The accompanying notes are an integral part of these condensed consolidated financial statements
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
NOTE 1 —The Company and its significant accounting policies
Description of Business —Sonim Technologies, Inc. (“Sonim”, “we”, “our”, or the “Company”) was incorporated in the state of Delaware on August 5, 1999 and is headquartered in Austin, Texas. The Company is a leading U.S. provider of ultra-rugged mobile phones and accessories designed specifically for task workers physically engaged in their work environments, often in mission-critical roles. We currently sell our ruggedized mobility solutions to several of the largest wireless carriers in the United States— including AT&T, T-Mobile and Verizon—as well as the three largest wireless carriers in Canada—Bell, Rogers and Telus Mobility. Due to the acquisition of Sprint by T-Mobile, the Company’s current generation of products sold to Sprint/T-Mobile will be phased out. The Company is actively working to develop a new series of products for T-Mobile. Our phones and accessories connect workers with voice, data and workflow applications in two end markets: industrial enterprise and public sector.
The Company is closely monitoring the impact of the COVID-19 global outbreak and its resulting impact on its manufacturing operations and supply chain, with its top priority being the health and safety of our employees, customers, partners, and communities.
The Company believes sales partners have sufficient inventory to continue meeting customer needs in the near term. However, demand for the Company’s solutions may be reduced as a result of the COVID-19 outbreak and resulting market uncertainty. It also remains possible that the Company’s results could be negatively impacted by interruptions in the global supply chain due to the continued and unpredictable spread of this pandemic. The magnitude of any future impact of the COVID-19 outbreak is unknown. The Company is working closely with its partners and suppliers to manage through this situation.
Restrictions on travel and the imposition of stay-at-home or work remote conditions have impacted our operations and those of our customers. The Company has effective communications and collaboration tools in place to ensure business continuity during periods requiring remote operation. While we have not experienced major disruptions, our ability to interact with customers has been impacted by the current environment. There is a risk that our inability to meet in-person with current or prospective customers, as well as the cancellation or postponement of Company-sponsored events or third-party events at which our products are featured, may have a negative impact on our business.
Liquidity – The Company’s condensed consolidated financial statements account for the continuation of its business due primarily to approximately $25 million in net proceeds from the Company’s public offering of common stock that closed June 2020 and redemption of approximately $10 million of note payable in June 2020. The Company believes that the proceeds from the foregoing capital raise has provided the Company with sufficient funds to continue operations for at least the next twelve months.
Our principal sources of liquidity as of September 30, 2020 consist of existing cash and cash equivalents totaling $31.7 million, which includes approximately $25 million in net proceeds from our June 2020 public offering of common stock. Although we remain subject to the risks and uncertainties associated with the development and release of new products, among others, we believe our operations have been streamlined to enable us to conduct business more effectively and efficiently despite near term economic uncertainty.
On April 13, 2020, the Company received approximately $2.3 million in loan proceeds from the Payroll Protections Program (the “PPP”) administered by the United States Small Business Administrations (the “SBA”). The PPP was established under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). Following further guidance from the SBA on April 23, 2020 and further deliberation by the Board of Directors of the Company (the “Board of Directors”), the Company repaid the PPP Loan on April 29, 2020.
The Company may seek to raise additional capital from the sale of equity securities or the incurrence of indebtedness to allow it to invest in growth opportunities. There can be no assurance that additional financing will be available to the Company on acceptable terms, or at all. Additionally, if the Company issues additional equity securities to raise funds, whether to existing investors or others, the ownership percentage of its existing stockholders would be reduced. New investors may demand rights, preferences, or privileges senior to those of existing holders of common stock. Additionally, the Company may be limited as to the amount of funds it can raise pursuant to SEC rules and the continued listing requirements of Nasdaq. In addition, global financial crises and economic downturns, including those caused by widespread public health crises such as the COVID-19 pandemic, may cause extreme volatility and disruptions in capital and credit markets, and may impact the Company’s ability to raise additional capital when needed on acceptable terms, if at all. If the Company cannot grow its revenue run-rate or raise needed funds, it might be forced to make substantial reductions in its operating expenses, which could adversely affect its ability to implement its business plan and ultimately its viability as a Company.
5
SONIM TECHNOLOGIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
Financial Statement Presentation—The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and pursuant to the rules and regulations of the SEC for interim financial information. The unaudited interim condensed consolidated financial statements, which reflect all adjustments (consisting of normal recurring items or items discussed herein) that management believes necessary to fairly state results of interim operations, should be read in conjunction with the Notes to Consolidated Financial Statements (including the Significant Accounting Policies and Recent Accounting Pronouncements) included in the Company’s audited consolidated financial statements for the year ended December 31, 2019. Results of operations for interim periods are not necessarily indicative of annual results of operations. The unaudited condensed consolidated balance sheet at, December 31, 2019 is extracted from the audited annual consolidated financial statements and does not include all disclosures required by U.S. GAAP for annual financial statements.
Principles of Consolidation — The accompanying condensed consolidated financial statements include the accounts of Sonim Technologies. Inc. and its wholly owned foreign subsidiaries, Sonim Technologies Spain SL, Sonim Technologies India Private Limited, Sonim Technologies (Shenzhen) Limited, Sonim Technologies (Hong Kong) Limited, Sonim Technologies (Canada), Inc. and Sonim Communications India Private Limited. All significant intercompany transactions and balances have been eliminated in consolidation.
Estimates —The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates include, but are not limited to, estimates related to revenue recognition; valuation assumptions regarding the determination of the fair value of common stock, the useful lives of our long-lived assets; product warranties; loss contingencies; and the recognition and measurement of income tax assets and liabilities, including uncertain tax positions. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Notwithstanding the foregoing, the worldwide spread of the COVID-19 pandemic is expected to result in a global slowdown of economic activity, which is likely to decrease demand for a broad variety of goods and services, including from the Company’s customers, while also disrupting sales channels and marketing activities for an unknown period of time until the disease is contained. The Company expects this to have a negative impact on its ability to make estimates. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s financial statements.
Significant accounting policies — Other than the adoption of new accounting standards in New Accounting Pronouncements describes in the note below. There have been no material changes in the accounting policies from those disclosed in the audited consolidated financial statements for the year ended December 31, 2019.
Revenue Recognition — The Company adopted the requirements of Accounting Standards Codification (“ASC”) 2014-09, Revenue from Contracts with Customers (Topic 606), effective January 1, 2019, using the modified retrospective method. Under the modified retrospective method, this guidance is applied to those contracts which were not completed as of January 1, 2019. Refer to New Accounting Pronouncements, Pronouncements adopted in 2019, for a discussion of the effect of the adoption of Topic 606.
The Company recognizes revenue primarily from the sale of products, including our mobile phones and accessories. The Company also recognizes revenue from other contractual arrangements that may include a combination of products and Non-Recurring Engineering (“NRE”) services or from the provision of solely NRE services.
Revenue recognition incorporates discounts, price protection and customer incentives. In addition to cooperative marketing and other incentive programs, the Company has arrangements with several distributors, which allow for price protection and limited rights of return, generally through stock rotation programs. Under the price protection programs, the Company gives distributors credits for the difference between the original price paid and the Company’s then current price. Under the stock rotation programs, certain distributors are able to exchange certain products based on the number of qualified purchases made during the period.
The Company’s handsets typically require a technical approval process. This process entails design and configuration activities required to conform the Company’s devices to a wireless carrier customer’s specific network requirement. Each wireless carrier defines its own specific functional requirements and certification process in order for the product to be ready for manufacture. While the technical approval process does involve some level of customization, in addition to design and configuration, the Company does not charge separately and is not reimbursed for these activities to the extent that they do not involve significant customization and does not incur these costs in advance of entering into binding agreements with its wireless carrier customers. Such technical approval is obtained prior to shipment.
6
SONIM TECHNOLOGIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
Under Topic 606, revenue is recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To determine revenue recognition for its arrangements, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. See Note 2, Revenue Recognition, for additional information.
The 2020 Offering (“PO”) —On June 9, 2020, the Company completed an underwritten public offering (“PO’) in which the Company sold 36,800,000 shares of its common stock, at a price to the public of $0.75 per share. The offer and sale of the shares in the PO were registered under the Securities Act of 1933, as amended (the “Securities Act”) pursuant to a registration statement on Form S-1 (File No. 333-238869), which was declared effective by the SEC on June 4, 2020. The Company raised approximately $25,056 in net proceeds, after deducting underwriting discounts and commissions of $1,656 and offering expenses of approximately $719. Offering costs, which consist of direct incremental legal, consulting, banking and accounting fees relating to the Company’s PO, are offset against proceeds from the PO within stockholders’ equity.
Initial Public Offering (“IPO”) —On May 14, 2019, the Company completed an initial public offering (“IPO’) in which the Company sold 3,571,429 shares of its common stock, at a price to the public of $11.00 per share. The offer and sale of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-230887), which was declared effective by the SEC on May 9, 2019 and the Company’s common stock began trading on -the Nasdaq -Global Market on May 10, 2019. On May 22, 2019, the Company sold an additional 505,714 shares of common stock, and its Chief Executive Officer sold 30,000 shares of common stock, at a price to the public of $11.00 per share pursuant to the exercise of the underwriters’ option to purchase additional shares. The Company raised approximately $36,849 in net proceeds, after deducting underwriting discounts and commissions of $3,139 and offering expenses paid by us of approximately $4,861 . Offering costs, which consisted of direct incremental legal, consulting, banking and accounting fees relating to the Company’s IPO, were offset against proceeds from the IPO within stockholders’ equity. As of December 31, 2018, there was $63 of deferred offering costs within other non-current assets on the condensed consolidated balance sheets. During the nine months ended September 30, 2019, $4,798 in deferred offering costs were incurred and charged to additional paid in capital. $331 issuance cost was unpaid and charged to accounts payable/accrued expenses as of September 30, 2019.
New accounting pronouncements:
Pronouncements adopted in 2019:
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies are required to adopt the new or revised standard. This may make comparison of the Company’s consolidated financial statements with another public company that, is neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition period, difficult or impossible because of the potential differences in accounting standards used.
As discussed above, the Company adopted Topic 606 under the modified retrospective method effective January 1, 2019. The adoption of Topic 606 did not materially impact the Company’s timing and measurement of revenue recognition as compared to the prior Topic 605 guidance, however, resulted in a cumulative effect adjustment of $3,115, net of the associated income tax effect of $215, to reduce the opening accumulated deficit as of January 1, 2019 relating to the capitalization of certain non-recurring engineering costs that were incurred to fulfill contracts pursuant to Subtopic 340-40, Other Assets and Deferred Costs, which were previously expensed. In addition, the Company identified approximately $770 of deferred revenue as contract liabilities.
7
SONIM TECHNOLOGIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
The guidance permitted two methods of adoption, the full retrospective method applying the standard to each prior reporting period presented, or the modified retrospective method with a cumulative effect of initially applying the guidance recognized at the date of initial application. The standard also allows entities to apply certain practical expedients at their discretion. The Company adopted the standard using the modified retrospective method with a cumulative adjustment and provided additional disclosures comparing results to previous U.S. GAAP in Note 2. We applied the new revenue standards only to contracts not completed as of the date of initial application, referred to as open contracts.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments, which clarifies eight specific cash flow issues in an effort to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. This ASU is effective for nonpublic business entities beginning after December 15, 2019 with early adoption permitted. We applied this new standard as of the effective date and believe there is no significant impact.
Pronouncements not yet adopted:
In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles of ASC 740 in order to reduce cost and complexity of its application. The ASU removes the exception related to the incremental approach for intra-period tax allocation as well as two exceptions related to account for outside basis differences of equity method investments and foreign subsidiaries. This guidance is effective for fiscal years beginning after December 31, 2021 with early adoption permitted. The Company is currently evaluating the potential impact of the new standard on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820)—Changes to the Disclosure Requirements for Fair Value Measurement. The ASU eliminates certain disclosure requirements for fair value measurements for all entities and modifies some disclosure requirements. This ASU is effective for nonpublic entities beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating this new standard and the impact it will have on its presentation of the condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), as amended, which requires lessees to recognize a liability associated with obligations to make payments under the terms of the arrangement in addition to a right-of-use asset representing the lessee’s right to use, or control the use of the given asset assumed under the lease. The standard will be effective for nonpublic business entities for annual reporting periods beginning after December 15, 2021. The Company is currently evaluating this new standard and the impact it will have on its condensed consolidated financial statements, information technology systems, process, and internal controls.
8
SONIM TECHNOLOGIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
NOTE 2 —Revenue recognition
The following reflect the changes in account balances as a result of adoption of ASC 606:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended, September 30, 2019 (unaudited)
|
|
|
As Reported
|
|
|
Balances
Without
Adoption
of Topic
606
|
|
|
|
Effect of
Change
Higher/(Lower)
|
|
Net revenues
|
|
$
|
28,850
|
|
$
|
28,850
|
|
|
$
|
-
|
|
Cost of revenues
|
|
|
21,968
|
|
|
21,602
|
|
|
|
366
|
|
Gross profit
|
|
|
6,882
|
|
|
7,248
|
|
|
|
(366
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,651
|
|
|
7,010
|
|
|
|
(359
|
)
|
Sales and marketing
|
|
|
3,042
|
|
|
3,042
|
|
|
|
—
|
|
General and administrative
|
|
|
2,870
|
|
|
2,870
|
|
|
|
—
|
|
Restructuring costs
|
|
|
578
|
|
|
578
|
|
|
|
—
|
|
Total operating expenses
|
|
|
13,141
|
|
|
13,500
|
|
|
|
(359
|
)
|
Loss from operations
|
|
|
(6,259
|
)
|
|
(6,252
|
)
|
|
|
(7
|
)
|
Interest expense
|
|
|
(235
|
)
|
|
(235
|
)
|
|
|
—
|
|
Other expense, net
|
|
|
(248
|
)
|
|
(248
|
)
|
|
|
—
|
|
Loss before income taxes
|
|
|
(6,742
|
)
|
|
(6,735
|
)
|
|
|
(7
|
)
|
Income tax expense
|
|
|
(33
|
)
|
|
(33
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,775
|
)
|
$
|
(6,768
|
)
|
|
$
|
(7
|
)
|
Net loss per share, basic and
diluted
|
|
$
|
(0.33
|
)
|
$
|
(0.33
|
)
|
|
$
|
—
|
|
Weighted–average shares used in
computing net loss per share,
basic and diluted
|
|
|
20,356,447
|
|
|
20,356,447
|
|
|
|
|
|
9
SONIM TECHNOLOGIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended, September 30, 2019 (unaudited)
|
|
|
As Reported
|
|
|
Balances
Without
Adoption
of Topic
606
|
|
|
|
Effect of
Change
Higher/(Lower)
|
|
Net revenues
|
|
$
|
99,081
|
|
$
|
99,081
|
|
|
$
|
-
|
|
Cost of revenues
|
|
|
68,733
|
|
|
67,644
|
|
|
|
1,089
|
|
Gross profit
|
|
|
30,348
|
|
|
31,437
|
|
|
|
(1,089
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
20,996
|
|
|
23,644
|
|
|
|
(2,648
|
)
|
Sales and marketing
|
|
|
10,986
|
|
|
10,986
|
|
|
|
—
|
|
General and administrative
|
|
|
12,770
|
|
|
12,770
|
|
|
|
—
|
|
Restructuring costs
|
|
|
578
|
|
|
578
|
|
|
|
—
|
|
Total operating expenses
|
|
|
45,330
|
|
|
47,978
|
|
|
|
(2,648
|
)
|
Loss from operations
|
|
|
(14,982
|
)
|
|
(16,541
|
)
|
|
|
1,559
|
|
Interest expense
|
|
|
(1,212
|
)
|
|
(1,212
|
)
|
|
|
—
|
|
Other expense, net
|
|
|
(519
|
)
|
|
(519
|
)
|
|
|
—
|
|
Loss before income taxes
|
|
|
(16,713
|
)
|
|
(18,272
|
)
|
|
|
1,559
|
|
Income tax expense
|
|
|
(785
|
)
|
|
(785
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,498
|
)
|
$
|
(19,057
|
)
|
|
$
|
1,559
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.97
|
)
|
$
|
(1.05
|
)
|
|
$
|
0.08
|
|
Weighted–average shares used in
computing net loss per share,
basic and diluted
|
|
|
18,085,719
|
|
|
18,085,719
|
|
|
|
|
|
The Company recognizes revenue primarily from the sale of products, including its mobile phones and accessories, and the majority of the Company’s contracts include only one performance obligation, namely the delivery of product. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is defined as the unit of account for revenue recognition under ASC 606. The Company also recognizes revenue from other contracts that may include a combination of products and NRE services or from the provision of solely NRE services. Where there is a combination of products and NRE services, the Company accounts for the promises as individual performance obligations if they are concluded as distinct. Performance obligations are considered distinct if they are both capable of being distinct and distinct within the context of the contract. In determining whether performance obligations meet the criteria for being distinct, the Company considers a number of factors, such as the degree of interrelation and interdependence between obligations, and whether or not the good or service significantly modifies or transforms another good or service in the contract. During the three and nine months ended September 30, 2020 and 2019, the Company did not have any contracts in which the products and NRE services were concluded to be a single performance obligation. In certain cases, the Company may offer tiered pricing based on volumes purchased for specific model phones. To date, all tiered pricing provisions have fallen into observable ranges of pricing to existing customers, thus, not resulting in any material right which could be concluded as its own performance obligation. In addition, the Company does not offer material post-contract support services to its customers.
Net revenue for an individual contract is recognized at the related transaction price, which is the amount the Company expects to be entitled to in exchange for transferring the goods and/or services. The transaction price for product sales is calculated as the product selling price net of variable consideration which may include estimates for marketing development funds, sales incentives, and price protection and stock rotation rights. The Company generally does not offer a right of return to its customers. Typically, variable consideration does not need to be constrained as estimates are based on specific contract terms. However, the Company continues to assess variable consideration estimates such that it is probable that a significant reversal of revenue will not occur. The transaction price for a contract with multiple performance obligations is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices for products are determined based on the prices charged to customers, which are directly observable. Standalone selling price of the professional services are mostly based on time and materials. We determine our estimates of variable consideration based on historical collection experience with similar payor classes, aged accounts receivable by payor class, terms of payment agreements, correspondence from payors related to revenue audits or reviews, our historical settlement activity of audited and reviewed claims and current economic conditions using the portfolio approach. Revenue is recognized only to the extent that it is probable that a significant reversal of the cumulative amount recognized will not occur in future periods.
10
SONIM TECHNOLOGIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
Revenue is then recognized for each distinct performance obligation as control is transferred to the customer. Revenue attributable to hardware is recognized at the time control of the product transfers to the customer. Revenue attributable to professional services is recognized as the Company performs the professional services to the customer.
Disaggregation of revenue
The following table presents our net revenue disaggregated by product category:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
Smartphones
|
|
$
|
5,684
|
|
|
$
|
11,709
|
|
|
$
|
18,040
|
|
|
$
|
45,578
|
|
|
|
Feature Phones
|
|
|
8,323
|
|
|
|
16,224
|
|
|
|
28,059
|
|
|
|
49,623
|
|
|
|
Accessories/Other
|
|
|
386
|
|
|
|
917
|
|
|
|
2,058
|
|
|
|
3,880
|
|
|
|
|
|
$
|
14,393
|
|
|
$
|
28,850
|
|
|
$
|
48,157
|
|
|
$
|
99,081
|
|
|
|
Shipping and handling costs
The Company has elected to account for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products.
Contract costs
Applying the practical expedient, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred when the amortization period of the assets that otherwise would have been recognized is one year or less. These costs are included in sales and marketing and general and administrative expenses.
The costs associated with design and development non-recurring engineering activities for technical approval represent costs to fulfill a contract pursuant to ASC 340-40. Accordingly, the Company capitalizes these non-recurring engineering costs and amortizes such costs over the estimated period of time over which they are expected to be recovered, which is typically, the estimated life of a particular model phone.
As of December 31, 2019, the total costs to fulfill a contract which were deferred and capitalized upon adoption of ASC 606 totaled $4,525 and were recorded in Other Assets. The total capitalized costs to fulfill a contract is primarily associated with Company’s introduction of the XP8 model phone. As of September 30, 2020, the total costs to fulfill a contract included in other assets were $3,298.
Contract balances
The Company records accounts receivable when it has an unconditional right to consideration. As of September 30, 2020, the Company does not have a contract receivable balance. Contract liabilities are recorded when cash payments are received or due in advance of performance. Contract liabilities consist of advance payments and deferred revenue, where the Company has unsatisfied performance obligations. Contract liabilities are presented as a component of deferred revenue on the consolidated balance sheets. As of December 31, 2019, and September 30, 2020, the contract liabilities were $291 and $290, respectively, with the contract liabilities as of September 30, 2020 expected to be recognized into revenue in 2020.
The following table is a rollforward of contract balances as of September 30, 2020:
|
|
Contractual
|
|
|
|
Liability
|
|
Balance at, January 1, 2020
|
|
$
|
291
|
|
Recognition of revenue
|
|
|
(177
|
)
|
Addition to deferred revenue
|
|
|
176
|
|
Balance at, September 30, 2020
|
|
$
|
290
|
|
11
SONIM TECHNOLOGIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
NOTE 3 —Fair value measurement
The fair value measurements standard establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the standard are described below:
Level 1—Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level 2—Inputs to the valuation methodology include:
|
•
|
Quoted market prices for similar assets or liabilities in active markets;
|
|
•
|
Quoted prices for identical or similar assets or liabilities in inactive markets;
|
|
•
|
Inputs other than quoted prices that are observable for the asset or liability;
|
|
•
|
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.
Level 3—Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Following is a description of the valuation methodologies used for assets and liabilities measured at fair value. There have been no changes in the methodologies used at, September 30, 2020 and 2019, and December 31, 2019.
Money market funds are classified within level 1 of the fair value hierarchy because they are valued using quoted market prices.
Trade-in guarantee liability is classified within level 3 of the fair value hierarchy because the fair value measurement is based on inputs that are not observable in the market, including the probability and timing of a customer upgrading to a new device and the value of the upgraded device.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
12
SONIM TECHNOLOGIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
The following tables sets forth by level, within the fair value hierarchy, the Company’s assets and liabilities at fair value:
|
|
September 30, 2020
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds *
|
|
$
|
17,900
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds *
|
|
$
|
9,250
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Included in cash and cash equivalents on the condensed consolidated balance sheets.
|
The table below sets forth a summary of changes in the fair value of the Company’s level 3 liabilities for the nine months ended September 30, 2020 and 2019:
|
Trade-In
|
|
|
|
Guarantee
|
|
|
Balance at, January 1, 2020
|
$
|
—
|
|
|
Recognition of revenue
|
|
—
|
|
|
Balance at, September 30, 2020
|
$
|
—
|
|
|
|
|
|
|
|
Balance at, January 1, 2019
|
$
|
268
|
|
|
Recognition of revenue
|
|
(268
|
)
|
|
Balance at, September 30, 2019
|
$
|
—
|
|
|
NOTE 4 —Inventory
Inventory consisted of approximately the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Finished goods
|
|
$
|
7,523
|
|
|
$
|
13,559
|
|
Work in process
|
|
|
553
|
|
|
|
—
|
|
Raw materials
|
|
|
3,567
|
|
|
|
4,522
|
|
Accessories
|
|
|
1,185
|
|
|
|
1,450
|
|
|
|
$
|
12,828
|
|
|
$
|
19,531
|
|
13
SONIM TECHNOLOGIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
NOTE 5 —Warranty Liability
The table below sets forth the activity in the warranty liability, which is included in accrued expenses on the condensed consolidated balance sheets, for the nine months ended September 30, 2020 and 2019:
Balance, January 1, 2020
|
|
$
|
1,154
|
|
Additions
|
|
|
1,269
|
|
Cost of warranty claims
|
|
|
(1,187
|
)
|
Balance, September 30, 2020
|
|
$
|
1,236
|
|
|
|
|
|
|
Balance, January 1, 2019
|
|
$
|
1,103
|
|
Additions
|
|
|
957
|
|
Cost of warranty claims
|
|
|
(856
|
)
|
Balance, September 30, 2019
|
|
$
|
1,204
|
|
NOTE 6 —Borrowings
Senior Credit Agreement
In prior years, the Company maintained a loan and security agreement with East West Bank. No borrowings were made under this facility in 2019 and 2020, and the facility was cancelled in June 2020.
Long-Term Debt
Riley Loan— The Company had a Subordinated Term Loan and Security Agreement, as amended, (the “B. Riley Loan Agreement”) with B. Riley Principal Investments, LLC (“BRPI”), an affiliate of B. Riley Financial, Inc., a shareholder of the Company. Under the amended B. Riley Loan Agreement, the Company could borrow principal up to $12,000 via a subordinated secured convertible promissory note, with an optional conversion feature.
The amended B. Riley Loan Agreement included repayment penalties if any repayment reduced the principal amount outstanding below $10,000. The prepayment penalty was 1% for 2019 through maturity. The borrowings under the B. Riley Loan Agreement, as amended would have matured on September 1, 2022 and carried a stated interest rate of 10% and provided that the first year of interest commencing on October 26, 2018 was compounded into the principal, with interest-only payments beginning thereafter.
On June 1, 2020, the Company entered into a Note Amendment and Debt Cancellation Agreement with BRPI (the “Note Amendment”), which provided that, contingent upon the closing of the PO, the Company would repay $4 million of the outstanding indebtedness to BRPI in cash (the “B. Riley Repayment”) and the remaining principal amounts, accrued interest and other amounts outstanding under the B. Riley Loan Agreement, after giving effect to the B. Riley Repayment, would be redeemed for shares of common stock to be issued to BRPI or its affiliates at the public offering price of shares of our common stock in the PO.
Pursuant to the Note Amendment, as amended, the Company made the B. Riley Repayment on June 9, 2020 and the remaining principal amount, accrued interest and other amounts outstanding under the B. Riley Loan Agreement, after giving effect to the B. Riley Repayment, in the amount of $6,170, was redeemed into 8,226,834 shares of the Company’s common stock issued to BRPI and BRC Opportunity Fund L.P., an affiliate of BRPI, (the “Redemption Shares”). Following the B. Riley Repayment and the issuance of the Redemption Shares, the Company has no outstanding indebtedness under the B. Riley Loan Agreement. Also on June 11, 2020, the Company entered into a registration rights agreement with BRPI and BRC Partners Opportunity Fund, L.P. pursuant to which the Company agreed to file a registration statement covering the resale of the Redemption Shares and to use its best efforts to cause such registration statement to become effective upon the time frames set forth in the registration rights agreement. A registration statement on Form S-3 (File No. 333-239664) registering the Redemption Shares for resale by BRPI and BRC Partners Opportunity Fund, LP was declared effective by the SEC on July 13, 2020.
14
SONIM TECHNOLOGIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
As of September 30, 2020, and December 31, 2019, the total outstanding principal and interest under the B. Riley Loan Agreement, as amended, was zero and $10,003, respectively. In July 2019, the Company repaid $3,250, or 25% of the principal amount under the B. Riley Loan Agreement and incurred a 2% fee on the amount below the $10,000 threshold as a result of the prepayment. During the nine months -ended September 30, 2020, the compounded interest, which was added to the outstanding principal totaled $166.
As of December 31, 2019, the Company had classified the debt under the B. Riley Loan Agreement, as a current liability based on the occurrence of a material adverse change in its business. Upon the occurrence and during the continuance of an event of default under the B. Riley Loan Agreement, BRPI had the option, among other things, to accelerate the debt and foreclose upon the assets pledged as collateral. In addition, the Company was unable to borrow under the EWB facility during the continuance of an event of default thereunder or under the B. Riley Loan Agreement.
Promissory Notes Payable—In 2014 and 2017, the Company entered into agreements with one of its suppliers, whereby certain of its trade payables for royalties and royalty up-front payments were converted to payment plans. In December 2018, the Company amended its accounts payable financing agreements, effective January 1, 2019, which provides for the $736 outstanding balance to be paid in twenty equal quarterly installments. The amounts due under these agreements would be paid in quarterly installments over periods from two to four years, with interest ranging up to 8%. Remaining balances are $399 and $508, at September 30, 2020 and December 31, 2019, respectively.
PPP Loan--On April 13, 2020, the Company received approximately $2.3 million in PPP loan proceeds. Following additional guidance issued by the SBA on April 23, 2020 that casted doubt on the ability of public companies to qualify for loans under the PPP, the Company repaid the PPP loan on April 29, 2020.
Other Financing Arrangements—In 2017, the Company entered into three financing arrangements totaling approximately $472 with remaining maturity dates of June 2020 and August 2020. During the quarter ended September 30, 2019, the Company repaid the remaining outstanding balance.
Future aggregate annual principal payment on all long-term debt, are as follows for the next 5 years as of September 30, 2020:
Year Ending December 31,
|
|
|
|
|
2020
|
|
$
|
33
|
|
2021
|
|
|
144
|
|
2022
|
|
|
144
|
|
2023
|
|
|
78
|
|
|
|
$
|
399
|
|
NOTE 7 —Warrants
During the nine months ended September 30, 2020 and year ended December 31, 2019, there was no activity related to the Company’s warrants. The following table discloses warrants issued and outstanding as of September 30, 2020 and December 31, 2019:
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
Exercise
|
|
|
Number of
warrant
|
|
|
Year of
|
|
Exercise
|
|
|
Number of
warrant
|
|
|
Year of
|
Issuance date
|
|
price
|
|
|
shares
|
|
|
expiration
|
|
price
|
|
|
shares
|
|
|
expiration
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 2012
|
|
$
|
6.03
|
|
|
|
7
|
|
|
2028
|
|
$
|
6.00
|
|
|
|
7
|
|
|
2028
|
November 2012
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6.00
|
|
|
|
927
|
|
|
2020
|
November 2012
|
|
$
|
14.50
|
|
|
|
22
|
|
|
2028
|
|
$
|
14.50
|
|
|
|
22
|
|
|
2028
|
Total warrants
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
956
|
|
|
|
Warrants for 927, expired January 2020.
15
SONIM TECHNOLOGIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
NOTE 8 —Stock-based Compensation
As of September 30, 2020, the Company had the 2012 Equity Incentive Plan (the “2012 Option Plan”) and 2019 Equity Incentive Plan (the “2019 Option Plan”) and the 2019 Employee Stock Purchase Plan in place.
As of September 30, 2020, the number of shares available to be issued under the 2019 Option Plan were 2,967,576. In May 2020, the Board of Directors approved an increase in the number of shares of common stock reserved for future issuance under the 2019 Option Plan by 3,000,000 shares, which was approved by the Company’s stockholders on September 29, 2020. As of September 30, 2020, the number of shares available to be issued under the 2019 Employee Stock Purchase Plan was 408,453.
The 2019 Option Plans provides for the grant of incentive and non-statutory stock options (“Options”), stock appreciation rights (“SAR”), restricted stock awards (“RSA”), and restricted stock unit awards (“RSU”) to employees, nonemployee directors, and consultants of the Company. Option awards granted under the 2019 Option Plan generally become exercisable ratably over a two-year or four-year period following the date of grant and expire ten years from the date of grant. At the discretion of the Board of Directors, certain awards may be exercisable immediately at the date of grant but are subject to a repurchase right, under which the Company may buy back any unvested shares at their original exercise price in the event of an employee’s termination prior to full vesting. All other awards are exercisable only to the extent vested. At, September 30, 2020 and December 31, 2019, there were no shares that had been early exercised that were subject to the Company’s repurchase right at that date. The exercise price or strike price for Options and SARs granted under the 2019 Option Plan must generally be at least equal to 100% of the fair value of the Company’s common stock at the date of grant, as determined by the Board of Directors. The exercise price of incentive stock options granted under the 2019 Option Plan to ten percent or greater stockholders must be at least equal to 110% of the fair value of the Company’s common stock at the date of grant, as determined by the Board of Directors, and are not exercisable after five years from the date of grant.
The Board of Directors adopted, and its stockholders approved, the 2019 Employee Stock Purchase Plan and the 2019 Option Plan in March 2019 and April 2019, respectively, each of which became effective in connection with the IPO. There are 541,379 shares of common stock reserved for issuance under the 2019 Employee Stock Purchase Plan as of September 30, 2020. Additionally, the number of shares of common stock reserved for issuance under the 2019 Employee Stock Purchase Plan automatically increases on January 1 of each calendar year for 10 years, starting January 1, 2020, and ending on, and including, January 1, 2029, in an amount equal to the lesser of 1% of the total number of shares of capital stock outstanding on December 31st of the prior calendar year, and (ii) 500,000 shares, unless the Board of Directors or the compensation committee of the Board of Directors determines prior to such date that there will be a lesser increase, or no increase. The increase under the 2019 Employee Stock Purchase Plan for 2020 was 204,372 shares. As of September 30, 2020, 5,906,900 shares of common stock are reserved for future issuance under the 2019 Option Plan, plus the number of shares subject to outstanding stock options or other stock awards that were granted under the 2012 Option Plan that are forfeited, terminated, expire or are otherwise not issued. Additionally, the number of shares of common stock reserved for issuance under the 2019 Option Plan automatically increases on January 1 of each calendar year for 10 years, starting January 1, 2020 and ending on and including January 1, 2029, in an amount equal to 5% of the total number of shares of capital stock outstanding on December 31 of the prior calendar year, unless the Board of Directors or compensation committee determines prior to the date of increase that there will be a lesser increase, or no increase. The increase under the 2019 Option Plan for 2020 was 1,021,861 shares.
On May 15, 2020, 64,320 shares of common stock were issued under the 2019 Employee Stock Purchase Plan.
Stock-based compensation expense for the three and nine months ended September 30, 2020 and 2019 is as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Research and development
|
|
$
|
64
|
|
|
$
|
93
|
|
|
$
|
195
|
|
|
$
|
269
|
|
Sales and marketing
|
|
59
|
|
|
65
|
|
|
165
|
|
|
543
|
|
General and administrative
|
|
173
|
|
|
114
|
|
|
371
|
|
|
5,044
|
|
Cost of revenues
|
|
16
|
|
|
35
|
|
|
39
|
|
|
55
|
|
|
|
$
|
312
|
|
|
$
|
307
|
|
|
$
|
770
|
|
|
$
|
5,911
|
|
16
SONIM TECHNOLOGIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
Stock Options:
Stock option activity for the nine months ended September 30, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
exercise price
|
|
|
contractual life
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
per share
|
|
|
(in years)
|
|
|
Value
|
|
Outstanding at January 1, 2020
|
|
|
2,645,714
|
|
|
$
|
3.50
|
|
|
|
8.51
|
|
|
$
|
4,184
|
|
Options granted
|
|
|
26,000
|
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(366,732
|
)
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(504,307
|
)
|
|
$
|
4.73
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(114,061
|
)
|
|
$
|
7.23
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2020
|
|
|
1,686,614
|
|
|
$
|
3.42
|
|
|
|
7.01
|
|
|
$
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30, 2020
|
|
|
1,686,614
|
|
|
$
|
3.42
|
|
|
|
7.01
|
|
|
$
|
97
|
|
Exercisable at September 30, 2020
|
|
|
719,158
|
|
|
$
|
3.85
|
|
|
|
4.23
|
|
|
$
|
96
|
|
As of September 30, 2020, there was approximately $3,547 of unamortized stock-based compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of three years.
Restricted Stock Units:
The following table summarized the outstanding RSUs as of September 30, 2020:
|
|
RSUs
|
|
Outstanding at January 1, 2020
|
|
|
249,500
|
|
Granted
|
|
|
2,692,000
|
|
Released
|
|
|
(119,875
|
)
|
Forfeited
|
|
|
(244,250
|
)
|
Outstanding at September 30, 2020
|
|
|
2,577,375
|
|
|
|
|
|
|
Vested at September 30, 2020
|
|
|
—
|
|
As of September 30, 2020, unvested restricted stock units totaled 2,577,375 shares. There were 676,500 and 2,692,000 RSUs issued for the three and nine months ended September 30, 2020, respectively. There were no RSUs issued for the three and nine months ended September 30, 2019. On September 24, 2020, Mr. Maurice Hochschild, who serves on the Board of Directors, informed the Company of his intention to step down from the Board of Directors of the Company effective September 27, 2020. In connections with the departure of Mr. Hochschild, the Board of Directors approved the acceleration of vesting of 57,000 shares of RSU’s. This acceleration resulted in additional stock-based compensation.
17
SONIM TECHNOLOGIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
NOTE 9 —Income Taxes
In determining quarterly provisions for income taxes, the Company uses the annual estimated effective tax rate applied to the actual year-to-date profit or loss, adjusted for discrete items arising in that quarter. The Company’s annual estimated effective tax rate differs from the U.S. federal statutory rate primarily as a result of state taxes, foreign taxes, and changes in the Company’s valuation allowance against its deferred tax assets. For the three months ended September 30, 2020 and 2019, the Company recorded provisions for income taxes of $150, and $33, respectively. For the nine months ended September 30, 2020 and 2019, the Company recorded provisions for income taxes of $513, and $785, respectively.
On March 27, 2020, the President signed into law the CARES Act, an economic stimulus package in response to the COVID-19 global pandemic. The CARES Act contains several corporate income tax provisions of which only the acceleration of timing of tax refunds for minimum tax credits apply to the Company. As a result of the CARES Act, the Company reclassified $68 of minimum tax credits from a non-current asset to a current asset as of September 30, 2020.
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (the “Tax Act”), which significantly changes existing U.S. tax laws, including a reduction in the corporate tax rate from 35% to 21%, a move from a worldwide tax system to a territorial system, as well as other changes. Beginning in 2018, the Company became subject to the global intangible low-taxed income (GILTI) provisions of the Tax Act on the income of the Company’s foreign subsidiaries. The Company’s foreign subsidiaries were profitable during the three and nine months ended September 30, 2020 and forecast profits for all of 2020. The GILTI subjects the income of the foreign subsidiaries to U.S. taxation. The Company’s accounting policy related to the GILTI is to treat GILTI related book/tax differences as period costs and to use the incremental cash tax savings approach in evaluating the Company’s U.S. net operating loss valuation allowance assessment.
The Company's income tax returns are subject to examinations by the Internal Revenue Service and other tax authorities in various jurisdictions. In accordance with the guidance on the accounting for uncertainty in income taxes, the Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. These assessments can require considerable estimates and judgments. As of September 30, 2020, the gross amount of unrecognized tax benefits was approximately $7,000. If the Company's estimate of income tax liabilities proves to be less than the ultimate assessment, then a further charge to expense would be required. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary. The Company expects to have an approximate $1,500 reduction in its unrecognized tax benefits during the next twelve months.
Sonim Technologies (Shenzhen) Limited was notified of a tax inquiry by the Shenzhen Tax Bureau Bao’an Branch of the State Administration of Taxation on June 18, 2020 for both the 2017 and 2019 tax years. The Company has met with the Shenzhen Tax Bureau Bao’an Branch of the State Administration of Taxation and cooperated with the audit. The Company previously recorded an uncertain tax position long-term tax lability plus interest for a potential claim by Shenzhen Bao’an Branch of the State Administration of Taxation and, as such, will not record an adjustment to the uncertain tax position liability related to this inquiry as of September 30, 2020. The Company resolved the tax inquiry in October 2020 and paid an additional $95. The Company reclassified $95 of a non-current tax liability to a current tax liability as of September 30, 2020. The Company has concluded there is a remote possibility that any further reassessment will occur for the applicable years and as such there has been an effective settlement for the years 2013 to 2019 and will recognize a net tax benefit in the fourth quarter of 2020 of $1,981.
NOTE 10 —Commitments and Contingencies
Royalty payments—The Company is required to pay per unit royalties to wireless essential patent holders and other providers of integrated technologies on mobile devices delivered, which, in aggregate, amount to less than 5% of net revenues associated with each unit and expire in 2021 and 2023. Royalty expense for the three months ended September 30, 2020 and 2019 was $470 and $862, respectively. Royalty expense for the nine months ended September 30, 2020 and 2019 was $1,664 and $2,560, respectively, which are included in cost of revenues in the condensed consolidated statements of operations.
18
SONIM TECHNOLOGIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
Securities litigation—On September 20, 2019, a purported Sonim stockholder who allegedly purchased stock registered in Sonim’s initial public offering (“IPO”) filed a putative class action complaint in the Superior Court of the State of California, County of San Mateo, captioned Pearson v. Sonim Technologies, Inc., et al., Case No. 19CIV05564, on behalf of himself and others who purchased shares of Sonim registered in the IPO (the “Pearson Action”). On October 4 and 16, 2019, two additional purported class action complaints substantially similar to the Pearson Action were filed on behalf of different plaintiffs yet the same putative class of Sonim stockholders, in the same court as the Pearson Action (the “’33 Act State Court Actions”). The defendants have asked the Superior court to dismiss the “33 Act State Court Actions based on the provision in the Company’s Amended and Restated Certificate of Incorporation requiring stockholders to file and litigate in federal court any claims under the Securities Act of 1933. The motion is pending. On October 7, 2019, a substantially similar putative class action lawsuit was filed in the United States District Court for the Northern District of California (the “’33 Act Federal Action”). All four complaints allege violations of the Securities Act of 1933 by Sonim and certain of its current and former officers and directors for, among other things, alleged false or misleading statements and omissions in the registration statement issued in connection with the IPO, relating primarily to an alleged failure to disclose software defects in Sonim’s phones and alleged misstatements about performance characteristics of Sonim’s phones. In July 2020, the Company entered into an agreement with the Lead Plaintiff in the 33 Act Federal Action to settle that case on a class wide basis for the amount of $2,000. This settlement is subject to definitive documentation and court approvals, as well as stockholders’ opportunity to object and opt-out as provided by the federal court. As a result, the Company recorded a $2,000 accrual in June 2020 in general administration expense.
Securities and Exchange Commission Formal Order of Private Investigation: In March 2020, the Company received a voluntary document request from the SEC San Francisco Regional office, and in August 2020, the Company was informed that the SEC Staff was conducting a formal investigation. The SEC’s investigation is ongoing. The Company has been cooperating with the SEC in the matter. The Company is unable to predict the likely outcome of the investigation or determine its potential impact, if any, on the Company.
Derivative litigation—On September 21, 2020, the Company, and certain of its current and former directors and officers were sued by a stockholder on behalf of our Company in a derivative action in the United States District Court for the District of Delaware, Case No 20-cv-1270-MN. The complaint is based largely on the same underlying factual allegations as the ’33 Act Federal Action. We believe we have meritorious defenses and intend to defend this matter vigorously. Nevertheless, given the early stages of these proceedings and the limited information available, we cannot predict the outcome of this legal proceeding or determine its potential impact, if any, on the Company.
General litigation—The Company is involved in various other legal proceedings arising in the normal course of business. The Company does not believe that the ultimate resolution of these other matters will have a material adverse effect on its condensed consolidated financial position, results of operations, or cash flows.
The results of any future litigation cannot be predicted with certainty and, regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management time and resources and other factors.
Indemnification—Under the terms of its agreements with wireless carriers and other partners, the Company has agreed to provide indemnification for intellectual property infringement claims related to Company’s product sold by them to their end customers. From time to time, the Company receives notices from these wireless carriers and other partners of a claim for infringement of intellectual property rights potentially related to their products. These infringement claims have been settled, dismissed, have not been further pursued by the customers, or are pending for further action by the Company.
Contingent severance obligations—The Company has agreements in place with certain key employees (Executive Severance Arrangement) guaranteeing severance payments under certain circumstances. Generally, in the event of termination by the Company without cause, termination due to death or disability, or resignation for good reason, the Company is obligated to the pay the employees: (i) any time before a Change in Control, amounts up to $1,754 or (ii) if at any time within 12 months of a Change in Control, amounts up to $2,345. As of September 30, 2020, and December 31, 2019, no accrual has been recorded.
On December 11, 2019, the Board of Directors approved the Sonim Technologies Inc. Transaction Bonus Plan (the “Plan”) that is intended to incentivize Company employees who are in a position to significantly impact the value received by the Company’s stockholders in a change of control transaction. Pursuant to the Plan, upon consummation of a change of control transaction, 10% of the consideration payable to Company stockholders, after deducting transaction expenses, will be distributed to Plan participants, including the Company’s named executive officers. The Plan has a three-year term and may be extended by the administrator of the Plan. Subject to the terms of the Plan, participants must be continuously providing services to the Company through the date of the closing of a change in control transaction to be eligible to receive a bonus thereunder, and payment is contingent upon delivery and non-revocation of a general release of claims. In connection with the adoption of the Plan, the Board of Directors allocated a 50%
19
SONIM TECHNOLOGIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
interest in the Plan to Tom Wilkinson, the Company’s Chief Executive Officer, and a 10% interest in the Plan to Robert Tirva, the Company’s Chief Financial Officer and 25% to 6 other key employees and consultants.
NOTE 11—Related Party Transactions
Management Services Agreement—In October 2017, the Company entered into a management services agreement with B. Riley Principal Investments, an investor, pursuant to which B. Riley Investments agreed to provide advisory and consulting services to the Company. The Company incurred approximately $56 in related consulting fees for the nine months ended September 30, 2019. At the closing of the Company’s IPO in May 2019, the management services agreement was terminated in accordance with its terms.
NOTE 12 —Net Loss Per Share Attributable to Common Stockholders
The following table sets forth the computation of the Company’s basic and diluted net loss per share attributable to common stockholders for the three and nine months ended:
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2020
|
|
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss allocable to
common stockholders
|
|
$
|
(6,464
|
)
|
|
$
|
(6,775
|
)
|
|
$
|
(23,524
|
)
|
|
$
|
(17,498
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
used in computing net loss
per share, basic and diluted
|
|
|
65,938,028
|
|
|
|
20,356,447
|
|
|
|
39,494,441
|
|
|
|
18,085,719
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.10
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.60
|
)
|
|
$
|
(0.97
|
)
|
The dilutive common shares that were excluded from the calculation of diluted net loss per share because their effect would have been antidilutive for the three and nine months ended September 30, 2020 and 2019, are presented are as follows:
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2020
|
|
|
|
2019
|
|
Shares subject to options to
purchase common stock
|
|
|
1,686,614
|
|
|
|
1,721,121
|
|
|
|
1,686,614
|
|
|
|
1,721,121
|
|
Unvested restricted stock
units
|
|
|
2,577,375
|
|
|
|
90,000
|
|
|
|
2,577,375
|
|
|
|
90,000
|
|
Shares subject to warrants to
purchase common stock
|
|
|
29
|
|
|
|
956
|
|
|
|
29
|
|
|
|
956
|
|
Shares subject to term debt
optional conversion into
common stock
|
|
|
—
|
|
|
|
1,099,317
|
|
|
|
—
|
|
|
|
1,099,317
|
|
Total
|
|
|
4,264,018
|
|
|
|
2,911,394
|
|
|
|
4,264,018
|
|
|
|
2,911,394
|
|
20
SONIM TECHNOLOGIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
NOTE 13 —Entity Level Information
Segment Information—The Company operates in one reporting segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, who is the chief executive officer, in deciding how to allocate resources and assessing performance. The Company’s chief operating decision maker allocates resources and assesses performance based upon discrete financial information at the consolidated level.
The following table summarizes the revenue by region based on ship-to destinations for the three and nine months ended September 30, 2020 and 2019:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
U.S
|
|
$
|
9,128
|
|
|
$
|
23,170
|
|
|
$
|
34,824
|
|
|
$
|
78,385
|
|
Canada and Latin America
|
|
|
3,987
|
|
|
|
3,964
|
|
|
|
10,645
|
|
|
|
13,271
|
|
Europe and Middle East
|
|
431
|
|
|
|
756
|
|
|
1,225
|
|
|
|
4,766
|
|
Asia Pacific
|
|
847
|
|
|
960
|
|
|
1,463
|
|
|
|
2,659
|
|
Total revenues
|
|
$
|
14,393
|
|
|
$
|
28,850
|
|
|
$
|
48,157
|
|
|
$
|
99,081
|
|
Long-lived assets located in the United States and Asia Pacific region were $4,828 and $1,096 and $6,626 and $1,492 as of September 30, 2020 and December 31, 2019, respectively.
The composition of revenues for the three and nine months ended September 30, 2020 and 2019 as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Product Sales
|
|
$
|
14,337
|
|
|
$
|
28,773
|
|
|
$
|
48,074
|
|
|
$
|
98,714
|
|
Services
|
|
56
|
|
|
77
|
|
|
83
|
|
|
367
|
|
Total revenues
|
|
$
|
14,393
|
|
|
$
|
28,850
|
|
|
$
|
48,157
|
|
|
$
|
99,081
|
|
Concentrations of Credit Risk—The Company’s product revenues are concentrated in the technology industry, which is highly competitive and rapidly changing. Significant technological changes in the industry or customer requirements, or the emergence of competitive products with new capabilities or technologies, could adversely affect the Company’s consolidated operating results. Financial instruments that potentially subject the Company to credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited with high-quality, federally insured commercial banks in the United States and cash balances are in excess of federal insurance limits at, September 30, 2020 and December 31, 2019. The Company generally does not require collateral or other security in support of accounts receivable. To reduce credit risk, management performs ongoing credit evaluations of its customers’ financial condition. The Company analyzes the need for reserves for potential credit losses and records allowances for doubtful accounts when necessary. The Company had allowances for such losses totaling approximately $52 at both September 30, 2020 and December 31, 2019.
Receivables from three customers approximated 24%, 12% and 11% of total accounts receivable at, September 30, 2020 and three customers approximated 54%, 22%, and 11% of total accounts receivable at, December 31, 2019.
21
SONIM TECHNOLOGIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
Revenue from customers with concentration greater than 10% in the three and nine months ended September 30, 2020 and 2019 accounted for approximately the following percentage of total revenues:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Customer A
|
|
11%
|
|
|
25%
|
|
|
*
|
|
|
31%
|
|
Customer B
|
|
28%
|
|
|
19%
|
|
|
40%
|
|
|
12%
|
|
Customer C
|
|
11%
|
|
|
19%
|
|
|
11%
|
|
|
20%
|
|
Customer D
|
|
13%
|
|
|
*
|
|
|
10%
|
|
|
*
|
|
Customer E
|
|
*
|
|
|
12%
|
|
|
*
|
|
|
*
|
|
*
|
Customer revenue did not exceed 10% in the respective periods.
|
NOTE 14 —Restructuring Costs
The Company has reduced its global headcount from approximately 500 employees at year end 2019 to headcount of 349 of which 287 are full time employees and 62 contractors as of September 30, 2020. The Company executed a reduction in force of approximately 10% of our U.S. employees in February 2020, as well as in certain of our non-U.S. locations. The Company has also relocated its headquarters from San Mateo, California to Austin, Texas, a lower cost location.
The table below sets forth the activity in the Company’s restructuring costs, which is included in accrued expenses on the condensed consolidated balance sheet, as of September 30, 2020:
Balance, January 1, 2020
|
|
$
|
511
|
|
Additions: expensed costs
|
|
|
1,204
|
|
Expenses paid out
|
|
|
(1,715
|
)
|
Balance, September 30, 2020
|
|
$
|
—
|
|
Total restructuring costs of approximately $1,204 were broken out between operating expenses of $1,104 and cost of revenues of $100 for the nine months ended September 30, 2020.
NOTE 15—Covid-19 Uncertainty
The Company is closely monitoring the impact of the COVID-19 global outbreak and its resulting impact on our manufacturing operations and supply chain, with its top priority being the health and safety of its employees, customers, partners, and communities.
The Company believes its sales partners have sufficient inventory to continue meeting customer needs in the near term. However, demand for our solutions may be reduced as a result of the COVID-19 outbreak and resulting market uncertainty. It also remains possible that our results could be negatively impacted by interruptions in the global supply chain due to the continued and unpredictable spread of this pandemic. The magnitude of any future impact of the COVID-19 outbreak is unknown. The Company is working closely with our partners and suppliers to manage through this situation.
Restrictions on travel and the imposition of stay-at-home or work remote conditions have impacted our operations and those of our customers. The Company has effective communications and collaboration tools in place to ensure business continuity during periods requiring remote operation. While we have not experienced major disruptions, our ability to interact with customers has been impacted by the current environment. There is a risk that our inability to meet in-person with current or prospective customers, as well as the cancellation or postponement of Company-sponsored events or third-party events at which our products are featured, may have a negative impact on our business.
22
SONIM TECHNOLOGIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
NOTE 16 —Subsequent Events
Sonim Technologies (Shenzhen) Limited (“Sonim China”) was notified of a tax inquiry for the 2017 to 2019 tax years by the Shenzhen Tax Bureau Bao’an Branch of the State Administration of Taxation (the “China Tax Authority”) in June 2020 and resolved the tax inquiry with the China Tax Authority in October 2020. Sonim China paid RMB 644,498 of additional China taxes for the 2013 to 2019 years as a result of this inquiry, which was equal to USD $95 of additional tax using the FX rate at September 30, 2020. Because Sonim China had more than $1.4 million of non-current income tax payable as of December 2019 for the 2017 to 2019 years, no additional tax accrual is needed with respect to the additional China tax paid as a result of the China tax inquiry.
On October 9, 2020, payment was made to the China tax authority for $95. This is considered an effective settlement and as such no future further reassessments will occur for those years. Based on this review, the Company has concluded that there has been an effective settlement and will have a $1,981 of a net tax benefit in the fourth quarter of 2020.
23