Socket Mobile Inc (SCKT) 2010 Q1 法說會逐字稿

Greetings, and welcome to the Socket Mobile first quarter 2010 management conference call. At this time, all participants are in a listen-only mode. A brief 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 with MKR Group. Thank you. You may begin.

Thank you, Operator. Good afternoon, and welcome to Socket's conference call to review financial results for its 2010 first quarter ended March 31, 2010. On line today are Kevin Mills, President and CEO of Socket and Dave Dunlap, CFO of Socket.

Socket Mobile distributed its earnings release over the wire service at the close of the market today. The release has also been posted on Socket's website at www.SocketMobile.com. In addition, a replay of today's call will be available at Vcall.com shortly after the call's completion and a transcript of this call will be posted on Socket's website within a few days. We have also posted replay numbers in today's press release for those wishing to replay this call by phone. The phone replays will be available for one week.

Before we begin, I would like to remind everyone this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities and Exchange Commission 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 the timing, distribution, and market acceptance of the products, and statements predicting trends, sales and market conditions and opportunities in the markets in which we sells our products.

Such statements involve risks and uncertainties and actual results could differ materially from the results anticipated in such forward-looking statements as a result of a number of factors, including but not limited to, the risk that our new products may be delayed or not roll out as predicted, if ever, due to technological, market or financial factors, including the available of necessary working capital; the risk that market acceptance and sales opportunities may not happen as anticipated; the risk that our application partners and current distribution channels may choose not to distribute the products, or may not be successful in doing so; the risk that acceptance of our products in vertical application markets may not happen as anticipated; and other risks described in our most recent Form 10K and 10Q reports filed with the Securities and Exchange Commission. Socket does not undertake any obligation to update any forward-looking statements.

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

Thanks, Jim, and thank you for joining us today. I will first provide an overview of our first quarter of 2010, followed by our current outlook for the markets and business for the rest of 2010.

We generated a sequential improvement in revenue in the first quarter and saw continued progress in other key areas. This includes increases in activity in our sales pipeline, recent introduction of additional new products and enhancements that further expand our overall market, and continued progress in maintaining price controls on our expenses with a focus on achieving profitable operating results.

Our sequential increase in Q1 revenue reverses a trend we have seen over the past two years, where Q1 has typically declined from Q4. Overall, while the general pace of business purchasing remained slow, we are seeing a slight uptick in strategic investment by businesses for deployment and expansion of systems for their mobile workers as a cost-effective means to enhance productivity during a period of economic slowdown.

We remain very focused on converting opportunities in our growing sales pipeline into revenue growth. Yesterday we announced a two-year $3 million OEM agreement with Epocal, a leading provider of point-of-care blood diagnostic products to supply a unique version of our SoMo 650 Handheld Computer as an integral component of their Blood Analysis System.

We have been working with Epocal for some time and over the past 12 months, they have purchased approximately 1,000 of our standard SoMo units to serve their North American requirements. We believe this new agreement reflects the proven success of their blood analysis system, which is in daily operations in many hospitals.

To give further color, Epocal has recently partnered with Inverness Medical, whereby Inverness has agreed to distribute the product via its worldwide distribution network, provide funds and agree to purchase Epocal subject to some performance metrics. The agreement with Inverness changes the size and scope of the opportunity based on their size and market reach.

Our OEM agreement with Epocal puts the mechanisms in place to realize the opportunity. Socket will provide customized versions of its SoMo and Scanner to Epocal under the Epocal name that meets the terms of their worldwide distribution agreement with Inverness and enable Epocal to ship their product worldwide.

The agreement is for 5,000 units over a three-year period and is targeted to generate over $3 million of revenue to Socket. We expect revenue under this agreement to begin in Q2 and be a solid contributor to revenue going forward.

Our agreement with Epocal represents the ideal type of opportunity and partnership for Socket. We're able to leverage our investment in the SoMo hardware and software platform in the medical market via Epocal. And we are also able to get the benefit from the Inverness Medical sales organization to bring this feet-on-the-street sales team its own market focus and its expertise. Inverness Medical is a $2 billion a year company with approximately 9,000 employees.

As we've noted, these significant strategic relationships take time to develop. Socket has been working with Epocal for almost two years prior to reaching this important milestone.

We also announced last month a collaboration with 3M under which they've selected our SoMo Handheld Computer for their asset and inventory tracking system. 3M sells this system worldwide primarily to libraries and small businesses that need to track inventory and assets, but do not have a lot of IT support. The package was recently upgraded to include mobile support with the SoMo being the selected platform. Again, we expect this program to contribute to our SoMo sales beginning in Q2 and ramping from there.

Our collaboration with 3M is another ideal opportunity in terms of Socket's business model. End-user customers are purchasing the software solution from 3M that runs on the SoMo, which means that 3M sales teams will be selling and promoting the solution and Socket will again be leveraging its investment in the SoMo.

Obviously, we're delighted that 3M has selected the SoMo for their mobile solution and they're now actively promoting the solution to their customers. 3M has asset tracking solutions in over 12,000 libraries, so we feel there is an excellent market potential for this solution.

We believe we have many software applications waiting in the wings that will further drive sales of the SoMo, applications like the 3M asset tracking software. Some of these applications we know about and some, we don't, as the development process can remain under the radar. Either way, the SoMo is increasingly being recognized as a dependable and reliable platform for major enterprises to deploy their mobility applications.

During the first quarter, we saw companies like Hospira, one of our key partners, relaunch certain healthcare solutions at the HIMSS Healthcare IT Show in Atlanta. In our discussions with Hospira, they have noted that due to the changes in the healthcare requirements for closed-loop medication dispensing systems, and the associated reimbursement rate, the market was finally ready to be receptive to the Hospira solution. Hospira has begun to actively market the solution and will be presenting the solution to potential customers at the Clinical Laboratory Management Show in Las Vegas on May 4th and 5th.

Software-driven solutions remain the key to SoMo growth and both 3M and Hospira are early indicators of an increasing number of new solutions that are again coming to market and will help drive SoMo sales.

We continue to have a long and growing list of software solutions that are SoMo-ready and can drive increased sales as these solutions are aggressively promoted by their respective offers. We are excited by the 3M opportunity and equally excited by the increasing indicators that other providers will also be moving their solutions more aggressively into the market.

During the first quarter, we saw solid growth in SoMo sales in the US, reflecting increased deployments driven by our increasing number of software solutions. This was offset by lower SoMo sales in the EMEA region in Q1, reflecting several large deals that were delayed or postponed. We have narrowed our focus in EMEA and are now working more closely with fewer partners and are confident that SoMo sales in EMEA will be stronger in Q2.

Moving on to our data collection products, we have started to see a general recovery in this segment of our business. First quarter sales were up about 28% over the preceding quarter and we are slowly getting back to more historic levels. Today, we are primarily selling our Compact Flash Scanning products in conjunction with SoMo, whether in new deployments like Epocal or into our installed base. We expect this segment to continue to grow through 2010.

Our Cordless Scanners continue to be driven by applications running on third-party host platforms like Windows-based mobile phones, notebooks, tablets and even desktops. This portion of our business is likely to see stronger sales in the coming quarters for the following reasons.

We lowered our pricing to make the solution much more affordable. These changes are making the scanner more attractive to a larger community. We've been able to deliver our 2D solution in the same ultra-small and super-light package and feel we will benefit from this later in the year as more and more applications begin to use 2D Bar Codes, particularly in the healthcare market.

We recently announced support for the Apple iPad. The iPad is a new category of device that is highly portable with a big screen and long battery life. We expect a number of similar devices to come to market in the coming months. While these devices have great appeal in the mass consumer market, they also have a lot of appeal in business markets. These tablet devices can be used to replace the many clipboard-type paper-based applications currently in use today. For this to happen, someone has to write an application to emulate the current process and can then add the benefits of real-time communication and data capture.

These applications will be written and deployed over the coming quarters and we expect that many will require scanning, which will drive sales of our Cordless Scanners. In the short-term, we will primarily be providing scanners to the Apple developer community, as there are no scanning-enabled applications at this time, but even this represents some reasonable numbers. The serious numbers will come after the applications are written and deployed.

Obviously, it's impossible to know for certain, but we feel there is a good chance that we'll also be able to support the new soon-to-be-released OS4-based iPhone based on Apple's desire to maintain compatibility on products using the same core OS. Overall, our Scanning business is recovering and at a faster rate than the SoMo, which we would expect as the sales cycle for add-on scanning is significantly shorter.

Turning to our OEM business, it continues to be a solid contributor to our business. We expect this portion of our business to recover slowly over 2010 and to continue to represent approximately 15% of our growing revenue. A long sales cycle resulted in a slow decline and also a slow recovery. We have completed all the major technical challenges of bringing our new wireless LAN product to market, and currently are sampled with key customers who are evaluating them for inclusion in their products.

In conclusion, over the past few quarters, we have grown SoMo sales and built up our other products with new or enhanced versions so that our total revenue mix is made up of about 40% SoMo sales, 40% Scanning and 15% OEM. This is what we predicted a little over two years ago when we began volume shipments of the SoMo. While we're still short of our sales objectives, we have made significant accomplishments within a tough economic climate.

During this time, we have also reduced our expenses by some 40%. We continue to maintain tight control on costs and believe the cost reductions we are taking will enable us to achieve positive cash flow in the second quarter.

We believe we have the right products and solutions and with our strategic focus on the healthcare and hospitality markets, we are well positioned to benefit greatly as conditions improve. We will continue to tightly manage our expenses until we see clear indicators that the economy has in fact turned the corner.

We are fortunate to have committed employees who continue to work very hard in these difficult times. With our broad portfolio of products and relationships with key customers, we anticipate achieving solid growth in 2010 and expect to be profitable before the end of the year.

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

Thank you, Kevin. Our first quarter 2010 revenue was 3.8 million, an increase of 5% over our previous quarter's revenue of 3.6 million, but a decline of 20% compared to first quarter revenue of $4.8 million a year ago. First quarter revenue growth compared to the previous quarter was primarily due to increases in the sales of our Bar Code Scanning products. Bar Code Scanning product sales increased by $320,000 or 28% to 1.45 million and represented 38% of our first quarter revenue.

Bar Code Scanner sales increased across all product categories, including Plug-In Scanners, Cordless Hand Scanners and our Ring Scanner. New product sales, including the newest version of our Cordless Ring Scanner and our newest 2D Barcode Scanner Model 7X, were contributors to that growth.

We also experienced increases in sales of our entry-level Bar Code Scanners, reflecting the introduction late last year of laser-based entry-level products to replace imager technology-based products. And we also experienced increases in our Plug-In Bar Code Scanner sales, as customers such as Epocal, which uses the Plug-In Scanner as part of its blood analysis system, increased their purchases of these products.

Our Handheld Computer sales for the first quarter of 2010 were 1.5 million, flat with the previous quarter and down 4% from the first quarter a year ago. Handheld Computer sales are very dependent upon the timing of product deployments, and although our sales pipeline is signaling significant growth in deployments, particularly in healthcare, our first quarter sales reflected lower hospital deployments in Europe compared to the previous quarter with a number of hospital expected to increase deployments in the second quarter.

As Kevin noted, many of our application partners are also signaling growth and our OEM agreement with Epocal announced yesterday is a good example of the progress being made by our partners. Epocal, we are targeting a minimum of $3 million in sales of both Handheld Computers and Bar Code Scanners, both integral to their mobile blood analysis system over the initial two-year period of the agreement.

We've also continued to develop our Accessories program to meet specific needs of customers including a DuraCase, a hard cover with rubber corners to add protection against drops and scratches without affecting the easy-to-use features of the Handheld Computer, and other accessories such as headsets, a wide range of chargers, accessories to add a wireless network card to speed the transfer of data over a mobile phone network, and through our STAR or third-party accessories program, keyboards and other accessories such as mobile printers that are in the works.

Our OEM sales revenue in the first quarter of 2010 was $.5 million or 14% of our first quarter revenue, a decline of 17% compared to the previous quarter, and a decline of 42% compared to the first quarter a year ago. We enable the Bluetooth and wireless LANs that we use on our own products to be incorporated into non-competitive third-party products. As we reported in our year-end conference call, our OEM customers were transitioning in 2009 out of older discontinued Bluetooth technology products and older wireless LAN 802.11 b/g technology products.

And the OEM sales team is now shipping the newest 802.11 a/b/g technology products, which includes the use of Socket's WiFi companion software with Cisco's CTX Security extensions. Socket's WiFi products directly support Windows mobile and Windows CE operating systems and through our development partner, emb-Wise, support other operating systems including Linux, ThreadX and Nucleus.

OEM sales require design wins and as these design wins are won, and the products move into production, our OEM sales are expected to increase as we move through the year.

As a final comment on revenue, Socket offers extended three-year service warranties on its Handheld Computers and its Bar Code Scanning products and we recognized service revenue over the service period. We also offer product refurbishment and repair for out-of-warranty products for a fee. Our service revenue in the first quarter of 2010 was $193,000 or 5% of our first quarter revenue. Service revenue in the first quarter of 2010 was up over 300% from the first quarter a year ago. These service contracts provide customers with increased protection from breakage and enhanced warranty protection, and are becoming a more significant part of our quarterly revenue stream.

As Kevin noted, customers in our sales pipeline are increasing their activity needed to resume their purchases of Handheld Computers and Bar Code Scanning products both for updating existing applications and for deploying new productivity-enhancing solutions for their mobile workforce. Based on this activity and an accelerating order pace compared to last quarter, we anticipate revenue growth in the second quarter and beyond as the economy continues its slow improvement. Much of the activity relates to our newest products, including our 2D Bar Code Scanner, our new entry-level Laser Bar Code Scanners, our more Ruggedized Ring Scanner and our Handheld Computers as we see them deploy in more and more software applications.

Our operating expenses in the first quarter of 2010 were 2.6 million, a reduction of 9% from first quarter operating expenses a year ago of 2.9 million. Expense reductions during 2009 that continue into 2010 have included a combination of lower headcount, reduced salary levels for employees and lower discretionary spending.

At the same time, we've maintained essential product development programs and key sales and marketing programs. We are continuing our cost reduction programs in the second quarter to improve operating results while maintaining essential programs and services.

Our cash target for the first quarter was to achieve cash breakeven results and we accomplished that objective. Our cash balance at March 31, 2010, was $1.982 million compared to $1.940 million at December 31, 2009.

We partially financed growth in quarter-end receivables compared to the previous quarter-end through additional draws from our receivables-based bank line of credit and we continue to generate cash by reducing our inventory levels.

We've continued to receive strong support from our distributors and they have a long history of timely payments to us for our products, and from our vendors in maintaining flexible credit terms. As is typical of economic recessions, our distribution channel in response to lower business activity, has reduced its stockage of our products to about half the level they were holding a year ago, which puts pressure on our cash, as we are paid by our distributors when we ship products to them. As the effects of the recession turn around, we would expect to see shipments and distributor stocking levels return to higher levels to the benefit of our working capital and cash balances.

An important element of our working capital is our working capital bank line that we use to finance our receivables. The bank line is helpful in enabling us to generate cash to pay our vendors for products shipped to customers prior to receiving payment from our customers. And because the availability of the line grows as our receivables grow, it is particularly valuable when sales are growing.

As many of you will have noted, we did not meet our first quarter revenue covenant threshold of $4.565 million and we are in discussions with our bank to enable them to consider a waiver of this covenant for the first quarter. We will report on the results of these discussions in a Form 8K within a few days.

Our priorities for 2010 remain to grow our revenues and manage our costs to achieve near-term profitability while we maintain essential product development, sales and service programs for 2010.

Our annual meeting of stockholders will be held this Thursday at the Company's headquarters in Newark, California, located in the San Francisco Bay area. Six of our seven directors are standing for re-election to serve the Company for the ensuing year.

Standing for election as a new Board member is Dr. Charles Emery, Jr. Dr. Emery has had a distinguished career in healthcare IT services; the last 10 years of his business career as Senior Vice President and Chief Information Officer of Blue Cross Blue Shield of New Jersey.

Most recently, Dr. Emery has been active with Arizona State University and the University of Maryland teaching graduate classes in healthcare information systems, strategic planning and healthcare finance. With over 35 years of experience within the health, insurance and healthcare provider sectors, we welcome the opportunity for Dr. Emery to serve on Socket's Board with our focus on healthcare as one of our primary markets.

We would also like to recognize the significant contributions of our retiring Director, Dr. Enzo Torresi, who has worked closely with us for the past 10 years.

In summary, and as I noted in my comments at the end of February, while no one can predict with certainty the timing or pace of economic recovery, over this past 15 months, we have made significant adjustments in our cost structures and we continue careful management of our costs and expenses and our working capital.

We've done so with the support of our vendors, our customers, our bank, our partners and our employees, and we are very appreciative of their unwavering support. And we particularly to wish to thank our stockholders for their continued support. With that support, we have been able to move forward with the essential programs that are continuing to establish the SoMo Handheld Computer family with its data collection option as systems of choice in key vertical markets, particularly in healthcare and hospitality.

We are continuing the development of essential programs and product improvements to keep pace with new technologies and the needs of our customers in the vertical markets that we serve. And we are maintaining Socket's standards of quality products and responsive customer support.

We remain focused on further building on the growing and active pipeline of customers showing an increasing interest in ordering our products. We are monitoring and supporting our solution partners' product development activities and their marketing progress, and providing an environment that encourages them to bring productivity-enhancing solutions into the business mobility markets that we serve.

We're looking forward to a much improved year in 2010 compared to 2009, with a combination of new products in anticipation of an improving economy, a returning base of productivity-enhancing applications in our key vertical markets and the experiences of operating as a lean organization.

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

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question is from Brian Swift with Security Research Associates. Please go ahead.

Thank you. Can you give us a little bit more color on how you expect this 3M association to roll out? You mentioned that they're in libraries. You mean book-type libraries or software libraries? What kind of libraries?

Yes, it's mainly book-type libraries, Brian, and they essentially have an asset tracking solution targeted to small business where you can track a number of assets. They list a whole slew of them on their web page, but it's designed for people who need to track either books in a library situation or critical assets in a small business, etc.

You subscribe to the service. It's an annual type service and then you can either use the SoMo or you can use a tethered bar code ccanner in conjunction with a notebook to scan the assets, right, and then put them in your database. They support both 1D, 2D and RFID tags. So then based on the type of assets you're tracking, you would scan it into your database and then basically maintain it over a period of time.

So they've just started to promote it. They're basically beginning to sell it. If you go to their web page or you go to their brochures, they essentially give people two choices. They give them a stationary-type solution that's based on a desktop and a tethered scanner, or they give them a mobile-based solution, which is based on the SoMo with our Plug-In RFID Scanner combination card.

Okay. And so is this primarily public libraries or --

I would say it's primarily school and small libraries. I'm sure they cover public libraries, but the vast majority of the business seems to be organizations that don't have a lot of their own in-house IT support. So again, I think in smaller public libraries, that may be the case. If you get the bigger libraries, often they will have their own IT facilities and maybe do things slightly differently. So the software package is designed for small business on the assumption that you're not going to have a lot of in-house expertise.

Well, certainly in this economic state though, funding for those types of indices is rather scarce. So what is their anticipation of how quickly this can ramp? It doesn't seem like it's a product that libraries can afford.

Well, again, it's an existing product, so it's not a new product, and essentially what they did was they upgraded the product to allow people to go mobile. And I would say today, the product is primarily a stationary-based product and the new version that's coming out this year includes this mobile option.

And as they sell it as more of a subscription, I think that it won't be a new purchase. It can be an upgrade to an existing install, and we're still working closely with 3M to get our arms around the exact rollout schedule, but they intend to sell this product worldwide. So I think we'd have a better answer over the next four or five weeks.

We have a meeting scheduled with them, I think, in the next two weeks where our sales representatives will be sitting down and going over the plan. So I don't really have all the answers right now other than they've rolled out the product. They've basically selected the SoMo as their mobile, and we'll get more color and details going forward.

And this is one of the situations where we didn't have a lot of, I would say, interaction with 3M as they developed this product. They came to us really when the product was fully developed and operational and we've got involved with them over the last six weeks. And obviously, the fact that people can spend a year developing a product, testing it, going to certain customers kind of under the radar, makes forecasting somewhat more difficult, right, but also kind of suggests that there's a lot more going on.

I think people have generally slow-rolled their new developments into the market because there's not a lot of buyers, and I think we are seeing, in a few situations, people changing that attitude. So they're moving them out, as I pointed out in the case with Hospira, where essentially, they sat on the program and did very little promotion or activity for almost 14 months, and just have re-entered the market at the HIMSS Show to remarket the product because of changes in the environment.

Yes, speaking of that, maybe you can elaborate a little bit more on what the -- there are some incentives that the government, through their --

Reimbursement mechanisms?

Yes, yes, those are kind of interesting, that -- maybe you can --

Yes, so, I mean, in our discussion with Hospira, one of the things that I would say convinced them to re-engage with the market more aggressively was the fact that the government has mandated that everyone needs to have a closed-loop medication dispensing system in place, I believe, by January the 1st, 2013, okay?

And as an incentive to have those in place, they're providing, I think it's an extra 2% on all expense reimbursements in 2010, an extra 1% in 2011 and '12. And then if you don't have a system in place, you get deducted, I think, 1% in 2013 and 2% in 2014.

So there's both a carrot-and-stick kind of approach. Obviously, medication-dispensing errors is a big problem and causes a great deal of cost, as well as can have serious consequences for everyone involved. It's been targeted as an area of improvement.

Hospira, if you remember, purchased the Sinclair software which [is] Veriscan software with the five [rights] of medication. Hospira is an organization of about 14,000 people. Their primary business is IV pumps and they have something in the region of .5 million in sales, and then they're enhancing this with the Veriscan System. And they're just starting again and I think I pointed out that they'll be at the Clinical Show in Las Vegas on May 4th and 5th.

Okay. Well, I'll let somebody else ask a question and I'll come back if I think of something else, but --

Thank you very much, Brian.

Bye.

The next question is from Bernard Fidel, a private investor. Please go ahead with your question.

Hello, fellows. Kevin?

Hi, Dr. Fidel. How are you?

A question -- you were just speaking about the 3M and I think you emphasized the libraries, but the way I understand it, it isn't solely for libraries. It's for small and medium businesses to keep track of their inventory or items, whatever it is. Am I correct on that assumption?

Yes, absolutely. I think as -- they actually have three segments in their literature of what they do, and two of them are not libraries. Libraries is one and obviously, it allows people to track books in and out of a library situation, but I think as you correctly point out, it also allows people to track any valuable assets they have in their business, and both ins and outs, demo pools, various other types of assets that they are viewed as critical to their business.

Yes, and I understand that the nice thing about it is that this is not -- even coming in from scratch, it is not an expensive system for these small and medium businesses versus having to do it themselves. I think it's only a couple of thousand or something, isn't it?

I don't think it's even a couple of thousand. I think it's a relatively inexpensive system and again, I think software developed as a solution becomes very attractive because you get to leverage the investment in the software to many, many different people.

And again, this is not a new product. This is a product area that 3M has been involved in. They're the market leader and they've upgraded an existing product to basically add the mobile capabilities. So again, not only do you get new customers, but you also get to resell or to sell to the installed base.

Well, I think it's very interesting that 3M chose Socket because they're a very large operation. They probably did a lot of research and this Handheld Computer probably came out the best, and so therefore, that's a positive.

Also I think -- and (inaudible) you correct me on this -- is that the 3M could be a relatively substantial source of income for us because 3M wouldn't go into a program for just a couple of hundred. And if it's worldwide, the potential could be tens of thousands of these types of systems.

Yes, I mean, obviously, we hope so and as I mentioned when Brian Swift was on the line a minute ago, we do have a meeting set up and we will have more details probably in the next two or three weeks. But, yes, large companies generally, when they invest in something, need a reasonable return and especially when you're talking about a company like 3M that's already got billions in this category, they don't do it for the sake of a small number of units. It also tends to be for the long-term.

I think that just with 3M and with others, we are seeing that when we engage with someone, and they do test the SoMo, I do feel that in this category of products for durable, dependable, reliable platforms that run software, the SoMo continues to do better and better, and we continue to win deals like this.

Similarly with Epocal, I mean, they worked closely with us for two years. We would rest all of their issues. The SoMo had continued to get better and better as a product, more stable, more dependable. We've continued to upgrade it with the latest and greatest from Microsoft and others. We're up to 6-1; we'll be able to go to 6-5. And I think it's our commitment also to the space that has helped people to -- I would say standardize is probably too strong a word yet, but really select the SoMo as their platform of choice.

Yes. On Epocal, you mentioned that that is a slightly over 3 million over two years. Am I correct?

That's correct.

That comes out to approximately an additional 400,000 every quarter, assuming it's an even thing, you know?

Yes, again, that's -- I mean, and what's nice with Epocal is that not only do we get the benefit of their sales organization, but we also get the benefit of the planning. So at the beginning of each quarter starting in Q3, we will know what they basically have to count on for Epocal.

One of the things that's been a real challenge for the last, I would say, four or five quarters has been the fact that the business has been so lumpy, and the fact that you can start with .5 million or 600,000 or 700,000 in the quarter as a known certainly helps for planning purposes, for smooth-of-operations purposes and just basically for comfort-of-revenue purposes.

By the way, that 3 million, you mentioned before, that could be increased. Am I correct?

Yes, Dr. Fidel. That's based on just the minimum expected quantities for that contract over the initial two-year period. So not only do we expect that it'll be renewed over multiple additional years, but my sense is that they were being cautious in trying to set minimums. I would love to see their business do substantially more than that over this next two years.

Right. And in the second quarter, we could -- are we going to start reporting this or something?

Well, yes, it'll depend on partly how much we sell and what Epocal's desires are. We continue and love to highlight the activities of our partners where they're becoming significant to our operation, so I'm anticipating we will be addressing progress with Epocal as we go forward.

And they're in just a gearing-up mode now. They are looking to increase their business around the world and we'll certainly be behind that process as we move forward. We've already done over the past year substantial improvements that help the system work more effectively and I think it's been a very close and a very excellent partnering arrangement.

Yes, and --

Okay. I just have a couple of more questions. April is almost over, Kevin. How are we doing? Is it what you expected or --

Yes, I mean, it's -- again, April is, I would say, reasonable. It's not -- I wouldn't describe it as huge. I think we'll end up being ahead of where we were in January at the end of the [audio drop] the April period, but again, I mean, most of the business happens in the second half of the quarter.

And even on our SoMos, I mean, Q1 was a little bit strange in that we had a lot of our SoMo shipments towards the end of the quarter as deals happened. And so overall, I would say April is reasonable and solid. I wouldn't say it's way ahead or way behind our expectations.

Yes, and orders are coming in each day. As of yesterday, I think our shippable orders, orders that we have on hand that'll ship during the quarter, now total somewhere in the 1.5 to $1.6 million level. So as we move each day, that number obviously increases.

Well, that's darn good. That -- especially if the second half of the quarter is going to be usually the strongest. Am I correct?

Yes, I mean, that's the usual trend. I mean, essentially, if I look at Q1, January was light, February was stronger, March was stronger still.

Okay.

So --

That's pretty good, 1.6, I'll tell you that.

Yes.

Now, do you anticipate -- or can you be profitable in the second quarter? What sales amount do you need to be profitable?

Well, we're targeting to bring down our operating costs in the second quarter. That happens because, one, the -- some of the first quarter non-recurring costs like our audit fees and the costs of publishing our annual materials doesn't recur in the second quarter. And then we're continuing to very tightly manage our discretionary costs, and so we're looking to bring somewhere between 300,000 and $400,000 out of our operating costs in the second quarter.

So you can calculate -- the breakeven point for us, the cash breakeven point, is probably around $4.5 million and we would hit profitability assuming we can hit those costs and our typical margins at around $5 million for the quarter.

Okay. So there's probably a good chance that you can meet the bank covenants, I guess?

Well, I think it will depend on what we work out with the bank. Typically when we don't meet the covenant, as happened in the first quarter, we will look to the bank to reset expectations for allowing us to continue using the bank line. And if the bank is amenable to that, typically we'll set a new covenant that will provide them a basis for either simply agreeing that we're meeting expectations, or if we're not, that gives them the opportunity to take another look to make sure that the risks that are associated with that bank line are reasonable for the bank.

And we're very sensitive to that, but we'll see. We'll report probably the middle of next week in a Form 8K what the going-forward plan with the bank is and it should have all those details in there.

Yes. Going back to if we have sales for the first of 1.6 already, that's an average of 5 million for the quarter, not counting the second half, which is usually stronger. So I think that we could easily do that and there's a solid chance of being profitable, but you don't have to comment on that anyhow.

Okay.

Yes, again, orders can vary in terms of their timing and the types of orders will vary as well. Our standard products typically we see orders come in just a week or two before people are looking for delivery, but for our OEM products, you often see orders in on a much longer time period. So it's always hard to equate based on your orders as to what you're going to get over the next couple of months, but I think the start that we have right now, as Kevin mentioned, is a bit stronger in the second quarter than we saw in the first.

Yes, okay. Now, have you people evaluated what you think that the 3M deal could possibly bring in?

We -- as I said I think to Brian, I think we have a meeting set up in the next two weeks and we're meeting with the 3M people to basically assess the market potential and set some expectations. So we don't have a number right now, but we will have probably in the next two weeks.

Okay. Just two more questions, then I'll let the other fellow go back. How was Europe doing in Germany, the deals in England for the hospitals that you announced with the Handheld, etc., etc.?

I think overall, we were a bit disappointed with our results in Q1 in Europe. We had a large deal that we were pretty confident that we had and I think you asked the question and I answered it in the last call, of our approximately 800 units. We got to the point of the various parties sitting down to do signing of contracts when one of the parties changed their mind, and the deal fell apart. And this was a surprise and certainly weakened our sales in Europe, so basically, the hospital stuff continues to proceed, but hospitals tend to be slow.

Germany, we had expected one deployment in the first quarter that didn't happen. In talking to our distributor, he [thought] it didn't happen because of vacation and out-of-office-related issues with personnel involved as opposed to any business decision not to do it. So we still think we have a very big opportunity.

I'm actually going to Germany to meet with the distributor and be there next Tuesday to actually go over the specifics of all the deals. So I don't have the exact numbers, but I'll be happy to report as we get more information about these deals.

Okay. That 800-unit deal that you were supposed to have was basically postponed?

Yes, I mean, without going into all of the details, there were two parties involved. There was both a franchisee and a person who owns the -- I suppose relationship is probably a good way of describing it. They didn't reach an agreement. We believe in 2011, the contract will be amended so that our system, or the system involving the SoMo, will be part of the going-forward plan, but as the contracts are awarded on an annual basis, we don't think there's much opportunity for it to be revisited in 2010.

Okay. And the last question right now -- maybe I'll get back with one or two after someone else. Where do you see the major growth in the second quarter?

Well, again, we're actually quite bullish on our Scanning. We are seeing, I would say, a marked uptick in our Scanning. I think as Dave pointed out in his remarks, Scanning was up 28% Q1 over Q4. Certainly, Scanning recovery can happen a lot quicker because the sales cycle is shorter. So I would actually say I would expect Scanning to lead the way in Q2 and with SoMo to be also growing, but -- and closely aligned. So I think those are the two main drivers. OEM, we expect to be, I would say, slightly up, but again, I think as Dave pointed out, we get more visibility in OEM because the lead times are longer.

Yes, and as Kevin noted, we, in Europe -- Europe was where sales of the SoMo were actually down in the first quarter. Sometimes you'll see lulls in terms of deployment planning and we were running at about twice the pace through the four quarters of 2009 in Europe on deployment of SoMos into hospital environments and we just hit a lull.

There was one deal that had slipped out, but it was going forward, but we were down by about $400,000 in total revenue. A good part of that was the SoMo in Europe in the first quarter. You combine that with the 800-unit deal that Kevin talked about which would have added to those totals. And so our expectations in Europe were significantly higher for the first quarter than we actually achieved. Now, with the hospital deployments coming back, I think that lull was just a first quarter issue. Again, you'll see growth there.

There's a number of other [audio drop] that our group is tracking down. The US grew by a -- with Bar Code Scanning being the big driver, but the US grew by some 31% in the first quarter over the fourth quarter. So even though it was substantially offset by some decline in OEM and by European sales dropping, if we can simply see now Europe picking up to the pace that was achieved in the United States in the first quarter, everyone will start to appreciate the results.

Okay. I'm going to let the other fellow who wants to come back. I took up enough of your time, and then I may have another question after.

Okay. Thank you very much, Dr. Fidel.

Okay. Take care.

(Operator Instructions). The next question is from Ryan (sic) Swift with Security Research Associates. Please go ahead.

Close enough. Getting back to the 3M thing, what do you get on revenues when they make a sale? I mean, they're renting this or leasing it or whatever, but you get paid on the --

Yes, (inaudible) of distribution, I would say we'd be in the 700 to $800 range per system if it included both the SoMo and a combination of RFID and Bar Code Scanner which looks like it would be their default choice of equipment.

Okay.

Okay?

Thank you. That's it.

Thank you.

Thank you very much, Brian.

We have another question from Bernard Fidel with -- a private investor. Please go ahead with your question.

Yes, hi. This is the last one. A question -- in England, I think I mentioned before, there was something that the Handheld was going to be -- possibly be introduced to all the hospitals for the physicians to take it around to be on call, etc., etc.

Yes, that's --

How is that getting along?

That's actually going -- continues to go quite well. This is the iBleep solution whereby they're using it as a (inaudible) upgraded paging system where they can page the doctors on call and the doctor can accept or reject the page and pass it to another doctor. We did get two or three more hospitals. I think [Liverhampton] and Maidenhead both went forward with their pilot.

I think as I explained previously, the way it works in the UK is that there are essentially around 700 hospitals and within that, there is about 160 what they call trust funds, each trust fund looking after four or five hospitals. And this solution has been deployed to a number of hospitals and as it gains acceptance within a particular trust, then that trust can propose it to the National Health Service and it would be deployed by all hospitals.

We're still, I would say, down a path to do that and again, as I mentioned, I'm actually heading over to Europe this week so that I can catch up, but that deployment is still, I would say, on track, moving a little less quickly than we'd like, but we are making good progress in that category.

Okay. Last question, then I'm finished. The large deals you announced, do we have any additional large deals in the pipeline or is there anything that is pending for the near future?

Yes. I would say that we continue to have people approach us on an almost daily basis with opportunities and deals. So, yes, we actually are quite busy. I think that a lot of people are, I would say, actively involved in the sales process. Not enough of them are purchasing really in the short term, but we are seeing a market improvement in that category.

Anything pending in the near -- relatively near future, let's put it that way.

I don't want to be giving the kiss of death like I did last quarter when I said that we'd get the 800 units. It seems to be I killed it in a hurry. So I'll avoid doing the same this quarter.

Okay. I'll take that as a positive, but you don't want to kill it.

Right.

Well, listen, Kevin, you have a good trip in Europe.

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

Okay.

There are no further questions in queue. I'd like to turn the call back to management for closing remarks.

Okay. We would just like to thank everyone for participating in today's call and wish you all a good day. Thank you very much.

This concludes today's teleconference. You may disconnect your lines. Thank you for your participation.