Airgain, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Airgain designs and sells antenna technologies for wireless devices and markets including connected home, enterprise, automotive and IoT. It reports as one operating segment.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Sales | $15.0 million | $13.0 million | $28.3 million | $24.3 million |
| Gross profit | $6.6 million | $6.1 million | $12.8 million | $11.4 million |
| Gross margin | 44.1% | 47.0% | 45.3% | 47.0% |
| Operating income (loss) | ($3.6 million) | ($0.1 million) | ($4.8 million) | $0.3 million |
| Net income (loss) | ($3.2 million) | ($0.1 million) | ($4.3 million) | $0.3 million |
| Net loss per share | ($0.34) | ($0.01) | ($0.45) | — |
- Q2 sales rose 15.1%; six-month sales rose 16.5%. Gross profit increased, but gross margin contracted 2.9 percentage points in Q2 and 1.8 points for the six-month period.
- Operating expenses rose 64% in Q2 and 58.5% for six months. Q2 sales and marketing expense included $1.3 million in costs to terminate a marketing-related agreement; general and administrative expense included $1.2 million of accelerated stock compensation for the former CEO.
- For the six months, operating cash outflow was $1.6 million, compared with $1.8 million in 2017. Investing activities provided $1.9 million, principally reflecting net maturities of available-for-sale securities; financing used $2.1 million, including $1.3 million of share repurchases and $0.7 million of debt repayment.
- At June 30, cash and cash equivalents were $13.3 million and short-term investments were $18.8 million, down from $15.0 million and $21.3 million, respectively, at year-end. Current assets were $40.4 million and current liabilities $7.3 million.
- Total debt was approximately $0.7 million, consisting of the term loan; the $10 million revolving credit facility had no borrowings. The term loan matures December 1, 2018. Airgain reported compliance with loan covenants.
Changes, outlook and risks
- Organic sales increased $1.5 million in Q2 and $1.3 million for the six months; Antenna Plus contributed $1.9 million and $4.2 million, respectively. Six-month organic device volume fell 9%, while average antennas per device rose 24% and average selling price per device rose 14%. Management attributed sales growth mainly to carrier gateways and retail routers; lower set-top box and television sales partly offset this.
- Management said it intends to invest in product development, engineering, sales capacity and international expansion while pursuing sustainable profitability. It expects sales and marketing expense to decrease in absolute dollars as efforts are realigned, but expects research and development and growth investments to rise. Management believes available cash, investments and operating proceeds will cover working-capital needs for at least 12 months. No specific revenue or earnings guidance was provided.
- On May 2, 2018, CEO and President Charles Myers resigned; Chairman James K. Sims became interim CEO. COO Glenn Selbo resigned in April, and the filing identifies management transitions as a risk. The board extended the up-to-$7 million share repurchase program through August 14, 2019; $2.6 million had been repurchased through the filing date.
- Customer concentration is significant: Customer A accounted for 37% of Q2 sales and 34% of six-month sales. China represented 76% of Q2 sales and 70% for six months by customer bill-to location. Products were manufactured primarily by two vendors in China and Airgain’s Arizona facilities.
- The filing says ZTE halted future orders after U.S. export restrictions were lifted in April 2018 and notes that future export-control actions could disrupt sales, particularly in China. Other cited risks include customer/device concentration, pricing pressure, management transitions and international operations.
- Other unusual items: a $388,733 gain arose from settling the Skycross deferred purchase-price matter for a $375,000 payment. CEO separation costs included $484,000 cash severance and accelerated options; the filing recognized $1.2 million of related stock compensation. Airgain reported no material legal proceedings, no material off-balance-sheet arrangements and effective disclosure controls.
Key facts investors should verify
- Whether operating costs and one-time termination/severance expenses moderate, and whether the company can return to profitability.
- Whether sales growth and margin performance persist as device volumes, product mix and selling prices change.
- Exposure to Customer A, China-based customers and manufacturing vendors, including the effects of export restrictions and any ZTE order losses.
- Cash and investment balances, operating cash use, covenant compliance and repayment of the term loan due in December 2018.
- Progress in appointing a permanent CEO and the financial impact of the extended share repurchase program.