Airgain, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Airgain designs and sells antenna technologies for wireless, enterprise, industrial and consumer devices. Financial statements are unaudited.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Sales | $13.0 million | $9.9 million | $24.3 million | $18.4 million |
| Gross profit / margin | $6.1 million / 47.0% | $4.5 million / 46.1% | $11.4 million / 47.0% | $8.2 million / 44.8% |
| Operating income (loss) | $(0.1) million | $1.0 million | $0.3 million | $1.1 million |
| Net income (loss) | $(0.1) million | $1.3 million | $0.3 million | $1.5 million |
| Basic EPS | $(0.01) | $0.97 | $0.03 | $0.34 |
- Q2 sales increased 32.0% year over year; six-month sales rose 32.1%. Growth reflected stronger product sales, including $1.4 million from Antenna Plus, and favorable demand and product mix.
- Gross margin expanded 0.9 percentage points in Q2 and 2.2 points for the six-month period, primarily from a mix shift toward higher-margin set-top boxes and carrier gateways/routers.
- Operating expenses rose 74.9% in Q2 and 55.8% for the six-month period. Q2 G&A included $0.8 million of acquisition costs; higher public-company, staffing and other expenses also contributed. Q2 operating results shifted to a loss.
- Six-month operating cash flow was $(1.8) million, versus positive $1.0 million in 2016. The filing attributes cash use primarily to changes in operating assets and liabilities, including receivables. Investing cash use was $6.5 million, mainly the Antenna Plus acquisition. Financing cash use was $0.3 million.
Financial position and liquidity
- Cash and cash equivalents were $36.6 million at June 30, 2017, down $8.6 million from year-end 2016. Current assets were $45.7 million and current liabilities $9.0 million.
- Total debt was $2.0 million, including $1.3 million current; the $3.0 million revolving credit facility had no borrowings. Airgain reported compliance with financial covenants. Term-loan interest is fixed at 5%; the undrawn revolver rate is prime plus 1.25% and it matures in April 2018.
- Management said cash and expected operating cash flows should fund working capital requirements for at least the next 12 months.
Material developments, outlook and risks
- Airgain acquired substantially all Antenna Plus assets in April 2017 for approximately $6.3 million cash, net of working-capital adjustments. The preliminary purchase allocation included $1.5 million goodwill and $3.6 million intangible assets. Acquired operations contributed $1.4 million revenue and a $0.3 million net loss after acquisition.
- The purchase-price allocation remained preliminary. The filing identifies expected market expansion into automotive fleet, public safety and industrial IoT applications, with anticipated synergies and efficiencies.
- In July 2017, Airgain consolidated Shullsburg, Wisconsin operations into Scottsdale, Arizona; management expected cost savings and operating efficiencies. The transferred long-lived assets had a June 30 carrying amount of about $0.3 million.
- No quantitative earnings or revenue guidance was provided. Management expects continued investment in sales, engineering, R&D and capital expenditures, and notes that spending may rise in absolute dollars.
- Key risks include reliance on two China-based contract manufacturers for most products, lack of long-term manufacturing commitments, customer and product concentration, pricing pressure, and dependence on demand in China and other markets. China accounted for 65% of Q2 revenue by customer bill-to location. The company noted a six-to-nine-month estimated transition time if contract manufacturing had to be moved.
- Customer concentration remained material: two customers represented 34% of Q2 sales; one customer was 20%. Airgain reported no material legal proceedings, no material changes to previously disclosed risk factors other than the manufacturing risk described, and effective disclosure controls.
Important facts for investors to verify
- Confirm the acquisition closing date: the notes state April 27, while MD&A says April 17, 2017.
- Track final Antenna Plus purchase accounting, integration costs and whether anticipated synergies emerge.
- Assess whether operating cash flow improves as receivables increase, and monitor cash use and the company’s ability to meet loan covenants.
- Monitor customer concentration, China exposure and continuity, quality and delivery performance of contract manufacturers.
- Evaluate whether gross-margin gains and sales growth offset higher operating expenses, including ongoing public-company and growth-related costs.