Airgain, Inc. — Q1 2017 Form 10-Q
Business and period: Airgain designs and sells embedded antenna technologies for wireless devices. This unaudited report covers the three months ended March 31, 2017, compared with Q1 2016. Airgain operates as one segment.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Sales | $11.25 million | $8.51 million |
| Gross profit / margin | $5.29 million / 47.0% | $3.68 million / 43.2% |
| Operating expenses | $4.86 million | $3.56 million |
| Operating income / margin | $425,479 / 3.7% | $116,794 / 1.4% |
| Net income | $385,090 | $139,153 |
| Net income (loss) attributable to common shareholders | $385,090 | ($464,916) |
| Diluted earnings (loss) per share | $0.04 | ($0.82) |
| Operating cash flow | ($3.12 million) | ($853,056) |
- Sales increased 32.2%. Management attributed growth to higher device volumes, more antennas per device, a higher average selling price per device, and demand in set-top-box and carrier gateway/router markets. Shipped volume was approximately 40 million antennas for 13 million devices.
- Gross margin increased 3.8 percentage points, primarily from a sales mix shift toward higher-margin set-top boxes and carrier gateways/routers.
- Operating expenses rose 36.6%; general and administrative expense increased 64.1%, including public-company costs and higher personnel-related expenses.
- Operating cash use was driven principally by a $2.36 million increase in receivables and cash payments reflected in lower accrued bonus and other accrued liabilities.
Financial position and liquidity
- At March 31, 2017, cash and cash equivalents were $41.86 million, total assets $55.06 million, and stockholders’ equity $45.82 million. Cash declined $3.30 million from year-end 2016.
- Debt consisted of $2.33 million outstanding under a 5% term loan: $1.33 million current and $1.00 million long-term. The $3.0 million revolving credit facility had no borrowings. Airgain reported compliance with its financial covenants.
- Q1 investing cash use was $119,312, primarily property and equipment purchases; financing cash use was $64,131, including $388,563 of debt repayments and $323,651 of option-exercise proceeds.
- Management said existing cash and expected operating cash flows should meet working-capital needs for at least 12 months. This assessment preceded the post-quarter Antenna Plus acquisition cash payment.
Outlook, risks, and unusual items
- No quantified revenue or earnings guidance was provided. Management expects continued investment in research and development, sales and engineering headcount, and capital expenditures; it anticipates these investments will increase in absolute dollars.
- On April 27, 2017, the notes report completion of the Antenna Plus asset acquisition for approximately $6.4 million cash, subject to working-capital adjustments, with certain contracts and liabilities assumed. The filing’s MD&A instead says the acquisition closed April 17; the date discrepancy should be verified. Purchase accounting had not been completed, and the acquisition was not included in Q1 results.
- Customer concentration is significant: three customers represented 49% of Q1 sales (22%, 14%, and 13%). Two vendors in China manufactured all products. China accounted for 71% of revenue by customer bill-to location, although management says end users are more geographically diverse.
- Airgain identifies pricing pressure and dependence on a limited number of end-customer devices as business risks; product discontinuations or modifications could materially affect results. Sales tend to be lower in Q1, partly because of Chinese New Year.
- A $1.0 million deferred purchase-price obligation related to the Skycross asset acquisition remained outstanding. Operating lease commitments totaled $1.95 million. The company also reported a full valuation allowance against net deferred tax assets and $1.67 million of gross unrecognized tax benefits, offset by deferred tax assets.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, and no material legal proceedings. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Confirm the Antenna Plus closing date, final purchase-price adjustments, assumed liabilities, and purchase-price allocation.
- Track receivables, collections, and operating cash flow, given the sharp increase in receivables and operating cash use despite higher earnings.
- Monitor customer and supplier concentration, China-related exposure, product-cycle demand, and pricing/margin trends.
- Review term-loan covenant headroom and liquidity after the acquisition, and assess whether management’s 12-month liquidity expectation remains valid.
- Assess whether deferred tax assets may become realizable and whether any NOL utilization limits apply following ownership changes.