Socket Mobile Inc (SCKT) 2020 Q3 法說會逐字稿

Welcome to the Socket Mobile Q3 Management Conference Call. My name is Karen. I will be your operator for today's call.

Before we begin, I'd 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 data collection and mobile data collection products, including details on timing, distribution and market acceptance of products and statements predicting the trends, sales and market conditions and opportunities in the markets in which Socket Mobile sells its products.

Such statements involve risks and uncertainties and actual results could differ materially from the results anticipated in such forward-looking statements because of a number of factors, including, but not limited to, the risk that manufacture of Socket products may be delayed or not rolled out as predicted due to technological, market or financial factors, including the availability of product components and necessary working capital.

The risk that market acceptance and sales opportunities may not happen as anticipated, the risk that Socket 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 Socket's products and vertical application markets may not happen as anticipated as well as other risks described in Socket's most recent Form 10-K and 10-Q reports filed with the Securities and Exchange Commission.

Socket does not undertake any obligation to update any such forward-looking statements. (Operator Instructions) Please note that this conference is being recorded.

I would now turn the call over to Kevin Mills. Kevin, you may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. Revenue for the third quarter of 2020 was $4.1 million, a decrease of 17% over revenue of $5 million for the same quarter a year ago and an increase of 51% over our revenue of $2.7 million in Q2.

Net income for the third quarter of 2020 is expected to be $424,000 or $0.07 per share compared to net income of $94,000 in the third quarter of 2019 and a net loss of $768,000 in Q2.

I need to point out that Q3 may be impacted by adjustments to our goodwill, which is under review as part of our normal annual process. Should our auditor adjust our goodwill valuation, then these adjustments will have to run through the income statement, which would impact our net income numbers.

And a more profit growth, the goodwill review would have been completed before today's announcement. But unfortunately, this annual review has not started in time and therefore, could not be completed. We found it was important to proceed with the earnings call today, explain the situation, [asterisk] aspects our net income numbers rather than postpone our call and cause confusion and uncertainty.

The analysis is expected to be completed in the coming weeks and is expected to be fully updated in our 10-Q. We were pleased with our revenue growth in Q3. Retail-related sales primarily drove Q3 revenue as our product demand increased as economic restrictions were relaxed and retail activities resumed.

In Q3, we also benefited from lower expenses. The actions we took to reduce our costs starting in late Q1 as the scale of the pandemic economic impact came into focus were realized in Q3. Like many cost reduction efforts, some time is required between the action and it being realized. Most of our cost savings are related to furloughs in July, reduced executive salaries and delaying noncritical discretionary spending.

However, we continue to invest in critical projects, we go to market, our new DuraSled for the XCover Pro, our new medical-grade scanners, and we continue to invest in our contactless reader, the S550. We also strengthened our balance sheet in Q3 by $1.5 million through convertible debt financing.

Our positive results from cost reduction actions allowed us to navigate the last 2 quarters well and put us in a much stronger financial position. Strengthening our financial position during Q3 was very important as we feel the pandemic and the associated economic impact is far too long. We are entering Q4 and the winter in much better shape from a financial perspective, but still believe there's a significant economic impact ahead. We have operated for 6 months under these trying conditions. We better understand how impacts demand. We have taken cost reduction actions. We have put ourselves in good shape to survive and emerge a stronger company as we continue to make progress on our new products. We expect the winter to be tough, but feel we are putting ourselves in a position to benefit from the economic rebound we expect in 2021.

With that said, I'd now like to turn the call over to Lynn Zhao, Socket's Chief Financial Officer. Lynn?

Thanks, Kevin. As Kevin mentioned as well as the disclose in our earnings release, we run out of time to complete the annual review of the goodwill impairment before today's release. We apologize for this analysis -- that this analysis was not completed earlier, and we would like to remind everyone to keep this in mind when reading our financials. Our gross margin on revenue for the 3- and 9-month period ended September 30, 2020, was 55% and 53%, respectively, compared to gross margin on revenue of 53% and 52%, respectively, for the corresponding periods in 2019. The increase in our margins is partially attributed to the reduction of manufacturing overhead, which is the part of the cost savings plan that was implemented.

The cost savings plan also contributed to the operating expense reduction. For Q3, the operating expenses were $1.8 million, a decrease of 27% compared to the same year -- same quarter a year ago and a decrease of 16% sequentially from Q2.

Operating expenses for the 9 months were $6.3 million, a decrease of 13% compared to $7.3 million for the same period a year ago. EBITDA was $725,000 in Q3 compared to $378,000 in the same quarter a year ago and a negative $488,000 in Q2.

In April, we received a loan proceed of $1.06 million under the SBA Paycheck Protection Program. The loan was primarily used to cover payroll cost, rent and utility costs during the 8-week period from April 20 through June 12. We believe we qualify for the loan forgiveness and that more than 80% of the loan is likely to be forgiven. The mechanism to apply for the loan forgiveness was not available to us until October, and therefore, we included the entire loan amount as debt in Q3.

We applied for the loan forgiveness last week. Whatever amount is forgiven will be treated as other income in that period, hopefully, in Q4. The remaining portion of the loan will carry a 2-year term at a fixed annual rate of 1%. At the end of September, the balance of our cash was $1.8 million, and our total debt was $2.5 million, consisting of the PPP loan and the convertible note financing that was completed on August 31. Now I will turn the call over to the operator for your questions. Operator?

(Operator Instructions) And we do have our first question from [Allan Ryan], a private investor.

I thought you did a really great job controlling costs and generating a profit under the circumstances. Kevin, two things. Can you talk about what was right during the quarter and what still isn't right and what customers and what business you seem to be making most headway in and where do you have a lot of progress to still do to get back to levels you're looking to do?

Thanks, Al. So I think in the quarter, we saw, I think, 2 things that's happening. We saw better demand from retail. And we also saw some of our distributors bringing their stocking levels back up to a more normal level. In Q2, we had actually sold out $3.2 million of product, though we had only sold in around $2.7 million, which we reported. And in Q3, we sold out $3.7 million, up about $500,000, but our distributors will stock from the vendors. So that's kind of balanced the 2 quarters out.

The other thing we saw is demand in the retail is still in the 75% range. And I think as people are forced to deal with the COVID situation, the requirement for portable or highly mobile cash registers, that are Apple iPad-centric is actually greater. I still think that overall, we're suffering quite a bit in terms of that segment. We've been working hard to get over more to transportation and logistics, and we've done a number of things that we believe will help us long-term in that category, but that work is still ahead of us, and we would expect to see improvements in non-retail categories starting in Q4, but generally going into 2021. And I think we've done a lot of work on the S550. We will be making some announcements about that in the near future. And I think that will also generate a lot of interest as well as strengthen our prospects for 2021.

So you find this where you're generating business pretty comparable customers like you had before, whether it's Ingram or (inaudible) or whoever?

Yes. I think the demand was driven by the usual suspects, Shopify's player, ShopKeep and the point-of-sale people. We did see a little bit more from commercial services, et cetera. But obviously, all our project flows through the Ingrams of the world. So they appear as our customers before they buy the product, but they are not really driving the demand. And the demand was very much in line what we've seen pre-COVID. It's slightly lower levels, obviously, but generally in the same trends and direction.

On the question of goodwill. I mean, if I know -- I know they haven't -- they got started late. But frankly, looking at the criteria you used to making any impairment adjustment and what was done in September and looked at in December (inaudible) and looking at your outlook, it doesn't seem like -- but really this should be a minor impairment that could affect any other than the P&L, it is a noncash item. But when does that -- where does that goodwill come from? It's been forever (inaudible)

(inaudible) acquisition we did in 2000, a lot of us, and it has been adjusted over the years. I think the situation we found this year is, the analysis was not complete. We're not trying to preempt our [gains] or interfere with the analysis. It's just that it wasn't complete. And therefore, we wanted to point out that it's not increased. Obviously, it is -- if there's adjustments, we will have to deal with it, it goes through the income statement. And therefore, it would impact the numbers we reported. But I think as you correctly pointed out, this is a noncash and really doesn't impact the day-to-day running of the business.

I presume they probably wanted to see how this quarter was because that would give them some ammunition to -- if they were going to require any amortization.

Yes. We're not in -- I don't think we're in a good position to -- the auditors need to be independent as much as possible. And therefore, we have to live by their results and -- as opposed to interfering with their judgment. So we're happy with whatever they do, but it wasn't done, so we couldn't actually put it in the past tense, if you will, prior to the call today.

(Operator Instructions) And I'm showing that there are no questions in queue.

Okay. Thank you, operator. So I'd like to thank everyone for participating in today's call. And I'd also like to take the opportunity to thank our employees for their continued commitment and hard work and our business partners for their support. And we look forward to a healthier 2021. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.