Notes to Unaudited Condensed Financial Statements
Note 1. Basis of Presentation
Business Description
Airgain, Inc. (the Company) was incorporated in the State of California on March 20, 1995 and reincorporated in the State of Delaware on August 15, 2016. The Company is a leading provider of advanced antenna technologies used to enable high performance wireless networking across a broad range of devices and markets, including connected home, enterprise, automotive and Internet of Things (IoT). The Company designs, develops, and engineers its antenna products for original equipment and design manufacturers worldwide. The Company is headquartered in San Diego, California with office space and research facilities in the United States, United Kingdom and China.
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Interim financial results are not necessarily indicative of results anticipated for the full year. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, from which the balance sheet information herein was derived.
The condensed balance sheet as of December 31, 2017 included herein was derived from the audited financial statements as of that date but does not include all disclosures including notes required by GAAP.
The condensed statements of operations for the three and nine months ended September 30, 2018 and September 30, 2017, and the balance sheet data as of September 30, 2018 have been prepared on the same basis as the audited financial statements.
In the opinion of management, the accompanying unaudited condensed financial statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of results of the Company’s operations and financial position for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2018 or for any future period.
Segment Information
The Company’s operations are located primarily in the United States, and most of its assets are located in San Diego, California and Scottsdale, Arizona. The Company operates in one segment related to the sale of antenna products. The Company’s chief operating decision-maker is its interim chief executive officer, who reviews operating results on an aggregate basis and manages the Company’s opertions as a single operating segment.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include valuation of intangible assets and goodwill.
Fair Value Measurements
The carrying values of the Company’s financial instruments, including cash and cash equivalents, trade accounts receivable, accounts payable, accrued liabilities and debt approximate their fair values due to the short maturity of these instruments.
8
Fair value measurements are market-based measurements, not entity-specific measurements. Therefore, fair value measurements ar
e determined based on the assumptions that market participants would use in pricing the asset or liability. The Company follows a three-level hierarchy to prioritize the inputs used in the valuation techniques to derive fair values. The basis for fair valu
e measurements for each level within the hierarchy is described below:
•
|
Level 1: Quoted prices in active markets for identical assets or liabilities.
|
•
|
Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
|
•
|
Level 3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable in active markets.
|
Cash Equivalents and Short-Term Investments
Cash equivalents are comprised of short-term, highly liquid investments with maturities of 90 days or less at the date of purchase.
Short-term investments consist predominantly of commercial paper, corporate debt securities, U.S. Treasury securities and asset backed securities. The Company classifies short-term investments based on the facts and circumstances surrounding the investments at the time of purchase and evaluates such classification as of each balance sheet date. All short-term investments are classified as available-for-sale securities as of September 30, 2018 and are recorded at estimated fair value. Unrealized gains and losses for available-for-sale securities are included in accumulated other comprehensive income (loss), a component of stockholders’ equity. Realized gains and losses are included in other income, in the unaudited condensed statements of operations. The Company evaluates its investments to determine whether those with unrealized loss positions are other than temporarily impaired. Impairments are considered to be other than temporary if they are related to deterioration in credit risk or if it is likely that the Company will sell the securities before recovery of their cost basis.
Inventory
The majority of the Company’s products are manufactured by third parties that retain ownership of the inventory until title is transferred to the customer at the shipping point. In certain instances, shipping terms are delivery at place and the Company is responsible for arranging transportation and delivery of goods ready for unloading at the named place. The Company bears all risk involved in bringing the goods to the named place and records the related inventory in transit to the customer as inventory on the accompanying balance sheet. With the acquisition of substantially all of the assets of Antenna Plus, LLC (“Antenna Plus”), in April 2017, the Company began manufacting products at its Scottsdale, Arizona and Shullsburg, Wisconsin locations. In July 2017, the Company relocated all of its product manufacturing produced in Shullsburg, Wisconsin to the Scottsadale, Arizona facility. See Note 6 for additional information relating to the Company’s acquisition of the Antenna Plus assets.
Inventory is stated at the lower of cost or net realizable value. For items manufactured by the Company, cost is determined using the weighted average cost method. For items manufactured by third parties, cost is determined using the first-in, first-out (FIFO) method. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. As of September 30, 2018, the Company’s inventories consist primarily of raw materials. Provisions for excess and obsolete inventories are estimated based on product life cycles, quality issues, and historical experience. As of September 30, 2018, there is no provision for excess and obsolete inventories.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Accumulated other comprehensive loss on the unaudited condensed balance sheet at September 30, 2018 includes unrealized gains and losses on the Company’s available-for-sale securities.
Note 2. Summary of Significant Accounting Policies
During the three and nine months ended September 30, 2018, there have been no material changes to the Company’s significant accounting policies as described in the Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
9
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-15,
Intangibles – Goodwill and Other – Internal-Use Software
, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company has adopted this pronouncement on a prospective basis. The impact on the financial statements are immaterial.
In August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement: Disclosure Framework – Changes to Disclosure for Fair Value Measurement,
which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company has adopted this pronouncement on a prospective basis. The impact on the financial statements are immaterial.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. The Company is evaluating the effect that ASU 2016-02 will have on its financial statements and related disclosures. The Company has not yet selected a transition method, nor has it determined the effect of the standard on its ongoing financial reporting.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2018 and interim periods in fiscal years beginning after December 15, 2019. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is in the process of selecting a transition method and determining the effect of the standard on the Company’s ongoing financial reporting, including whether the adoption of ASU 2014-09 will result in a change to the timing of revenue recognition for a portion of the Company’s revenue transactions from a “point in time” upon physical delivery to an “over time” model.
Note 3. Net Income (Loss) Per Share
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average shares of common stock outstanding for the period. Diluted net income (loss) per share is calculated by dividing net income (loss) by the weighted average shares of common stock outstanding for the period plus amounts representing the dilutive effect of securities that are convertible into common stock. The Company calculates diluted earnings per common share using the treasury stock method and the as-if-converted method, as applicable.
The following table presents the computation of net income (loss) per share:
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
2018
|
|
|
2017
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
437,259
|
|
|
$
|
234,353
|
|
|
|
$
|
(3,858,879
|
)
|
|
$
|
549,323
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
9,566,118
|
|
|
|
9,545,235
|
|
|
|
|
9,495,278
|
|
|
|
9,475,708
|
|
|
Plus dilutive effect of potential common shares
|
|
|
526,383
|
|
|
|
624,324
|
|
|
|
|
—
|
|
|
|
763,279
|
|
|
Weighted average common shares outstanding - diluted
|
|
|
10,092,501
|
|
|
|
10,169,559
|
|
|
|
|
9,495,278
|
|
|
|
10,238,987
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
|
$
|
0.02
|
|
|
|
$
|
(0.41
|
)
|
|
$
|
0.06
|
|
|
Diluted
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
|
|
$
|
(0.41
|
)
|
|
$
|
0.05
|
|
|
10
Diluted weighted average common shares outstanding for the three months ended September 30, 2018 and 2017, includes 526,383 and 624,324 options outstanding, respectively. Diluted weighted average co
mmon shares outstanding for the nine months ended September 30, 2017, includes 6,281 warrants and 756,998 options outstanding.
Potentially dilutive securities not included in the calculation of diluted net income (loss) per share because to do so would be anti-dilutive are as follows:
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
2018
|
|
|
2017
|
|
|
Employee stock options
|
|
|
244,543
|
|
|
|
375,277
|
|
|
|
|
887,287
|
|
|
|
427,645
|
|
|
Warrants outstanding
|
|
|
51,003
|
|
|
|
51,003
|
|
|
|
|
51,003
|
|
|
|
—
|
|
|
Total
|
|
|
295,546
|
|
|
|
426,280
|
|
|
|
|
938,290
|
|
|
|
427,645
|
|
|
Note 4. Cash, Cash Equivalents and Short-Term Investments
The following tables show the Company’s cash and cash equivalents and short-term investments by significant investment category as of September 30, 2018 and December 31, 2017:
|
|
September 30, 2018
|
|
|
|
Amortized Cost
|
|
|
Gross Unrealized Gain (Loss)
|
|
|
Estimated Fair Value
|
|
|
Cash and Cash Equivalents
|
|
|
Short-Term Investments
|
|
Cash
|
|
$
|
2,215,116
|
|
|
$
|
—
|
|
|
$
|
2,215,116
|
|
|
$
|
2,215,116
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
7,848,998
|
|
|
|
—
|
|
|
|
7,848,998
|
|
|
|
7,848,998
|
|
|
|
—
|
|
U.S. treasury securities
|
|
|
989,051
|
|
|
|
89
|
|
|
|
989,140
|
|
|
|
—
|
|
|
|
989,140
|
|
Subtotal
|
|
|
8,838,049
|
|
|
|
89
|
|
|
|
8,838,138
|
|
|
|
7,848,998
|
|
|
|
989,140
|
|
Level 2 (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
8,531,479
|
|
|
|
—
|
|
|
|
8,531,479
|
|
|
|
—
|
|
|
|
8,531,479
|
|
Corporate debt obligations
|
|
|
5,936,106
|
|
|
|
(2,008
|
)
|
|
|
5,934,098
|
|
|
|
—
|
|
|
|
5,934,098
|
|
Repurchase agreements
|
|
|
3,000,542
|
|
|
|
—
|
|
|
|
3,000,542
|
|
|
|
3,000,542
|
|
|
|
—
|
|
Asset-backed securities
|
|
|
3,312,145
|
|
|
|
(1,626
|
)
|
|
|
3,310,519
|
|
|
|
—
|
|
|
|
3,310,519
|
|
Subtotal
|
|
|
20,780,272
|
|
|
|
(3,634
|
)
|
|
|
20,776,638
|
|
|
|
3,000,542
|
|
|
|
17,776,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,833,437
|
|
|
$
|
(3,545
|
)
|
|
$
|
31,829,892
|
|
|
$
|
13,064,656
|
|
|
$
|
18,765,236
|
|
|
|
December 31, 2017
|
|
|
|
Amortized Cost
|
|
|
Gross Unrealized Losses
|
|
|
Estimated Fair Value
|
|
|
Cash and Cash Equivalents
|
|
|
Short-Term Investments
|
|
Cash
|
|
$
|
3,040,696
|
|
|
$
|
—
|
|
|
$
|
3,040,696
|
|
|
$
|
3,040,696
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
8,234,751
|
|
|
|
—
|
|
|
|
8,234,751
|
|
|
|
8,234,751
|
|
|
|
—
|
|
U.S. treasury securities
|
|
|
2,490,799
|
|
|
|
(5,540
|
)
|
|
|
2,485,259
|
|
|
|
—
|
|
|
|
2,485,259
|
|
Subtotal
|
|
|
10,725,550
|
|
|
|
(5,540
|
)
|
|
|
10,720,010
|
|
|
|
8,234,751
|
|
|
|
2,485,259
|
|
Level 2 (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
9,716,093
|
|
|
|
—
|
|
|
|
9,716,093
|
|
|
|
—
|
|
|
|
9,716,093
|
|
Corporate debt obligations
|
|
|
6,829,191
|
|
|
|
(9,414
|
)
|
|
|
6,819,777
|
|
|
|
—
|
|
|
|
6,819,777
|
|
Repurchase agreements
|
|
|
3,000,233
|
|
|
|
—
|
|
|
|
3,000,233
|
|
|
|
3,000,233
|
|
|
|
—
|
|
Asset-backed securities
|
|
|
3,018,276
|
|
|
|
(1,953
|
)
|
|
|
3,016,323
|
|
|
|
750,388
|
|
|
|
2,265,935
|
|
Subtotal
|
|
|
22,563,793
|
|
|
|
(11,367
|
)
|
|
|
22,552,426
|
|
|
|
3,750,621
|
|
|
|
18,801,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,330,039
|
|
|
$
|
(16,907
|
)
|
|
$
|
36,313,132
|
|
|
$
|
15,026,068
|
|
|
$
|
21,287,064
|
|
|
(1)
|
Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.
|
11
|
(2)
|
Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs tha
t are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
The Company’s investments were primarily valued based upon one or more valuations reported by its investment accounting and reporting service provider. The investment service provider values the securities using a hierarchical security pricing model that relies primarily on valuations provided by a third-party pricing vendor. Such valuations may be based on trade prices in active markets for identical assets or liabilities (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets or liabilities, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. The Company performs certain procedures to corroborate the fair value of its holdings, including comparing valuations obtained from its investment service provider with other pricing sources to validate the reasonableness of the valuations.
The Company typically invests in highly-rated securities, and its investment policy limits the amount of credit exposure to any one issuer. The policy requires investments in fixed income instruments denominated and payable in U.S. dollars only and requires investments to be investment grade, with a primary objective of minimizing the potential risk of principal loss.
The following table presents the Company’s short-term investments with unrealized losses by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2018:
|
|
Less Than 12 Months
|
|
Description of Securities
|
|
Estimated Fair Value
|
|
|
Unrealized Losses
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
Corporate debt obligations
|
|
$
|
4,482,979
|
|
|
$
|
(2,091
|
)
|
Asset-backed securities
|
|
|
3,310,519
|
|
|
|
(1,626
|
)
|
Total
|
|
$
|
7,793,498
|
|
|
$
|
(3,717
|
)
|
The Company considers the declines in market value of its short-term investments to be temporary in nature. Fair values were determined for each individual security in the investment portfolio. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investment’s cost basis. As of September 30, 2018, the Company does not consider any of its investments to be other-than temporarily impaired.
Contractual maturities of short-term investments as of September 30, 2018 are as follows:
|
|
Estimated Fair Value
|
|
Due within one year
|
|
$
|
18,765,236
|
|
Total
|
|
$
|
18,765,236
|
|
Note 5. Property and Equipment
Depreciation and amortization of property and equipment is calculated on the straight-line method based on estimated useful lives of six to ten years for tenant improvements and three to five years for all other property and equipment. Property and equipment consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Lab equipment
|
|
$
|
2,399,956
|
|
|
$
|
1,914,911
|
|
Computer equipment
|
|
|
169,366
|
|
|
|
169,366
|
|
Computer software
|
|
|
317,747
|
|
|
|
299,227
|
|
Furniture and fixtures
|
|
|
250,801
|
|
|
|
202,218
|
|
Tenant improvements
|
|
|
894,756
|
|
|
|
763,898
|
|
Other office equipment
|
|
|
132,817
|
|
|
|
63,825
|
|
|
|
|
4,165,443
|
|
|
|
3,413,445
|
|
Less accumulated depreciation
|
|
|
(2,799,134
|
)
|
|
|
(2,376,585
|
)
|
|
|
$
|
1,366,309
|
|
|
$
|
1,036,860
|
|
12
Depreciation expense was $156,093 and $114,358 for the three months ended September 30, 2018 and 2017, respectively, and $422,549 and $336,817 for the nine months ended September 30, 2018 and 2017, respectively.
Note 6. Acquisitions
Antenna Plus
On April 27, 2017, the Company completed the acquisition of substantially all of the assets of Antenna Plus. Antenna Plus is a supplier of antenna-based solutions for mobile and automotive fleet applications for government, public safety, and IOT markets. The acquisition provides leverage for the Company’s existing products into several new markets, including the fast-growing automotive fleet and industrial IOT space.
The transaction was completed pursuant to an Asset Purchase Agreement with MCA Financial Group, Ltd., acting as the court-appointed receiver for Antenna Plus. Upon the closing of the transaction, the Company paid to Antenna Plus total consideration of approximately $6.3 million in cash, net of post-closing working capital adjustments. In addition, the Company assumed certain contracts and other liabilities of Antenna Plus, as expressly set forth in the Asset Purchase Agreement.
The following table shows the allocation of the purchase price for Antenna Plus to the acquired identifiable assets, liabilities assumed and goodwill:
Consideration:
|
|
|
|
|
Cash
|
|
$
|
6,383,500
|
|
Working capital adjustments
|
|
|
(34,770
|
)
|
Fair value of total consideration transferred
|
|
$
|
6,348,730
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed:
|
|
|
|
|
Accounts receivable
|
|
$
|
584,390
|
|
Inventory
|
|
|
432,770
|
|
Fixed assets
|
|
|
402,958
|
|
Intangible assets
|
|
|
2,600,000
|
|
Current liabilities
|
|
|
(121,879
|
)
|
Total identifiable net assets acquired
|
|
|
3,898,239
|
|
Goodwill
|
|
|
2,450,491
|
|
Total
|
|
$
|
6,348,730
|
|
Goodwill was primarily attributable to the anticipated synergies and economies of scale expected from the operations of the combined business. The synergies include certain cost savings, operating efficiencies, and other strategic benefits projected to be achieved as a result of the acquisition. Goodwill is expected to be deductible for tax purposes.
Sales associated with the acquired Antenna Plus assets was $1.8 million and $3.3 million for the three and nine months ended September 30, 2017, respectively. Cost of goods sold associated with the acquired Antenna Plus assets was $0.8 million and $1.4 million for the three and nine months ended September 30, 2017, respectively. Net income associated with the acquired Antenna Plus assets was $308,750 and $11,176 for the three and nine months ended September 30, 2017, respectively.
Unaudited Pro Forma Information
The following unaudited pro forma financial information presents combined results of operations for each of the periods presented, as if Antenna Plus had been acquired as of the beginning of the fiscal year 2017. The pro forma information includes adjustments to amortization and depreciation for intangible assets and property, plant and equipment acquired. The pro forma data are for informational purposes only and are not necessarily indicative of the consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal year 2017 or of the results of future operations of the combined business. Consequently, actual results will differ from the unaudited pro forma information presented below:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2017
|
|
Pro forma sales
|
|
$
|
12,448,436
|
|
|
$
|
38,982,040
|
|
Pro forma income from operations
|
|
$
|
200,632
|
|
|
$
|
1,047,435
|
|
Pro forma net income
|
|
$
|
234,353
|
|
|
$
|
1,097,806
|
|
13
Skycross
On December 17, 2015, the Company executed and entered into an asset purchase agreement for certain North American assets of Skycross, Inc. (Skycross), a manufacturer of advanced antenna and radio-frequency solutions. In addition to the $4.0 million paid up front, the purchase price also included a contingent consideration arrangement. The $1.0 million of contingent consideration is payable upon the later of (i) the expiration of the Transition Services Agreement between the Company and Skycross which defined transition services to be provided by Skycross to the Company and (ii) the date on which the Company received copies of third party approvals with respect to each customer and program that was purchased. The potential undiscounted amount of all future payments that could be required to be paid under the contingent consideration arrangement was between zero and $1.0 million. The fair value of the contingent consideration was estimated by applying the income approach. The income approach is based on estimating the value of the present worth of future net cash flows. During the nine months ended September 30, 2018, the Company and Skycross came to an agreement that the Company would pay Skycross $375,000 to settle all outstanding balances between the parties, which included $1.0 million of deferred purchase price and $125,802 due to Skycross and $362,069 of accounts receivable from Skycross. The settlement with Skycross resulted in the recognition of a gain on deferred purchase price liability of $388,733 during the nine months ended September 30, 2018 in the unaudited condensed statements of operations.
Note 7. Intangible Assets
The following is a summary of the Company’s acquired intangible assets:
|
|
September 30, 2018
|
|
|
|
Weighted
Average
Amortization
Period (years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Intangibles, Net
|
|
Customer relationships
|
|
|
10
|
|
|
$
|
4,830,000
|
|
|
$
|
1,116,332
|
|
|
$
|
3,713,668
|
|
Developed technologies
|
|
|
9
|
|
|
|
1,080,000
|
|
|
|
241,515
|
|
|
|
838,485
|
|
Tradename
|
|
|
3
|
|
|
|
120,000
|
|
|
|
56,667
|
|
|
|
63,333
|
|
Non-compete agreement
|
|
|
3
|
|
|
|
67,000
|
|
|
|
62,273
|
|
|
|
4,727
|
|
Total intangible assets, net
|
|
|
10
|
|
|
$
|
6,097,000
|
|
|
$
|
1,476,787
|
|
|
$
|
4,620,213
|
|
|
|
December 31, 2017
|
|
|
|
Weighted
Average
Amortization
Period (years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Intangibles, Net
|
|
Customer relationships
|
|
|
10
|
|
|
$
|
4,830,000
|
|
|
$
|
754,082
|
|
|
$
|
4,075,918
|
|
Developed technologies
|
|
|
9
|
|
|
|
1,080,000
|
|
|
|
142,477
|
|
|
|
937,523
|
|
Tradename
|
|
|
3
|
|
|
|
120,000
|
|
|
|
26,667
|
|
|
|
93,333
|
|
Non-compete agreement
|
|
|
3
|
|
|
|
67,000
|
|
|
|
45,523
|
|
|
|
21,477
|
|
Total intangible assets, net
|
|
|
10
|
|
|
$
|
6,097,000
|
|
|
$
|
968,749
|
|
|
$
|
5,128,251
|
|
The estimated annual amortization of intangible assets for the next five years and thereafter is shown in the following table. Actual amortization expense to be reported in future periods could differ from these estimates as a result of acquisitions, divestitures, asset impairments, among other factors. Amortization expense was $169,346 and $74,402 for the three months ended September 30, 2018 and 2017, respectively, and $508,038 and $396,206 for the nine months ended September 30, 2018 and 2017, respectively.
|
|
Estimated Future Amortization
|
|
2018 (remaining three months)
|
|
$
|
168,490
|
|
2019
|
|
|
655,052
|
|
2020
|
|
|
627,667
|
|
2021
|
|
|
598,420
|
|
2022
|
|
|
563,000
|
|
Thereafter
|
|
|
2,007,584
|
|
Total
|
|
$
|
4,620,213
|
|
14
Note 8. Long-term Notes Payable (including current portion) and Line of Credit
In December 2013, the Company amended its revolving line of credit under the amended and restated loan and security agreement with Silicon Valley Bank to include a growth capital term loan of up to $750,000. The growth capital term loan required interest only payments through June 30, 2014 at which point it was to be repaid in 32 equal monthly installments of interest and principal. The growth capital term loan matured on February 1, 2017, at which time $55,230 in principal and accrued interest was paid. The growth capital term loan interest rate was 6.5%. As of September 30, 2018 and December 31, 2017, there was no balance owed under this loan.
In December 2015, the Company further amended its amended and restated loan and security agreement with Silicon Valley Bank to include a term loan in the amount of $4.0 million. The loan requires 36 monthly installments of interest and principal. The loan matures on December 1, 2018. Effective September 2017, the Company further amended its amended and restated loan and security agreement with Silicon Valley Bank to update the financial covenants. The amended and restated loan and security agreement required the Company to maintain, at all times, measured as of the last day of each month (unless otherwise specified) either (i) a minimum cash balance of unrestricted cash at Silicon Valley Bank or its affiliate of not less than $25.0 million dollars or (ii) a liquidity ratio of 1.25 to 1.00 and a minimum EBITDA measured as of the last day of each fiscal quarter for the previous six month period. The interest rate was fixed at 5.0%.
In January 2018, the Company entered into a second amended and restated loan and security agreement (the Amended Loan Agreement) with Silicon Valley Bank. The Amended Loan Agreement modified the amended and restated loan and security agreement to, among other things, increase the aggregate principal amount available under the revolving line of credit from $3.0 million to $10.0 million and modify certain existing financial covenants. There was no balance owed on the line of credit as of September 30, 2018.
Under the Amended Loan Agreement, the Company may borrow up to $10.0 million under the line of credit, subject to a borrowing base limit of 80% of the aggregate face amount of all eligible receivables. The Amended Loan Agreement removed the minimum EBITDA requirement previously applicable to the line of credit and term loan and maintained the liquidity ratio financial covenant such that the Company must maintain a ratio of cash and cash equivalents plus accounts receivable outstanding debt under the Amended Loan Agreement minus deferred revenue of 1.25 to 1.00.
The Company will be required to pay interest on borrowings outstanding, if any, under the revolving line of credit at a floating rate per annum equal to 1% above the Wall Street Journal prime rate (5.00% as of September 30, 2018) (or, if unavailable, the Silicon Valley Bank prime rate) on a monthly basis, so long as the Company maintains a liquidity ratio of cash and cash equivalents plus accounts receivable to outstanding debt under the Amended Loan Agreement minus deferred revenue of 1.50 to 1.00. If this liquidity ratio is not met, the Company will be subject to a minimum interest charge of $3,000 per month and borrowings outstanding, if any, under the revolving line of credit will accrue interest at a floating rate per annum equal to 2% above the Wall Street Journal prime rate (5.00% as of September 30, 2018) (or, if unavailable the Silicon Valley Bank prime rate) on a monthly basis. Prior to the amendment in January 2018, the revolving line of credit bore interest rate at the U.S. prime rate plus 1.25%. The revolving line of credit matures on January 31, 2020.
Borrowings outstanding under the term loan under the amended and restated loan and security agreement will continue to be repaid in equal monthly installments of interest and principal and matures on December 1, 2018.
Silicon Valley Bank maintains a first security interest over the Company’s assets, excluding intellectual property, for which Silicon Valley Bank has received a negative pledge. The Amended Loan Agreement contains customary affirmative and negative covenants and events of default applicable to the Company and any of its subsidiaries.
The remaining principal payments on the $4.0 million term loan subsequent to September 30, 2018 are as follows:
Year ending:
|
|
|
|
|
2018 (remaining three months)
|
|
$
|
333,333
|
|
|
|
$
|
333,333
|
|
The Company was in compliance with its financial covenants in the Amended Loan Agreement as of September 30, 2018.
15
Note 9. Treasury Stock
In August 2017, the Company’s Board of Directors (the Board) approved a share repurchase program pursuant to which the Company may purchase up to $7.0 million of shares of its common stock over the twelve month period following the establishment of the program. The repurchases under the share repurchase program are made from time to time in the open market or in privately negotiated transactions and are funded from the Company’s working capital. Repurchases will be made in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, subject to market conditions, available liquidity, cash flow, applicable legal requirements and other factors. All shares of common stock repurchased under the Company’s share repurchase program will be returned to the status of authorized but unissued shares of common stock. On August 7, 2018, the Board approved an extension to the existing share repurchase program for an additional twelve month period ending August 14, 2019.
During the three and nine months ended September 30, 2018, the Company repurchased 42,995 and 193,523 shares of common stock, respectively, under the share repurchase program. For the three months ended September 30, 2018, the shares were repurchased at an average price per share of $11.95 per share, for a total cost of $0.5 million. For the nine months ended September 30, 2018, the shares were repurchased at an average price of $9.49 per share, for a total cost of $1.8 million. As of September 30, 2018, the Company has repurchased a total of $3.1 million in common stock under the share repurchase program.
Note 10. Income Taxes
The Company’s effective income tax rate was -2.94% and 9.74% for the nine months ended September 30, 2018 and 2017, respectively. The variance from the U.S. federal statutory tax rate of 21% and 34% for the nine months ended September 30, 2018 and 2017, respectively, was primarily attributable to the utilization of deferred tax attributes that had a full valuation allowance.
Management assesses its deferred tax assets quarterly to determine whether all or any portion of the asset is more likely than not unrealizable under Accounting Standards Codification (ASC) Topic 740. The Company is required to establish a valuation allowance for any portion of the asset that management concludes is more likely than not to be unrealizable. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company’s assessment considers all evidence, both positive and negative, including the nature, frequency and severity of any current and cumulative losses, taxable income in carryback years, the scheduled reversal of deferred tax liabilities, tax planning strategies, and projected future taxable income in making this assessment. At September 30, 2018 and December 31, 2017, the Company has a valuation allowance against net deferred tax assets but for the exclusion of a deferred tax liability generated by goodwill (an indefinite lived intangible) that may not be considered a future source of taxable income in evaluating the need for a valuation allowance.
Note 11. Stockholders’ Equity
Shares Reserved for Future Issuance
The following common stock is reserved for future issuance at September 30, 2018 and December 31, 2017:
|
|
September 30, 2018 (1)
|
|
|
December
31, 2017 (1)
|
|
Warrants issued and outstanding
|
|
|
51,003
|
|
|
|
51,003
|
|
Stock option awards issued and outstanding
|
|
|
1,479,654
|
|
|
|
1,203,627
|
|
Authorized for grants under the 2016 Equity Incentive Plan
|
|
|
438,584
|
|
|
|
633,052
|
|
Authorized for grants under the 2016 Employee Stock Purchase Plan
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
2,069,241
|
|
|
|
1,987,682
|
|
|
(1)
|
Treasury stock in the amount of 328,523 and 135,000 as of September 30, 2018 and December 31, 2017, respectively, are excluded from the table above.
|
16
Note 12. Stock Options
The following table summarizes the outstanding stock option activity during the periods indicated:
|
|
Number
of shares
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining contractual term
|
|
Balance at December 31, 2017
|
|
|
1,203,627
|
|
|
$
|
7.06
|
|
|
|
8.10
|
|
Granted
|
|
|
998,800
|
|
|
|
9.90
|
|
|
|
7.33
|
|
Exercised
|
|
|
(297,719
|
)
|
|
|
2.07
|
|
|
|
0.91
|
|
Expired/Forfeited
|
|
|
(425,054
|
)
|
|
|
11.87
|
|
|
|
0.04
|
|
Balance at September 30, 2018
|
|
|
1,479,654
|
|
|
$
|
8.60
|
|
|
|
8.26
|
|
Vested and exercisable at September 30, 2018
|
|
|
488,427
|
|
|
$
|
5.83
|
|
|
|
6.91
|
|
Vested and expected to vest at September 30, 2018
|
|
|
1,479,654
|
|
|
$
|
8.60
|
|
|
|
8.26
|
|
The weighted average grant date fair value of options granted during the nine months ended September 30, 2018 and for the year ended December 31, 2017 was $3.98 and $6.02, respectively. For fully vested stock options, the aggregate intrinsic value as of September 30, 2018 and December 31, 2017 was $3,778,754 and $3,596,624, respectively. For stock options expected to vest, the aggregate intrinsic value as of September 30, 2018 and December 31, 2017 was $3,449,919 and $1,469,154, respectively.
At September 30, 2018 and December 31, 2017, there was $3,244,431 and $2,453,342, respectively, of total unrecognized compensation cost related to unvested stock options granted under the Company’s equity plans. That cost is expected to be recognized over the next three years and is based on the date the options were granted.
The Company currently uses authorized and unissued shares to satisfy share award exercises.
Note 13. Commitments and Contingencies
Operating Leases
The Company has entered into lease agreements for office space and research facilities in San Diego, California, Rancho Santa Fe, California, Poway, California, Melbourne, Florida, Scottsdale, Arizona, Taipei, Taiwan, Shenzhen and Jiangsu, China, and Cambridgeshire, United Kingdom. Rent expense was $220,081 and $223,866 for the three months ended September 30, 2018 and 2017, respectively, and $687,113 and $615,176 for the nine months ended September 30, 2018 and 2017, respectively. The longest lease expires in February 2022. The Company moved into its facility in San Diego, California during the year ended December 31, 2014. The San Diego facility lease agreement included a tenant improvement allowance which provided for the landlord to pay for tenant improvements on behalf of the Company up to $515,000. Based on the terms of this landlord incentive and involvement of the Company in the construction process, the leasehold improvements purchased under the landlord incentive were determined to be property of the Company.
The future minimum lease payments required under operating leases in effect at September 30, 2018 were as follows:
Year ending:
|
|
|
|
|
2018 (remaining three months)
|
|
$
|
247,687
|
|
2019
|
|
|
832,039
|
|
2020
|
|
|
502,461
|
|
2021
|
|
|
134,529
|
|
2022
|
|
|
22,527
|
|
|
|
$
|
1,739,243
|
|
17
Note 14. Concentration of Credit Risk
(a)
|
Concentration of Sales and Accounts Receivable
|
The following represents customers that accounted for 10% or more of total revenue during the three and nine months ended September 30, 2018 and 2017 and customers that accounted for 10% or more of total trade accounts receivable at September 30, 2018 and 2017.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Percentage of net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
38%
|
|
|
24%
|
|
|
35%
|
|
|
22%
|
|
Customer B
|
|
|
9
|
|
|
|
14
|
|
|
|
8
|
|
|
|
14
|
|
Customer C
|
|
|
7
|
|
|
|
11
|
|
|
|
7
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
Percentage of gross trade accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
24%
|
|
|
22%
|
|
|
|
|
|
|
|
|
|
Customer B
|
|
|
16
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Customer C
|
|
|
13
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
Customer D
|
|
|
10
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
Net revenue by geographic area are as follows. Revenue is attributed by geographic location based on the bill-to location of the Company’s customers.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Percentage of net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
79%
|
|
|
71%
|
|
|
73%
|
|
|
68%
|
|
|
Other Asia
|
|
|
5
|
|
|
|
4
|
|
|
|
6
|
|
|
|
13
|
|
|
North America
|
|
|
13
|
|
|
|
19
|
|
|
|
16
|
|
|
|
14
|
|
|
Europe
|
|
|
3
|
|
|
|
6
|
|
|
|
5
|
|
|
|
5
|
|
|
Although the Company ships the majority of antennas to its customers in China (primarily Original Design Manufacturers and distributors), the end-users of the Company’s products are much more geographically diverse.
(c)
|
Concentration of Purchases
|
During the three and nine months ended September 30, 2018, primarily all of the Company’s products were manufactured by two vendors in China and by the Company’s facilities in Arizona. During the three and nine months ended September 30, 2017, all of the Company’s products were manufactured by two vendors in China and by the Company’s facilities in Wisconsin and Arizona.
Note 15. Termination Costs
On June 30, 2018, the Company terminated a marketing-related agreement to better align its sales and marketing efforts with its longer-term growth objectives and near-to-intermediate term profitability goals. In consideration of terminating the agreement, the Company paid $1.3 million in termination costs. The termination costs were included in sales and marketing expense on the unaudited condensed statements of operations for the nine months ended September 30, 2018.
On May 2, 2018, Charles Myers, the Company’s Chief Executive Officer, President and member of the Board resigned from all positions with the Company, effective immediately, to pursue other opportunities. The Board accepted Mr. Myers resignation on May
18
2, 2018. Mr. Myer’s decision to resign was not related to a disagreement with the Company over any of
its operations, policies, or practices.
In connection with his resignation, Mr. Myers, upon a general release of claims as set forth in his employment agreement, received a lump sum cash payment in the amount of $484,000; a lump sum cash payment in the amount of $3,200 covering twelve months of monthly premiums for disability insurance under the Company’s disability insurance plan; a lump sum cash payment in the amount of $20,000 covering certain other employment benefits; the acceleration of all his unvested options for a total of 282,994 shares and the continuation of his health coverage pursuant to COBRA at the Company’s expense for a period of twelve months following his last day of employment. In connection with Mr. Myers’ resignation, the Company recognized stock compensation expense of $1.2 million for the nine months ended September 30, 2018. Mr. Myer’s costs were included in general and administrative expense on the unaudited condensed statements of operations for the nine months ended September 30, 2018. As of September 30, 2018, the remaining amount payable to Mr. Myers is $20,389.
On April 2, 2018, Glenn Selbo, the Company’s Chief Operating Officer, resigned from his position with the Company. Following his resignation, Mr. Selbo will be providing consulting services to the Company. Mr. Selbo’s outstanding stock options continue to vest during the term of his consulting services.
In connection with his resignation, Mr. Selbo, upon a general release of claims as set forth in his employment agreement, received a lump sum cash payment in the amount of $150,000 and the continuation of his health coverage pursuant to COBRA at the Company’s expense for a period of six months following his last day of employment. In connection with Mr. Selbo’s resignation, the Company recognized stock compensation expense of $44,267. Mr. Selbo’s costs were included in sales and marketing expense on the unaudited condensed statements of operations for the nine months ended September 30, 2018. As of September 30, 2018, there are no further amounts owed to Mr. Selbo.
19