therefore – and not only do we have to ship them, but the units must clear the distribution channel before we recognize them as revenue.

We did have a number of units that we shipped in the last week that didn’t clear the channel and therefore, weren’t recognized.

So I would say our 4,500 was a good guess, but we were still a little bit constrained by the late arrival in the quarter of certain components as well as our shipments. So we fell a little bit short and didn’t really fall on the 4,500 we expected to recognize.

The number of units we shipped was actually maybe a little bit higher. I don’t have that directly in front of me. But we probably increased the number of units in the channel probably by another 2 to 300 units. So we were pretty close to the 4,500, but didn’t quite get there.

Marco Rodriguez – Stonegate Securities

And you mentioned component shortages. Was there more than just the LCD screens?

Kevin Mills

No, not really. Again, that was a major component shortage. You all would have, oh, I’d say, some of the components showed up a few days late, but it was nothing significant except the LCD screens.

Marco Rodriguez – Stonegate Securities

Okay. And then if I understood you correctly, this last 600 units, you’re a bit short on. Did those already ship?

Kevin Mills

Yes. And a lot of them shipped in the last – we had a very busy last week of the quarter, and late June, and some of them actually shipped back then, or early July. But as I mentioned, we only recognize revenue based on sales out of distribution. So you know, generally speaking, that’s a 10-day, 15-day process between us shipping and the distributor receiving, and processing and shipping. It tends to get a little bit compressed towards the end of the quarter because everyone’s looking to make their numbers. But we were just a little bit too late. We shipped a lot in the last four or five days, and some of it just didn’t clear the channel.

Marco Rodriguez – Stonegate Securities

Okay. Fair enough. And then I was hoping you could help clarify something for me. When reading your press release, when you’re talking about the LCD supply situation being constrained, it somewhat implies that Q3 will continue to see some of this problem.

But in some of your prepared remarks, it kind of implies it’s going to be gone in Q3. Can you help me kind of bridge the gap there?

Kevin Mills

Sure. We strongly believe it will be gone in Q3, but based on the history, I think we remain somewhat cautious. We would like to physically have the screens in our posession before we really say it’s gone. We have been able to get somewhere in the region of 2,000 screens already this quarter. We have pretty firm delivery dates for everything that we need to, I would say, make a major dent in the backlog. But I think we remain a little bit cautious. I think the supply situation is definitely, definitely improving. But you know. We’ve been at this now for nine months. We’ve seen a lot of progress. So if there’s a conflict, I think it’s just the fact that we’re maybe a little bit gun shy. But if we were – we were a little bit too constrained in the press release. But we believe the supply problems are behind us now.

And the assurance that we have for Q3 are good, and there’s enough, I would say, slack in the system as to ensure that we have a good number for Q3.

Marco Rodriguez – Stonegate Securities

And can you provide an update on your second source for LCDs?

Kevin Mills

Yeah. I mean, we have qualified a second source. The environment has changed a little bit in that the primary supply came back and agreed to manufacture more screens, which we availed at the opportunity. So we know have multi-primary supplier as well as the secondary supplier approved and ready to go.

So that’s where we currently are at.

Marco Rodriguez – Stonegate Securities

And did they, the manufacturers ship any else [inaudible] in Q2, or…

Kevin Mills

No. No, they did not. What happened was, in late Q2 we got a call back through the – from our supplier who had been unable to supply to say that if a certain number could be ordered, that they would do one last production run. And working in conjunction with the manufacturing partner and other people who use this screen, came up with an acceptable number and placed that order in late June. And the deliveries of that order are supposed to happen in early August.

So based on that, and the fact that we’re back with our primary supplier and they’re manufacturing this in the primary factory, and there’s a large order involved, gives us a great deal of confidence that the screens will be delivered.

We’ve already seen some screens, so they are being produced.

Marco Rodriguez – Stonegate Securities

Okay, that’s helpful. And then the thing, I was wondering if you could talk a little bit more about your cost cutting initiatives. You’ve obviously done a good job in taking some expenses out of the model. I was just wondering if you could put some more color around what of that is kind of sustainable because you talked about salary reductions, reducing discretionary spending, if you could put any kind of color around those numbers as well as when you might see those number comes back up from a historical perspective, I guess.

Kevin Mills

Okay. Well, as I said, there’s a number of things to that question. Maybe Dave can help me out there a little bit.

But there’s two parts to your question. One is we made some structural changes, certainly, in late Q4, where the associated cost would not come back into the company. And essentially, we removed an outside sales force and concentrated our sales effort much more inside the building here. I think that reduced our sales costs quite significantly.

Then there’s areas where we took – we asked people to take a lower salary or eliminate a variable component as compensation, as well as we have reduced the amount of advertising spending we have done.

Those costs will come back in slowly as we reach profitability. We don’t think they’ll be huge, but you know, I would say all tolled they probably account for 5% of our costs. That’s, you know, - so – and then as we grow, we have to add some of the people. We’ve had the organization operating with less than really the optimal number of people. And I think that’s one of the reasons that we’re still here. And certainly, as we get financially a little bit stronger, we will operate a little bit more normal and that will probably add another 5%.

But it will only be done in light of achieving growth.

Dave Dunlap

Yeah, Socket’s largest expense, of course, are it’s people. And we run between 55 and 60% of our expenses directly related to compensation for – today, which is in the mid 60s, about 65 employees.

If we grow, we’re expecting to grow and we clearly control the timing, we would like to add about another five employees between now and at the end of the year. But it will be strictly tied to as we grow because a lot of it is driven by growth.

The other area of expense that we’ve been very good about continuing is with our development program. And we do expect that we will pick up the pace on some of our development programs that are looking forward as we move through the next two quarters if we get the growth that we’re expecting to, to really fund it.

All of it will be really driven by our desire to obviously achieve positive bottom line results. And as Kevin noted, we are targeting to be positive on the bottom line in Q3. And then, our EBITDA number, of course, would be substantially larger. The difference between our bottom line result and EBITDA results for us these days is about half a million dollars. Those are all the soft costs that we get to take; amortization, depreciation and so on .

So that’s our expectations. So the pace by which our expenses grow will be a function of the overall growth in both the top line and the bottom line, and we expect to see positive trends in Q3 and Q4.

Marco Rodriguez – Stonegate Securities

And then in regards to the guidance for positive net income in Q3, is that GAAP or is that an adjusted number?

Dave Dunlap

That’s GAAP.

Marco Rodriguez – Stonegate Securities

And just real quick, a few housekeeping items. I was wondering if you could provide any sort of percent of revenues that came from Japan from mobile handheld, and then what was your cash flow from operations for the quarter?

Kevin Mills

Dave will look up the cash flow. On Japan, I have to look at it, but first I would say about 10% would be the number I would put for Japan in Q2.

We don’t look – I haven’t looked at it that way, but just from the top of my head, about 10% for Japan would be 260K, maybe a bit more, but somewhere in that range of the handhelds.

Dave Dunlap

And Marco, cash flow from operations in the second quarter was somewhere in the neighborhood of about $280,000.

Marco Rodriguez – Stonegate Securities

Perfect. Thanks, guys.

Kevin Mills

Thank you.

Operator

Our next question comes from the line of Bernard Fidel, private investor. Please proceed with your question.

Bernard Fidel – Private Investor

Okay, good day, gentlemen.

Dave Dunlap

Hi, Dr. Fidel.

Kevin Mills

How are you?

Bernard Fidel – Private Investor

Good. You know what really stands out particularly, and I just want to make sure I’m not misinterpreting this. And that is the impact of HP leaving the market. All right, for instance, I would assume that H&P probably had 70, 80% of the market. And if that is the case, this is all a guess, we are more or less selling about 50,000 SoMos per year. And if they did have 70% or 80%, we’re talking about a market of 350,000 to 400,000.

Kevin Mills

That is correct.

Bernard Fidel – Private Investor

Okay. It’s a point I want to bring up. Now if we just achieve getting only half of that business, and I think our SoMo is more less a product of choice, similar to what happened in Japan, the number could fly off the walls.

Now, am I – is this wishful thinking or is my figures off, or what?

Kevin Mills

I mean, the short answer is, we don’t know, but we believe – we share your belief that this is a big opportunity for Socket. In that the departure of HP certainly opens up the markets and based on the fact that people liked the SoMo, it really does the job that HP did and then some. We think it’s a big opportunity and we’re working hard. We hope that Japan is a – an example of what would happen other places, and we’ll keep everyone posted.

As I said in my remarks, a lot of people are just in the eval phase right now, so we are getting a lot of inquiries to get samples out. And the – and people have to make choices. Do they stick with the form factor, do they change the form factor? I think the more credible we become a supplier, the easier it will be for people to choose us.

And we’re working very hard to, I would say, restore supply so we can be the credible, reliable suppler that HP was and enjoy some of those numbers.

Bernard Fidel – Private Investor

Yes because we’re talking about hundreds of thousands. Okay, but I just wanted to see if my thinking was positive on that.

Kevin Mills

Your thinking is definitely positive, and we would share – we believe this is a big opportunity. Now, I don’t know about the end number, but I think there’s plenty of [inaudible] potential in the near term based on the HP departure.

Bernard Fidel – Private Investor

Right. Now, with the Apple scanner, that is something that will be coming out soon? Does that have to be certified or approved by Apple or something like that?

Kevin Mills

Yes. So there’s a process involved and essentially we announced an SDK. We sent that off to Apple for approval and we will send the scanner off for approval this week. So have the scanner now ready to be submitted for approval. There has to be some time allowed between people developing the application and people wanting to buy the scanner.

So it was always our plan to announce the SDK first, and allow then a number of weeks to go by before we put the Apple-approved scanner into the markets. And we remain on track to do that. I expect by mid-August we will have that approved scanner in the marketplace, and we hope to have applications developed by then so that people who have [inaudible] will be able to buy those scanners.

Bernard Fidel – Private Investor

Can we announce that – if it is certified, we’d be able to say that this is a certified by Apple?

Kevin Mills

Yes. There is a program, and once we have certified, they have tested it and approved it, and given us their Good Housekeeping seal of approval if you will, yes, we will – that is something we will announce.

Bernard Fidel – Private Investor

That’s great.

Kevin Mills

Yes. We’re looking forward to that. I think that gives us a…

Bernard Fidel – Private Investor

And that can be sold throughout the world, is that correct?

Kevin Mills

That will be sold throughout the world. So for anyone who wants to have an Apple-centric solution where they’re scanning needs to be, I would say, the data needs to be controlled.

And so we think that also is a big opportunity for Socket. Again, our engineers and our marketing teams [inaudible] in this position. And even though the last two years have been extremely difficult, one of the areas where we preserved a lot of our resources was in R&D. And this is the results of that, is that now as the sun comes back out in many ways, we have good products to enter the market with.

So we’re looking forward to getting the boost that we believe this will bring in the second half of the year.

Bernard Fidel – Private Investor

Okay. And now my usual quarterly question, is the – how is the nursing home order that’s on hold, and the English [inaudible]?

Kevin Mills

Yes. We haven’t really made a lot of progress in either of those, and I would just say that generally speaking, as I said last quarter, and until our supply situation improves, we won’t really make a lot of progress. People have remained in the testing stage and we haven’t done a lot of outreach. We have a lot of people looking for SoMos and samples, and we continue to struggle to support them.

So we’ll see how it goes with both those opportunities, but I would say there’s a lot more opportunities that have come in the last six months that are equal and we’re providing samples to them right now.

Bernard Fidel – Private Investor

Yes. The supply thing seems to be flaring up at this point.

Kevin Mills

Certainly improving a lot. And we expect to make a big dent in our supply issues in Q3.

Bernard Fidel – Private Investor

By the way, the second provider, shall we say factor number two, are we going to give them any orders in the near future?

Kevin Mills

You know, we have to. I mean, you – it’s okay to have a second supplier, but if you don’t give them any orders, you don’t have a second supplier.

So we already have orders placed and then we have to work the timing. But again, as you can see from our inventory management and other areas, operations do a great job, and they’ll coordinate that with the respective suppliers and factory. It will be seamless, we believe, to the end customer.

We’re pleased…

Bernard Fidel – Private Investor

[Inaudible] pretty quickly.

Kevin Mills

Correct.

Bernard Fidel – Private Investor

Okay by the way, how’s [inaudible]? I haven’t heard about that in a long time.

Kevin Mills

I actually haven’t followed up too closely with [inaudible]. I know that they believe that 2012 would be the year where they would really make a lot of in roads. It’s on our list to follow up, but again, we’ve really been very busy with fixing our screen problem and getting units out to existing customers.

Bernard Fidel – Private Investor

Okay. Now, this is for David, the CFO. Now, with the HP and orders coming in, what would a – and this is a – for the first time that I could think of, it could be conceivable in a not-so-distant future. What would a $50 million per year sales equal in earnings?

Dave Dunlap

Well, you can almost build your own model, Dr. Fidel. But as you know, our margins today are running in the low 40% range. Those will improve as we grow. So you might want to use something in the mid-40s range, it could be higher. Our expenses, because we’re leveraged, will not go up as fast as our revenues go up, and so – but even if you use a doubling of today’s revenues, today at the 2 million level, that’s about 8 million a year. So you might use 15 or 16 million, your report tax numbers would be somewhere in the range of 10 to 15% of revenues.

So you’re probably looking at 5 to say 7 ½ million at 50 million, apply some tax, and then, although we haven’t had an operating loss carry forward, it would absorb a good part of that for a while. So – and then we – I would use the 5 million shares outstanding. Once the notes are fully converted, we’ll be just a little bit shy of 5 million shares. So you can take the results, you know, if you use 5 million, and it’s 5 million shares, that’s $1 a share, if you want to do it on a per-share basis.

But the key is if we’re bringing in $5 million a quarter and then as we grow beyond the 15 million level, that number continues to go up. That’s a great way to fund a business, and we certainly are looking forward to that opportunity.

Bernard Fidel – Private Investor

Right. That’s a little bit over my head. What would that be per share, would you say?

Dave Dunlap

Well, if you…

Bernard Fidel – Private Investor

On a quarterly and yearly I guess.

Dave Dunlap

Well, if you’ve got 5 million shares outstanding and you’re doing $5 million for a year, that would be a dollar. So it’d be $0.25 a quarter. Now, as you have said, so many variables, so we probably can grow to that level without needing to double our expenses. We don’t know yet what a portion of our before-tax incomes would be subject to taxation. So there’s lot of variables, but 50 million is a much healthier number for us because it covers the fixed costs associated with research and development, the fixed costs associated with operating the factory here, which is packaging and testing, and repair facility. And so many of our other fixed costs, like accounting and finance and the like.

So we’re really set up to leverage for growth and as you move well above the 50 million, it simply gets better.

Bernard Fidel – Private Investor

Okay. Well, just one more, or two more questions and I’ll get off. How would the sales so far in July?

Kevin Mills

I mean, they’re fine. There’s – I mean, I’d say we’re on track. I'm mean, there’s nothing extraordinarily good or bad to report. I mean, we’re off to a reasonable start. I wouldn’t say July is our most robust of months, but we are very much on track.

Bernard Fidel – Private Investor

Okay.

Dave Dunlap

And our sales order page as you recall from our previous conversations, picked up very strong after the first of the year. And we had $5 million in new orders coming in in the first quarter, and even though we only were recognizing 4. The second quarter, it was even higher, another 10% higher perhaps, ½ million. We’re just early into the third quarter, but we’re still on that type of pace.

Bernard Fidel – Private Investor

So we’re going pretty well then, huh?

Kevin Mills

Yes.

Dave Dunlap

Yes.

Bernard Fidel – Private Investor

Do you have any suggestion about next year, or the fourth quarter?

Kevin Mills

I would generally say no. I mean, so much depends, as you found out in your first question, what happens with HP. No, I think that, you know, right now we have a lot of people evaluating the SoMo that haven’t made decisions, they’re in evaluation. And I think we’ll have lot more color as we get into the October-November timeframe. The HPs are still available in the distribution channel, so there’s still pockets of them available. But anyway, by the end of the year, that won’t be the case. People will have to make up their minds.

So at this stage, I would say we don’t, but we’re certainly building a case whereby we will have a good projection going forward, but the HP is as much as swinger…

Bernard Fidel – Private Investor

Oh yeah, that could be an phenomenal thing, that HP. You know, it could be explosive by the situation.

Kevin Mills

Correct. So I would just say that we’re pretty positive on our outlook and that we’ll have better numbers as we see what people are doing.

Bernard Fidel – Private Investor

And you [inaudible] profitable for the third quarter, are you?

Kevin Mills

That’s the target. We think that’s the realistic target based on the combination of backlog, the strength we see on the business and the…

Bernard Fidel – Private Investor

That would be the first time in several years, I guess.

Kevin Mills

Well, again, I think getting to EBITDA, or EBITDA positive was a big step. And we just need to make a similar big step in Q3 and we’ll be profitable. So people are working very hard to make that happen.

Bernard Fidel – Private Investor

Okay. Last question. Do you want to comment a little bit more about the Apple scanner. Would that be significant?

Kevin Mills

Yeah, I mean, the whole Apple situation is very dynamic. There are many, many people wanting to use Apple in their solution. And certainly the – they need [inaudible]. As we pointed out many times, the weakness in both tablets and iPhone or phone-based devices is data entry. And scanning is an idea way to solve that. What we did first with Apple, I think was, it’s kind of a good start, but really not robust enough for people to use it in a business-critical application.

We’re very pleased with the progress we’ve made, the tools we’ve created and the opportunity in front of us. I think that it’s hard to know at this stage which is a bigger opportunity; the HP withdraw or the Apple scanner.

Bernard Fidel – Private Investor

[Inaudible].

Kevin Mills

So at least got two horses in the race.

Bernard Fidel – Private Investor

That’s what I was saying, which scanner do you like better or something, you know.

Kevin Mills

No, I think that, you know, we’ve narrowed the business over the last two, three years, and we really have focused our efforts in two areas, and I think we know have two reasonable, sizable opportunities in front of us.

Bernard Fidel – Private Investor

And actually, you expect to get Apple certification in the next couple of weeks then?

Kevin Mills

Yes.

Bernard Fidel – Private Investor

Well, that’s pretty good.

Kevin Mills

Yeah, again, I mean, Apple is a very well organized organization. We have to submit it. We believe we’ll do that this week and then you know, realistically, 3 to 4 weeks later we get an answer back and then we’d be allowed to ship. And we’ll announce when we get the answer back but not beforehand.

Bernard Fidel – Private Investor

Good. Well, listen, I’m extremely pleased. Let’s put it that way. You’ve got – everything seems to be going good.

Kevin Mills

Well, we’re happy you’re happy and we look forward to moving to the next step.

Bernard Fidel – Private Investor

All right.

Kevin Mills

All right. Thank you very much, Dr. Fidel.

Operator

There are no further questions in the queue. I’d like to turn the call back over to management for closing comments.

Kevin Mills

Okay, we would like to thank everyone for participating in today’s call, and wish you all a good afternoon. Thank you very much.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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