Business context and reporting period
The supplied filing is Sonim Technologies, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2019; it does not identify DNA X, Inc. as the registrant. Sonim sells rugged mobile phones, accessories and, beginning in 2019, software services, primarily through wireless carriers. Unless otherwise noted, dollar amounts below are in millions.
Financial results and position
- Third-quarter revenue: $28.9, down 27% from $39.5 in 2018. Gross profit was $7.2 versus $14.1; gross margin fell to 25% from 36%. Operating loss was $6.3, compared with operating income of $3.3, and net loss was $6.8 versus net income of $2.1.
- Nine-month revenue: $99.1, up 11% from $89.1. Gross profit rose 5% to $31.4, but gross margin declined to 32% from 34%. Operating loss widened to $16.5 from $0.1; net loss widened to $19.1 from $3.1. Adjusted EBITDA, a non-GAAP measure, was a loss of $9.0 versus income of $1.1.
- Cash flow: Operating activities used $28.8 in the first nine months, versus $2.0 used in 2018. Investing activities used $1.3; financing activities provided $33.4. Cash increased by $3.3 to $16.3, with IPO proceeds contributing significantly to financing.
- Liquidity and debt: Current assets were $65.8 and current liabilities $29.6 at September 30. Balance-sheet debt was $9.9, including $9.8 of long-term debt; the Riley loan disclosure reports $9.8 of principal and deferred accrued interest outstanding. No East West Bank line borrowings were outstanding at quarter-end, although access to the line was subsequently restricted pending a blocked account and subject to lender discretion.
- Other metrics: Inventory was $24.9, up from $21.8 at year-end 2018. Stockholders’ equity was $28.6, compared with $5.1 at year-end. Common shares outstanding were 20,357,783 at September 30 and November 1, 2019.
Material changes versus the prior comparable period
- Third-quarter sales fell mainly because of lower XP8 smartphone and XP5 feature-phone volumes to U.S. carriers. Management cited XP8 technical challenges and accessory-related issues in feature phones. Nine-month growth reflected XP3’s March launch and stronger first-half XP8 and XP5S sales.
- Third-quarter unit sales were 95,000 versus 93,000: smartphones declined to 20,000 from 47,000, while feature phones rose to 75,000 from 46,000. Nine-month units were 318,000 versus 205,000.
- Quarterly gross profit was affected by a $2.1 inventory reserve for aged materials and finished goods and a $0.7 loss on end-of-life purchase commitments.
- Nine-month operating expenses increased 60% to $48.0. Higher research and development and sales and marketing costs reflected product certification, launches, staffing and customer-service spending; general and administrative expense included substantial IPO-related stock compensation.
- The May 2019 IPO raised approximately $36.8 net. The company also repaid $3.25 of Riley loan principal during the third quarter.
Outlook, risks and unusual items
- Going concern: The company stated that substantial doubt existed about its ability to continue as a going concern, citing operating cash use and a reduced revenue run-rate. Management believed cash and expected proceeds from forecast billings would fund planned operations into the third quarter of 2020, but gave no formal revenue or earnings guidance. It planned to reassess the going-concern position at year-end and said additional financing might be needed.
- Credit agreement: Sonim was out of compliance with the East West Bank fixed-charge coverage covenant at September 30; the lender waived the breach in October and suspended that covenant through the amended February 28, 2020 maturity. The amendment also required a blocked account and placed future advances at the lender’s discretion.
- Restructuring and leadership: A September restructuring eliminated 14 positions and incurred $0.6 of charges; $0.5 remained payable by the second quarter of 2020. The CFO departed in September, an interim CFO was appointed, and the CEO departure and successor appointment were announced in October.
- Litigation: Four putative IPO-related securities class actions alleged misleading statements or omissions, including about software defects and phone performance. The company recorded no litigation accrual because the outcome and potential loss could not be estimated; an adverse outcome could materially affect results.
- Business risks: Sales depend heavily on a small number of carrier customers, with the top five representing approximately 83% of third-quarter and 85% of nine-month 2019 revenue. Carrier purchase orders generally lack minimum volume commitments. Product defects, inventory forecasting, competition, supplier reliance and ongoing cash burn are significant risks.
- The filing reported disclosure controls and procedures were effective at a reasonable-assurance level. It also disclosed two previously identified material weaknesses related to revenue recognition and inventory reporting and ongoing remediation efforts.
Important facts for investors to verify
- Confirm the registrant identity: the supplied filing is for Sonim Technologies, Inc., not DNA X, Inc.
- Track quarterly revenue, carrier orders and technical remediation for XP8, XP5 and feature-phone issues, as well as inventory and gross-margin trends.
- Assess cash burn against management’s stated runway, projected billings and any need or ability to obtain additional financing.
- Review compliance with amended credit terms, blocked-account requirements, lender discretion and the February 2020 credit-line maturity.
- Monitor developments in the IPO securities litigation, potential losses and legal costs, and the effect of management transitions and restructuring.