Sonim Technologies, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The supplied filing is for Sonim Technologies, Inc. (Nasdaq: SONM), not “DNA X, Inc.” Financial amounts below are in millions of U.S. dollars unless stated otherwise.
Business context and financial performance
Sonim sells ultra-rugged mobile phones, accessories, and, since 2021, rugged handheld scanners and tablets. It relies substantially on wireless carriers, distributors, and outsourced manufacturing and development partners.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $14.4 | $14.4 | $38.6 | $48.2 |
| Gross profit | $1.8 | $4.4 | $6.9 | $11.5 |
| Gross margin | 12.3% | 30.6% | 17.9% | 23.8% |
| Operating expenses | $12.5 | $10.5 | $33.2 | $33.3 |
| Operating loss | $(10.7) | $(6.1) | $(26.3) | $(21.8) |
| Net loss | $(10.9) | $(6.5) | $(26.9) | $(23.5) |
| Operating cash flow | Not separately presented for quarter | Not separately presented for quarter | $(20.9) | $(0.7) |
- Q3 revenue was essentially flat year over year, while nine-month revenue declined 20%. Q3 product mix included lower smartphone sales and higher feature-phone sales; the XP3 Plus contributed about $4 million in Q3, partly offsetting legacy product declines.
- Gross profit fell 59% in Q3 and 40% year to date. Management attributed the decline to product mix, lower average selling prices, higher average costs, and reduced legacy-unit sales; the lower-margin XP3 Plus also weighed on margin.
- Q3 research and development expense rose 62% to $5.5 million, reflecting spending on SmartScanner products and next-generation phones. Nine-month R&D increased 31% to $13.8 million.
Liquidity, debt, and capital
- At September 30, cash and cash equivalents were $10.2 million, down from $22.1 million at December 31, 2020. Current assets were $32.6 million and current liabilities $24.2 million. Total debt was approximately $0.25 million ($0.18 million current and $0.07 million long term), versus $0.36 million at year-end.
- Nine-month operating cash use was $20.9 million, compared with $0.7 million in 2020; investing cash use was $0.02 million. Financing provided $9.0 million, primarily from ATM equity sales. Cash declined by $12.0 million over the nine months.
- The company stated that substantial doubt exists about its ability to continue as a going concern for at least one year from issuance of the financial statements. Management said existing cash was insufficient to fund commercial-scale production and sales and was evaluating additional financing; availability and terms were uncertain.
- The company sold shares through ATM programs, receiving approximately $9.0 million in cash by September 30 and reporting approximately $1.3 million of related proceeds collected in October. It reported $14.3 million of net ATM proceeds from sales between October 1 and October 15, and cash of approximately $17.5 million at October 31. The filing said about $24.8 million remained available under the ATM program as of October 31.
- Shares outstanding were 9.25 million at September 30; the cover reported 16.07 million as of October 29. A 1-for-10 reverse split took effect September 15, 2021. Further ATM issuance could materially dilute existing holders.
Changes, outlook, and notable risks
- Revenue was flat in Q3 but down year to date as legacy products aged and unit sales fell. Management reported strong XP3 Plus demand and purchase-order volume into Q4, while cautioning that orders were nonbinding and could be terminated.
- Sonim launched the XP3 Plus and introduced rugged scanner/tablet products. It reported carrier design wins for products expected in 2022, but design wins do not require carrier purchases and further development funding is needed. No specific financial guidance was provided.
- The company outsourced substantially all software development and manufacturing work. Its software-development agreement covered $7.1 million of expected business volume over three years, with a $3.1 million minimum in year one; $2.5 million had been paid through September, with another $0.6 million expected in Q4. Headcount fell to 78 from 317 at December 2020.
- Sonim began a review of strategic and financing alternatives in August; the process was ongoing, with no assurance of a transaction. The former CEO departed in May; Robert Tirva became President, COO, and CFO, and the company reported having no CEO.
- Customer concentration is significant: the top three customers represented about 72% of Q3 revenue and 64% of nine-month revenue. Carrier and distributor agreements generally lack firm minimum purchase commitments.
- The SEC investigation remained ongoing; the company and SEC staff began discussing a potential resolution in October, but Sonim could not predict the outcome or impact. A previously disclosed $2.0 million securities class-action settlement received final court approval in March 2021. A related derivative action remained pending, with outcome and impact uncertain.
- Disclosure controls were deemed ineffective, and the company disclosed a material weakness in IT general controls, including elevated access to financial reporting systems. Remediation efforts and outside-consultant work were underway.
- Nasdaq notified the company in September that it had regained compliance with the minimum bid-price requirement after the reverse split; continued listing compliance was not assured. Other key risks include product-development and certification execution, supplier dependence, product defects, ongoing losses, and financing availability.
Important facts for investors to verify
- Whether ATM financing, cash balances, and operating cash burn support operations and commercial-scale production, and the extent of dilution from shares issued after quarter-end.
- Whether XP3 Plus and next-generation products generate sustained sales and improve gross margins, and whether reported purchase orders convert into shipments.
- Customer concentration, nonbinding purchase commitments, and the company’s dependence on carrier decisions and third-party partners.
- Developments and potential financial consequences of the SEC investigation and derivative litigation.
- Progress remediating the material weakness and restoring effective disclosure controls, as well as continued Nasdaq listing compliance.