SONIM TECHNOLOGIES, INC. The following commentary should be read in conjunction with the Consolidated Financial Statements and related notes thereto contained in Part IV of this Annual Report on Form 10-K. This discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Item 1A.,"Risk Factors ," included in Part I of this Annual Report on Form 10-K. Company Overview We are a leadingU.S. provider of ultra-rugged mobile devices, including phones and accessories designed specifically for task workers physically engaged in their work environments, often in mission-critical roles. We currently sell our ruggedized mobile phones and accessories to the three largest wireless carriers inthe United States - AT&T, T-Mobile and Verizon-as well as the three largest wireless carriers inCanada -Bell, Rogers and Telus Mobility. We also sell our ruggedized phones and accessories through distribution channels inNorth America ,South America andEurope . Our devices and accessories connect workers with voice, data and workflow applications in two end markets: industrial enterprise and public sector.
We generate revenues primarily from sales of our mobile phones and
industrial-grade accessories. We sell our mobile phones and accessories
primarily to wireless carriers in both
Because ourU.S. sales channel is primarily comprised of large wireless carriers, the number of customers that we sell to is limited. For the year endedDecember 31, 2021 , approximately 90% of our revenues came from large wireless carriers and 68% came from our top three customers. For the year endedDecember 31, 2021 , our smartphones accounted for approximately 27% of our revenues and our feature phones accounted for approximately 69% of our revenues. To help control and manage the quality, cost and reliability of our supply chain, we directly manage the procurement of all final assembly materials used in our products, which include LCDs, housings, camera modules and antennas. To help contain costs and improve the efficiency of our operations, we have outsourced substantially all of our manufacturing functions, software development and quality control functions to third parties, transferring the employeeswho previously performed this work. In order to continue to develop differentiated products to attract and retain customers, we have made significant investments in research and development through our partnerships with ODMs. We expect this investment to result in a new generation of rugged phones which will deliver a significant percentage of the Company's revenue by the end of 2022.
Recent Developments
Liquidity and Going Concern
Currently, our principal source of liquidity consists of cash and cash equivalents totaling$11.2 million , asDecember 31, 2021 . During the year endedDecember 31, 2021 , our net loss was$38.6 million , and it is likely that we will continue to experience operating losses into the future because we have not yet generated sufficient revenue levels needed to ensure profitability. 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. However, our liquidity has been negatively impacted by a decline in the sales of our legacy products while our next generation products are still under development. In addition, legal expenses related to our ongoingSEC investigation have been significantly higher than expected and may continue to impact our results in the foreseeable future. In addition, the terms and conditions of applicable bylaws, certificates or articles of incorporation, agreements or applicable law may obligate us under certain circumstances to indemnify our current and former directors, officers or employees, and underwriters, with respect to certain of our litigation matters, including the ongoingSEC investigation, and we have been advancing legal fees and costs to certain current and former directors, officers, employees and underwriters in connection with certain of the matters disclosed in Note 11, Commitments and Contingencies. As a result of the foregoing, substantial doubt exists regarding our ability to continue as a going concern for a period of at least one year from the date of issuance for the audited consolidated financial statements included in this Annual Report on Form 10-K.
Next Generation of Phones
The Company is developing next generation phones that are expected to be launched in the third quarter of 2022. The XP5plus replaces the XP5s and the XP10 replaces the XP8.
38
--------------------------------------------------------------------------------Restructuring in 2021
OnMay 31, 2021 , Mr.Tom Wilkinson resigned from his positions and offices withSonim , including as our Chief Executive Officer. In connection with and effective uponMr. Wilkinson's separation with the Company onMay 31, 2021 , the Board appointed Mr.Robert Tirva , the Company's Chief Financial Officer, to the additional positions of President and Chief Operating Officer of the Company. In 2021, the Company began co-development and manufacturing with ODM partners. To ensure the efficient manufacturing of our legacy products through this transition, we outsourced our final assembly to a supply chain partner. These changes resulted in a reduction of global headcount from 263 employees and 54 contractors as ofDecember 31, 2020 to 77 employees and 25 contractors as ofDecember 31, 2021 .
Nasdaq Delisting and Reverse Stock Split
OnApril 28, 2021 , we received a deficiency letter from the Staff of Nasdaq notifying us that, for the last 30 consecutive business days, the bid price for our common stock had closed below$1.00 per share, which is the minimum closing price required to maintain continued listing on theNasdaq Stock Market under Nasdaq Listing Rule 5450(a)(1). OnSeptember 15, 2021 , the Company effected the 1-for-10 Reverse Stock Split of its issued and outstanding shares of common stock on that date. OnSeptember 30, 2021 , we received a letter from the Staff notifying us that we had regained compliance with the minimum bid requirement. OnFebruary 16, 2022 , we received a new deficiency letter from the Staff of Nasdaq notifying us that, for the last 30 consecutive business days, the bid price for our common stock had closed below$1.00 per share, which is the minimum closing price required to maintain the Minimum Bid Requirement. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have been provided a period of 180 calendar days, or untilAugust 15, 2022 , in which to regain compliance. In order to regain compliance with the Minimum Bid Price, the closing bid price of our common stock must be at least$1.00 per share for a minimum of ten consecutive business days during this 180-day period. In the event that we do not regain compliance within this 180-day period, we may be eligible to seek an additional compliance period of 180 calendar days.
ATM Program
OnJune 30, 2021 , we entered into an At Market Issuance Sales Agreement, or the Sales Agreement, withB. Riley Securities, Inc. and EF Hutton, a division ofBenchmark Investments, LLC , or the Sales Agents, to sell shares of our common stock,$0.001 par value per share, having an aggregate offering price of up to$10 million from time to time, through an "at-the-market offering" program, or theJune 2021 ATM Program. Under the terms of the Sales Agreement, we paid the Sales Agents a commission equal to 3.0% of the gross proceeds from each sale of common stock sold through it under the Sales Agreement. We exhausted thisJune 2021 ATM Program onJuly 14, 2021 , selling an aggregate of 1,820,785 shares of our common stock at a weighted average price per share of$4.59 and for net proceeds of approximately$8.4 million . OnSeptember 23, 2021 , we entered into a new At Market Issuance Sales Agreement, or the New Sales Agreement, withB. Riley Securities, Inc. , as Sales Agent, to sell shares of our common stock having an aggregate offering price of up to$41.6 million from time to time, through a new "at the market offering" program or the New ATM Program. Under the terms of the New Sales Agreement, we will payB. Riley Securities, Inc. a commission equal to 3.0% of the gross proceeds from each sale of common stock sold through it under the New Sales Agreement. FromSeptember 27, 2021 throughDecember 31, 2021 , we issued and sold an aggregate of 10,280,906 shares of our common stock at a weighted average price per share of$1.89 under the New ATM Program for net proceeds of approximately$19.4 million . All proceeds were received byDecember 31, 2021 . As ofDecember 31, 2021 , we had approximately$21.6 million remaining under our New ATM Program.
COVID-19 Pandemic
The COVID-19 pandemic has negatively impacted the global economy, disrupted
global supply chains and work force participation and created significant
volatility and disruption in financial markets. As a result of the pandemic,
including the introduction of new variants of COVID-19, our workforce shifted to
operating in a primarily remote working environment, which has created
productivity, connectivity, and oversight challenges. We have been experiencing
and expect to continue to experience supply chain delays and higher shipping
costs. The effects of the ongoing pandemic are unpredictable, and as a result we
may experience increased costs and/or disruption as long as the pandemic
persists.
39
--------------------------------------------------------------------------------Restructuring and Reduction in Force
During 2020, we reduced our headcount to better align our expenses with our revenue profile. The Company executed a reduction in force of approximately 10% of itsU.S. employees inFebruary 2020 and has also reduced headcount in certain international locations inIndia andShenzhen . Our headcount atDecember 31, 2021 was 102. During 2020, we decided to proceed with future product co-development and manufacturing with ODM partners. To ensure the efficient manufacturing of our legacy products through this transition, we outsourced our final assembly to a supply chain partner and transferred twenty-two employees to that partner to enhance their efficiency in taking over our production work. We have also relocated our headquarters fromSan Mateo, California toAustin, Texas . We recorded costs related to restructuring totaling$1.5 million , in 2020, of which$1.0 million was paid out in 2020, and$0.1 million is included in cost of revenues in 2020. The remaining$0.5 million was paid out in 2021.
Key Metrics
We review a variety of key financial metrics to help us evaluate growth trends, establish budgets, measure the effectiveness of our business strategies and assess operational efficiencies.
Units Sold
Our smartphones include the XP6, XP7, and XP8 models. The number of smartphone units sold during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 decreased by 43%, primarily because the XP6 and XP7 reached end of life in 2020 in terms of new sales and our XP8 smartphone is approaching end of life as we prepare to introduce a replacement 5G smartphone in 2022. Our feature phones include the XP3plus, XP3, XP5, and XP5s models. The number of feature phone units sold during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 decreased by 3%, primarily because sales of our new XP3plus were not high enough to offset a decrease in the older XP3. We launched updated versions of the XP3, the XP3plus, in the third and fourth quarter of 2021. Adjusted EBITDA In addition to our financial results determined in accordance withU.S. GAAP, we believe the following non-GAAP and operational measures are useful in evaluating our performance related metrics. Year EndedDecember 31 ,
2021 2020
(in thousands)
Smartphones and scanners 31 50
Feature Phones 198 205
Total Units Sold 229 255
Adjusted EBITDA $ (34,746 ) $ (24,333 )
We define Adjusted EBITDA as net loss adjusted to exclude the impact of
stock-based compensation expense, depreciation and amortization, interest
expense, income taxes, and restructuring costs. Adjusted EBITDA is a useful
financial metric in assessing our operating performance from period to period by
excluding certain items that we believe are not representative of our core
business, such as certain material non-cash items and other adjustments, such as
stock-based compensation.
We believe that Adjusted EBITDA, viewed in addition to, and not in lieu of, our
reported GAAP results, provides useful information to investors regarding our
performance and overall results of operations for various reasons, including:
• non-cash equity grants made to employees at a certain price do not
necessarily reflect the performance of our business at such time, and as
such, stock-based compensation expense is not a key measure of our
operating performance; and
• costs associated with certain events, such as restructuring costs, are not
considered a key measure of our operating performance.
We use Adjusted EBITDA:
• as a measure of operating performance;
• for planning purposes, including the preparation of budgets and forecasts;
• to allocate resources to enhance the financial performance of our business;
40
--------------------------------------------------------------------------------• to evaluate the effectiveness of our business strategies;
• in communications with our board of directors concerning our financial
performance; and
• as a consideration in determining compensation for certain key employees.
Adjusted EBITDA has limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include:
• it does not reflect all cash expenditures, future requirements for capital
expenditures or contractual commitments;
• it does not reflect changes in, or cash requirements for, working capital
needs;
• it does not reflect interest expense on our debt or the cash requirements
necessary to service interest or principal payments; and
• other companies in our industry may define and/or calculate this metric
differently than we do, limiting its usefulness as a comparative measure.
Set forth below is a reconciliation from net loss to Adjusted EBITDA for the
respective periods:
Year Ended December 31,
2021 2020
(in thousands)
Net loss $ (38,627 ) $ (29,932 )
Depreciation and amortization 2,129 2,728
Stock-based compensation 1,085 1,087
Interest expense - 759
Income taxes 167 (521 )
Restructuring costs - 1,546
Adjusted EBITDA $ (34,746 ) $ (24,333 ) Factors Affecting Our Results of Operations
We believe that the growth and future success of our business depend on many factors. While these factors present significant opportunities for our business, they also pose important challenges that we must successfully address in order to improve our results of operations.
Research and Development
We believe that our performance is significantly dependent on the investments we make in research and development and that we must continue to develop and introduce innovative new products on a two to three-year cycle. Our partnerships with ODMs are expected to enable us to shift between different types and numbers of devices under development without the need to adjust the size of our internal team. While the hardware design of our phones is generally the same for all wireless carriers, each device must be configured to conform to the requirements of each wireless carrier's network, resulting in higher development expenses as the number of wireless carriers we sell through increases. In addition to the design and configuration costs, each device must undergo a multi-month technical approval process at each carrier before it can be certified to be stocked at each carrier. The approval process for each device for each carrier has historically cost between$1 million and$2 million . Prior to commencement of development of a product for certification, we generally do not receive any purchase orders or commitments. Following a carrier's review of product concepts, we may receive a product award letter from that carrier to move forward with the development and certification process, at which time we may begin receiving advance purchase orders or commitments. Since the timing of when we seek technical approval with our wireless carriers tends to be cyclical in nature, quarter-over-quarter expenditures may vary significantly depending on the number of approvals in process during the quarter. If we fail to innovate and enhance our product offerings, our brand, market position and revenues may be adversely affected. If our research and development efforts are not successful, then we will not recover these investments that we make. 41 --------------------------------------------------------------------------------
New Customer Acquisitions
We are focused on continuing to acquire new customers, both inNorth America and overseas, to support our long-term growth. Historically, we have been dependent on a small number of wireless carriers distributing our products. We have invested, and expect to continue to invest, in our sales and marketing efforts to drive new customer acquisition. A key part of our strategy is to further expand the use of our solutions over cellular networks in the public safety and industrial enterprise markets. We also intend to continue to invest in and expand our international sales teams. As a result, we expect our sales and marketing costs to increase as we seek to acquire new customers. Sales and marketing investments will often occur in advance of any sales benefits from these activities, and it may be difficult for us to determine if we are efficiently allocating our sales and marketing resources.
Seasonality and New Product Introduction
We have historically experienced lower net revenue in our first quarter compared to other quarters in our fiscal year due to seasonal demand associated with the introduction of new products to our lead customers. New product introductions can significantly impact net revenue, gross profit and operating expenses. The timing of product introductions can also impact our net revenue as our wireless carrier customers prepare for a new product launch, and channel inventory of an older product often declines as the launch of a newer product approaches. Net revenue can also be affected when consumers and distributors anticipate a new product introduction. However, neither historical seasonal patterns nor historical patterns of product or service introductions should be considered reliable indicators of our future pattern of product or service introductions, future net sales or financial performance.
Components of Our Results of Operations
The following describes the line items set forth in our consolidated statements of operations.
Revenues
Revenues are recognized on the date that the customer receives the products sold
or when title is passed to the customer upon shipment. For products shipped on
consignment, revenue is not recognized until the products is sold to the end
customer. Any discounts, marketing development funds, product returns or other
revenue reductions are treated as offsets to revenues, which is presented on a
net basis. A return reserve reduces revenue for products that are sold to
distributors with a right of return. We have also historically entered into
customer agreements with channel partners that include a combination of products
and non-recurring engineering services, or NRE services. When a customer
agreement includes NRE services which involve significant design modification
and customization of the product software that is essential to the functionality
of the hardware, revenues are also recognized as control transfers to the
customer under Accounting Standards Codification ("ASC") 606, Revenue from
Contracts with Customers. All of our revenues are derived from a single segment.
The Company recognizes revenue primarily from the sale of products, including
our 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 commitment 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 commitments as individual
performance obligations if they are both capable of being distinct and are
distinct within the context of the contract.
Our customer agreements with channel partners set forth the terms pursuant to
which our channel partners purchase our products for distribution on a purchase
order basis. While these arrangements are typically long term, they generally do
not contain any firm purchase volume commitments. As a result, our channel
partners are not contractually obligated to purchase from us any minimum number
of products. However, while our channel partners provide us with demand
forecasts under these sales arrangements, we are generally required to satisfy
any and all purchase orders delivered to us within specified delivery windows,
with limited exceptions (such as orders significantly in excess of forecasts).
Our sales arrangements also generally include technical performance standards
for our mobile phones and accessories sold, which vary by channel partner. If a
technical issue with any of our covered products exceeds certain preset failure
thresholds for the relevant performance standard or standards, the channel
partner typically has the right to cease selling the product, cancel open
purchase orders and levy certain monetary penalties. In addition, our channel
partners retain sole discretion in which of their stocked products to offer
their customers.
We also offer our channel partners channel marketing and other limited
promotional incentives, such as sales volume incentives, in exchange for retail
price reductions. Under certain of our customer agreements, we may also offer
NRE services in the form of third-party design services relating to the design
of materials and software licenses used in the manufacturing of our products.
42
--------------------------------------------------------------------------------Cost of Revenues and Gross Profit/Gross Margin
Cost of revenues for products manufactured by third parties is the negotiated price that the Company pays for the products. For products that are manufactured by the Company, the cost of revenues primarily consists of the following:
• Direct costs consist of raw materials, supplies and sub-assemblies used in
the production of our products. Direct materials represent the majority of
our direct manufacturing expenses.
• Direct labor costs expended in the final assembly and testing of our
products. Labor is charged to each product based on the actual time
required to build that specific product.
• Indirect manufacturing expense associated with producing our products,
such as rent on production facilities, depreciation on production
equipment and tooling, engineering and support salaries and other indirect
manufacturing costs.
For both products manufactured by third parties and for products manufactured by
the Company, cost of revenues includes other direct costs related to the
shipment of the final product to the customer, including such items as shipping
costs, royalties on third-party technology included in the product, warranty
cost accruals and packaging and handling costs.
Amortization of NRE expenses are part of cost of revenues. Gross profit is
defined as revenues less cost of revenues. Gross margin is gross profit
expressed as a percentage of revenues. We expect that our gross margin may
fluctuate from period to period, primarily as a result of changes in average
selling price, revenue mix among our devices, and manufacturing costs. In
addition, we may reserve against the value at which we carry our inventory based
upon the device's lifecycle and conditions in the markets in which we sell.
Operating Expenses
Our operating expenses consist of the following categories:
Research and development. Research and development expenses consist primarily of personnel-related expenses, including salaries, bonuses, stock-based compensation and employee benefits, as well as outsourced costs incurred through our ODM partnerships. Research and development expenses also include the costs of developing new products and supporting existing products. Research and development activities include the design of new products, refinement of existing products and design of test methodologies to ensure compliance with required specifications, as well as all costs associated with achieving technical acceptance with each product at each carrier. All research and development costs are expensed as incurred. We expect our research and development expenses to fluctuate over time as we experience the various product cycles of our devices. Sales and marketing. Sales expenses consist primarily of personnel-related expenses, including salaries, bonuses, stock-based compensation, commissions to sales representatives, travel costs and employee benefits, as well as field support and customer training costs. Marketing expenses include all social media and collateral print media, and brand development expenses.
General and administrative. General and administrative expenses consist primarily of personnel-related expenses, including salaries, bonuses, stock-based compensation, travel costs and employee benefits, as well as professional and consulting fees, legal fees, trade shows, depreciation expense and occupancy costs.
Income taxes. As part of the process of preparing our consolidated financial statements we are required to estimate our taxes in each of the jurisdictions in which we operate. We account for income taxes in accordance with the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities and the tax effects of net operating loss and credit carryforwards using the enacted tax rates expected to apply in the periods of expected settlement. In addition, this method requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Year Ended
2021 2020 $ Change % Change
Provision for Income Taxes (in
thousands, except percentages)
(Benefit) Provision for Income Taxes $ 167 $ (521 ) $ 689 (132 %)
We recognized income tax provision of $167,000 during 2021 as compared to an
income tax benefit of $521,000 during 2020. The increase in tax expense in 2021
was primarily due to a release of an uncertain tax position in 2020, partially
offset by the Company's decrease in earnings in foreign subsidiaries in 2021 as
compared to 2020.
43
--------------------------------------------------------------------------------Results of Operations
Years Ended
The following tables present key components of our results of operations for the respective periods (In thousands):
Year Ended December 31, 2021 vs 2020
Increase
2021 2020 (Decrease) %
(in thousands)
Net revenues $ 54,570 $ 63,992 $ (9,422 ) -14.7 %
Cost of revenues 48,156 48,781 (625 ) -1.3 %
Gross profit 6,414 15,211 (8,797 ) -57.8 %
Operating expenses:
Research and development 17,696 16,218 1,478 9.1 %
Sales and marketing 9,566 10,411 (845 ) -8.1 %
General and administrative 10,284 9,834 450 4.6 %
Legal expenses 6,869 6,462 407 6.3 %
Restructuring costs - 1,546 (1,546 ) -100.0 %
Total operating expenses 44,415 44,471 (56 ) -0.1 %
Loss from operations (38,001 ) (29,260 ) (8,741 ) 29.9 %
Interest expense - (759 ) 759 -100.0 %
Other expense, net (459 ) (434 ) (25 ) 5.8 %
Loss before income taxes (38,460 ) (30,453 ) (8,007 ) 26.3 %
Income tax (expense) benefit (167 ) 521 (688 ) -132.1 %
Net loss $ (38,627 ) $ (29,932 ) $ (8,695 ) 29.0 %
Net revenues. Net revenues for the year ended December 31, 2021 , decreased by
$9.4 million , or 14.7% to $54.6 million compared to $64.0 million for the year
ended December 31, 2020 . The decrease in net revenues was primarily attributable
to a 35% decrease in unit sales of the XP8 resulting in a decrease of $9.9
million in revenues as this product approaches end of life. Sales of the next
generation XP3plus and of the XP5s increased in 2021, but were partially offset
by lower sales of the XP3 as it approaches end of life. The launch of an updated
smartphone in the third quarter of 2022 is expected to replace the XP8 and
increase unit sales of our smartphones in 2022.
Cost of revenues. Total cost of revenues for the year ended December 31, 2021 ,
decreased $0.6 million , or 1.3%, to $48.2 million , or 88.2% of revenues,
compared to $48.8 million , or 76.2% of revenues for the year ended December 31,
2020 . This decrease was attributable to fewer units sold as discussed above. The
higher cost of revenue as a percentage of revenue in 2021 was due to sales mix
and specifically the sale of relatively higher margin XP8's in 2020. In 2021,
the cost of revenue as a percentage of revenue for the XP8 was 54% as compared
to 80% for the XP3plus and 79% for the XP5s.
Gross profit and margin. Gross profit for the year ended December 31, 2021 ,
decreased $8.8 million , or 57.8%, to $6.4 million , or 11.8% of revenues, from
$15.2 million , or 23.8% of revenues for the year ended December 31, 2020 . This
decrease to gross profit was primarily due to a 35% decrease in unit sales of
the XP8 in 2021. The decrease in gross profit margin was primarily attributable
to product sales mix, as more relatively higher margin XP8's were sold in 2020.
Research and development. Research and development expenses for the year ended
December 31, 2021 , increased by $1.5 million or 9.1%, to $17.7 million compared
to $16.2 million for the year ended December 31, 2020 . These expenses increased
primarily due our investment in the development of a new generation of products
that were released in 2021 and are scheduled for release in 2022.
Sales and marketing. Sales and marketing expenses for the year ended December
31, 2021 , decreased by $0.8 million , or 8.1% to $9.6 million compared to $10.4
million for the year ended December 31, 2020 . This decrease is due to a $1.7
million decrease in personnel costs due to cost cutting measures that was
partially offset by a $0.9 million increase in handset demos that were provided
to retail stores.
44
--------------------------------------------------------------------------------
General and administrative. General and administrative expenses for the year
ended December 31, 2021 , increased by $0.5 million , or 4.6% to $10.3 million
compared to $9.8 million for the year ended December 31, 2020 . This increase was
due primarily to a $0.6 million increase in bad debt expense.
Legal expenses. Legal expenses for the year ended
Restructuring costs. InSeptember 2019 , the Board of Directors approved, and management commenced and completed, a restructuring plan to reduce operating costs and better align our workforce with the needs of our business. For the year endedDecember 31, 2020 , we recorded costs related to restructuring totaling$1.6 million , of which$0.1 million is included in cost of revenues. We did not record any costs related to restructuring during the year endedDecember 31, 2021 .
Interest expense. Interest expense/other expense decreased by
Other expense, net. We recorded$0.5 million in foreign exchange loss for the year endedDecember 31, 2021 and$0.4 million in foreign exchange loss for the year endedDecember 31, 2020 . Income tax expense. Income tax expense increased by$0.7 million , or 132% to$0.2 million , for the year endedDecember 31, 2021 , from$(0.5) million , for the year endedDecember 31, 2020 . The increase is primarily because in 2020 we released$0.8 million of prior years' uncertain tax position accruals. Net loss. The net loss forDecember 31, 2021 , was$38.6 million compared to net loss of$29.9 million forDecember 31, 2020 . The increase in the net loss is a result of a decrease in revenues of$9.4 million and a decrease in the gross profit margin percentage in 2021. Adjusted EBITDA. Adjusted EBITDA was negative$34.7 million , for the year endedDecember 31, 2021 , compared to negative$24.3 million , for the year endedDecember 31, 2020 . This higher loss was primarily due to lower revenues and a decrease in the gross profit margin percentage in 2021.
Liquidity and Capital Resources
Historically, we have funded operations from a combination of public and private equity financings, convertible loans from existing investors and borrowings under loan agreements. As ofDecember 31, 2021 , we did not have any convertible loans or any other borrowing structures in place. Currently, our principal source of liquidity consists of cash and cash equivalents totaling$11.2 million , asDecember 31, 2021 . During the year endedDecember 31, 2021 , our net loss was$38.6 million , and it is likely that we will continue to experience operating losses into the future because we have not yet generated sufficient revenue levels needed to ensure profitability. 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. However, our liquidity has been negatively impacted by a decline in the sales of our legacy products while our next generation products are still under development. In addition, legal expenses related to our ongoingSEC investigation have been significantly higher than expected and may continue to impact our results in the foreseeable future. In addition, the terms and conditions of applicable bylaws, certificates or articles of incorporation, agreements or applicable law may obligate us under certain circumstances to indemnify our current and former directors, officers or employees, and underwriters, with respect to certain of our litigation matters, including the ongoingSEC investigation, and we have been advancing legal fees and costs to certain current and former directors, officers, employees and underwriters in connection with certain of the matters disclosed in Note 11, Commitments and Contingencies. As a result of the foregoing, substantial doubt exists regarding our ability to continue as a going concern for a period of at least one year from the date of issuance for the audited consolidated financial statements included in this Annual Report on Form 10-K. To alleviate these conditions, our management is currently evaluating various funding alternatives and may seek to raise additional funds through the issuance of equity, mezzanine or debt securities, through arrangements with strategic or investment partners with greater resources or access to funds or through obtaining credit from government or financial institutions. As we seek additional sources of financing, there can be no assurance that such financing would be available to us on favorable terms or at all. Our ability to obtain additional financing in the debt and equity capital markets, including through our New ATM Program, is subject to several factors, including market and economic conditions, our performance and investor sentiment with respect to us and our industry. See risk factor entitled "Our liquidity has been adversely impacted by our ongoing net losses, including as a result of declines in the sales of our legacy products while our next generation products are still under development and our ongoingSEC investigation, and there is 45 --------------------------------------------------------------------------------
no assurance that we will have sufficient liquidity to continue operations." in this Annual report on Form 10-K for additional information.
Our cash balance as of
During the quarter endedDecember 31, 2021 , we issued and sold an aggregate of 10,280,906 shares of our common stock at a weighted average price per share of$1.89 under the New ATM Program for net proceeds of approximately$19.4 million . As ofDecember 31, 2021 , we had approximately$21.6 million available for future issuances under the New ATM Program. See "Recent Developments - New ATM Program" for additional information. The accompanying consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Cash Flows
The following table summarizes our sources and uses of cash for the periods presented:
2021 2020
Net cash used in operating activities
(46 ) (11 )
Net cash provided by financing activities 27,614 21,414
Cash flows from operating activities
For the year endedDecember 31, 2021 , cash used in operating activities was$38.5 million , primarily attributable to a net loss of$38.6 million . Non-cash charges of$5.7 million were partially offset by changes in operating assets and liabilities of$5.6 million . Non-cash charges primarily consisted of$1.1 million in stock-based compensation,$1.6 million in inventory write-downs,$2.1 million in depreciation and amortization, and$0.9 million for an increase to the provision for doubtful accounts. The changes in our net operating assets and liabilities were primarily due to a$7.5 million increase in accounts receivable, an increase in other assets of$2.7 million , and an increase in non-trade receivable of$1.8 million , partially offset by a$4.2 million decrease in inventory, a$1.6 million decrease in prepaid expenses, and a$1.2 million increase in accounts payables and accrued liabilities. For the year endedDecember 31, 2020 , cash used in operating activities was$10.6 million , primarily attributable to a net loss of$29.9 million , partially offset by a net cash inflow of$14 million from changes in our net operating assets and liabilities and non-cash charges of$5.3 million . Non-cash charges primarily consisted of$1.1 million in stock-based compensation,$0.7 million in inventory write-downs, and$2.7 million in depreciation and amortization. The net cash inflow in our net operating assets and liabilities was primarily due to a$7.5 million decrease in inventory, a$5.5 million decrease in accounts receivable, and an increase in accounts payable and accrued liabilities of$2.7 million , partially offset by a$1.1 million increase in prepaid expenses and other assets, a decrease in income tax payable of$0.7 million , and a$0.3 million decrease in deferred revenue.
Cash flows from investing activities
For the year ended
For the year ended
Cash flows from financing activities
For the year endedDecember 31, 2021 , cash provided by financing activities was$27.6 million , primarily attributable to proceeds from issuance of common stock through the ATM Program. For the year endedDecember 31, 2020 , cash provided by financing activities was$21.4 million , primarily attributable to proceeds from issuance of common stock upon a public offering of common stock, net of costs, of$25.1 million , and proceeds from stock options and ESPP of$0.5 million , offset by the repayment of long-term debt of$4.1 million . 46 --------------------------------------------------------------------------------
Material Cash Requirements
The Company had a contractual obligation with third-party designers for the Company's next generation of phones of approximately$3.7 million for the XP10 and$2.5 million for the XP5plus as ofDecember 31, 2021 . We had approximately$5.7 million in noncancelable purchase orders for inventory and other operating expenses as ofDecember 31, 2021 . We had approximately$4.0 million in contractual obligations with a third-party software developer atDecember 31, 2021 . We had$2.3 million in noncancelable operating lease commitments as ofDecember 31, 2021 . We anticipate the source of funds to meet these obligations to be existing cash, future product sales, and future ATM Program stock sales.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material. OnMarch 11, 2020 , theWorld Health Organization declared the COVID-19 outbreak a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and work force participation and created significant volatility and disruption in financial markets. The onset of the COVID-19 pandemic initially impacted our supply chain partners and resulted in a shutdown of our manufacturing operations inChina , in the first quarter of 2020. In the middle ofMarch 2020 , the majority of our offices worldwide had enacted shelter-in-place measures, with employees being mandated to work from home. We expect this to have a negative impact on our sales and our results of operations, the size and duration of which we are currently unable to predict. In preparing our consolidated financial statements in accordance with GAAP, we are required to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and the accompanying disclosures. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of these financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, judgments or revise the carrying value of our assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our financial statements While our significant accounting policies are more fully described in the Note 1 to our consolidated financial statements appearing elsewhere in this prospectus, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and results of operations and require our most difficult, subjective and complex judgments. Revenue Recognition The Company accounts for revenue in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers. 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 Company recognizes revenue primarily from the sale of products, including our mobile phones, scanners, and accessories. The Company also recognizes revenue from other contractual arrangements that may include a combination of products and 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 some 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 estimates future returns from distributors with a right of return and accrues for estimated customer allowances or future price protection discounts. 47 --------------------------------------------------------------------------------
Stock-Based Compensation
We account for stock-based payments at fair value. The fair value of stock options is measured using the Black-Scholes option-pricing model. For share-based awards that vest subject to the satisfaction of a service requirement, the fair value measurement date for stock-based compensation awards is the date of grant and the expense is recognized on a straight-line basis, over the vesting period. We account for forfeitures as they occur. The fair value of each stock option grant is determined using the methods and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment and estimation by management.
• Expected term. The expected term represents the period that stock-based
awards are expected to be outstanding. Our historical share option exercise
information is limited due to a lack of sufficient data points and does not
provide a reasonable basis upon which to estimate an expected term. The
expected term for option grants is therefore determined using the simplified
method. The simplified method deems the expected term to be the midpoint
between the vesting date and the contractual life of the stock-based awards.
• Expected volatility. Because our stock has not been publicly traded for a
sufficiently long period of time, in 2020 we use an expected volatility
figure based on a review of the historical volatilities, over a period of
time, equivalent to the expected life of the instrument being valued, of
similarly positioned public companies within our industry.
• Risk-free interest rate. The risk-free interest rate is based on the
for zero-coupon
the stock-based awards' expected term.
• Expected dividend yield. The expected dividend yield is zero as we have not
paid nor do we anticipate paying any dividends on our common stock in the
foreseeable future.
We account for restricted stock units (RSUs) issued to employees and non-employees at fair value, based on the market price of our stock on the date of grant. The RSUs are expensed over the vesting period, and we account for forfeitures as they occur. RSUs, primarily issued as long-term incentives, generally vest annually over four years.
During the years endedDecember 31, 2021 and 2020 we recorded$1.1 million in each year of stock-based compensation related to stock options and restricted stock units. Provision for Income Taxes The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in multiple tax jurisdictions. We may be periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due. These reviews may include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, we record estimated reserves when it is more likely than not that an uncertain tax position will not be sustained upon examination by a taxing authority. Such estimates are subject to change.
Inventory Valuation
We report inventories at the lower of cost or net realizable value. Cost is determined using a first-in, first-out method, or FIFO, and includes materials, labor, shipping and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The net realizable value of inventory is based on management's estimates of forecasted sales of each model and the estimated sale price of each model. Inventory that is not part of the sales forecast is fully written-off. Inventory was written down for one model because the estimated net realizable value was less than the cost. If the net realizable value was lower by 10% for this model, then an additional$44 of inventory write-off would be realized and cost of revenue would be increased by$44 . An increase of the estimated sale price of 10% would increase the inventory value and decrease cost of revenue by$33 . All other models have costs that are significantly lower than the estimated net realizable value. 48 --------------------------------------------------------------------------------
Warranty Reserves We provide standard warranty coverage on our accessories and devices for one and three years, respectively, providing labor and parts necessary to repair the systems during the warranty period. We account for the estimated warranty cost as a charge to cost of revenues when revenue is recognized. The estimated warranty cost is based on historical product performance and field expenses. We update this estimate periodically. The actual product performance and/or field expense profiles may differ, and in these cases, we adjust warranty accruals accordingly. The warranty liability account balance is based on management's estimates of the lifetime return rate for each model and the cost to repair each returned model. These assumptions are based on historical rates for similar products and on actual return rates. If the estimated cost to repair each unit increased by 10%, then the warranty liability balance would be$84 higher atDecember 31, 2021 . If the lifetime return rate was increased by 10%, then the warranty liability balance would be$146 higher atDecember 31, 2021 . The cost of revenue for the year endedDecember 31, 2021 would increase by the same amount as the warranty liability. Decreases to these rates 10% will reduce the warranty liability by the same amount.
Recently Issued and Adopted Accounting Pronouncements and Critical Accounting Policies and Estimates
See "Note 1 - The Company and Its Significant Accounting Policies" of "Notes to the Consolidated Financial Statements" under the caption Recently Issued Accounting Pronouncements and Recently Adopted Accounting Pronouncements.
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