Airgain, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; comparisons are to the same 2015 periods. Airgain designs embedded antenna products for wireless devices. The filing reflects its August 2016 IPO and conversion of preferred shares into common stock.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales | $12.44 million | $6.67 million | $30.81 million | $18.46 million |
| Gross profit | $5.58 million | $2.78 million | $13.80 million | $7.80 million |
| Gross margin | 44.8% | 41.6% | 44.8% | 42.3% |
| Operating income (loss) | $1.23 million | ($71,000) | $2.32 million | ($531,000) |
| Net income (loss) | $1.18 million | $669 | $2.63 million | ($228,000) |
| Net income (loss) attributable to common stockholders | $861,000 | ($617,000) | $1.10 million | ($2.06 million) |
- Sales rose 86.5% in Q3 and 66.9% for the nine-month period. Management attributed growth primarily to higher product volumes, more antennas per device, and demand in set-top-box and TV markets. Skycross-acquired assets contributed $1.4 million of Q3 and $3.7 million of nine-month sales.
- Operating margins were 9.9% for Q3 and 7.6% for nine months, versus losses of 1.1% and 2.9%, respectively, in 2015. Gross margin improvement was associated with a greater mix of board-mounted antennas; management cautioned this mix may be lower in future periods.
- Operating expenses increased 52.7% in Q3 and 37.8% for nine months, but declined as a share of sales. Q3 G&A included a $500,000 CEO bonus for completing the IPO and additional IPO-related costs.
- Nine-month operating cash flow was $1.97 million, compared with cash used of $9,000 in 2015. Investing used $276,000; financing provided $9.80 million, mainly from IPO proceeds, net of costs, partly offset by $1.22 million of debt repayments.
Liquidity, debt, and capital changes
- Cash was $16.83 million at September 30, 2016, versus $5.34 million at December 31, 2015. Current assets were $23.14 million and current liabilities $8.67 million.
- Notes payable totaled approximately $3.13 million: $1.46 million current and $1.67 million long-term. No amount was drawn on the $3.0 million revolving credit line. Airgain reported compliance with financial covenants.
- The August IPO sold 1.5 million shares at $8 per share; the underwriters later bought 200,100 additional shares. Net proceeds were approximately $10.9 million. Preferred stock converted into common shares, and accumulated preferred dividends were settled with shares.
- Management said cash and expected operating cash flows should cover working-capital needs for at least the next 12 months. The company plans continued investment in sales, engineering, R&D, and capital expenditures.
Outlook, risks, and other notable items
- No quantified revenue or earnings guidance was provided. Management expects R&D, sales and marketing, and public-company costs to increase in absolute dollars.
- Revenue is concentrated: two customers represented 50% of Q3 sales and 49% of nine-month sales. All products were manufactured by two vendors in China. China accounted for 69% of Q3 and 72% of nine-month revenue by customer bill-to location.
- Management cited pricing pressure, dependence on customer device design wins and product lifecycles, and potential discontinuation or modification of key devices as risks. Sales may be affected by Chinese holiday purchasing patterns and Chinese New Year seasonality.
- The company owes $1.0 million of deferred Skycross purchase consideration, contingent on specified transition and customer-approval conditions. Skycross historical and pro forma results were not presented because the acquired assets were integrated and historical information was impracticable to obtain.
- During Q3, Airgain shortened the estimated useful life of acquired developed technology from 10 years to 5 years, increasing amortization. The warrant liability was eliminated after warrants were net-exercised in May 2016; the nine-month results included a $460,000 favorable fair-value adjustment.
- Management reported no material legal proceedings, no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Whether customer and supplier concentration, especially reliance on two customers and two China-based manufacturers, has changed.
- Whether sales growth and gross-margin performance persist as product mix and device lifecycles shift.
- How IPO-funded growth investments affect expenses, cash generation, and margins.
- Debt covenant headroom, repayment schedule, and satisfaction of the contingent Skycross payment conditions.
- Whether the shortened technology useful life or other accounting estimates lead to further changes in amortization or reported earnings.