Socket Mobile Inc (SCKT) 2010 Q3 法說會逐字稿

Greetings and welcome to the Socket Mobile Third 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, 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 2010 third quarter and nine months ended September 30, 2010. Online today are Kevin Mills, President and CEO of Socket; and Dave Dunlap, CFO of Socket.

Socket Mobile distributed its earnings release over the wire service at the close of the market today. The release has also been posted on Socket's website at www.socketmobile.com. In addition, a replay of today's call will be available at vcall.com shortly after the call's completion and a transcript of this call will be posted on the Socket website within a few days. We'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 27A of the Securities Act of 1933, as amended; and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, but are not limited to, statements regarding mobile computer, data collection and OEM products, including details on timing, distribution, and market acceptance of products and statements predicting trends, sales and market conditions, and opportunities in the market in which we sell our products.

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

Our third quarter revenue of $3.4 million reflects solid quarterly sales of our SoMo handheld computer, along with improved sales of our cordless scanning products, offset by reduced sales in our legacy businesses.

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

Starting with our SoMo handheld and SoMo-driven barcode scanning solutions. In Q3, we generated quarterly SoMo sales of $1.67 million, slightly lower than the record $1.73 million we achieved in Q2. In Q3, we saw lower shipments to our customer Epocal, as they transitioned during the quarter from our standard SoMo to a proprietary and custom Epoc-branded SoMo. The process has completed and, going forward, we will be delivering customized SoMo units to Epocal on a scheduled basis.

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

As we look to Q4, we are expecting record SoMo shipments in the quarter. With Epocal's transition to proprietary Epoc-branded version of the SoMo complete, they are seeing a solid uptick in their business around the world. As mentioned on our last call, Epocal launched their solution in Japan, Germany, Italy and the UK at the beginning of the summer, and the initial market acceptance seems to be high and is driving good demand for their bedside blood analysis solution which, in turn, drives sales for both our SoMo and plug-in scanners.

In addition to this very positive Epocal news and a steady demand from existing SoMo customers in Q3, we began initial deployments with Sigma Care's software for long-term health care. Lancaster Hospital selected the combination solution of Sigma Care's software running on the SoMo as their solution and has begun a rollout to multiple locations. We have discovered getting the first deployment is always the most difficult and we are very pleased to be working with Sigma Care which provides software solutions to over 150 long-term facilities in the US. We believe a successful deployment at Lancaster will serve as a validation to promote deployments with similar enterprises. In addition to Lancaster and Sigma Care, we've been selected by a long-term care provider in Australia that supports more than 100 facilities. We will provide details about this win in early November.

Our SoMo handheld is gaining increasing acceptance and seems to be the ideal product within the long-term health care market, and we're focused on maximizing opportunities in this area.

Hospitality is the second area we continue to see strong demand for the SoMo handheld, particularly with table-side ordering. In Q3, we announced a partnership with Menusoft, the provider of Digital Dining restaurants offer. This relationship came about after working closely with Digital Dining and getting endorsements from some of their key retailers and customers who benefited from using the SoMo handheld and deploying a complete mobile solution. Digital Dining, through its network of retailers, has over 30,000 installations in the US and over 50,000 worldwide. We believe this important endorsement will greatly benefit our increasing success in establishing that SoMo has the recommended waiter pack in the hospitality market.

While it has taken time for us to establish strong footholds for the SoMo in our target markets, we are confident in the long-term prospects for our continued growth in both health care and hospitality markets. As we gain improved understanding and traction in the long-term health care and tableside ordering markets, we expect to see increasing deployments in the coming quarters and are very focused on establishing the SoMo as the de facto device in these market segments.

Turning to our barcode scanning products. This business was up sequentially in Q3 and we expect that trend to continue. We have made a lot of progress with our cordless products over the last two quarters, starting with our support for the Apple iOS platform -- namely the iPhone, iPad and iPod touch devices. We began supporting the Apple devices with our 2D cordless scanners -- cordless scanning products, and in mid-September, we added Apple support for our less expensive laser-based scanners, which we believe will further increase our sales.

As we announced yesterday, we've also rewritten our core cordless barcode scanning software, SocketScan 10, representing an extremely important milestone. This is the result of almost two years of work. Our previous version of SocketScan took several years of produce and it migrated over time to encompass numerous plug-in and data collection technologies, which is great for developers implementing various types of technology-based solutions. However, since our target devices are now using just Bluetooth as a connection scheme, we've restructured and modularized the software to allow us to properly support the rapidly-changing mobile phone landscape. This will allow us tremendous flexibility going forward, something we were not able to do with our previous version of software.

Our SocketScan 10 software allows us to integrate commercial-grade rapid and robust barcode scanning into mobile applications. Most of our customers -- our potential customers -- need to update a database or populate information like scanning a medication or an [asset] into a database, or they need to scan several items in less than a few seconds. In many cases, they require tools to confirm scanned barcodes are populating the right fields, data checking needs confirmation or, in some instances, scanned data characters need to be modified. This requires sophisticated tools which need to be written for small code-space environments and made available for multiple operating systems. This week, we launched SocketScan 10 for Windows 7 with support for the new crop of tablet computers hitting the markets, like the new HP 500 Slate, as well as the Blackberry devices. This is our initial release of the software -- supports our complete line of both 1D and 2D cordless barcode scanners. We'll be releasing SocketScan 10 for Android in late Q4 and a version that will support the Apple iOS platform devices in Q1 of next year.

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

We also announced our new developer compensation program with the release of SocketScan 10. This is truly a revolutionary program allowing developers to (inaudible) on the attachments of barcode scanners to devices running their application software. We're extremely excited about this and are already receiving positive feedback from developers that we've talked to about the program. We built a mechanism to both work more closely with the developers, but also enable a revenue-sharing mechanism for our developers which creates applications that incorporates commercial-grade robust and rapid barcode scanning into their applications.

A tremendous amount of work has been done in making all this happen and we expect it will have a meaningful impact on our cordless scanning sales beginning this quarter, as well as future quarters.

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

In conclusion, while these difficult economic market conditions have made the past two years especially challenging, we have made significant strides in right-sizing our business, shedding a number of underperforming legacy sources of revenue and creating new-generation solutions representing new sources of revenue. Today, 72% of our revenue comes from SoMo-related sources when you include SoMo services, support and plug-in scanning and about 10% from cordless scanning. Total revenue will be driven by growth of these core products going forward. We expect to see a strong finish to Q4 and 2010, and we should be in good shape for 2011.

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

Thank you, Kevin.

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

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

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

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

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

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

We are signing today -- and will announce later this afternoon -- a definitive agreement for a $1 million convertible note financing. The 18-month note has an interest rate of 10% and is convertible into common stock at the option of the holder at an additional conversion price of $2 per share. We will also issue a 5-year warrant to purchase 500,000 shares of common stock at a price of $2.41 per share. The proceeds will be used to improve our working capital. This financing will, in part, replace our current bank line and will also reduce our overall borrowing costs. The shares that are reserved for issue when notes are converted and warrants are exercised will be registered during the next 90 days. Details of the financing will also be filed in a Form 8-K, which we expect to file at the end of the day today.

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

Our CEO, Kevin Mills, presented yesterday morning at the financial conference sponsored by Security Research Associates in San Francisco. The presentation included Power Point slides and is a good overview of Socket's products, markets and directions. Both the slides and Kevin's remarks are available on a link that can be accessed on the Conference Calls and Events page of the Investor Relations/About Socket portion of our website at www.socketmobile.com, and I encourage you to review the presentation.

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

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

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

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS.) Our first question comes from the line of Paul Bernstein with Black Diamond. Please proceed with your question.

Yes. I decided to join the conference call -- I haven't been on for a while -- just to see the progress. Looks like you have pretty good technology, but you're still not cash-flow positive. I know you're addressing some of the cost issues and you're right-sizing your business, but I'm wondering when you might have to make -- giving that things are picking up -- when you might be cash-positive -- within the next 2 years, 3 years? Are you still borrowing money? And also wondering if the senior management would take a dollar salary and get a huge bonus when you become cash-flow positive since the shareholders really haven't benefited very much for all this good technology that you have because you really haven't had many sales, haven't been cash-flow positive for -- I don't even know how many years. So kind of two questions -- trying to right-size the business and you have very small market cap. So (inaudible) improve (inaudible) leverage the technology, which we haven't seen yet.

Okay. Well, to answer your question, we believe we'll be cash-flow positive basically this quarter -- in Q4 -- and obviously, we've been working towards that, but we believe that that is achievable this quarter and, as Dave mentioned, we are off to a good start. And there is a bit more predictability in the business due to the fact that we have converted a key customer over to a contract with a custom version of our SoMo as opposed to going strictly through distribution where predictability has always been an issue. And as regard management taking a dollar salary, all I would say is that the management team here has reduced their compensation for almost two years by an average of over 35% and that the current salaries we're paying are extremely small relative to what people could earn elsewhere, and no bonuses or no variable compensation has been paid in over two years and base salaries have been reduced in addition by, I would say, over 20% for executives, and the impact has been -- again, I can speak for myself -- over 50% or about 50% for two years. So there's a high level of commitment. I don't think that we are in a position to take a dollar-a-year salary. If I was, I would. Does that answer your question?

Yes. And I'm glad you're seeing you're making a little progress, but if you've been a shareholder for years, you haven't had any return, no cash flow, nothing. So --

We understand and --

No no. So that was the point. It looks like you have some technology. Hopefully you'll get some critical mass. Otherwise, might as well hang it up because you can't keep doing this for years and years and years. You've got to come to a head and show what you can do.

Yes. We agree with your sentiments. We agree with your sentiments. We have to show critical mass. I think that we have worked hard to, I would say, right-size the business and it's always difficult to predict when it'll happen. I think we're close. And we actually have, I would say, a good -- a very good possibility to be cash-positive in Q4 and that's what we're working hard to achieve. I think once we achieve that, we will be able to leverage ourselves going forward, but it's been difficult for the past two years and we fully understand the shareholders have not gotten a return, and we're sensitive to the whole -- issues.

Okay. As long as you're driven to do that and if you become cash-flow-positive and you can sustain it -- that's your next goal -- that at least you're making a little progress because there hasn't been any for -- I don't know -- 5 or 6 years, so hopefully this is the year you start making some progress.

We appreciate your support and your comments, Paul.

Thank you. Our next question comes from the line of [T. Fidel] who is a private investor. Please proceed with your question.

Yes. Hi there, Kevin and David.

Hi, Dr. Fidel.

Hi.

Okay. (Inaudible) you mentioned something about Australia and 100 nursing homes in Australia?

Yes. So let me just clarify, okay? What we're discovering is that in many market segments, there is an author of a piece of software who will write an application or software solution for a particular market. And that software is then, I would say, sold or used in a number of facilities. What we have is that the author of the software -- a company in Australia -- and we don't want to release their name until next week because they've asked us not to because they're upgrading their website and doing some other work -- basically have selected the SoMo as a replacement for a Palm Pilot that they've been using for the last five years. Currently, their software is used by over 100 nursing home facilities in Australia, and we've done a series of tests with them. They have deployed about 120 units prior to releasing the final package and we're -- they're announcing that final package next week and then their customers will be able to switch over to the SoMo using the new improved software. And we see this as a trend. You see also the same thing with Sigma Care. Sigma Care makes a pretty standard package that 150-plus hospitals or facilities use for long-term care. Once the orderer of the software endorses a solution and selling it to the individual facilities, it's much easier. Each facility really makes their own decision and -- once they've selected the software -- and generally speaking, they like to select something that has been recommended by the person who's written the software purely because in the event there's a bug found or a problem, they know they'll get support. So this is really how you create leverage. We have, obviously, supported customers like Good Samaritan Hospital who wrote their own software and currently we have in over 190 facilities, but unlike a Good Sam, Sigma Care and the guys in Australia -- they bring their own sales force to the party. So in addition to getting the near-term business, you also get a sales force that's selling it to other facilities. So there's a lot of leverage in the solution.

Could you estimate how many SoMos would be sold from something like that?

It's always hard to estimate. What I -- what we know right now is that they have north of -- I don't know -- 1,500 Palm Pilots and they basically would like to expand their market. And again, this is one software provider. If you look at someone like Sigma Care -- again, they're supporting 150-plus facilities. It's hard to know how many people will switch from kiosk-based solutions to handheld-based solutions, but these are the stones that get us across the river here because each of these steps has a multiplying effect.

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

Yes. So let me give you an update on that. The trial is still ongoing. The facility in question had told us --and prior to the last call -- that they needed to make a decision by late August, and when late August arrived and went, they basically told us they had pushed the date to around Thanksgiving. We believe strongly that we will get this business, and they have approximately 65 units purchased for the trial, and they're simultaneously deploying in 5 facilities. We're -- without being overly confident, we are the primary solution they are testing, but ultimately, they will make their decision when they're ready and we have to be patient. But we believe that deal is still very much alive and we are confident we will win that business; we just don't know when.

Okay. You mentioned -- what is it called? Epoco?

Epocal.

Epocal. That --

This is the company that has the blood analyzer.

Right. Right. Were they affected -- when we -- when you transferred over to putting their name on it and all that, how much did that affect the third quarter if they didn't do it that way?

Well, essentially it reduced our sales to them by about 300-400 units and that was the difference between not having a record quarter and having a record quarter.

Oh okay.

So the issue would be -- and now that we're over -- the name of the company is Epocal but their brand is Epoc -- E-P-O-C.

Okay.

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

Okay. Let's see. Remember about last year at this time, there was a hospitality deal from Europe that was going to be put over for one year or something?

Yes.

How is that doing?

We believe it is still on the table. This was a hospitality for festivals and events. Basically, we need to stay in contact with these people. They have done a press announcement saying that they will be supporting and they have the contracts in place. We are expecting to see that business in 2011. We're not expecting to see any of it in 2010 because everything got postponed. If I was just to replicate the timing, it seems that most of these contracts are -- these events and the franchising of the food and alcohol services seems to happen (inaudible) the Q1 and that's when we got the ugly surprise last year that it didn't happen. And so I expect to get a definitive answer around that time and -- based on their business practices. The individual involved, I know, has been here in the US negotiating contracts in other things, so we remain hopeful that that will happen in Q1. And again, if it happens in Q1, I think it would be an uptick to Q2 business.

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

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

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

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

Yes. That's about right. As you know, we've maintained our cost reduction programs and that has brought our -- both our cash break-even point and our bottom line break-even point down considerably. So today, we're operating at levels that -- that cash break-even point from operations is below -- well below $4 million. I think 3.8 to 3.9 is a pretty good estimate right now. And then from there, you'd need another -- at 4 and a quarter, 4.5, you'd actually hit profitability. So as these increases are happening and as many of these deals start to kick in, we think the revenue growth that will come from those moves us up into that territory and our intention is to move beyond cash break-even on the profitability as quickly as we can. And we'll continue to advise everybody on the progress on these various initiatives that were described earlier by Kevin, but most of those initiatives are expected to be yielding higher revenues quarter over quarter as we move through these next few quarters.

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

I think that's stretching it. I think that the issue we have also -- and one of the things we've done exceptionally well -- is we have managed our inventory. Our inventory has fallen from almost $4.1 million to $1.4 million. We've generated $2.7 million of cash. So as you manage things, how quickly you can recover is also somewhat managed. I think we'll take a good, positive step in Q4, but it's too big a risk, even if we had the orders, to go for a blow-out at this stage. So I think the issue would be you should look for us to be in that range, and I'd be happy to be, at the end of the quarter, in that range. It would be an extraordinary event that would get us profitable in Q4 and require us probably to take more risk than we could to make it happen.

But our distribution model, Dr. Fidel, recognizes revenue on sales out from our general distribution channels, and the inventory in those channels today worldwide is somewhere approaching $2 million. So if customers want to buy products from the distributors, that can accelerate the revenue recognition and then those distributors replenish with us. However, it's key for us to be forecasting the pace of that growth because we don't want to wind up with a lot of inventory in too soon. So the channel acts as a wonderful buffer to our customers so that they can continue to get product and then we work with the distributors to replenish that product as we go along. So it's really a function of the customers' decisions on when they want to buy, but -- and with that buffer, we are able to support revenue growth faster than we would if we were just relying on our own ability to produce the product for unforecasted upside business.

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

Essentially we have moved that to our OEM group for a number of reasons. The biggest one being is that through the distribution channel, it doesn't really work well because many of the large customers who are interested in it have direct relationship with the (inaudible) or the (inaudible) [Tech Logics] or the (inaudible) of the world and aren't used to buying through a distribution channel. So we've moved that product over to our OEM group. And again, we haven't seen a lot of deployment. I think a lot of companies -- ourselves included -- have been -- basically for the last two years -- avoiding all capital expense and minimizing wherever possible. So that product works great. It still has sold and we have customers who continue to buy it, but we haven't been aggressively promoting it because our sales channel doesn't match up well with where the customer normally buys.

Okay. Very good. I just remembered that. That's why. Now this is one thing. The OEM that used to be a good sales leader-type of thing that we had in the past couple -- in the past --

Yes?

That used to amount to millions.

Yes. So the OEM business is driven by a very different dynamic. It's a what we call "design win business" --

Yes.

And we won a number of designs in 2003, 4, 5, and all of those customers were running for 3 to 4 to 5 years. And we basically saw that business grow. We had two elements -- Bluetooth and wireless LAN. But it was primarily Bluetooth. If you remember back to 2003, Bluetooth was a very complicated technology to get right, and we got it right early and we were able to provide a working solution to people who couldn't get a working solution otherwise. Over the last 4 or 5 years, with Microsoft improving their stack and the chips getting better, the level of complexity in Bluetooth is now much lower and it's easier to buy something off the shelf that works. So that has largely gone away. We have a similar situation in wireless LAN where we are now doing a design cycle. We've done a lot of work to deal with the complex environment out there. We have a number of customers looking at design wins, looking at our new designs, to put in the products. We're now shipping samples to the -- those customers. We've got our first, I would say, nibbles and we are delivering product beginning in Q4 to some customers. We expect to continue to, I would say, get design wins up until the middle of 2011, and at that stage, we'll see that business come back. The good thing about OEM business is it -- once you get a design win, you typically get it for 2-4 years. And again, it's a very leveraged situation. Right now, we're between design wins so the business looks pretty anemic, but it's actually got more potential than it's showing right now.

But looking back in terms of the phasing out of the products that have been end-of-lifed, in 2008, we did over $9 million of business through our OEM team, heavily weighted -- two-thirds of that -- to Bluetooth. 2009, as we finished up the phase-out of those products, we had dropped by about $6 million of revenue, so -- and to a little over $3 million -- and this year, we're on a pace to wind up with a little over a million dollars of the business in the OEM group. So -- now that doesn't count the contribution that our OEM customers are making to handheld computers and barcode scanning sales, because that -- but we're talking about the unique Bluetooth and wireless LAN products. That's been the substantial reason that you've seen an overall decline in the company's revenues. The good news is that we're now at the -- that phase-out is essentially completed and from this point forward, we should just be experiencing growth in the OEM business as they continue to secure design wins, with the focus at this time being on wireless LAN.

Do you expect the OEM to be increased in the fourth quarter?

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

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

I think that what we know of this business that -- I think that you should be looking at Q3 next year when the people who are currently evaluating and have made commitments -- usually you're talking about after they sign, 120 days -- I would expect to sign much of the business in Q1, Q2 next year and see improvements in Q3, Q4 next year. That will be in line with historical patterns. And again, it's the kind of business where you have to be patient. We all loved the $9 million that we had in 2008, but that was the result of a lot of work, while we were only earning $100,000 a quarter in 2003 and 4. And we're going through a similar situation right now and we're pretty confident that that will add to our revenue, but it's not an (inaudible) because it requires someone else to design it into their products.

But the OEM business does nicely leverage the technology we're using in our products. Because our focus has always been to make the use of this technology easy for our customers, it's an attractive alternative for others to put into their third-party devices that are not competitive, and as Kevin notes, once you're in a design win for a product, typically that product's in the market for anywhere from 3 to 5 years and so it becomes repetitive business based on the success of that product. So it's not a large incremental cost for us since we're not putting any special time and attention in. If there is a special need of an OEM customer, typically we have them fund that special need. So it's a good return on that investment as we see that business rebuild.

Okay. Good. Three more questions and I'll get off if anybody else (inaudible). How is the European business, particularly with the weak American dollar?

Certainly it's helped and the European business was stronger (inaudible) this summer. We had good European business. One of the things that's, I would say, a challenge with a rapidly-changing currency which is independent is that we have to price-protect the distribution channel. So if we lower our prices, we have to pay the difference to all our distributors. So we have been conservatively lowering our price, but certainly the weaker has helped our business, both in Europe, and also we expect it to help our business in Japan where we recently launched the SoMo and, obviously, the price of the SoMo is very attractive in Japan relative to the HP which continues to, I would say, be less than (inaudible) available. So a weak dollar is helpful certainly, but it's not an instant thing. But business was good in Europe.

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

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

Well, we have the hardware now. We developed that, didn't we?

Correct. The hardware's been available. We are seeing more and more applications. One of the things that we have done with SocketScan 10 which we talked about is because it's ever-changing, we needed to have really more flexible and smaller software. And we rewrote our (inaudible) software over the last two years so that we could address this mobile phone-centric market. We're now in the position. The hardware's available. The software tools are available. We are seeing requirements for applications. And then once the applications become available, hardware sales will start. And -- so we're in that phase right now. I think the process has begun. So that's where we're at.

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

I would say a lot of improvement. I think one of the things you -- we've struggled with in the last year in particular is that a lot of our legacy businesses -- whether it'd be plug-in scanners, whether they'd be to HP, either Dells or other sources of revenue -- has been declining. Right now, 85% of our business is on -- is coming from the SoMo and cordless scanning -- two areas where we see growth. We have about 5% -- maybe a bit more -- 8% coming from OEM, which is stable. We have lost a lot of revenue because the market has changed and things have changed. There's not a lot left to lose, and I know that sounds like a positive, but I think you'll see a lot of the growth that we've had -- and you have to remember, the SoMo has grown almost every quarter through this horrendous last two years, but often it's replacing just whole other revenues sources were leaving. So I would say you'll see a good 2011, and we'll be able to give a lot more color on that in the next call.

Right. Do you look for profitability in 2011?

Absolutely. Absolutely.

Well, listen. The -- as far as a stockholder, from a technology point of view -- I'm trying to find something to criticize and I really can't. It looks like everything is coming in -- it's like a puzzle. Everything seems to be falling in place at this point.

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

Alright. If another person wants to speak, I'm finished.

Alright. Thank you very much, Dr. Fidel.

Thank you. Our next question comes from the line of Steve Swanson, who is a private investor. Please proceed with your question.

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

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

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

Yes. We're just in the process of doing that. Those documents will get signed later today. And we will -- that's where I'll be turning next, but the arrangements are in place. The bank line, for us, was not as good a fit as we would have liked. First of all, as the banks are tending to do, there were some very tight financial covenants which, as you know from our history, we had measured on a quarterly basis and some of them we were having difficulties in meeting, even though we were taking alternative steps to keep our cash balances where they needed to be. And we had some limited borrowing percentages and we also had a high -- very high cash collateral requirement compared to the amounts we were actually borrowing. Socket historically has funded its operations for -- from equity financings, and at this point, we concluded that we would be better to take that step, bring in a small amount of equity financing. And at this point, we've stepped the bank line aside so that we could provide the first level of security for the notes. But these notes are convertible notes. The arrangements have been structure with the expectation that they will convert to common stock over that 18-month period, and as they do, and particularly as they get fully converted, there would be nothing to keep us from resetting up alternative arrangements, such as our bank line, back with the bank. We have a solid relationship with our bank, which is Silicon Valley Bank. They've been very supportive and we -- I wouldn't be surprised that you'll see us reinstituting those -- we're maintaining our banking relationships there, in any case. I wouldn't be surprised if you'll see us moving in the direction of re-establishing that type of line when it's appropriate for us to do so.

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

Well, I think it provides overall strengthening to the company's working capital, and we've understandably kept it lower than -- we didn't try to do a large financing --

Sure.

-- at these levels, so it's a balancing act.

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

Okay. I'd be happy to do that. Eventually, we have a lot of developers and they're very agnostic about whose scanner they (inaudible). We can just take a few examples. Let's just take someone who(inaudible) an application where, we'll say, just for the iPhone, for the sake of our discussion, and they're doing it for dietary needs. So you can go to the supermarket, scan a particular item on the shelf and maybe this application goes and checks to see does it contain peanuts, oil or something like that. Okay? People write those applications and at the end of the day, they don't care whose scanner is used. Okay? What we're essentially saying to the developer community is, "We will provide you with the tools, but if your application is successful and you are selling a lot of scanners, we will provide a rebate mechanism so you can earn some money off the sales of the scanner, so we want you to care." That essentially is the program. And we can do this because we're really doing it over the mobile phone networks and we're targeting iPhones, Blackberrys, Android phones, Windows mobile phones, Windows -- yes, mobile phones, etc. And then basically, because these devices are connected to the internet, you can basically say, "That application sold that scanner" and give the developers a reason to care. We sell to our developer community and, particularly on the Apple Store or the App Store, often the applications are being sold for $1 or $2. And we can basically incent people to care about the scanner and pay them some money for that referred business, if you will. And this, we don't believe, has been done before. The tools haven't been in place to make it possible before. Now they are. And -- so we're basically saying, "Work with us." And the reaction so far has been very positive. I don't know if that clarifies it for you.

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

No. The target for the compensation is the developers. They, in turn, market the --

No no no no. But the application that you described -- what I thought I heard you say was very similar to applications on an iPhone or for the tablet. So they're targeting private -- they're targeting individual consumers (inaudible) --

That was just the example I gave, but we've talked to the likes of, I will say, Kelly Blue Book who would target people who are in the professional business of selling used cars. They were very excited about the opportunity. And book resellers. So I just used maybe -- I didn't use the best example, but in each market, there are people who target a group of customers. And then they will use a device, whether it's a Blackberry, which would be more corporate, and maybe Apple, which would be more consumer. I could've used an example with the Blackberry, whether it was a -- for tracking inventory, etc. And again, we kind of know this stuff works. Many years ago, as an example, we worked with a company that was servicing Coca-Cola fountains. Okay? And they had a similar problem in places. If you did maintenance on a Coca-Cola fountain and you sent the information off to Coca-Cola, there was a $1 if you scanned the barcode of the soda fountain and there was a bonus of $20 if it was not in their database. Okay? So at some point along the way, they had lost control of all soda fountains that are out there. So you can reach out to your developers and say, "Put this in" and there's a mechanism. We're essentially saying the same thing and we're pretty agnostic about the application. And you don't know which application is going to be very successful. We continue to be surprised by -- we sell a lot of scanners to book resellers, to people collecting things like wines or CDs. We sell a lot into the automotive industry where everything is bar-coded and they're used to buy and sell cars, etc. We didn't create these apps, but we need to service them. And basically we're trying to give incentives to the people who are creating the apps to be more Socket-aware and to benefit by selecting us, not only for the tools and the good size of the device, but to have an opinion. And that has always been a problem because, at the end of the day, a lot of software people don't care too much about hardware; they only care about software.

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

Well, we only launched it -- we will share progress at the next conference call, yes.

Okay. That's all I had. Thanks (inaudible).

Alright. Thank you very much.

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

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

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