Sonim Technologies, Inc. — Q1 2019 Form 10-Q
Issuer identification: The supplied filing is for Sonim Technologies, Inc. (Nasdaq: SONM), not “DNA X, Inc.” The unaudited reporting period is the three months ended March 31, 2019; financial amounts below are in U.S. dollars unless noted.
Business context
Sonim sells ultra-rugged mobile phones, accessories and, beginning in 2019, software and application services, primarily through wireless carriers serving industrial enterprise and public-sector customers. Carrier customers generated about 87% of Q1 revenue; the five largest customers accounted for 82%. The company launched its XP3 rugged flip phone with Sprint during the quarter and began commercial XP3 sales with AT&T in April.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $26.5 million | $18.2 million; up 46% |
| Gross profit / margin | $9.4 million / 35.4% | $5.3 million / 28.9% |
| Operating expenses | $14.6 million | $9.3 million; up 57% |
| Operating loss | $5.2 million | $4.0 million |
| Net loss | $6.2 million | $5.1 million |
| Adjusted EBITDA (non-GAAP) | $(4.9) million | $(3.6) million |
| Cash used in operating activities | $4.5 million | $4.7 million |
Revenue growth reflected higher shipments: approximately 72,000 total units versus 39,000 a year earlier, including a 176% increase in feature-phone units and a 14% increase in smartphone units. Gross-margin improvement was attributed to lower component and factory costs and higher average selling prices, partly offset by the lower-margin XP3 launch. R&D rose 63% to $8.4 million, principally due to carrier certification and product-launch costs and increased headcount.
At March 31, cash and cash equivalents were $9.9 million, down from $13.0 million at December 31, 2018. Current assets were $58.8 million and current liabilities $47.3 million. Inventory increased to $29.1 million from $21.8 million. Total liabilities were $61.3 million and stockholders’ equity was $0.6 million; accumulated deficit was $149.7 million.
Balance-sheet debt included $282,000 current and $13.1 million long-term. The B. Riley subordinated note had $12.0 million principal plus $1.0 million accrued interest, carries 10% interest and matures September 2022. No amount was drawn on the East West Bank line at quarter-end; the company reported $8.0 million of capacity and a May 2019 maturity. It said it was compliant with financial covenants as of March 31.
Changes, outlook, and notable items
- Compared with Q1 2018, revenue and gross margin improved, but operating expenses grew faster than gross profit and net loss widened by $1.1 million. Adjusted EBITDA deteriorated by about $1.3 million.
- Management expected continued unit sales through carrier customers and anticipated XP3 launches with additional carriers, including AT&T, in Q2 and Q3 2019. It cautioned that carrier certification, product-launch timing, and first-quarter seasonality can make quarterly results vary.
- Management stated that, based on then-current plans and market conditions and IPO proceeds, available resources and operating cash generation were expected to cover anticipated cash needs for at least 12 months. This is forward-looking, not a profitability forecast.
- After quarter-end, the IPO closed May 14 at $11 per share; the company reported approximately $37.6 million in net proceeds. Its shares began Nasdaq trading May 10. The filing says proceeds were intended for general corporate purposes, including working capital, sales and marketing, R&D and growth; some could be used to repay the B. Riley note. Additional shares were sold under the underwriters’ option on May 22.
- Major risks include concentrated carrier and customer dependence, lack of firm minimum purchase commitments, lengthy carrier approval cycles, inventory and supplier constraints, competition, China-related tariff exposure, and continuing losses. Receivables were concentrated in three customers (49%, 24% and 16% of total at quarter-end); one customer generated 37% of quarterly revenue.
- The company disclosed ordinary-course litigation and intellectual-property indemnification exposure, but stated it was not then party to proceedings expected to have a material adverse effect. Unrecognized tax benefits were approximately $6.0 million; management did not anticipate material changes in uncertain tax positions over the next 12 months.
- Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material quarterly change in internal control over financial reporting. Separately, the filing identifies two 2018 material weaknesses concerning revenue recognition and inventory reporting and says remediation efforts were ongoing.
Important facts for investors to verify
- Confirm the intended issuer: the filing identifies Sonim Technologies, Inc. (SONM), not DNA X, Inc.
- Track subsequent filings for IPO proceeds actually received and used, and whether the B. Riley note was repaid or the East West Bank facility was extended, refinanced or repaid after its May 2019 maturity.
- Monitor carrier launches and purchase orders, especially XP3 adoption, certification timing and the company’s high customer concentration.
- Assess whether revenue growth translates into sustained gross-margin gains, lower operating losses and improved operating cash flow; Q1 still showed a net loss and cash burn.
- Review inventory levels and customer collections, given the quarter’s inventory build and concentrated receivables, and follow progress on the disclosed revenue-recognition and inventory control weaknesses.
- Evaluate the effect of debt service, supplier royalties, tax exposures and potential intellectual-property claims on liquidity and results.