Airgain, Inc. — Q3 2018 Form 10-Q
Business context and period: Airgain designs and sells antenna technologies for wireless networking applications. This unaudited report covers the quarter and nine months ended September 30, 2018; comparable figures are for 2017.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $15.79M | $12.45M | $44.06M | $36.71M |
| Gross profit / margin | $6.87M / 43.5% | $6.00M / 48.2% | $19.66M / 44.6% | $17.41M / 47.4% |
| Operating income (loss) | $0.31M | $0.20M | ($4.51M) | $0.50M |
| Net income (loss) | $0.44M | $0.23M | ($3.86M) | $0.55M |
| Diluted EPS | $0.04 | $0.02 | ($0.41) | $0.05 |
- Cash flow: In the first nine months, operating activities used $1.24M; investing activities provided $1.87M, principally reflecting net maturities of short-term investments; financing activities used $2.60M. Cash and cash equivalents declined $1.96M.
- Liquidity: At September 30, cash and cash equivalents were $13.06M and short-term investments were $18.77M. Current assets were $41.31M versus current liabilities of $7.37M.
- Debt: $0.33M remained on a term loan, due December 1, 2018. The $10M revolving credit facility had no borrowings outstanding and matures January 31, 2020. The company reported compliance with its financial covenants.
- Balance sheet: Total assets were $51.34M, total liabilities $7.65M, and stockholders’ equity $43.69M. Accumulated deficit was $46.27M.
Material changes versus the prior comparable period
- Q3 revenue rose 26.8% year over year; nine-month revenue rose 20.0%. Management attributed growth mainly to carrier gateway and set-top-box sales in Q3, and to retail router and carrier gateway sales year to date.
- Gross margin fell 4.7 percentage points in Q3 and 2.8 points for the nine-month period. Management cited product mix, including higher carrier gateway sales in Q3 and lower set-top-box sales year to date.
- Nine-month operating expenses increased 42.9% to $24.17M, including higher R&D, sales and marketing, and G&A costs. Nine-month results also included a $1.3M payment to terminate a marketing agreement, executive transition/severance costs, and $1.2M of accelerated stock compensation for the former CEO.
- Nine-month other income included a $0.39M gain from settling the Skycross deferred purchase price liability; the settlement required a $0.38M cash payment.
Outlook, commentary, risks, and unusual items
- No quantified revenue or earnings guidance is provided. Management said existing cash, investments, and expected operating cash proceeds should meet working-capital needs for at least the next 12 months. It plans to keep investing in product development, engineering, sales, and international market penetration; it expects sales and marketing expense to decrease as efforts are realigned.
- Management identified pricing pressure, customer and device concentration, product-cycle changes, and execution of growth and acquisition strategies as operating risks. Sales are concentrated geographically: China represented 79% of Q3 revenue and 73% of nine-month revenue. One customer accounted for 38% of Q3 and 35% of nine-month revenue.
- The filing reports that ZTE halted future orders for Airgain antenna products after U.S. export restrictions were lifted, and warns that future export controls could constrain sales. The company also discusses uncertainty around U.S.-China trade policy; it did not expect then-current tariffs to have a material impact.
- Management changes included the May 2018 resignation of CEO Charles Myers, with Chairman James K. Sims serving as interim CEO, and the April 2018 resignation of COO Glenn Selbo. The filing cautions that leadership transitions may disrupt execution and notes uncertainty around finding a permanent CEO.
- The company had no material legal proceedings and reported disclosure controls effective at a reasonable assurance level. It was evaluating the potential effects and transition approach for the new revenue-recognition standard, including whether some revenue timing could shift.
Important facts for investors to verify
- Whether revenue growth and product mix can improve or stabilize gross margins.
- How customer concentration and exposure to China, export restrictions, and trade-policy changes affect sales.
- Whether the company sustains liquidity and meets debt obligations, including the December 2018 term-loan maturity and credit-facility covenants.
- The recurring earnings impact of elevated operating expenses versus the identified termination and executive-related charges, and the extent of future stock-based compensation.
- Progress on permanent CEO succession and the effects of leadership changes on strategy and execution.
- The effect of adopting the revenue-recognition standard on reported revenue timing; the filing does not provide a clear quantified estimate.