Socket Mobile's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Jul.26.12 | About: Socket Mobile, (SCKT)

Socket Mobile, Inc. (OTCQB:SCKT) Q2 2012 Earnings Call July 26, 2012 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

Brian Swift – Security Research Associates

Paul Bornstein– Black Diamond Advisers, LLC

Bernard Fidel – Private Investor

Roy Rogers – Private Investor

Operator

Greetings, and welcome to the Socket Mobile Second Quarter 2012 Management Conference Call. (Operator Instructions)

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

Jim Byers

Thank you, Operator. Good afternoon and welcome to Socket’s conference call today to review financial results for its 2012 second quarter ended June 30th, 2012. On the call today from Socket are Kevin Mills, President and CEO, and Dave Dunlap, Chief Financial Officer. Socket Mobile distributed its earnings release over the wire service at the close of the market today. The release has also been posted on Socket’s website at www.socketmobile.com. In addition, the 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 Socket’s 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, and section 21-E 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 Socket sells its products. Such statements involve risks and uncertainties, and actual results could differ materially from the results anticipated in such forward-looking statements, as a result of a number of factors, but not limited to, the risk that the manufacture of Socket’s products may be delayed and not rolled out as predicted due to technological market or financial factors including the availability of product components and necessary working capital, the risk that market acceptance and sales opportunities may not happen as anticipated, the risk that Socket’s application partners and current distribution channels may choose not to distribute the products or may not be successful in doing so and the risk that acceptance of Socket’s products and vertical application markets may not happen as anticipated, as well as other risks described in Socket’s most recent form 10-K and 10-Q reports filed with the Securities and Exchange Commission. Socket does not undertake any obligation to update any such forward-looking statements.

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

Kevin Mills

Thanks, Jim. Good afternoon everyone and thank you for joining us today. In today’s call, I’ll begin with a brief review of our Q2 results, then discuss the business opportunities we see ahead and our outlook for 2012.

Our revenue for the second quarter was 4 million, consisting of 2.1 million of SoMo related sales, 1.6 of cordless scanning related sales and 300,000 from service and other legacy-related products.

Q2 revenue was essentially flat compared to Q1, reflecting the impact of the transition we have been going through with both our product families. Both our next generation handheld computer and new cordless scanning products are now shipping, and we expect to be well-positioned to see growth in both categories in the third quarter and going forward.

Revenue from our SoMo product line was impacted by customers waiting for our next generation handheld, the SoMo655. We started shipping the new 655s in late Q2, a few weeks later than originally expected. Based on our late quarter shipments and the fact that we only recognize revenue based on sales out of distribution, we only recognized about $10,000 of revenue within our stated second quarter results. The positive side of this minor delay is that sales of our previous version, the SoMo 650, remained strong in Q2, and we began the process of transitioning our existing and new customers over to the 655.

We also completed a transition in our cordless scanning business during Q2, for the phasing in of our Apple-certified version, the 7ci, which utilizes a cost-reduced 1D scanning engine that positions the scanner nicely within our Apple-certified product family. This introduction allows us to consolidate our lower-priced 1D scanning offerings into a single product.

I’d now like to provide more detail on each product family, starting with the SoMo handheld product business. We expect the transition to our new and enhanced SoMo655 to be completed during Q3. In Q2, we sold 3,776 standard SoMo650s, an increase of 70% over the same period last year and 8% more than in Q1. So overall demand for the product remains solid. We have approximately 1,000 SoMo650 units in distribution, which is about three to four weeks’ supply, and once the supply is exhausted, we expect our customers to move rapidly to the newer 655 model. We are currently stocking our distribution channels and these units are being purchased by existing and new customers for compatibility and validation testing for their applications and usage scenarios, prior to final deployment. Several of these customers were members of our beta testing team, and we’ve already seen these customers completing their qualification tests without any issues. However, as with most corporate deployments, we typically don’t see or expect transition to new devices to start in earnest until the last of the existing supply of qualified units are depleted.

I’m happy to report that feedback from early customers has been excellent, and customers are very happy with the improvements we’ve made on the performance of the new hardware and associated software. In addition, numerous new features like our new support for [inaudible] has opened up new opportunities for us in the healthcare markets. For example, in the healthcare segment, we are seeing institutions mandate implementation of [inaudible] standards for their wireless infrastructure, which is a wireless protocol the SoMo650 does not support.

A quick update on [inaudible] to one of our large OEM customers. As discussed in our last call, we did visit them during Q2 and they now have a 655 SoMo in testing. However, based on the current inventory levels and business outlook, we do not anticipate that they will need any more SoMo units until early next year.

Overall, we are feeling very good about the SoMo 650 to 655 transition, even though it has extended a little further than expected. We look forward to completing the transition during the current quarter, and being in a position to grow the business going forward.

Turning to our cordless scanning business. Our quarterly scanning revenue in Q2 was 1.6 million, which is slightly higher than in Q1 and is up 49% over Q2 of last year. We remain very positive on the general outlook, and while we are somewhat disappointed that we didn’t see stronger growth in Q2, overall sales in the quarter were impacted by some larger deals being delayed and the completion of our transition to the Applecentric product family of 7ci and 7xi.

Yesterday, we announced a new and revolutionary software developer’s kit, or SDK, which will enable us to grow our cordless scanning business much quicker going forward. The new SDK addresses the issue of enabling the smartphone’s camera to be used as a barcode reader, which is something that is both real and significant, even though companies that make traditional laser and imaging scanning engines and Bluetooth scanners don’t always like to acknowledge. The use of a smartphone camera as a scanner isn’t new. It’s been offered for several years, and only recently has become mainstream with the adoption of popular consumer QR codes.

Over the last year, we’ve had very healthy and extensive discussions with our software development community in the Apple iOS and Google Android space. Following our discussions with these developers and their customers, we determined that nearly all Socket’s barcode scanning customers who use mobile phone and Bluetooth CHS scanners first tried to use the built-in camera in their phone to read the barcodes. Obviously the reasons they tried the built-in camera is the hardware is free. After concluding that scanning with the built-in camera was too difficult for a significant percent of the users in corporate and time-sensitive occupations, they then moved to the cordless hand scanner.

For the developer to move from the built-in camera scanner to our cordless hand scanner, they needed to rewrite, retrain and in general, do rework to make this happen. Rather than fight this issue, we made a rather bold move and decided to embrace the mobile phone camera and work with our developers to enhance the overall development efforts. Frankly, our goal in doing this is to help the developers in their application creation efforts. Based on our extensive discussions with corporate developer community, roughly 33% of the customers who start using smartphones’ free built-in camera as the barcode scanner are satisfied with the results, which means 66% of these customers are looking for a better or more comprehensive scanner. Obviously, Socket would like to capture as much of this 66% as possible. Today we capture one developer at a time, but each developer needing to rework her code to support the more robust and dedicated scanner like the CHS.

With the new SocketScan 10 SDK we announced yesterday, we’ve made it possible for developers to develop their code once, with a single application programming interface, or API, and be able to support both the 33% of customers who are happy with the built-in, free smartphone camera scanner, and the 66% of customers who will need a more robust or dedicated scanner. This, in effect, gives the developer and his customers some assurances that they are being taken care of as they deploy the solution into the real world of day-to-day activities.

Our new SocketScan 10 SDK utilizes a scan engine technology from the leading supplier of embedded camera scanning software, RedLaser, which is an eBay company. Applications that surround this new SDK will allow use of either the built-in camera or the Bluetooth barcode scanner, individually or both at the same time, as requirement dictates. In addition, developers do not need to do any rework should the customer need to transition from using the built-in scanner to a more robust cordless hand scanner.

We feel this approach of embracing the free smartphone camera into our barcode solution set is both unique and revolutionary, as it makes life easier for the developers and their customers they serve. It will make it easier to grow our business, attract new iOS and Android developers, and it will allow people to use the scanner that suits their needs. If they just use the built-in camera as the scanner, that’s fine, but if they need to step up in performance and capability, then we’re there to help without any changes in the software. This is hassle-free upgrading.

In addition to this exciting enhancement to the SDK, we also announced a new developer program. Complete information can be found on the web at developer.socketmobile.com. Our new program is structured to build our development community to higher levels and to offer improved support and interaction with this important group. To briefly summarize the program, both barcode scanners and SoMo handhelds are supported. For your $19 enrollment fee, developers are entitled to free updates, invitations to our developer conference, inclusion of beta programs and [inaudible] groups, development lead referrals, plus some discounts.

In summary, as we anticipated, Q2 continued as a transition quarter, but these transitions are now largely behind us. We began shipping our new 655 handheld in Q2, are seeing strong customer acceptance, and are again in position to generate growth in the mobile handheld business. We completed our cordless scanning transition and launched a revolutionary SDK that will enable developers to support both free smartphone-based camera scanning and Socket’s Bluetooth scanners, simultaneously. We believe this will not only accelerate Socket’s cordless scanning growth along with improving developers’ capabilities, but solidify Socket as a leader in the emerging mobile scanning [inaudible].

I would now like to turn the call over to Dave for a review of the financials.

Dave Dunlap

Thank you, Kevin. Our second quarter 2012 revenue was just over $4 million, flat with the previous quarter and down 7% from the second quarter a year ago. Product sales in both first and second quarters were nearly identical, as both quarters were impacted by product transitions that were announced in the first quarter and completed in the second. As Kevin mentioned, we released during the second quarter our low-cost Apple-certified barcode scanner, our model 7ci. Our cordless barcode scanning revenue was 1.6 million in the second quarter, an increase of 5% from sales of 1.5 million in the first quarter. Our 2D scanners represented 48% of this total. Sales of our linear barcode scanners represented 42%, with the balance of 10% attributed to sales of our ring scanner and accessories.

The mix was similar to the mix in the previous quarter, but with increasing sales of our high-end and low-end linear barcode scanners, while the sales in our intermediate model, the 7m, declined somewhat, all based on customer preferences that can vary from quarter to quarter. Early adoption of the model 7ci has been good, with approximately 800 units selling out of the channel during the second quarter. The channel is now fully-stocked with our model 7ci product. We defer revenue recognition until products ship out of the channel. The favorable pricing of the model 7ci has allowed application developers such as LightSpeed, which offers a point of sale retail solution, to bundle our 7ci barcode scanner with their point of sale application. We expect continued growth in both our low-end and high-end barcode scanning models as we move through the year.

We also released our newest handheld computer, our SoMo model 655. But it was released just about a week prior to the end of the second quarter, so as Kevin noted, almost all of the 2.1 million in second quarter SoMo-related sales revenue reflected continuing sales of the SoMo 650 computer.

We have not produced the SoMo 650 handheld computers since the end of last year, and expect supplies in the channel of our standard and antimicrobial models to be fully depleted during the second half of this year. Maintaining availability of our SoMo 650 handheld computer in the channel, while the new SoMo655 ramped up, was one of our key objectives, and that appears to be transitioning well. We continue to ship SoMo 655 products into the channel, and expect the channel to be fully stocked by the end of August. As product becomes more readily available and as the remaining available supply of SoMo 650s becomes depleted, we expect SoMo 655 sales to become a significant revenue producer in the third quarter and beyond.

Our gross margin for the second quarter was 37.1% of revenue, slightly lower than the gross margin of 38.5% in the first quarter. These margins are somewhat lower than our average margins last year of 41.4%, as reductions in the channel in SoMo 650 products, without having the new product to immediately replace them with SoMo 655 products, reduced our overall shipments into the channel during the quarter, and resulted in higher fixed period costs charged to the quarter rather than being absorbed into inventory. As our shipping volumes accelerate in the third quarter and beyond, we expect to see a return to higher gross margin levels.

Our operating expenses in the second quarter were 2.2 million, compared to expenses of 2.4 million in the first quarter and expenses of 2.0 million in the second quarter a year ago. G&A expenses in the second quarter decreased by over $100,000, as the first quarter includes most of the cost of our annual audit and annual meeting shareholder communication costs. The increase of operating expenses in the second quarter, compared to the same quarter a year ago, included higher engineering development costs associated with completion and release of our products, and increases in employee compensation associated with employees in engineering and sales and marketing, that were not on the payroll a year ago but were needed to support our new product development and to manage our sales crew.

Our second quarter net loss was $755,000, or $.16 per share, compared to a first quarter net loss of $872,000 or $.18 per share, and a net loss in the second quarter a year ago of 392,000 or $.09 per share. In the second half of the year, we expect to improve operating results with higher sales revenue and improved margins, while holding our operating expenses flat. Our objective remains to bring the company to profitable quarterly operating levels during the second half of this year.

Operating losses in the first and second quarter of 2012 lowered our stockholders’ equity below the minimum threshold required for continued listing on the NASDAQ capital market. The NASDAQ listing’s qualification staff has limited discretion to provide an extension of time to correct the deficiency, and unfortunately with our new SoMo 655 handheld computer shipping very late in the second quarter, there was not time to generate sufficient revenue to regain compliance during the second quarter from operating results. We now [inaudible] see that we will commence trading on the over-the-counter market starting tomorrow. We qualify for the market’s highest tier for the best companies, the OTC-QX tier, and we expect to move from a bulletin board tier to the QX tier in the next few weeks, as soon as our application has been processed and approved.

The OTC markets provide complete visibility to investors on trading activity, and the company will continue to maintain all of its corporate governance and reporting activities, the same as required of a company listed on the NASDAQ Exchange. We will continue to closely manage our working capital, hold down our expenses to those deemed essential and stay focused on ramping up sales of all of our products, while building customer demand.

We have engaged Accelerize New Media, a company specializing in effectively presenting the company and communicating our activities to investors and other interested persons. We will provide more information about Accelerize on our website over the next several weeks.

We continue to enjoy close cooperation and support from our suppliers, our customers and our employees. Our objective in 2012 remains focused on serving the emerging mobility markets in business and healthcare, growing Socket’s revenues to profitable operating levels and building shareholder value.

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 Brian Swift – Security Research Associates. Please proceed with your question.

Brian Swift – Security Research Associates

Yes, I don’t know if you can hear me. I missed a little bit of the earlier comments, but can you give us a little bit more collar on how your pipeline of customer orders are for the new 655, and what kind of ramp should we be expecting over the next quarter or two?

Kevin Mills

Sure. So I said on the ramp. Right now I would describe it as we are still in testing phase. We sold near record levels of the 650 in Q2, that’s almost 3,800 units. Most of those customers are happy with the 650, and until we run out of supplies of the 650, which we anticipate should happen probably in the next three weeks, I don’t see the majority of, I will call it, the runway customers moving across.

We’ve had many people test and approve. The difference with the 655 is that we now can attract new customers, and we are seeing customers come to us that we didn’t previously have, that are testing and adding to our revenue.

So, it’s still a little early, but we would expect, I would say a small increase in Q3, and a much bigger increase in Q4, as people have completed their evaluation.

Even though we had 80 companies test the beta unit, we also had a number of them who declined to be in the beta program, and selected to test the real production units, and we are just getting to those customers now.

Brian Swift - Security Research Associates

(inaudible) about the ability to get supply, how is that ramping up, are you on tract with what you expected?

Kevin Mills

Yes. Well overall as we pointed out in our call. We are probably three weeks later than expected in delivering the product. So, we’re a few weeks behind in ramping up.

In the first phase we just filled up the channels, but not overstocked us, as the people can get their eval units, and then the plan is to fill the channels with the appropriate number to meet demands I would say by late August. As you know during the summer, and particularly this year with the Olympics, we do expect July and August to be light, particularly in Europe, and the anticipation is that we’ll have a strong September. That’s our traditional pattern in Q3, it might be a little bit more exaggerated because of things like the Olympics that are going on this year.

Brian Swift - Security Research Associates

Okay, thanks.

Kevin Mills

Thanks Brian.

Operator

Thank you. Our next question comes from the line of Paul Bornstein - Black Diamond Advisers. LLC. Please proceed with your question.

Paul Bornstein – Black Diamond Advisers. LLC

Yes, thank you. I’m just kind of curious since you guys have been involved for a number of years with Socket, and you have been struggling to get the company profitable. I mean you haven’t been profitably in at least five years if not longer. I’m just wondering what is the push here? You have a number of excuses, you having traded any sales of value in five years. I’d go back longer if you’d like. You guys have paid a lot of money. Your expenses just went up again on compensation, and I’m just kind of curious, how does all this – how much sales do you need to benefit the bottom line where we can see a growth, since you’re supposed to be a growth company and not a biotech company that never makes money. So, I’m just kind of wondering what the problem is here. You’ve come out with a lot of new devices, new products that seem to be great, but you can’t sell them. You just don’t have the faction to be profitable, so I just wanted to get the thought process, since you guys have been pretty much onboard for a longtime with the company, and haven’t been able to make it profitable.

Kevin Mills

Okay, so there were many questions in there. Let me start by addressing them in order, as best I can. So, in terms of the growth, obviously we have struggled and certainly the environment we have been in, in the last few years have been difficult. No excuses, we would have like to have grown the company, but certainly our timing of launching our new products at the beginning of the recession, was not maybe the most fortuitous. But, we sold 50-60,000 units.

(inaudible) on the scanning side, it’s been very difficult for the last five years. The biggest problem being, - or if you take a five year period, that for three and a half of those five years, we couldn’t address the Apple markets. And probably as everyone predicted, right, the Apple market has been an enormous factor on the mobile phone space. I mean (inaudible) few people in the world would have predicted three years ago – five years ago when Apple started the iPhone that Nokia would be $6 billion dollars in market (inaudible). And Apple would be $600 billion.

So, we’ve been struggling, we have now got back the situation where we can support the Apple market. We have Apple approved products, that profits through the year with certified products. We are struggling, I’m not trying to suggest were not. But I think what keeps people here is, we believe we can still grow the company on a combination of our scanning products, as well as our handheld products.

As regards to pay, no executive in the company has got pay increase in the last five years. So…

Paul Bornstein – Black Diamond Advisers. LLC

I would not expect that to be, given you haven’t been profitable in five years.

Kevin Mills

But you made the statement that we are paying ourselves more, which is actually technically incorrect. We are paying ourselves less than we were five years ago. So if you phrase the question differently, I would have answered it differently. But you can go back and you can check. The salaries have been either cost or no salary has been increased, okay.

So yes, we still believe, yes it’s been a struggle. We now have gotten to the point of getting some new products in the market that we feel will make a difference but time will tell. At the end of the day, I think people have put a lot of effort in to stay alive during the last few years, it’s not been easy. People are motivated by the fact that they still believe. The environment hasn’t been easy and it’s not getting any easier. We make decisions, like supporting the Apple (inaudible). And just the qualifications alone took nine months.

So, I think that we’ve put ourselves in a better position to grow going forward, and certainly we, I would say telegraphed at the beginning of the year that we didn’t expect much growth for the first half because we had these big transitions to get through. Now we are through the transitions and let’s see what happens. That’s all I can basically do in terms of an answer to you.

Dave Dunlap

And Paul, let me quantify a little bit. When revenue is at $4 million, we’re obviously incurring losses, but the growth – the $5.4 million is about where we would breakeven in terms of bottom line breakeven results. We grew last year 30% in our revenue, and that was primarily driven by the growth in barcode scanning and particularly with the introduction of the 2D Apple certified scanner at the beginning of the year because it finally opened up our markets for 2D scanning, but it provided access to Apple devices early on. We now have expanded that line. We need to go be about 30% higher than where we are today.

So, that’s the objective, and the question is how quickly can we grow to the five and half million dollar level, and then go beyond that. We’ve held our expenses down, we’ve actually reduced them overall over the last several years. We are up based on the immediate comparison to a year ago period, but only because we’ve added some key middle management people particularly in sales, that were needed to support now the growth plans that we have. So, that’s where we are heading, but (inaudible) wise, we should hit profitability, you know, certainly by five and half million at quarterly revenue.

Kevin Mills

And just maybe to add one last thing on the expense category. Our expenses in 2011 were $10 million. If you go back five years ago, I think they were close to $13 million.

Paul Bornstein – Black Diamond Advisers. LLC

I’m not saying your expenses didn’t go down. (inaudible)

And you guys are running out of time. (Inaudible) decreased the value, I think your stock was probably $10 dollars five or six years ago, it’s under $2 and you got knocked down another bulletin board, you know.

So, I understand the marketplace, and I’m just wondering what the reality is for the company, because you either rip it this year to show you can do something, or you have to do something else that – I just don’t see how you can get the traction, if you don’t get the sales going real quickly.

Kevin Mills

Okay, well we’re working real hard to get the sales up quickly, and we’re not arguing any points you make, yes we have to perform.

Paul Bornstein – Black Diamond Advisers. LLC

And you haven’t in five years. So, let’s hope you can perform in the next six months.

Kevin Mills

Okay.

Operator

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

Bernard Fidel – Private Investor

Hello?

Kevin Mills

Hello, Dr. Fidel. How are you ?

Bernard Fidel – Private Investor

Fine, how you doing? Oh yeah, by the way, as far as performing in the next six months, there is one catalyst and that is the 655 and then new scanners, so – which you didn’t have in the past.

Kevin Mills

That’s very agreed. I mean, we basically told everyone at the start of the year that things would be difficult as we did the transitions, now they’re behind us so we’re looking for things to improve.

Bernard Fidel – Private Investor

But on the other hand, the transition is now finished, I would assume and you’re getting into 655s, is that correct?

Kevin Mills

Yeah, I mean, finished is probably not the correct phrase. I mean, we’re now filling up the distribution channel and I would say the transition will be finished in about another four weeks. But the final portion of it is taking place right now.

Bernard Fidel – Private Investor

Right. Are there any large orders being contemplated?

Kevin Mills

I mean, certainly we hope so but the larger orders are not going to happen without people fully testing the 655. We know from our extensive history that for someone to buy a large order, they usually take I would say six months of between product testing and field trials before they would deploy that large order.

Bernard Fidel – Private Investor

Yeah, but what about those 18 groups for the past six months?

Kevin Mills

Okay, no, eventually the process – again, I don’t want to get into too much detail, but there’s a [inaudible] process because the products are like complicated. During this quarter, we worked with [inaudible] companies and we did, I would say, about six iterations of the software during the first six – the six eight weeks of the quarter to make sure that the products are fully tested in multiple environment, many of which we don’t have. Once we completed that, then we took all that know how, put it into the final version, we then made the final version and we started to distribute them as of the end of June. The aiding customers will now check to make sure the final version is in fact – meets all the needs. We’ve just begun that phase and as the initial reports, as I said in my discussion, is that nobody has found any problems with the final version of the SoMo. And now we begin the process of converting those into orders. At the same time, customers are continuing to buy the 650, which is why we sold almost 38,000 650s in Q2.

Now, I just – to get the timing and the expectations right, I would expect most of July and the beginning of August, people will continue to [inaudible] the 650, they will continue to do their testing and they’ll be comfortable to move over to the 655 as the quarter proceeds.

And now in addition, we will be able to capture customers who are new and larger customers, people we could not seriously entertain as we have limited stock in the 650. And from these new customers, this is where the additional grow will come.

Bernard Fidel – Private Investor

Okay, now what do you look for in sales for the third quarter? A ballpark figure.

Kevin Mills

Well, there’s no such thing as a ballpark figure. We’re looking…

Bernard Fidel – Private Investor

Substantially better than the second quarter?

Kevin Mills

I think that the next objective is to make sure that we’re cash positive. We don’t have the ability to continue to burn cash. We burned cash in the first six months, but much of this was used to develop the new product that we needed for the 7Ci and the 655. The objective internally is to be cash neutral in Q3 and to be profitable in Q4. I think those are both realistic and obtainable goals. You can work out what those numbers are.

Bernard Fidel – Private Investor

What are the – what would it be, the – in the third quarter, cash positive?

Dave Dunlap

We’ll want to be in the 5 million range, Dr. Fidel.

Bernard Fidel – Private Investor

For the third quarter?

Dave Dunlap

Yes. [Inaudible] but the 5 million gets you to cash breakeven levels and then on top of that you hit profitability around 5.4 or 5.5.

Bernard Fidel – Private Investor

Oh, that’s – that would be nice [inaudible] from the 5 million.

Dave Dunlap

It would and the key for us in this case is how quickly we get customers moving from the testing stage into the deployment stage and usually our – in our third quarter we find September is a very strong month because Europe’s back from vacation and everybody’s off and running. But if they’re still in the testing phases at the end of September, that will slip into the next quarter. But all of that will move forward more rapidly now that we have product available for customers. We’re ramping up supply as well. The expectations, as Kevin mentioned, is it will have the channel fully stocked, which means they’ll have taken care of all their customer orders and have product waiting in reserve by the end of August. And that’s an ideal position for us to be in because then customers can get a product very quickly as they’re ready to move forward.

Bernard Fidel – Private Investor

Okay, so you say that, Kevin, a $5 million quarter is certain feasible for the third quarter?

Kevin Mills

Yes, certainly feasible.

Bernard Fidel – Private Investor

Okay. Okay, and you look for the fourth quarter to be – that would make a case – [inaudible] positive or whatever. But anyhow – and the fourth quarter, you could see a profitability?

Kevin Mills

Correct.

Bernard Fidel – Private Investor

Okay. Well, that sounds good to me. Now let’s see, another question I have here, what do you think with the H – capturing the HP customers? Do you see them coming to you?

Kevin Mills

Yeah, we do, and you know, it’s difficult to quantify it, but just to give you an example, you know, we have a lot of smaller customers who we feel are using a similar HP replacement. And you know, we sell through Ingram, as an example, to over 180 or I’ll say over 150 different resellers on a quarterly basis. And a lot of this is small quantity. We – I think as I said on the last call, we’ve made extensive efforts in Europe to work with HP. I visited HP during Q2. Their sales [inaudible] the SoMo into a few products in Europe. So we’re working that angle. But HP is a big organization and it takes time. And really what we need is we need some success to – in some area of HP where HP’s involved to leverage that [inaudible] across the environment. We’re working on that. I can’t say that we’ve achieved that yet but we are achieving the replacement market through the vendor distribution channel.

Bernard Fidel – Private Investor

So they are replacing with the [inaudible] or the 650?

Kevin Mills

Oh, up until today, it’s all been 650. I mean, realistically people, I mean, we shipped on June 27th and by the time it gets to the distributors, it’s the 4th of July. I don’t think it was available out of distribution probably close to the 10th or 12 of July. Today is the 25th. It’s been available for two weeks. People generally will get a unit, [inaudible], deplete their stock and move mover.

Bernard Fidel – Private Investor

The one thing I did [inaudible] was one of the problems with the top of the company is that it is not that well-known, you have an excellent [inaudible], particularly with 5 million for this quarter and then profitability in the – well, the next quarter is only two months away. So you would have profitability but that you hired a public relations firm or something to that effect that’s going to broaden the …

Kevin Mills

Again, I just – we’ve been very frugal with our expenses and all the money we had went into the development efforts to get the new product into the market.

Bernard Fidel – Private Investor

But they’ve been saying they’ve hired a company or working with a company?

Dave Dunlap

I mentioned a company called Accelerize New Media. You can check them out in their – through the Internet. They’re in the business of marketing communications, specifically focused in terms of maintaining good contact between the company and investors so they’ll highlight the things we’re doing and greatly improve the communicates to a well-established distribution of interested investors that they have developed over the last several years.

So we’re looking forward to working with them. We’ll have more information on our website over the next couple of weeks, but I'm looking for that relationship to kick into high gear with the next week or two and the said we’ll try to substantially increase the information that we’re communicating. Now, we have a well-established website, but only some people like to go and go through a website because there’s lot of information on the website and they’ve got to click down to mobile tiers and so on. So Accelerize will refocus the things that we’re doing and target them at the direction of people who have expressed an interest in companies like Socket and I think that will be helpful at building interest in the stock and as we continue to report positive momentum, we hope we’ll see a lot more people wanting to become shareholders of Socket and building – helping us build shareholder value.

Bernard Fidel – Private Investor

Okay, no, I think that’s excellent. So justo summarize what we were just discussing, [inaudible] for this quarter, we’ll be in the $5 million range, which would be cash flow positive and next quarter as of October 1st, you’ll be in the positive area. By the way, any change of being positive for this quarter ?

Kevin Mills

I don’t [inaudible] expecting it. The rate at which we’re going to build product and bring product in will allow us to achieve our objective of cash positive. And as you can see from our balance sheets, we don’t have positive cash flow, we have to continue the cash flow management situation. So we would manage to have cash neutral in Q3 and we’ll manage to be profitable in Q4.

Bernard Fidel – Private Investor

Just one thing, what about – what do you think for next year?

Kevin Mills

Well, again, I think we can predict with this ever-changing [inaudible] , but I’m not sure our predictions would be worth much, so I’d much rather try to hit our short-term predictions right first before we go into long-term predictions.

Dave Dunlap

And Dr. Fidel, we’re very good at responding very quickly to orders, so as we find order pace picking up, we’re capable of expanding the production rates fairly rapidly and responding to those requirements. So we do have and we’re highly leveraged in terms of both our contract manufacturing arrangements where we can increase volumes, our costs are tied to – on a unit-cost basis will actually go down as our volumes go up and on the distribution side, because we have all our products through channel distribution, we can greatly increase the volumes without having to increase the expenses to manage those channels. So we’re looking forward to the opportunity to show that we can respond quickly but generating orders follows evaluations that Kevin has talked to on the products.

Bernard Fidel – Private Investor

[Inaudible] that we would have [inaudible] the 650 earlier, at the beginning of June, how much of an impact would have that had had to this quarter?

Dave Dunlap

It all depends on how quickly – the very things that are happening now would have happened at the time we began shipping. So if we had started two weeks earlier, you know, you would have had maybe 100,000, $200,000 benefit.

Kevin Mills

And if you had started four weeks earlier when it was originally planned, we expected the 650 sales in Q2, our original plan was it would be about half a million dollars, which was what we were short in terms of growing the business.

Bernard Fidel – Private Investor

So it would have been the 4.5 million…

Dave Dunlap

Again, it just depends how early we could have gotten it into the market, Dr. Fidel. But remember, there’s two groups out there. You’ve got the groups that are already utilizing our SoMo products and they’ve been able to continue to buy the SoMo 650s, which worked very well for them. So you haven’t lost any of that business. And then for new customers thought that have been waiting, that would be where the benefits would have come into play the earlier we could it into the channel. [Inaudible].

Operator

I’d like to turn the floor back over to management for closing remarks.

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