Airgain, Inc. — Q2 2016 Form 10-Q
Business context and reporting period
Airgain designs and sells embedded antenna products for wireless devices. This unaudited filing covers the quarter and six months ended June 30, 2016, with comparisons to the corresponding 2015 periods. The company reports one operating segment. Its August 2016 IPO and related preferred-stock conversion occurred after the reporting period.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales | $9.86 million | $6.06 million | $18.37 million | $11.79 million |
| Gross profit / margin | $4.55 million / 46.1% | $2.54 million / 42.0% | $8.22 million / 44.8% | $5.03 million / 42.6% |
| Operating income (loss) | $974,048 | ($173,007) | $1.09 million | ($459,901) |
| Net income (loss) | $1.31 million | ($171,352) | $1.45 million | ($228,853) |
| Net income (loss) attributable to common stockholders | $700,428 | ($781,689) | $235,511 | ($1.44 million) |
| Basic / diluted EPS | $0.97 / $0.15 | ($1.20) / ($1.22) | $0.34 / ($0.32) | ($2.25) / ($2.66) |
- Operating expenses were $3.57 million in Q2 and $7.13 million for the six months, up 31.5% and 30.0%, respectively, year over year.
- Six-month operating cash flow was $956,480, versus $199,373 in 2015. Investing used $47,030; financing used $985,265, principally for note repayments and deferred IPO costs. Cash declined $75,815 to $5.26 million.
- At June 30, 2016, total assets were $16.00 million, current assets $10.44 million, and current liabilities $7.92 million. Notes payable totaled approximately $3.54 million, including current portions; no amount was drawn on the $3.0 million revolving credit line. The company reported compliance with its loan covenants.
- Series E, F and G redeemable convertible preferred stock was recorded at $44.18 million at June 30, including accretion. Total stockholders’ deficit was $38.60 million.
Material changes versus prior comparable periods
- Sales rose 62.7% in Q2 and 55.8% for the first half. Management attributed growth to more devices incorporating Airgain antennas, more antennas per device, product mix and demand, and $1.4 million of Q2 and $2.4 million of first-half sales associated with acquired Skycross assets.
- Gross margin improved 4.1 percentage points in Q2 and 2.1 points for the first half. Management cited a higher mix of board-mounted antennas, which tend to have lower unit prices but higher margins.
- Research and development, sales and marketing, and general and administrative expenses all increased, primarily reflecting personnel growth and other operating costs. Interest expense also increased following the December 2015 $4.0 million term loan.
- Warrants were amended and net-exercised in May 2016, resulting in issuance of 127,143 common shares and elimination of the warrant liability. The $460,289 six-month fair-value gain increased reported income but was non-cash.
Outlook, risks and unusual items
- Management expected cash, cash equivalents and operating cash flows to cover working capital needs for at least 12 months. It planned continued investment in sales, engineering, R&D and capital expenditures, with related expenses expected to increase in absolute dollars. No numerical revenue or earnings guidance was provided.
- Management cautioned that the board-mounted antenna mix supporting higher margins might decline, potentially lowering gross margin. It also identified customer price pressure and dependence on a limited number of end-customer devices as factors that could adversely affect results.
- Customer and supply-chain concentration are notable: two customers represented 51% of Q2 sales (31% and 20%), China accounted for 75% of Q2 revenue by customer bill-to location, and all products were manufactured by two vendors in China.
- After quarter-end, the company completed its IPO at $8.00 per share: 1.5 million shares generated approximately $9.8 million net proceeds, and the underwriters’ additional 200,100 shares generated approximately $1.5 million net. Preferred shares converted into common stock and accumulated dividends were settled with 1,945,892 common shares. A $500,000 CEO bonus was also awarded in August.
- The filing reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls at quarter-end. It stated there were no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether sales growth and customer demand are sustainable, given customer concentration, product life cycles and the lengthy design-win process.
- How product mix affects gross margins; management expected the unusually favorable board-mounted antenna mix to moderate.
- The reported six-month diluted EPS of negative $0.32 despite positive net income and positive basic EPS. The diluted calculation includes preferred-stock and warrant adjustments; review the EPS reconciliation and post-IPO capitalization.
- Post-IPO cash, debt, preferred-stock conversion and share count, as well as the impact of the CEO bonus and new equity plans.
- Compliance with debt covenants and ability to meet scheduled loan repayments and operating lease commitments.