Greetings and welcome to the Socket Mobile Fourth Quarter and Full Year 2013 Management 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. I would now like to turn the conference over to your, Jim Byers of MKR Group. Thank you, Mr. Byers. You may begin.

Thank you, operator. Good afternoon. And welcome to Socket’s conference call today to review financial results for its 2013 fourth quarter and year ended December 31, 2013. On the call today from Socket are Kevin Mills, President and CEO; and Dave Dunlap, Chief Financial Officer. Socket Mobile distributed its earnings release over the wire service earlier today. The release has also been posted on Socket’s website at www.socketmobile.com. And 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. Now 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 handheld computer products, including details on timing, distribution and market acceptance of products, and statements predicting trends of 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 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’s application partners and current distribution channels may choose not to distribute the products or may not be successful in doing so, the risks 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. Now with that said, I would like to turn the call over to Socket’s President and CEO, Kevin Mills.

Thank you, Jim. Good afternoon, everyone, and thank you for joining us today. In today’s call, I will begin with a review of our results for the past year and then discuss the business opportunities we see ahead in 2014. Today we reported revenue for the 2013 full year of $15.7 million, an increase of 15% over 2012. We also just decreased our expenses for the year by 20% to $6.4 million. As a result, we achieved a positive EBITDA of $400,000 for 2013, a significant improvement over the $2.1 million EBITDA loss we reported in 2012. The growth in our full year revenue was primarily driven by the strength of our cordless barcode scanning sales, which grew 69% over last year and represented 61% of our total sales in 2013. Our SoMo handhelds represented 30% of annual sales with the remaining 9% coming from OEM legacy and service. Overall, 2013 was a good year for Socket and a very positive step in the right direction. While we did not achieve our goal of a profitable year, we returned to growth in our revenue, reduced our expenses, and saw other positives in our business, especially, for the barcode scanning. Let me discuss the dynamics of our business in 2013 and then outline our strategy and expectations for 2014, starting with our cordless barcode scanning business. Revenue from our cordless scanning business in 2013 grew 69% over last year to $10 million. This past year, Socket shipped over 35,000 scanners, an 84% increase over the 19,000 shipped in 2012. To gain further insights into the overall markets for these products, Socket reached out to Venture Development Corporation or VDC, a market expert on barcode scanning-related products to compare operator experience with their findings. According to VDC, there is a strong market…

Thank you, Kevin. 2013 was the year of excellent progress and a building year for 2014. Revenue for the year totaled $15.7 million, up 15% year-over-year. Within those total, our cordless barcode scanning product family revenues grew 69% year-over-year from $5.5 million in 2012 to $9.2 million in 2013 and grew 61% in the fourth quarter over the same quarter a year earlier. Cordless barcode scanning became our largest revenue generator in 2013, totaling 69% of our annual revenue and 64% of our revenue in the fourth quarter. As noted by Kevin, Socket is becoming a significant world-wide supplier of professional barcode scanners for use with mobile business applications running on smartphones and tablets. We have more than 800 registered developers developing mobile business applications in retail point of sale, commercial services, and healthcare. And as these developers build our barcode scanning software capabilities into their applications, and recommend our products for use for their applications, our entire cordless barcode scanning product line becomes available for application users. Our 69% annual revenue growth in barcode scanning reflects increases in deployed developer applications and increases in the breadth of our barcode scanning product offerings. Today we offer imagers, linear laser barcode scanners, and 2D barcode scanners. We offer standard cases in a choice of colors and rugged cases. And we introduced late in the third quarter of 2013, a new smartphone attachable format, our model 8Ci. We experienced revenue growth in all of our product models in 2013, with our most popular models being our model 7Ci entry-level imager scanner and our model 7Xi 2D barcode scanner. Revenue from our SoMo handheld computer family was $3.9 million in 2013, compared to $6.1 million in 2012. SoMo revenue benefited in the first half of 2012 from last time buys of our first-generation…

Thank you. We’ll now be conducting a question-and-answer session. (Operator instructions) Our first question comes from the line of Brian Swift from Security Research Associates.

Hi. Can you give us a little color on what the March quarter is shaping up to be relative to a year ago and the fourth quarter? Year ago you were around 4, 2 or something like that, so could you give any idea how you’re doing? And what's -- maybe some of the customer trials that you had talked about over the course of the year, whether any of those are beginning to roll out or do you have a visibility on those rollouts?

Yeah. Okay, so I think in general what we typically see in the first quarter is that we have a very weak January and things pickup in February and March. I would say this year we’ve seen a more robust January and February, and -- which has been quite good. We are not -- we haven’t had any large deals so far this quarter, but our run rate certainly seems to be picking up driven by the many applications that are in the market. We look at our sales out reports and we can see where all of the scanners are going. And I think what has surprised us is that we’ve seen a large increase in the number of customers buying scanners However, many are buying small quantity. So the business continues to seeing quite robust on the scanning side and continues to be driven by the applications that are in the market. I would say, we’re on track to have a solid first quarter. Last year if you remember, we did have a single deal with a Japanese customer for 3,200 units, which we won’t have such a similar deal this quarter. But I think that we will be able to pick up most of that 3,200 from other customers during the course of this quarter. So, I would say we’re on track for a solid first quarter and our scanning growth should be quite robust if you exclude 3,200 and it should be quite acceptable if you include the 3,200. On the SoMo side and we see it still struggling along and we do expect a lower number. So that will impact us a little bit. But I would say, we’re quite pleased with the quarter so far and I would expect to report a good quarter -- solid quarter in April.

Okay. And anything, any color on what’s happening with some of these like NCRs program, bakery outfit...

Yeah. So, in general I would say that we went to NRF and we actually had a very good NRF show. We saw a lot of customers displaying Apple-based mobile point-of-sale systems including NCR, including Epicor, including Vend and Shopkeep etcetera. We can see that they are driving our sales and enjoying a review of the year, I recon more than 60% of all our sales are coming from those type of applications. I think one of the things we learned at the show was that some of the mobile point-of-sale solutions particularly that are being successful in restaurants and bars don’t use scanners and one of the reasons is that not everyone has completed their inventory-based applications. But in talking with a number of customers, most expect to do that this year, which would drive a scanning requirement in those areas. As regards to customer deployed, the 3200 units -- purchased 3200 units in Japan. We have been able to confirm that they are now in the process of deploying them. They started in early January and they expect to finish the deployment of all units by the end of Q1 and there will be a follow-on meeting in early Q2 to determine the next step. I think as I outlined before that particular customer has around 3400 -- they bought some more scanners around that number of their larger stores, but they have 27,000 plus of the smaller stores and I think the discussion in April will be to know if we will deploy to the smaller stores, which obviously would be very good for us. But the deployments of the larger store should be complete by the end of this quarter and that’s what we've heard from Japan.

[WAN]:

We haven’t really seen any increase in sales distributed for this yet. But they have their sales conference and they are -- I think last week, last weekend, but right now, we haven’t actually seen any pick up. We remain hopeful, but I think we will have a solid quarter with or without them.

Okay. And can you remind us what that will last close to be, when it happened?

The company in question from what we know has 700 franchisees and their full deployment is about 6,000 to 7000 scanners if everyone wins and our understanding is that they paid for the application to be customized to their brand. They expect all their franchises to use us and we do too. I am pretty confident that thing will happen this year and we can't exactly nail down the time, but our understanding from the conference is that they are planning to go forward and the sooner the better as far as we are concerned.

Okay.

All right. Thanks.

I will come back if nobody...

Thank you. Our next question comes from Paul Bornstein from Black Diamond.

Yes. Thank you. I just have a question. I was on the call about two years ago and looks like you guys are still trying to become cash flow positive. So I don’t understand how management can still be in place after eight to nine years without ever being cash flow positive. So I don’t understand how the market has changed and you guys haven’t changed with it to be profitable because it looks like you are only looking at growth and losses going down, but you are never cash flow positive. Salaries of management is very high given the form the market has, so and they are non-performing. So I guess what you are saying -- so my question is whether you are going to be cash flow positive, so you'll start earning your money that’s my question.

Okay.

I mean you were supposed to be cash flow positive a year ago and you are still not.

Okay. So would like me to answer?

Yes.

Okay. So I believe we were cash flow positive. First of all we were profitable two quarters last year and we were cash flow positive in both of those quarters plus I believe we are cash flow positive in the third quarter. I don’t know if we are cash flow positive for the fourth quarter. Dave?

We are probably slightly down, but for the year with EBITDA profit to $400,000 there is probably 200,000 to 300,000 cash positive even in that total number.

Okay. As regards salaries, there has been no salary increases and perhaps if you look at our earnings in 2013 you will see that they were less than they were and they were less in 2012 than they were in 2011. We reduced $1.6 million of expenses last year, but that came out of the pockets of management as well as other members of the team here, coupled with a reduction in the work force. So...

All right. Well it was a good job, you need to operate. I am just telling you that when you started out years ago, you were making a lot of money, but now it’s coming down because you haven't performed.

Yes. So we haven’t given ourselves any raises and we don’t intend to give ourselves raises until we are in a position to do so.

When you get a $10 million to $12 million market cap or $15 million or $20 million where you should be, instead of four, then you maybe can look at given yourselves stock, no raises. So you are in the same game plan as the investors are who have got no returns from your cash flow. So that’s reality.

We cannot argue with the fact that the stock price has fallen and...

Right. So I think you should take -- and I think you take your whole salary and stock, then I have confidence you might actually do something that will have the benefit to investors. Taking all in stock, then I know you have confidence you will do something. You can spend all you won on expenses and I’ll give you that.

Okay. That’s not a question that’s a suggestion, but we hear you.

Well, the question is what I told you is when you are going to be on a continual cash flow basis, now one quarter up, one quarter down, that’s not reality and it's been going on for years. So that’s the reality. You have hardly anybody on the call because you have no market cap, because your performance has been horrible. So hopefully this is a lighting run and you'll start seeing performance oriented. I am talking about $20 million, $30 million in sales a quarter.

We look forward to getting there.

Thank you. Our next question comes from William Smart from Cardinal Value.

Yes. Good afternoon. I noticed in one of your filings that Micheal Gifford is leaving the company. I was just wondering what kind of impact that might have on your R&D effort and where his loss is going to served?

Okay. Well Mike was primarily in the marketing side and has been on thus far several months and it was a decision that certainly wasn't easy. We reduced our expenses by $1.6 million and obviously we lost a lot of good people in that. However, the reality is that we just couldn’t afford to keep salaries at certain levels and had to make some difficult choices. Certainly our marketing efforts have diminished. We not only lost Mike, we lost some other people, some who voluntarily resigned. We have hired a new Marketing -- Director of Marketing and Communication. We started earlier this week and we should be able to get back communicating more with our shareholders and with our customers going forward. And so I think as regard their R&D, we've continued to invest heavily in R&D and I think that has enabled us to grow at 70% last year. The scanning product in particular, the benefit of our investments in 2010 and '11, we reaped in 2012, '13 and will reap more in 2014. And we continue to invest. Right now we are investing I would say 30% -- close to 30% of all our expenses go into R&D and that's the only way that we believe we will get out of this is to have products that people truly want and have a value proposition that makes it work for us. So we are very committed to the R&D and have maintained our investment in that area. Obviously in the shorter term, both sales and marketing expense have come down substantially, which has allowed us to reduce our overall expenses.

Thank you very much. Good luck for the future.

Thanks Bill.

Thank you. (Operator instructions) Our next question comes from Dominic DiSanti from -- a private investor.

Hi Kevin and David. How are you guys?

Good Dominic.

It was nice meeting you last month, Kevin. Let me ask you about the market. What percentage of all the other scanning companies that makes scanners, what percentage of the market do you have currently?

Well, okay. Okay, well it depends on how you define the market. If you define all of scanning, okay, the market is probably on an annual basis, somewhere in the region of I would say $45 million, okay and that would include every type of scanner at Home Depot etcetera, cable centers. We are not in the cables scanner business. We are in this new category what we call Bluetooth scanners and in particular...

What was that new category?

The new category.

And that's directly talking about the new category, I am sorry to interrupt you.

Well we basically said that we believe we have about 10% -- 16% of the market for this new category, which are highly portable Bluetooth scanners. We are having $10 million of revenue. So the total market available in 2013 according to BBC was somewhere in the $16 million and we had a smaller percent about 9% in 2012. So we've done two things in 2013. One is we've seen the market increase a little bit and we've increased our market share within that. And there pretty bullish on the growth going forward are the 2D scanning, which was an area we will be focused on and we believe we can increase our market share going forward. I think part of the difficulty of all the forecast is determining what people are actually going to do and we've seen much of our growth driven by the deployment of mobile point-of-sale system and that seems to be an up and coming trend. But predicting how big and how quick that trend happens, I think is always a challenge.

Okay. So $60 million market right now, do you have the service that provide you with marketing data that gives you some anticipation for the next year or two, or three?

We do. We have forecast, but like all forecasts, they are subject to change. But I believe there is plenty of headroom in this market for the area that we’re focused on.

And it’s good to see that you actually increased your percent in that market in 2012 to ’13 albeit in small and growing, that's a positive to see that?

Yeah. And again that’s a good positive and we’re happy that this is a market that we believe has a lot of upside potential.

Okay. How much of competition there? What larger put – I mean, I assume the larger player is also in there competing with you a lot of competitors involved in that?

Well, I think this is one of things that's very important is traditionally all scanners particularly cable scanner look and behaves the same and were controlled by the operating system. One of things we’ve pointed out a number of times is that in the mobile and particularly in the Apple world, the actual application owns the scanner, which is why it's so important to have a large group of application developers and it’s that, that provides us protection. Once somebody designs your scanner into an Apple-based solution, than you can see that you've been designed in and then we will track to see how many scanners are being built. Once we get more competition, you don’t have to -- you can’t just say, I’ll provide a cheaper scanner. You have to go back to the developer to get your scanner qualify for that application, which is not attributable process. And ultimately that is a barrier to entry. And by better serving the developers with better tools and easier tools to make it easier to integrate our stuff in, that's what we see is our long-term competitive advantage.

Okay. So some of them get into the market, not so easy, it becomes almost that to get into a market, it needs to begin to acquire companies that are in the market already, so you need to get a foothold to that?

Yeah. It's not -- correct, it's not that easy because of the way it's structured and particularly with mobile stuff you need a tight integration between the application and the peripherals.

Right. And is there any new companies enter the market in the past, let’s say, year or so?

With scanners or…

Yes. Scanners, yeah. The ones that you guys have released yes.

We would -- we expect and continue to expect to see people enter the market. I would say, we haven’t seen any of what we call the large scanner guys enter into our space the likes of Motorola or Honeywell. We’ve seen more smaller Chinese, Taiwanese companies, Korean companies. But as this market grows, if you don’t get competition, you’re not doing something right, right? So part of it is that you need to be strong enough to deal with the competition and as we grow our market share here, we believe we'll be in that position. So, it's not that at the end of the day, it won’t be a big market and everyone else is afraid to go after it. You have to – if it’s a worthwhile market other people will come looking for us and we’ve got to be in a position to be the best otherwise you won’t succeed.

Can you share with us what the market people have anticipated the market to grow to and can you share with us?

I would -- not really. We pay for the services and they’re really not for public consumption. But I would say that solid growth particularly driven by 2D scanning is what's predicted. But we’re not in a position to share that at this stage.

Understood. The largest competitive you have, do you know what percentage of the market they have?

Well, there's obviously -- we don’t have 84% of the market, so we have larger competitors. There are certain segments of the market, particularly healthcare that seems to be dominated by companies like [Cold] Corporation and we would give them as probably the largest market share at this stage. They are a private company. We also would view both Honeywell have a Bluetooth product that does well in certain segments, but not necessarily in our segment. We believe we probably have the largest market share in mobile point of sale at this stage as well what's called commercial service. And mobile point of sale is probably the category that is expected to grow faster.

Okay, sounds good. You know Mike I’m going to see what I’m seeing so far. It’s like you guys have started -- hopefully 2014 turns out to be a great year for you guys, but it looks like you’re starting off the right foot.

All right. Thank you very much Dominic.

Yeah. You take care.

Bye-bye.

Bye now.

Thank you. Our next question is a follow-up from Brian Swift from SRA.

Yeah, on the SoMo, you had mentioned that some customers have explored the idea of abusing Android type of software as oppose to the Microsoft Windows Mobile. Have you considered switching over or at least putting out a model that would have--?

I think that certainly last year, we didn’t have a lot of resources and any resource we did have and phones we did have, we invested in the scanning side of the business. So, we did not really I would say invest the last in the SoMo in 2013. To build a hand-held computer regardless of the operating system is really a $2 million investment and right now, we would do much better focusing on the area that's growing at 69%. So, we haven’t. It would be within our scope to do this, but the level of competition in the Android market space is pretty fierce. So, I think we’re better off staying with Windows Mobile, servicing the customers that want us. And I would say -- I wouldn’t say turning the SoMo more into a cash cow, but it doesn’t seem wanted right now to do a large investment in this market due to the instability of the market. So, short answer is we could do it, but we don't intend to.

Okay. Thanks

Thanks.

Thank you. Our next question comes from Steve Swanson, a Private Investor.

Hi. While I appreciate management’s focus on cost, a little bit alarmed to hear that with the exit of Gifford there are some other marketing folks that are gone, are you guys just leaving the market to run your business or are you -- what plans do you have or what are intentions for the first quarter specifically this year to push the product and get the revenues? We cannot save our self to prosperity, so I’m wondering how you’re focusing on the revenue side of things? Thanks.

Okay. So, first of all, the -- I don't talk in great detail about personnel issues, but certainly because we hadn’t done salary increases for quite some time and we’re in the bay area and competitive markets, we run the risk of losing people and we did lose some people. And we’ve now replaced those people, so we will see more marketing activity. On the sales side, the vast majority of the selling is happening by the application providers. And who I mean by the application providers are people who have built and let's just take the example of mobile point of sale. If you go to let's say [Shopify’s] web page, and you want to buy the hardware for a mobile point of sale solution, they will offer you cash drawer, stands, a printer, a scanner. And when you click on that and you buy it, and that gets delivered to you via distribution. Today, based on the fact that we’re designed into I would say something close to 40 different point-of-sale systems all of those point-of-sale providers are either selling or recommending our scanners directly to their customers. One of the things that has changed certainly over the last two years has been that for applications like mobile point-of-ales, you can download the application direct from the Apple App Store or the Play Store and you don’t go anymore to the likes of a cash register retailer and if I look at our sales in 2013, our top three retailers were all online and include the people like Amazon and our top three stores 25% of all of our product and our top seven all online, so almost 40% of all of our products. So the selling activity is being driven by the developers who have designed and we are continuing to see that happen right going forward. I think where we need to continue to focus is on marketing to developers as well as to the end users and that’s within our scope this year. We will be launching a program specifically targeted at developers later this week and to make it even more attractive to build our scanners in for their customers. So yes we've had a little bit of disruption, but there has been no impact in the short term in terms of sales and Q4 and actually beginning of the year quite quiet in terms of mobile point-of-sales as people generally don’t change their cash registers during the busy selling season. We generally see NRF in mid January and we've seen a solid pick-up based on the referrals in February and we expect that to trend to continue all the way to June.

Okay. And then the other last question I have. I've been a long time shareholder and I was just wondering if trip out there to the shareholders meeting would actually be worthwhile or whether these are perfunctory 20-minute meetings that you have on an annual basis.

Well we don’t have a lot of shareholders and we certainly welcome you. What we generally do is we do a presentation to the company, shareholders included, outlining our strategy and taking questions. We view it both as an opportunity to educate all our employees on our strategy, our markets, what’s working and what’s not working. Generally the presentation lasts about 40 minutes and there is question-and-answer session afterwards and we will be happy if you would make the trip.

Does Charlie attend -- Charlie Bass and is he available for discussion with shareholders at that day?

I don’t believe Charlie will be at this meeting, but I can check.

Okay. That would be -- if he was there, I might seriously make the trip because a decision with him would be good as the Chairman as one of the founders and long time shareholder will be good to kind of get his thoughts as well. But I will check back with you later on in March to see kind of if you guys believe he will be there.

Okay.

Thank you.

Thank you for your questions.

Thank you. Our last question comes from David Savory, a Private Investor.

Hi, good afternoon, gentlemen.

Hi, David.

I got couple of things that surprised me in your quarterly numbers. The first one is a positive. I saw where your profit margins were 41% and does that -- should we see that going forward because I know you guys dropped the price with your scanners.

Yes. I mean -- I think on the scanning pricing we were anxious to make it attractive to get under a price of $1.99, which we achieved. And I think that will benefit us in the long term and we have reduced our cost and we are passing on those cost savings to customers. So I don’t think it will have a negative impact on our margins. The other thing is by reducing the price of some of our more expensive products, we have seen more uptick in those products for the balance as a little bit better. So we are not anticipating any margin impact with the lower prices at this stage.

Okay. Well, I was just anxious, saw it as a positive, because I know historically your SoMo was a higher profit margin item and so even though you’re selling more of them, I was actually glad to see this 41% profit margin on this $3.7 million.

Okay.

On expenses, I saw comparing third quarter numbers to fourth quarter numbers, you were up about 315,000. How much of that was legal cost to the [Hudson] lawsuit and what was the other expense about. I saw Sales and marketing went up about $185.

Okay. So I would say there was 200,000 that’s nonrecurring and I don’t want to get into detail.

Okay. So looking for first quarter about what numbers should we be looking for?

Approximately I think that we should be not quite as high as -- yeah, we should be not quite as high as Q4 and so I would expect to see lower expenses in Q1 and Q4.

Okay. Okay. And my last question is the...

And bear in mind, bear in mind, we do have audit expense in Q1. So generally speaking it tends to be more – one of our more expensive quarters, but even with that, we don’t expect it to be as high as Q4.

Okay. Okay. And the last question I have is on your supplemental loan that you took on for working capital last year? Do you have -- obviously, it's a high interest rate. Do you have a plan or timetable you can line up for shareholders and how you’re trying to get rid of it or pay it down or find a cheap resource of capital?

All of the above, right.

Okay.

So, we would like to get rid of it as soon as it's possible. But one of – yeah, we’d like to get rid of it as soon as possible and we’re working on a number of ways to do that.

Okay.

But it is not a good -- it’s a high interest loan, but the only thing that we could get available.

Yes. And just one last quick question. Should we see the new bank line of credit closing and will there be a press release about it?

We’ll file as an 8-k when all the documentation and I just completed, yes.

Okay. That sounds good. All right. Thank you very much.

Thank you. At this time we have no further questions. I would like to turn the call back over to our speakers for closing comments.

Okay. Thank you very much operator. We would just like to thank everyone for participating in today’s call. And we look forward to report of April -- Q1 in April. Thank you all very much. Good day.

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