Socket Mobile Inc (SCKT) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to dba Socket Mobile, Incorporated Quarter 3 Management Call. At this time, all participants are in a listen-only mode. Afterwards, the Question and Answer Session 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 the MKR Group. Thank you, Mr. Byers, you may begin.

Thank you, Operator. Good afternoon and welcome to Socket's Conference Call to review financial results for its 2007 third quarter. Online today are Kevin Mills, President and Chief Executive Officer of Socket and Dave Dunlap, Chief Financial Officer of Socket.

After market closed today, Socket distributed its earnings release over the wire service and has also posted the release on their website at www.socketmobile.com.

In addition, a replay of today's call will be available at vcall.com shortly after the completion of this call. And, a transcript of this call will be posted on Socket's website, typically by this Friday.

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.

And 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 with respect to the introduction, volume shipment, distribution, timing and market acceptance and effects on Socket's revenue and business of its new handheld mobile computer product, statements regarding Socket's ability to be a one-stop provider of hardware systems in its markets, and other statements predicting trends, sales and market opportunities in the markets in which Socket sells all of its products.

Such statements involve risks and uncertainties and actual results could differ materially from the results anticipated in such forward-looking statements as a result of a number of factors, including but not limited to the risk that the volume shipment of Socket's new product may be delayed or not happen 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 for new products may not happen as anticipated; the risk that Socket's integrator program and current distribution channels may not choose to distribute the new product or may not be successful in doing so; the risk that acceptance of Socket's new product in vertical application markets may not happen as anticipated, and other risks described in Socket's most recent Form 10-K and 10-Q reports filed with the Securities and Exchange Commission.

With that said, I will now turn the call over to Socket's CEO, Kevin Mills.

Thanks, Jim. In Q3, we made significant progress with our transition to a systems company with the continuing introduction into the marketplace of our new SoMo 650 Mobile Computing Device.

During the quarter, we continued to focus on further ramping customer validation and deployment of the SoMo. At the same time, we also experienced within our traditional peripherals business some familiar market delays has slowed deployment and impacted our total Q3 revenue.

In my comments today, I will address both these topics, including some additional color on the exciting prospects we see for the SoMo and how our strategy to successfully transition to a mobile systems company will improve the market timing issues and strengthen our overall business.

Starting with the SoMo. The roll-out of our new mobile computer into the markets continues on track, and we matched our third quarter objective of ramping up production and enabling wide-spread customer evaluation and qualification to begin.

Despite some initial delays, we began shipping volume units into the channel in September. As of the end of Q3, we have shipped 2,500 units. From these initial shipments, we have sold 1,000 units, recognizing revenue of $448,000 in Q3.

Most of the revenue is still coming from evaluation units, primarily in the U.S. We did have a few orders for initial deployment at orders of 50 units or more. These larger orders came from companies within the retail, merchandising, and health care sectors, which are strategically targeted areas where we expect demands to be strong. All of these orders are part of larger roll-out programs and will continue into 2008 and possibly into 2009.

While it is still very early, the good news is that we have received excellent customer feedback to date. And, we have seen the SoMo positively featured in numerous trade reviews. The SoMo is off to a very good start and currently represents about 8% of our total revenue as of Q3. While it is not yet at a point of being a significant contributor to total revenue, we expect its percentage contribution to increase rapidly as customer evaluations complete and deployments ramp further.

Our primary focus is to facilitate further customer validation and acceptance and drive increasing sales volume of the SoMo. That will bring significant growth and greatly enhance future success of the company. We will keep you updated on our progress.

Turning to our other product segments, we are obviously disappointed by the slowdown we experienced with our data collection and network connectivity peripherals during the quarter and the impact it had on total Q3 revenues.

However, the factors behind this slowdown are the very issues that we are strategically addressing with the launch of our own mobile computing device. We're working extremely hard to make sure that our mobile computing device, coupled with our peripheral products will come to represent a significant portion of our quarterly revenue and be a significant contributor putting Socket back onto a solid and sustainable revenue growth path.

To give you more color on factors behind the slow down and scanning and peripherals in Q3. Our scanning business has three elements-- our Series 3 or SD Scanners, our Series 5 and Series 6 CompactFlash Scanners, and our Series 7 and 9 Cordless Scanners. Each of these scanning product categories is driven by slightly different elements of the mobile market. SD Scanning is primarily Smartphone-centric with Palm, Treo, and Motorola MC35 being key drivers.

Our CompactFlash scanning is primarily PDA-centric with Dell and HP PDAs being the main market drivers historically, with [mini] tablets beginning to contribute of late. Our cordless scanners are primarily used with Smartphones, Tablet PCs, and peripherals vertical application devices for specific markets.

Socket's overall scanning business has been reaching record levels in the last several quarters. However, in Q3, we saw our CompactFlash scanning business decline by about $600,000, which was the primary reason for our lower total Q3 revenue. While the rest of our scanning business behaved as expected in a seasonally weak Q3, the decline in CompactFlash scanning was disappointing, but understandable, given certain conditions that currently exist in the PDA markets.

Dell is no longer in the PDA market, and, many of their customers are currently evaluating our SoMo device. Additionally, HP announced a new PDA model in early September. These announcements historically caused many customers to pause and reevaluate.

These factors disrupted and slowed customer deployment of our peripheral products, because of the time needed to evaluate and adopt new PDA models.

While sales of our CompactFlash scanners were impacted in the short term, there is a silver lining to this HP model change. Many HP customers, who had already qualified their mobile computing device and did not plan change, will now have to reevaluate and have the opportunity to consider SoMo as their going-forward mobile computing device.

As we noted before, our fundamental objective in pursuing our own mobile computing device is to take greater control of our own destiny and avoid the uncertainty of supply interruptions and deployment delays caused by such announcements.

The fundamentals of our scanning business remain very strong. And, we expect it to be stronger in Q4, especially the SD and cordless scanning products. The CompactFlash business will still be challenging during our transition period, which should strengthen significantly as customers qualify and begin to adopt the SoMo with CompactFlash scanners. Q4's scanning sales will be favorably impacted by a significant customer order we already received. The customer is adding the CompactFlash scanners to their existing Dell Axim.

Finally, we expect our OEM and Serial businesses to continue on track and to be seasonally strong in Q4.

To conclude, we remain excited and optimistic to have the opportunities we see with the SoMo and continue to focus on increasing market adoptions while carefully managing expenses in executing our transition plans.

We are anticipating a larger number of SoMo deployments in Q4 and expect to at least double our current volume by year end. While this would still represent a relatively modest revenue contribution, it will demonstrate our increasing traction in growing SoMo sales to become a significant driver of the overall growth in 2008.

I'd now like to turn the call over to Dave for his comments.

Thank you, Kevin. Our revenue for the third quarter of 2007 was $5.4 million, down 14% compared to revenue of $6.3 million in the preceding quarter, and down 9% from revenue of $6 million for the same quarter a year ago.

Our fastest growing product family was our SoMo Handheld Computer. We've shipped a total of 2,500 units from the date of our first shipments on June 20, 2007, to support current and future sales. From these units, we recognized 1,000 units or $448,000 as revenue in the third quarter, up from the sale of 144 units or $68,000 in the second quarter.

Although we are paid by our distributors for shipments into the distribution channels at the time of shipment, we defer recognition of revenue until unit ships out of distributor inventory.

As Kevin noted, our goals for Q3 were to reach mass production quantities with our contract manufacturer, fill our distribution channels, and enable the start of customer evaluations needed to qualify the handheld computer business use leading to deployments. We were successful in all counts, and most of the 1,000 units sold were small quantity purchases of the individual businesses, as they initiative their respective product evaluation processes.

We continue to supply our distribution channels in normal time frames, as we do with all of our products. Total SoMo revenue of $448,000 represented 8% of our quarterly revenue, and we expect this total and percentage of total revenue to grow as businesses ramp up their deployments of our SoMo Handheld Computers.

Data Collection peripherals are our largest product family, addressing the Data Collection needs of a number of platforms, including PDAs with and without phones, Smartphones, Tablets, and Notebooks. Data Collection sales for the third quarter of 2007 were $2.5 million or 46% of total revenue for the quarter. Our Data Collection peripheral sales dropped from the record quarterly levels we've enjoyed the past two quarters of $3.2 million in the first quarter and $3.3 million in the second quarter and were flat with Data Collection revenue of $2.5 million in the third quarter a year ago.

The third quarter is our seasonally weakest quarter. That seasonality was compounded by Hewlett-Packard's announcement in early September of new HP handheld computer models that address the consumer market. Since many businesses have been using consumer grade devices from Hewlett Packard with our Data Collection peripherals, the effect of this announcement was also to cause businesses to slow down deployment of our peripherals until the new units could be evaluated.

HP is now advising that some of these units may not be available until the first quarter, adding to the uncertainties and delays in the HP portion of the PDA market.

As Kevin noted, avoiding the uncertainty and delays caused by such announcements was the fundamental objective in pursuing our own handheld computer platform. Our commitment to the SoMo 650 model for a three to five year time period extends the return on investment made by our customers and increases market stability by reducing the frequency and timing of model changeovers.

We're confident that our business model is enhanced by our new system strategy. However, we may continue to experience ups and downs in our peripheral business until customers move into the deployment stage for the SoMo handheld computer when the impact will be less pronounced.

We expect our Data Collection business to substantially recover in the fourth quarter, based on sales order flow in October and potential sales in the pipeline including as mentioned by Kevin, an order from one of our customers for Data Collection peripherals of more than $400,000 that we've received in early October.

The second largest product category for Socket is our OEM sales. We have more than 30 customers who are incorporating Socket's Bluetooth and Wireless LAN technologies into their devices, such as ruggedized industrial handheld products, surveying equipment, and mobile printers.

OEM product sales were $1.5 million, a decline of 16% from record second quarter revenue levels of $1.8 million and flat with third quarter revenue a year ago of $1.5 million. OEM sales represented 28% of our third quarter revenue. Our OEM business reflects the sales expense of our OEM customers and can fluctuate from quarter to quarter. We believe that the general direction of our OEM business is upwards and expect to resume revenue growth in the fourth quarter and beyond.

Together our handheld computer, data collection peripheral products, and OEM product sales, which represent the product growth categories for Socket, were 83% of our total revenue for the third quarter.

Our other product categories, Serial and Connectivity products, support specific customer connectivity needs. And, sales results will fluctuate from quarter to quarter as those needs require. Our Connectivity and Serial product revenue in the third quarter was $935,000 or 17% of our revenue compared to $1.1 million or 19% of total quarterly revenue in the second quarter. Most of the reduction was due to the timing of modem sales.

We also introduced, near the end of the second quarter, a new extended service and warranty program called SocketCare for our handheld computer and our top-of-the-line bar code scanning products, the Cordless Hand Scanner and the Cordless Ring Scanner.

Payments for services are recognized ratably over the life of the service contract, usually from one to three years and become an ongoing revenue stream. Total service revenue in the third quarter was $13,000, as this program is just getting underway.

Our revenue backlog, as we entered the third quarter, which consists of orders on hand at the end of the quarter that are shippable in the following quarter, was within normal levels at approximately $1.4 million. Our gross margin in the third quarter was 48% compared to 49% in the second quarter and 47% in the third quarter a year ago. Our gross margins are affected by product mix and by the overall volume of sales in absorbing fixed overhead elements.

Our second quarter expense of $3.5 million compared favorably to our second quarter expense of $3.8 million and to our third quarter expense a year ago of $3.7 million. We've made an effort to keep our expenses under tight control until the benefits of our SoMo 650 transition are reflected in overall improved revenues and the slow downs experienced in the third quarter are behind us. We expect our expenses in the fourth quarter to grow modestly.

Our balance sheet at the end of September remained strong. Our current ratio, current assets divided by current liabilities, was 1.4 to 1. Cash at September 30, 2007, was $4.4 million down from $5.9 million at June 30, 2007. With the slow down in operations for the quarter, cash was used to pay down working capital, accounts payable, and accrued expenses of $1.2 million, because we slowed down selected inventory purchases to match the timing of sales; and, because under our variable compensation programs, reduced revenue results in lowered variable compensation payments and expense.

Approximately $400,000 in cash usage was due to our quarterly operating loss. Our working capital bank line, which we have drawn only at the end of a quarter, is available to fund working requirements as we grow. We believe we have adequate cash and working capital to support growth in our handheld computer business and to expand our overall sales.

Socket has a highly leveraged business model; 75% of our business flows through general distribution channels. We have in place the infrastructure needed to manage our distribution channels so much of the contribution from higher sales volumes will flow through to the bottom line. We also contract with third-party contract manufacturers to build the major components of our products, and so higher volumes generally reduce our product unit costs.

Our objective and our expectations are to continue to ramp up sales with the objective of a return to profitability and positive cash flow.

Finally, I wanted to highlight two of our recent press announcements. We are pleased to welcome Phil Ballai to our Technical Advisory Board. Phil is the Vice President of Technology for InfoLogix, and he was previously with Symbol Technologies, now Motorola. The Technology Advisory Board, or TAB as we call it, is comprised of senior executives representing primary technology segments, fundamentals of Socket's business strategy, including mobile data collection and capture, mobile computing, and application software. The TAB met in early October with management to review and provide and provide guidance on product development and related sales and marketing plans for 2008.

We also reported yesterday on a new report by Venture Development Corporation, an independent technology market research and strategy consulting firm, analyzing the cost of ownership of Business Mobility Devices. Their report concludes that, although the initial purchase cost of consumer grade devices is less than durable devices, such as the SoMo 650, that the total cost of ownership of consumer grade devices is up to 23% more than owning durable grade devices for business use.

Cost of ownership includes replacement costs, maintenance, and down time. We believe that the productivity enhancements from businesses using mobile handheld devices and a number of vertical applications and the lower cost of ownership in using the SoMo 650 over commercial grade units are both very strong selling features for the SoMo 650 class of mobile handheld computers.

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

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Kevin Dede with Morgan Joseph.

Hi, Kevin and Dave.

Hey, Kevin, how are you?

Pretty good thanks. Congrats on the uptake of the SoMo so far. Can you give me a read on some of the feedback you're getting from customers, and I know you can't give away too much competitive information, but your general expectations for the balance of the year and into next?

Yes, I'd be happy to give you some feedback. I think-- you know it's still early days, but the feedback we're getting is the device has been well designed and really meets the need. We positioned it as a durable device. The things where I think we're winning are on the fast roaming plan we've built in, which is particularly important in the hospital and the some of the hospitality applications.

People like the fact that there's more memory, faster processor speed, and they don't have to go all the way up to a fully ruggedized device. And, we're also getting very good feedback on the physical size. People want a device that is smaller and a little more discreet in many of these applications.

So, I think we're off to a good start. People like the device. I think when you go through the process of developing such a device, you do have some risks that you overlooked something or you have a serious problem.

You know, again, we have the 1,000 units out there in operation at this stage, and the feedback has been very positive. And, we don't have any major issues of any flavor. So, that's good.

And then, people like the modular aspects-- the fact that some people can have scanners, and some don't need to have scanners which again we've always allowed with our approach in terms of peripherals. So, it's going to take a little bit of time, but I really feel that we're off to a good start-- people like the device, meet the need, and overall, it feels like we're in pretty good shape.

Would you say your order book at this point is meeting your initial expectations?

Well, I would say we were. As in terms of our order book, we had hoped maybe for prior shipping in the August time frame, and we didn't really ship until September. But, yes, our pipeline is actually stacking up pretty nicely. And, we've only been available in the market really for 30 to 45 days. But, we have several thousands of opportunities lined up already.

Most of the time, people will buy units, they won't necessarily disclose their opportunities, do some testing, come back, start working the issues with you if they have any issues or larger deals, supply-related concerns. So, that's all happening. And, today we're probably getting close to a pipeline in the 20,000 units. But, that's spread out over possibly 18 months. People don't move as fast with these deployments as, certainly, we would like; but that's the nature of the business.

Have any of your competitors taken a look to it, and can you see any answers on the horizon from--?

We would assume that everybody who views us as being competitive would have bought at least one unit. That is kind of par for the course. Again, it's not really positions to compete against-- either Symbol or now Motorola or Intermec. And, I think HP's-- most of their focus is on their phone-centric devices. And again, our numbers are relatively small yet for HP to be, I would say, changing any strategies or doing anything relative to offset this stage.

What comments might you be able to add to your view on the seasonality on your OEM market? Is that lumpy regardless of calendar season, or is it a technology migration? Is there anything more specific you could add?

Well, again, I think seasonally Q3 is weak because we have about 30% of our business in Europe. And, certainly, Europe slows down dramatically during the summer months. And, the U.S. slows down a little bit.

On the OEM business, obviously, their demand is driven by their sales, which typically are weaker in the summer. And generally, we see that coming back in Q4 as people deploy before the end of the year.

Got it. Okay. Well, thanks for entertaining the questions.

All right. Pleasure, Kevin, thanks.

Thank you. Our next question comes from Brian Swift with Security Research Associates.

Thank you. HP announcement came later in the quarter. Do you-- what's your view on-- and that's a pretty substantial part of that section or that segment of your peripherals market. Do you think this order that you announced on the call here with the $400,000 order would be enough to maintain the level that you did in that sector? Or, is that going to--?

Yes, I think it is, Brian. I think that the-- we expect the scanning to be reasonably strong. HP's announcement won't affect our SD scanning business and largely won't affect our cordless scanning business, both of which behave, I think, much as expected.

The number of available CompactFlash slots certainly is impacted now that Dell is out of the market and HP, I think, is in transition mode. We've always had a good relationship with HP. But, I think, since we've announced our SoMo device, we've not had the information sharing we had historically. So, we don't get the good visibility.

So, I think it's going to be difficult for people, especially for an IT guy deploying, when a new device is announced. The first question Management asks is "Should we be moving to this device?" And, again, we order the device online. The initial expectation is it would be delivered almost immediately. We've subsequently got messages to say that it won't be delivered until the beginning of the year.

So, it basically put the crimp in people's ability to deploy. But, I think the order we got for $400,000 will certainly shore up that part of our business for Q4.

So, I would say overall, yes, we would expect scanning to be back to its solid self in Q4, just because of that order. I think that's what essentially we missed in Q3 in that respect. Somehow-- if we got that order in the last week of September instead of the first week in October, then we'd be looking at a number like 5, 8, or 6, that wouldn't have looked quite so bad compared to the $5.4 million we reported.

Uh-hum. And, how about-- was this order just a one-shot deal, or will you have continuing business--?

We actually-- the order is coming from a company that I'm not at liberty to say, but is one of our largest users of scanning technology. And, our understanding is that they use PDAs in their retail store, and they are primarily a Dell account. They have several thousand in active use, and they were sharing the scanners. They had one or two scanners for every four or five devices they had. And, what they're doing now is putting a scanner in every unit. I think we have probably close to 5,000 scanners at this particular account. And, obviously, we think that they will be an ideal target for SoMo as we go forward, because they benefit from the advantages. We don't expect this to continue to drive, because it's a replacement catch-up, if you will. But, we do expect them to be a good ongoing customer.

So then, perhaps some of your HP peripherals business will recover in Q1 to maybe hold that kind of steady then again.

Yes, I mean, again, if you look at signs as deploying these solutions-- one of the things I think we struggled with for the last two years has been the uncertainty in the markets. And, I think when we announced our intent to launch SoMo, we cited this as one of the primary reasons. I think today we can afford-- or we can be, I suppose, a little bit more philosophical about HP's announcement because we have SoMo. If we didn't have the SoMo, we'd be here struggling with there won't be a lot of slots available in Q4, which is the situation we were in for the last two years, because these transitions are happening every 12 months. So, we get a good run followed by an interruption, which has been one of the difficulties in growing the business.

SoMo, I think over time, will change this, where the peripheral business will be a smaller percent, that is non-SoMo-centric, if you will-- maybe 25%. And, therefore, if you have a hit on that 25% of your revenue, the overall impact is very small. Today, peripheral business and the PDA-centric business probably represents 65% of our overall business.

All right. Now, I'm painfully aware of your dependence or vulnerability on the whims of HP and Dell in the past, and of course I agree in that's where the interest is in SoMo. And so, I didn't want to delve too much on the peripheral side of it, but I just wanted to kind of get a feel for what to expect over the next quarter or two. But, why don't we return to more of the opportunistic side of that-- the silver lining, as you called it, from the standpoint that now, with both Dell out of the business and HP in a mode to come out with a new device, it seems like that gives you even more opportunity to get your foot even farther into the door in this market space.

Yes, we share that view. I mean, I think what we've seen from people is they generally pick a device, and then they'll stay with that device for three or four years.

The problem has been that they've been forced to change. Anyone who standardized on the HP device now has to change whether they are ready or not. I think anyone who goes back and does an evaluation will look at all the options in the market. And, I think that we will now get our foot in the door in those HP opportunities for the simple reason that if they went with the SoMo, not only is it a better device, but they get the option of not having to change in another 12 months. So, I know it's painful in the short term, but it does, I would say, reinforce the marketing message that we've been putting out there, as well as give us more opportunity going forward.

How much of an impact do you think it will have on delaying the decisions, as far as rolling out with the SoMo on your other customers, because sometimes that can happen--

Our primary focus today is on the Dell opportunity, which in Q3, about 60% of the revenue came from Dell-related activity, okay? So, those customers, I think, are more motivated because they don't have a choice. And, even in Q4 and Q1, we will still be very, I would say, Dell-centric.

Most customers won't be able to evaluate the HP device until they get one, which based on what HP has told us, because we order the units, they basically have indicated maybe we'd get a unit in Q1. So, I think evaluations will happen in Q1, and we might get a benefit from people selecting us in Q2 and Q3 next year. But, I think there's plenty of opportunity on the Dell side in the interim to grow the business.

Okay. And, have you-- you got any kind of read on sell through in October that would give you any indication that you're not really being impacted by HP's announcement as far as your Dell business is concerned?

Well, I don't-- I think that we're off to a reasonable start in the quarter, Brian. And, the SoMos continued to sell quite well. I think today we're let me just quickly say where we are. I think we're off to a solid start-- I don't have the exact number. I don't want to give you a wrong number. But, I think that the scanning business, particularly the three and the seven series have been on track. And we've been, I would say, given this order for $400,000 in the CompactFlash. So, that shores that section up.

Generally speaking, we do about $1 million in CompactFlash-- at $1.3 million, I think, was our record quarter in Q3. But, just a-- if we're counting on $1 million. We saw it drop down to $600,000 without-- over the summer. And, if you start with $400,000, start at the beginning, I think we'd be back in the $800,000 to $1 million range for the CompactFlash, which is the area of concern.

So, that's just where we are. And, overall, we track on a weekly basis sales of all of the products in U.S. distribution. We can't do that internationally, and we continue to sell well, particularly with the SoMo. So, we're pleased with that.

Well, thank you for that. My question was more related to SoMo as to how that sell-through has been in October with your Dell customers that there really hasn't been any-- are you getting any evidence to support that they're-- that people aren't slowing down the deployment based on the fact that now they want to wait and see what HP has to offer.

No, no, we don't think that. I mean, basically, we track on a weekly basis. But, I think that we've sold about 300-- approximately 400 units this quarter to date. Now, bear in mind that we get that as of last Friday, because we're a week behind.

And, that's only the U.S. portion of the business. So, international adds to that.

But, essentially, 400 units, if we say for the first three weeks of October. The Dell customers are primarily Dell-centric. They previously evaluated the HP unit, we suspect prior to going with the Dell Axim. Most of them won't wait for the HP unit. And, a lot of them are what I would describe as in production where they have a desperate need to continue to roll out a program they already have underway, which is why I think we get a faster start with Dell than we would if we were entering the market naturally.

I don't think that there's going to be a lot of impact to those customers in Q4 and Q1, based on what HP is doing. And, I think we will benefit in end of Q1 and Q2 where some of the current HP customers select SoMo, once they evaluated them head to head with the HP device.

One last stab before I let somebody else ask a question. Just to clarify something you mentioned you thought that the volume would double in Q4 over Q3. Were you talking about what you sell into the channel?

No.

You sold 2,500 into the channel last quarter. What do you expect to sell into the channel this quarter? Do you have any reorders yet? Or any (inaudible)?

Yes, we have reorders already, but really I think the point at the start of the program, if you will, is we need to fill up the distribution channel to make sure units are available so people can evaluate and feel good. We've done that. Going forward, we're only really concerned with sales out and to maintain adequate levels of inventory in the channels.

So, when we talk about any numbers going forward, I think we're talking about sales out, not sales in. The sales in importance, I think, evaporate now that we have filled the channel.

All right.

Okay?

All right. Thank you.

Thanks, Brian.

Thank you. Our next question comes from Dick Syracusa with Merrill Lynch.

How are you doing? Kevin, I think you had mentioned some significant sales of SoMo were in the health care and retail area.

Correct.

Could you give us an idea of what type of a health care user is buying this and retail user?

All right, so, on the health care, the drug safety area is the place we've highlighted. And, obviously, we've worked closely with St. Clair Hospital. They have deployed at their first hospital. They bought about 80 units for their first deployment, and they're in the process of converting over to the SoMo going forward. So, that was the health care. But, in general, the areas of health care where we have a lot of interest come down to drug dispensing, tracking of access-- the tracking of patients, and clinical trials. Those are the three areas that we continue to see opportunities. We saw them as a peripheral supplier, and we're continuing to see them as we have our own device.

Other areas that would potentially fall into the health care are things like a reference device. Many doctors have a reference library or reference data base, both for medical calculation points of view and, again, we're seeing some opportunity there.

On the retail, it's actually retail merchandising is the category. And, in most of these cases, what people are doing is they are collecting marketing-related information, merchandising product, replenishments of shelves-- all the activities that happen in retail that's not associated with the actual transaction. In most retail organizations, the cash register is basically a mechanism for relieving inventory off the central data base. And, there's a lot of other merchandising, marketing, coupon-related activity. And, people use PDAs; it's a separate system. And, we do very well in that. And, we've highlighted that as our main category for many years with our peripherals. And, we saw two opportunities where people are using our products now, in conjunction with scanners to merchandise. One is a paint manufacturer. The other was, I think, basically a reference type sales where they're using it for look-up, checking of prices, and availability of products.

Okay. Also, and I know you don't like to answer these questions, but is there any chance of attaining profitability in Q4?

I think the short answer is I don't think there's any chance we can be profitable in Q4, in terms of as we report by GAAP. I think that the objective of Q4 is to ramp up SoMo. And, I would like to be at cash-break-even levels, which I think is in the realm of possibility. But, I think the most important thing we focus on is to make sure that the SoMo is accepted by the market and that volume ramps so that we can basically have a good 2008.

The time frames are quite short. And, I think we have to be somewhat realistic in terms of how long people tend to evaluate something. Generally speaking, I would say 90 days is a good evaluation period and even an aggressive one. But, I think the good news here, Dick, is that once people evaluate and do select, they are talking about-- in many situations, roll-outs that are multi-year. And, we have to build that run rate. And, we're off to a good start. But, I don't want to have unrealistic expectations of--

So, you can move into-- we could go into '08 in the black?

Yes, when you say in the black, I mean--

You know, just starting the year out in '08 profitably, on an annualized basis.

Yes. I think that's a fair expectation of 2008, starting in Q1 will be at profitable levels. I don't think it's capable in Q4.

Okay. Thank you very much.

Thank you.

Thank you. (Operator Instructions). Our next question comes from Steve Swanson, Private Investor.

Good afternoon, gentlemen. Could you tell me about the $2 million cash draw down from year end to now? Is that-- are we going to need to continue drawing on that basis going forward?

No, I think most of the cash draw down is now completed. Part of that was, of course, to finish up the development-- of the extra expenses we incurred to finish up the development program for the SoMo in the first half of the year. And, then we also put some expenses that are needed to get ahead of revenues, in general, as we increased our sales spending, we've added key people into the sales force. So, those are investments that were needed to be able to adequately launch and support the SoMo.

Working capital is probably the biggest use of cash. We actually were cash positive from operations in the second quarter by several hundred thousand dollars. But, most of that use of cash has been working capital. And, certainly, as we grow, we'll see that. And, it's been the operating losses and funding those. Our total cash required the operating losses alone was about $1.5 million of that total. But, as Kevin mentioned, our objectives in Q4 are to now move the company up with the growth in SoMo and by continuing to tightly manage our expenses to achieve a cash positive level from operations.

If we do see a lot of growth in the fourth quarter, there may be some working capital impacts, but we do have a bank line that's working capital based that can be used to provide any type of short term revolving funding that we need to take care of working capital requirements.

So, I think most of the cash used, other than for working capital, is behind us. And, for the moment, the bank line, which we only draw on at the end of the quarter is available any time during the quarter for our use, should we need it.

And, what's the bank line capped out at?

The bank line, when you say how much is it?

Yes, what's it capped out at? What's the draw we can do on that?

The total line is $4 million. We think that could move up if we were growing faster than that. It's based on receivables-- based on receivables we've had so far, we draw typically $2 million to $2.5 million. As our receivables grow, of course, we can expand within existing line limits.

Okay, thanks very much.

Thank you.

Thank you. There are no further questions in the queue. I would now like to turn the conference over to management for closing comments.

Okay. In closing, we'd just like to thank everyone for their participation in today's call and to wish you a good day. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.