Sonim Technologies, Inc. — Q2 2020 Form 10-Q
Entity note: The supplied filing is for Sonim Technologies, Inc. (Nasdaq: SONM), not DNA X, Inc. It covers the quarter and six months ended June 30, 2020; amounts below are in U.S. dollars unless stated otherwise.
Business context and reporting period
Sonim sells ultra-rugged mobile phones and accessories, primarily through wireless carriers, for industrial enterprise and public-sector customers. Its carrier and customer concentration is high. The filing was signed August 12, 2020.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $21.1 million | $43.7 million | $33.8 million | $70.2 million |
| Gross profit | $4.9 million | $14.4 million | $7.1 million | $23.5 million |
| Gross margin | 23.4% | 33.0% | 21.0% | 33.4% |
| Operating loss | ($6.6 million) | ($4.6 million) | ($15.7 million) | ($8.7 million) |
| Net loss | ($7.1 million) | ($5.6 million) | ($17.1 million) | ($10.7 million) |
| Basic and diluted loss per share | ($0.22) | ($0.31) | ($0.65) | ($0.63) |
- At June 30, cash and cash equivalents were $38.1 million, versus $11.3 million at December 31, 2019; current assets were $64.9 million and current liabilities $28.7 million.
- Operating cash flow was positive $5.7 million for the first half, compared with cash used of $34.8 million a year earlier. The improvement reflected working-capital movements, including lower receivables and inventory and higher payables and accrued expenses, despite the net loss.
- Investing cash use was $0.2 million; financing cash provided was $21.3 million. Cash rose $26.8 million in the period.
- The B. Riley debt was extinguished in June: $4.0 million was repaid in cash and approximately $6.2 million was settled with 8.23 million shares. Remaining debt at June 30 was $0.5 million, consisting of supplier-related notes; the East West Bank facility had been cancelled.
Material changes versus the prior comparable period
- Revenue fell 52% in both the quarter and first half. Management attributed the first-half decline mainly to 33% fewer smartphone and feature-phone units, following expiration of a firm purchase commitment from a key channel partner and slower-than-expected sales to other partners. Q2 declines included lower XP8 and XP5s sales to major customers.
- Gross profit fell 66% in Q2 and 70% in the first half; margins contracted. Management cited higher handset allowances and first-quarter costs associated with a temporary Shenzhen manufacturing shutdown. Handset allowances were 11% of gross handset revenue in Q2 versus 2% a year earlier.
- Operating expenses declined 39% in Q2 and 29% in the first half, including lower R&D, sales and marketing, and G&A spending. The first half included $1.1 million of restructuring costs in operating expenses, in addition to costs recorded in cost of revenue.
- Common shares outstanding increased from 20.4 million at year-end 2019 to 65.9 million at June 30, reflecting the 36.8 million-share public offering and shares issued to settle debt, among other issuances.
Outlook, commentary, risks and unusual items
- Liquidity and outlook: The June offering generated approximately $25.0 million net. Management said available cash would fund operations for at least the next 12 months and gave no numerical revenue or earnings guidance. The filing is inconsistent on going-concern risk: the liquidity note says the statements assume continuation without a going-concern designation, while risk factors state that substantial doubt exists amid reduced revenue run-rate. Investors should reconcile these statements.
- Sprint/T-Mobile: Following the Sprint-T-Mobile merger, Sonim said Sprint products XP5s, XP8 and XP3 were expected to reach end of life during Q4 2020, subject to discussions to extend timing. Beginning August 2020, Sprint sales were limited to upgrades and line additions, then about half of Sonim’s Sprint sales. Sonim was developing a new product series for T-Mobile.
- COVID-19: The company cited possible demand weakness, supply-chain interruptions and component shortages, including camera modules and batteries. Shenzhen manufacturing temporarily closed in February and resumed full operations March 2. The ultimate effects were described as uncertain.
- Concentration: The top five customers accounted for 82% of Q2 revenue and 79% of first-half revenue. One customer represented 58% of Q2 revenue and 46% of first-half revenue. Two customers represented 43% and 12% of receivables at quarter-end.
- Legal and regulatory: Sonim accrued $2.0 million for a proposed class-wide settlement of federal IPO securities litigation, subject to documentation and court approval. The SEC informed the company in August 2020 that it was conducting a formal investigation; outcome and potential impact were not predictable. A Shenzhen tax inquiry concerning 2017 and 2019 was ongoing; the company reported approximately $7.0 million of gross unrecognized tax benefits.
- Listing and controls: Nasdaq notified Sonim in July 2020 that its bid price had been below $1 for 30 consecutive business days, providing a compliance period through January 18, 2021. Management deemed disclosure controls effective at a reasonable-assurance level, but disclosed two previously identified material weaknesses in IT general controls and accounting for contract fulfillment costs; remediation may not be sufficient.
- Other notable items include a 2020 workforce reduction and relocation of headquarters to Austin. Management reported 341 employees worldwide at June 30. The company also repaid a $2.3 million PPP loan in April after further SBA guidance.
Key facts for investors to verify
- Confirm the registrant identity: this filing is Sonim Technologies, Inc., despite the request metadata naming DNA X, Inc.
- Reconcile the filing’s conflicting statements about substantial doubt and going-concern risk, and assess cash needs if revenue remains depressed.
- Track Sprint product end-of-life timing, remaining upgrade and line-addition sales, and progress on replacement products for T-Mobile.
- Review customer concentration, purchase-order visibility, channel inventory, and exposure to further demand or supply disruption.
- Monitor approval and final terms of the $2.0 million securities settlement, the SEC investigation, and the Shenzhen tax inquiry.
- Check Nasdaq bid-price compliance and progress remediating the two internal-control material weaknesses.