Socket Mobile Inc (SCKT) 2011 Q2 法說會逐字稿

Greetings and welcome to the Socket Mobile Second Quarter 2011 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jim Byers of 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 2011 second quarter. On the call today from Socket Mobile are Kevin Mills, President and CEO, and Dave Dunlap, CFO.

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

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

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

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

Thanks, Jim. Thank you for joining us today.

In today's call, we'll begin with a short review of Q2 and then outline the business opportunities we see for the rest of this year.

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

I'll begin with a review of our current handheld computing business, then provide a going-forward outlook.

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

As we entered Q2, we reported significant back orders due to an industry-wide lack of LCD screens. During the second quarter, we improved our supply and shipped an additional 1,000 units of our handheld computers. We believe the supply situation will continue to improve this quarter. At the same time, our backlog has continued to grow, reflecting the strong demand we continue to see for the SoMo. Demand continues to be driven by several factors. The improving economy is helping. We are definitely seeing a return of deals that went dormant over the past two years and led us to re-engage with numerous customers, all with a good and positive event. We're also seeing increasing benefit from HP's exit from the classic PDA market. We are experiencing a significant increase in calls from current HP iPAQ customers and resellers looking for an alternative as supplies of the HP iPAQ diminish, and we believe we have not yet seen the full positive impact of HP's departure.

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

So to summarize on our SoMo, demand remains strong, and while supply continues to be somewhat constrained, we expect to make further significant dents in our backlog during Q3. We expect to enter the fourth quarter with a manageable backlog and an improved supply situation and be well-positioned to take advantage of the HP iPAQ opportunity as it materializes.

Turning to the cordless scanning business. Sales in the second quarter of our cordless barcode scanning products, which include sales of both our cordless hand scanners and cordless ring scanners, was down 16% from the first quarter. This was anticipated, as we saw the majority of a major rollout of our cordless ring scanner take place in Q1. Remembering that Q1 revenue had increased over fourth quarter revenue by 265%, the lower revenue in Q2 is not too surprising. Our cordless scanning revenue for the first 6 months of 2011 was up 240% over revenue for the same 6-month period a year ago.

Our cordless hand scanner business continues to be driven by companies collecting data using a combination of mobile phones, tablets, notebooks and desktops, while reading barcodes, and we see this as a primary driver of the cordless scanning business going forward. In this mobile phone-centric market, we are serving customers who require commercial-grade barcode scanning capabilities. Users are generally running business-critical functions with a software application running on a mobile device. As we noted in our last call, we are seeing very strong interest from both Apple and Android customers from many different markets. In all cases, customers are using an application on their device to collect and process the collected data.

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

Recently, we announced and began shipping our Apple Software Developers Kit -- or SDK -- for SocketScan tests. Our SDK allows application developers to control both the scanner and the data it collects, a vitally important requirement for customers who are collecting critical information. With our SDK, we enable developers and their respective customers to achieve the robust, dependable scanning solutions they demand, and we believe it will drive our scanning volumes going forward. As we developed the SDK, we worked closely and received excellent feedback from several developers, and they now have incorporated the scanning controls into their applications and intend to deploy several hundred scanners in Q3. It took them about 4 weeks to integrate and test their scanning-enabled applications. We hope this is typical of the development cycle but suspect it may be a bit longer.

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

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

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

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

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

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

In summary, over the past two quarters, we have seen significant sales improvements on the back of an improving economy and growing opportunities from an increased demand from HP iPAQ customers, and we have maintained very tight expense management. We have significantly reduced our net loss, improving from a net loss of $1.6 million in Q4 2010 to a net loss of $900,000 in Q1 and now down to a $300,000 net loss in Q2. We are very focused on continuing this positive trend, and we are targeting bottom-line profitability for the current third quarter. We believe this is a realistic target for Q3 based on the solid backlog we already have in place and a much-improved business environment, as well as increasing benefit from HP's departure, increasing demand for our cordless scanning products, and improved availability of handheld computers as our suppliers increase their production of computer screens.

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

Thank you, Kevin.

Our second quarter 2011 revenue was $4.4 million, a 19% increase over second-quarter revenue a year ago and an 8% increase over first-quarter revenue of $4 million. We entered the quarter with an order backlog of $3.2 million and exited the quarter with an order backlog of $3.4 million. Shipments of our handheld computers for the past several quarters have been limited by the availability of computer screens, as the factory producing our screens was acquired last fall for production of Apple screens. We noted on our last management call that screen production would continue to be limited, although improving in the second quarter, with the shortage significantly clearing up in the third quarter. As Kevin noted, we now have the delivery commitments from our screen supplier to significantly reduce the shortage this quarter and enable us to produce handheld computers in line with customer demand which has been growing.

The increase in revenue to $4.4 million from $4 million in the first quarter and $2.6 million in Q4 of last year, combined with an improvement in margins to 42%, up from 37.5% in Q1, and a reduction in operating costs to $2 million from $2.1 million in the first quarter, all moved in the right direction for us to achieve an EBITDA-positive bottom-line result of $73,000 for the second quarter. For the non-accountants on the call, EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization and is a traditional measure of operating profitability. Additionally, growth typically improves our bottom-line results. Because Socket builds most of its products through contract manufacturers, higher volumes of shipments can be accommodated by running their lines a bit longer, and the additional contributions generated by higher sales reduces our fixed manufacturing costs as a percentage of cost of sales, benefiting our overall margins and increases the overall contribution to the bottom line. On the sale side, since Socket distributes its products through worldwide general distribution channels and has in place the infrastructure to manage its channels, a large percentage of the higher contributions from higher volumes of sales will pass through to the bottom line.

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

Kevin has discussed the dynamics of our products in the business mobility markets that we serve. Revenue for our handheld computer products and related plug-in barcode scanners in the second quarter increased 24% over the first quarter, as we were able to ship an additional 1,000 computers over first-quarter levels. $2.6 million of the total of $3.4 million in backlog at the end of the second quarter is for SoMo-related products. As Kevin noted, demand for our handheld computers has been rising, assisted by Hewlett Packard's decision to discontinue its 200 Series iPAQ. The SoMo 650 is fully compatible with the discontinued HP units and enables businesses to substitute the SoMo 650 into their applications without needing to make changes to their software or how they use the hardware. Shipments of handheld computers for the past three quarters have been supply-limited, and we are looking forward to removing these limitations in the third quarter.

Improvements in margins from 37.5% in the first quarter to 42% in the second quarter reflected a combination of higher shipments, changes in the mix of products sold, and the absence of a non-recurring charge we incurred in the first quarter for license fees. Our operating costs in the second quarter were lower by 3%, as we incur most of our annual audit costs in the first quarter. Our G&A expense was lower by 10% in the second quarter, partially offset by increased sales and marketing expenses we elected to make in the second quarter.

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

Our balance sheet at June 30, 2011, reflects a number of working capital improvements since the end of last year, including higher unrestricted cash balances of $1,000,000, compared to $500,000 at year-end; higher accounts receivable balances of $1.5 million, compared to $800,000 at the end of the year; less cash invested in inventory at $1.2 million, compared to $1.7 million at the end of last year; and slightly improving accounts payable balances of $3.6 million, compared to $3.8 million at the end of last year.

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

For the past two years, Socket has operated as a significantly leaner organization, including fewer employees and extensive cost-reduction programs that reduce salaries and discretionary spending. At the same time, we retained key employees and funded the essential development programs that are benefiting us today and will benefit us in the future. We remain firmly committed to serving the business mobility markets with our mobile handheld computers and data collection devices. We support Windows Mobile applications on our SoMo 650 handheld computer. Our linear and 2-D barcode scanners and our RFID readers with our extensive SocketScan software are compatible with Windows Mobile, Windows, Blackberry, Android and Apple operating systems running on a wide range of smartphones, tablets, notebooks and other mobile computing devices.

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

Socket continues to be highly leveraged, both on the supply side -- with its contract manufacturers who have plenty of capacity to support growth -- and on the distribution side, for our many distribution partners and application partners that are interacting with customers around the world. Our goal remains to grow our revenue and bring growing, sustained profitability to the bottom line.

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

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS.) Our first question comes from the line of Marco Rodriguez from Stonegate Securities. Please proceed with your question.

Good afternoon, guys. Thanks for taking my questions.

Thank you, Marco

I was wondering if you could discuss a little bit more in regard to your unit shipments this quarter -- an additional 1,000 implies close to just shy of 4,000 --

That's correct.

I believe last quarter you guys were talking about unit shipments of 4,500. That was your supplier (inaudible) --

Yes.

And [Redmond's] in the 5 million range. Can you talk a little about the dynamics that happened there?

Absolutely. So your memory is pretty good there. So we shipped last quarter 2,900 units and we shipped 3,900 units approximately -- say 4,000 units -- this quarter. We had targeted to ship and recognize revenue of about 4,500. Due to the late arrival and, I would say, our continued delays in deliveries, even by a few days or a week, that last 600 units essentially fell into Q3. So it's always very difficult because we recognize revenue based on sales out, and therefore, not only do we have to ship them, but the units must clear the distribution channel before we recognize them as revenue. We did have a number of units that we shipped in the last week that didn't clear the channel and therefore weren't recognized. So I would say our 4,500 was a good guess, but we were still a little bit constrained by the late arrival in the quarter of certain components, as well as our shipments. So we fell a little bit short and only did really 4,000 of the 4,500 we expected to recognize. The number of units we shipped was actually maybe a little bit higher. I don't have that directly in front of me. But we probably increased the number of units in the channel probably by another 200 to 300 units. So we were pretty close to the 4,500 but didn't quite get there.

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

No. Not really. Again, they weren't -- that was the major component shortage, and you always have, I would say, other components that show up a few days late or -- but there was nothing significant except the LCD screens.

Okay. And then if I understand you correctly, there's (inaudible) 600 units you're a bit short on. Did those already ship?

Yes. A lot of them shipped in the last -- we had a very busy last week of the quarter and late June. Some of them actually shipped back then or early July, but, as I mentioned, we only recognize revenue based on sales out of distribution. So generally speaking, that's a 10-day, 15-day process between us shipping and the distributor receiving and processing and shipping, and it tends to get a little bit compressed towards the end of the quarter because everyone's looking to make their number. But we were just a little bit too late. We shipped a lot in the last 4 or 5 days and some of it just didn't clear the channel.

Okay. Fair enough. And then something you could just clarify something for me. When reading your press release, when you're talking about the LCD supply situation being constrained, it somewhat implies that Q3 will continue to see some of this problem, but in some of your prepared remarks, it kind of implies that it's going to be gone in Q3. So can you help me kind of bridge the gap there?

Sure. We strongly believe it'll be gone in Q3, but based on the history, I think we remain somewhat cautious. We would like to physically have the screens in our possession before we really say it's gone. We have been able to [guess] somewhere in the region of 2,000 screens already this quarter. We have pretty firm delivery dates for everything that we need to, I would say, make a major dent in the backlog. But I think we remain a little bit cautious. I think the supply situation is definitely, definitely improving. But we've been at this now for 9 months. We've seen a lot of progress. So if there's a conflict, I think it's just the fact that we're maybe a little bit gun shy but -- if we were a little bit too constrained in the press release. But we believe that the supply problems are behind us now and the assurances we have for Q3 are good and there's enough, I would say, slack in the system to ensure that we have a good number for Q3.

And can you provide an update on your second source relative use?

Yes. We have qualified a second source. The environment has changed a little bit in that the primary supplier came back and agreed to manufacture more screens, which we availed at that opportunity. So we now have both the primary supplier as well as the secondary supplier approved and ready to go. So that's where we currently are at.

And did they manufacture or ship any LCDs to you in Q2 or is it --

No. No. They did not. What happened was, in late Q2, we got a call back through the -- from our supplier who had been unable to supply to say that if a certain number could be ordered, that they would do one last production run and (inaudible) conjunction with this manufacturing partner and other people who use the screen came up with an acceptable number and placed that order in late June, and the deliveries of that order are supposed to happen in early August. So based on that and the fact that we're back with our primary supplier and they're manufacturing this in the primary factory and there's a large order involved gives us a great deal of confidence that the screens will be delivered. We've already seen some screens so they are being produced.

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

Okay. Well, I think there's a number of things to that question and maybe Dave can help me out here a little bit. But I think there's two parts to your question. One is we made some structural changes certainly in late Q4, where the associated costs will not come back into the company and essentially we removed an outside sales force and concentrated our sales efforts much more inside the building here. And I think that reduced our sales costs quite significantly. Then there's areas where we took -- we asked people to take a lower salary or eliminated variable components of compensation, as well as we have reduced the amount of advertising spending we have done. Those costs will come back in slowly as we reach profitability. We don't think they'll be huge, but I would say, all told, they probably account for 5% of our costs. So -- and then, as we grow, we'll have to add some of the people. We've had the organization operating with less than really the optimal number of people and I think that's one of the reasons that we're still here. And certainly, as we get financially a little bit stronger, we will operate a little bit more normal and that will probably add another 5%, but it will only be done in light of achieving growth.

Yes. Socket's largest expense, of course, are its people. And we run between 55% and 60% of our expenses directly related to compensation for -- today, which is in the mid 60's -- about 65 employees. If we grow as we're expecting to grow and we clearly control the timing, we would like to add about another 5 employees between now and the end of the year, but it will be strictly tied to as we grow because a lot of it is driven by growth. The other area of expense that we've been very good about continuing is with our development programs, and we do expect that we will pick up the pace on some of our development programs that are looking forward as we move through the next two quarters if we get the growth that we're expecting to really fund it. All of it will be driven by our desire to obviously achieve positive bottom-line results, and as Kevin noted, we are targeting to be positive on the bottom line in Q3. And then our EBITDA number, of course, would be substantially larger. The difference between our bottom line results and EBITDA results for us these days is about $500,000. Those are all the soft costs that we get to take amortization, depreciation and so on. So that's our expectation. So the pace by which our expenses grow will be a function of the overall growth in both the top line and the bottom line, and we expect to see positive trends in Q3 and Q4.

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

That's GAAP.

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

Dave will look up the cash flow. On Japan, I'd have to look at it, but gosh, I would say about 10% would be the number I would put for Japan in Q2. We don't look -- I haven't looked at it that way, but just from the top of my head, about 10% for Japan would be $260,000, maybe a bit more. But somewhere in that range of the handhelds.

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

Perfect. Thanks, guys.

Thank you.

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

Okay. Hello, gentlemen.

Hi, Dr. Fidel.

Hi, Dr. Fidel. How are you?

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

So that is correct. So if --

Okay. It's the point I want to bring up. Now if we just achieve getting only half of that business -- and I think our SoMo is more or less a product of choice, similar to what happened in Japan -- the numbers could fly off the wall. Now am I -- is this wishful thinking or is my figures off or what?

No. The short answer is we don't know what we believe -- we share your belief that this is a big opportunity for Socket in that the departure of HP certainly opens up the market and, based on the fact that people like the SoMo, it really does the job that HP did and then some. And we think it's a big opportunity and we're working hard. We hope that Japan is an example of what would happen in other places, and we'll keep everyone posted. As I said in my remarks, a lot of people are just in the eval phase right now so we are getting a lot of inquiries to get samples out. The -- and people have to make choices. Do they stick with the form factor? Do they change the form factor? I think the more credible we become as a supplier, the easier it will be for people to choose us. And we're working very hard to, I would say, restore supply so we can be the credible, reliable supplier that HP was and enjoy some of those numbers.

Yes. Because we're talking about hundreds of thousands. Okay. But I just wanted to see if my thinking was positive on that.

Your thinking is definitely positive and we would share -- we believe this is a big opportunity. I don't know about the end number, but I think there's plenty of upside potential for Socket in the near term based on the HP departure.

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

Yes. So there is a process involved and eventually, we announced an SDK. We sent that off to Apple for approval and we will send the scanner off for approval this week. So we have the scanner now ready to be submitted for approval. There has to be some time allowed between people developing the application and people wanting to buy the scanner. So it was always our plan to announce the SDK first, allow then a number of weeks to go by before we put the Apple-approved scanner into the market, and we remain on track to do that. I expect by mid-August we will have that approved scanner in the marketplace, and we hope to have applications developed by then so that people who have (inaudible) will be able to buy those scanners.

Can we announce that that would be -- if it is certified, we'd be able to say that this is certified by Apple.

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

That's great.

Yes. We're looking forward to that. I think that gives us a --

And that could be sold throughout the world. Am I correct?

That would be sold throughout the world. So for anyone who wants to have an Apple-centric solution where their scanning needs to be, I would say -- the data needs to be controlled. So we think that also is a big opportunity for Socket. Again, our engineers and our marketing teams have (inaudible) put us in this position, and even thought the last two years have been extremely difficult, one of the areas where we preserved a lot of our resources was in R&D. And this is the result of that, is that now, as the sun comes back out, in many ways, we have good products to enter the market with. So we're looking forward to getting the boost that we believe this will bring in the second half of the year.

Okay. Now my usual quarterly question is the -- how is the nursing home order that's on hold and the English event contract?

We haven't really made a lot of progress on either of those, and I would just say that generally speaking, as I said last quarter, until our supply situation improves, we won't really make a lot of progress. People have remained in a testing state and we haven't done a lot of outreach. We have a lot of people looking for SoMos and samples, and we continue to struggle to support them. So we'll see how it goes with both those opportunities, but I would say that there's a lot more opportunities that have come in the last six months that are equal and we're providing samples to them right now.

Yes. But the supply thing seems to be clearing up at this point.

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

By the way, the second provider -- shall we say factory number 2 -- are we going to give them any orders in the near future?

We have to. You -- it's okay to have a second supplier, but if you don't give them any orders, you really don't have a second supplier. So we already have orders placed and then we have to work the timing. But again, as you can see from our inventory management and other areas, operations team do a great job and they'll coordinate that with the respective suppliers and factory, and it'll be seamless, we believe, to the end customer. So we're pleased --

With a second factory, I guess this should clear it up pretty quickly.

Correct.

Okay. By the way, Hospira. I haven't heard about that in a long time.

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

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

Well, you can almost build your own model, Dr. Fidel, but our margins today are running in the low 40% range. Those will improve as we grow. So you might want to use something in the mid-40 range -- could be higher. Our expenses, because we're leveraged, will not go up as fast as our revenues go up, and so -- but even if you use a doubling of today's revenue, today at the $2-million level -- about $8 million a year, so you might use $15 million or $16 million. Your before-tax numbers would be somewhere in the range of 10% to 15% of revenues. So you're probably looking at $5 million to, say, $7.5 million at $50 million. You'd apply some tax and then, although we have a net operating loss carry-forward that would absorb a good part of that for a while. So -- and then I would use the 5 million share outstanding. Once the notes are fully converted, we'll be just a little bit shy of 5 million shares. So you can take the results. If you use 5 million and it's 5 million shares, that's $1 a share, if you want to do it on a per-share basis. But the key is if we're bringing in $5 million a quarter and then as we grow beyond the $50 million level, that number continues to go up, that's a great way to fund the business and we certainly are looking forward to that opportunity.

David, that's over my head. What would that be per share, would you say? On a quarterly and a yearly, I guess.

Well, if you've got 5 million shares outstanding and you're doing $5 million per year, that would be $1, so it'd be $0.25 a quarter. Now, as you've said, so many variables. So we probably can grow to that level without needing to double our expenses. We don't know yet what portion of our before-tax income would be subject to taxation. So there are lots of variables. But $50 million is a much healthier number for us because it covers the fixed costs associated with research and development, the fixed costs associated with operating the factory here, which is packaging and testing and the care facility, and so many of our other fixed costs like accounting and finance and the like. So we're really set up to leverage for growth and, as you move well above the $50 million, it simply gets better.

Okay. Now just one or two more questions and I will get off. How were the sales so far in July?

They're fine. They're -- we're on track, so there's nothing extraordinarily good or bad to report. We're off to a reasonable start. I wouldn't say July is the most robust of months, but yes, very much on track.

Our sales order pace, as you recall from our previous conversations, picked up very strongly after the first of the year, and we had $5 million in new orders coming in in the first quarter, and even though we only were recognizing 4. The second quarter, it was even higher -- another 10% higher perhaps -- $5.5 million. We're just (inaudible) of the third quarter, but we're still on that type of pace.

So we're going pretty well then, huh?

Yes.

Yes.

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

I would generally say no. So much depends on, as you point out in your first question, what happens with HP.

Yes.

So I think that, right now, we have a lot of people evaluating the SoMo that haven't made decisions if they're in evaluation. I think we have a lot of more color as we get into the October/November timeframe. The HPs are still available in the distribution channel, so there are still pockets of them available. But I think by the end of the year, that won't be the case and people will have to make up their mind. So at this stage, I would say we don't, but we're certainly building a case whereby we will have a good projection going forward, but the HP is such as swinger --

That could be a phenomenal thing -- that HP. It could be --

Yes.

An explosive (inaudible) situation.

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

And you think you'll be profitable for the third quarter, right?

That's the target. We think that that's a realistic target based on the combination of backlog, the strength we see in the business and the available --

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

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

Okay. Last question. You want to comment a little bit more about the Apple scanner. Is that -- could that be significant?

Yes. The whole Apple situation is very dynamic. There are many, many people wanting to use Apple in their solution and certainly, they need the peripherals. As we pointed out many times, the weakness in both tablets and iPhone or phone-based [directives] is data entry, and scanning is an ideal way to solve that. What we did first with Apple, I think, was kind of a good start but really not robust enough for people to use in a business-critical application. We're very pleased with the progress we've made, the tools we've created and the opportunity in front of us. I think that it's hard to know at this stage which is a bigger opportunity -- the HP withdrawal or the Apple scanner.

They both sound good to me.

Sound good. So we at least have two horses in the race.

Well, it's like saying, "Which candy do you like better?" or something.

Yes. No, I think that we've narrowed the business over the last two to three years and we really have focused our efforts in two areas, and I think we now have two reasonable sizeable opportunities in front of us.

And actually you expect to get Apple's certification in the next couple of weeks then.

Yes.

That's pretty fast, too.

Apple is a pretty well-organized organization. We have to submit it. We believe we'll do that this week and then, realistically, three to four weeks later, we'll get an answer back and then we'll be allowed ship. And we'll announce when we get the answer back but not beforehand.

Good. Well, listen. I'm extremely pleased. Let's put it that way. You've got everything seems to be going (inaudible).

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

Alrighty.

Alright. Thank you very much, Dr. Fidel.

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

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

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