UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM       TO       

Commission file number: 001-37851

 

AIRGAIN, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-0281763

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

3611 Valley Centre Drive, Suite 150

San Diego, CA

 

92130

(Address of Principal Executive Offices)

 

(Zip Code)

(760) 579-0200

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes    No

As of November 14, 2016, the registrant had 7,579,725 shares of Common Stock ($0.0001 par value) outstanding.

 

 

 

 


 

AIRGAIN, INC.

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

 

3

Unaudited Condensed Balance Sheets as of September 30, 2016 and December 31, 2015

 

3

Unaudited Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015

 

5

Unaudited Condensed Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2016

 

6

Unaudited Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015

 

7

Notes to Unaudited Condensed Financial Statements

 

8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

26

Item 4. Controls and Procedures

 

27

PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

28

Item 1A. Risk Factors

 

28

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

28

Item 3. Defaults Upon Senior Securities

 

28

Item 4. Mine Safety Disclosures

 

28

Item 5. Other Information

 

28

Item 6. Exhibits

 

28

SIGNATURES

 

29

 

 

 

 


 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Airgain, Inc.

Unaudited Condensed Balance Sheets

 

 

 

September 30, 2016

 

 

December 31, 2015

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

16,826,304

 

 

$

5,335,913

 

Trade accounts receivable, net

 

 

5,766,465

 

 

 

3,731,998

 

Inventory

 

 

105,019

 

 

 

119,733

 

Prepaid expenses and other current assets

 

 

439,398

 

 

 

191,502

 

Total current assets

 

 

23,137,186

 

 

 

9,379,146

 

Property and equipment, net

 

 

945,007

 

 

 

1,026,784

 

Goodwill

 

 

1,249,956

 

 

 

1,249,956

 

Customer relationships, net

 

 

2,901,668

 

 

 

3,137,918

 

Intangible assets, net

 

 

305,315

 

 

 

345,069

 

Other assets

 

 

96,119

 

 

 

121,541

 

Total assets

 

$

28,635,251

 

 

$

15,260,414

 

Liabilities, preferred redeemable convertible stock, and stockholders’ equity (deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,183,395

 

 

$

2,873,471

 

Accrued bonus

 

 

1,142,243

 

 

 

1,335,500

 

Accrued liabilities

 

 

796,033

 

 

 

660,987

 

Deferred purchase price

 

 

1,000,000

 

 

 

1,000,000

 

Current portion of long-term notes payable

 

 

1,463,300

 

 

 

1,625,030

 

Current portion of deferred rent obligation under operating lease

 

 

81,332

 

 

 

81,332

 

Total current liabilities

 

 

8,666,303

 

 

 

7,576,320

 

Preferred stock warrant liability

 

 

 

 

 

709,504

 

Long-term notes payable

 

 

1,666,667

 

 

 

2,721,865

 

Deferred tax liability

 

 

7,900

 

 

 

 

Deferred rent obligation under operating lease

 

 

478,592

 

 

 

558,641

 

Total liabilities

 

 

10,819,462

 

 

 

11,566,330

 

Preferred redeemable convertible stock:

 

 

 

 

 

 

 

 

Series E preferred redeemable convertible stock— 10,500,000 shares authorized at December 31, 2015; 0 shares and 8,202,466 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively; aggregate liquidation preference of $0 and $16,274,823 at September 30, 2016 and December 31, 2015, respectively

 

 

 

 

 

16,274,823

 

Series F preferred redeemable convertible stock— 5,000,000 shares authorized at December 31, 2015; 0 shares and 4,734,374 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively; aggregate liquidation preference of $0 and $10,517,081 at September 30, 2016 and December 31, 2015, respectively

 

 

 

 

 

10,517,081

 

Series G preferred redeemable convertible stock— 23,500,000 shares authorized at December 31, 2015; 0 shares and 10,334,862 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively; aggregate liquidation preference of  $0 and $17,987,553 at September 30, 2016 and December 31, 2015, respectively

 

 

 

 

 

16,315,002

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Preferred convertible stock:

 

 

 

 

 

 

 

 

3


 

Series A preferred convertible stock— 313,500 shares authorized at December 31, 2015; 0 shares and 313,500 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively; aggregate liquidation preference of $0 and $2,416,194 at September 30, 2016 and December 31, 2015, respectively

 

 

 

 

 

976,000

 

Series B preferred convertible stock— 1,183,330 shares authorized at December 31, 2015; 0 shares and 1,157,606 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively; aggregate liquidation preference of $0 and $5,081,890 at September 30, 2016 and December 31, 2015, respectively

 

 

 

 

 

2,457,253

 

Series C preferred convertible stock— 682,000 shares authorized at December 31, 2015; 0 shares and 682,000 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively; aggregate liquidation preference of $0 and $682,000 at September 30, 2016 and December 31, 2015, respectively

 

 

 

 

 

549,010

 

Series D preferred convertible stock— 4,276,003 shares authorized at December 31, 2015; 0 shares and 4,091,068 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively; aggregate liquidation preference of $0 and $4,516,013 at September 30, 2016 and December 31, 2015, respectively

 

 

 

 

 

1,986,286

 

Common shares, par value $0.0001, 200,000,000 and 80,000,000 shares authorized at September 30, 2016 and December 31, 2015, respectively; 7,577,525 and 665,842 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

758

 

 

 

1,094,375

 

Additional paid in capital

 

 

62,540,825

 

 

 

 

Accumulated deficit

 

 

(44,725,794

)

 

 

(46,475,746

)

Total stockholders’ equity (deficit)

 

 

17,815,789

 

 

 

(39,412,822

)

Commitments and contingencies (note 13)

 

 

 

 

 

 

 

 

Total liabilities, preferred redeemable convertible stock and stockholders’ equity (deficit)

 

$

28,635,251

 

 

$

15,260,414

 

 

 

 

 

See accompanying notes to unaudited condensed financial statements.

 

 

4


 

Airgain, Inc.

Unaudited Condensed Statements of Operations

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Sales

 

$

12,439,279

 

 

$

6,668,732

 

 

$

30,807,902

 

 

$

18,459,590

 

Cost of goods sold

 

 

6,862,992

 

 

 

3,893,657

 

 

 

17,007,228

 

 

 

10,657,495

 

Gross profit

 

 

5,576,287

 

 

 

2,775,075

 

 

 

13,800,674

 

 

 

7,802,095

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

1,432,581

 

 

 

1,075,228

 

 

 

4,096,670

 

 

 

3,099,080

 

Sales and marketing

 

 

1,453,391

 

 

 

940,155

 

 

 

4,078,250

 

 

 

2,840,514

 

General and administrative

 

 

1,459,993

 

 

 

830,723

 

 

 

3,304,790

 

 

 

2,393,433

 

Total operating expenses

 

 

4,345,965

 

 

 

2,846,106

 

 

 

11,479,710

 

 

 

8,333,027

 

Income (loss) from operations

 

 

1,230,322

 

 

 

(71,031

)

 

 

2,320,964

 

 

 

(530,932

)

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

(1,735

)

 

 

 

 

 

(1,735

)

 

 

 

Interest expense

 

 

41,735

 

 

 

7,311

 

 

 

141,505

 

 

 

25,000

 

Fair market value adjustment - warrants

 

 

 

 

 

(78,833

)

 

 

(460,289

)

 

 

(336,971

)

Total other expense (income)

 

 

40,000

 

 

 

(71,522

)

 

 

(320,519

)

 

 

(311,971

)

Income (loss) before income taxes

 

 

1,190,322

 

 

 

491

 

 

 

2,641,483

 

 

 

(218,961

)

Provision (benefit) for income taxes

 

 

7,278

 

 

 

(178

)

 

 

8,078

 

 

 

9,222

 

Net income (loss)

 

 

1,183,044

 

 

 

669

 

 

 

2,633,405

 

 

 

(228,183

)

Accretion of dividends on preferred convertible stock

 

 

(322,170

)

 

 

(617,493

)

 

 

(1,537,021

)

 

 

(1,827,461

)

Net income (loss) attributable to common stockholders

 

$

860,874

 

 

$

(616,824

)

 

$

1,096,384

 

 

$

(2,055,644

)

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.21

 

 

$

(0.93

)

 

$

0.59

 

 

$

(3.18

)

Diluted

 

$

0.16

 

 

$

(1.05

)

 

$

0.25

 

 

$

(3.70

)

Weighted average shares used in calculating income (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

4,133,020

 

 

 

662,415

 

 

 

1,849,647

 

 

 

646,877

 

Diluted

 

 

6,689,332

 

 

 

662,415

 

 

 

3,103,784

 

 

 

646,877

 

 

See accompanying notes to unaudited condensed financial statements.

 

 

5


 

Airgain, Inc.

Unaudited Condensed Statement of Stockholders’ Equity

 

 

 

Preferred

Convertible Stock

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity (Deficit)

 

Balance at December 31, 2015

 

 

6,244,174

 

 

$

5,968,549

 

 

 

665,842

 

 

$

1,094,375

 

 

$

 

 

$

(46,475,746

)

 

$

(39,412,822

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

224,039

 

 

 

 

 

 

224,039

 

Conversion of warrants

 

 

 

 

 

 

 

 

127,143

 

 

 

 

 

 

249,215

 

 

 

 

 

 

249,215

 

Exercise of stock options

 

 

 

 

 

 

 

 

46,500

 

 

 

112,100

 

 

 

 

 

 

 

 

 

112,100

 

Effect of accretion to redemption value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(473,254

)

 

 

(883,453

)

 

 

(1,356,707

)

Change in par value from no par value to $0.0001

 

 

 

 

 

 

 

 

 

 

 

(1,206,391

)

 

 

1,206,391

 

 

 

 

 

 

 

Issuance of common stock upon initial public offering, net of issuance costs

 

 

 

 

 

 

 

 

1,700,100

 

 

 

170

 

 

 

10,776,559

 

 

 

 

 

 

10,776,729

 

Issuance of warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

126,218

 

 

 

 

 

 

126,218

 

Conversion of preferred redeemable convertible stock to common stock upon initial public offering

 

 

 

 

 

 

 

 

3,778,753

 

 

 

378

 

 

 

44,463,234

 

 

 

 

 

 

44,463,612

 

Conversion of preferred convertible stock to common stock upon initial public offering

 

 

(6,244,174

)

 

 

(5,968,549

)

 

 

1,259,187

 

 

 

126

 

 

 

5,968,423

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,633,405

 

 

 

2,633,405

 

Balance at September 30, 2016

 

 

 

 

$

 

 

 

7,577,525

 

 

$

758

 

 

$

62,540,825

 

 

$

(44,725,794

)

 

$

17,815,789

 

 

See accompanying notes to unaudited condensed financial statements.

 

 

6


 

Airgain, Inc.

Unaudited Condensed Statements of Cash Flows

 

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

2,633,405

 

 

$

(228,183

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

357,425

 

 

 

343,529

 

Amortization

 

 

276,004

 

 

 

 

Fair market value adjustment - warrants

 

 

(460,289

)

 

 

(336,971

)

Stock-based compensation

 

 

224,039

 

 

 

310,719

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(2,034,467

)

 

 

127,128

 

Inventory

 

 

14,714

 

 

 

(136,068

)

Prepaid expenses and other assets

 

 

(214,574

)

 

 

25,411

 

Accounts payable

 

 

1,309,924

 

 

 

(77,163

)

Accrued bonus

 

 

(193,257

)

 

 

(156,966

)

Accrued liabilities

 

 

135,046

 

 

 

188,010

 

Deferred obligation under operating lease

 

 

(80,049

)

 

 

(68,717

)

Net cash provided by (used in) operating activities

 

 

1,967,921

 

 

 

(9,271

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(275,649

)

 

 

(93,455

)

Net cash used in investing activities

 

 

(275,649

)

 

 

(93,455

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayment of notes payable

 

 

(1,216,928

)

 

 

(203,169

)

Proceeds from initial public offering

 

 

13,600,800

 

 

 

 

Costs related to initial public offering

 

 

(2,697,853

)

 

 

 

Proceeds from exercise of warrants

 

 

 

 

 

225,000

 

Proceeds from exercise of stock options

 

 

112,100

 

 

 

77,372

 

Net cash provided by financing activities

 

 

9,798,119

 

 

 

99,203

 

Net increase (decrease) in cash and cash equivalents

 

 

11,490,391

 

 

 

(3,523

)

Cash, beginning of period

 

 

5,335,913

 

 

 

3,590,745

 

Cash, end of period

 

$

16,826,304

 

 

$

3,587,222

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

141,505

 

 

$

25,000

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Accretion of Series E, F, and G preferred redeemable convertible stock to redemption

   amount

 

$

1,356,707

 

 

$

1,612,500

 

Conversion of warrants

 

$

249,215

 

 

$

 

Conversion of preferred stock into common stock

 

$

50,432,161

 

 

$

 

Issuance of warrants to underwriters in connection with initial public offering

 

$

126,218

 

 

$

 

 

See accompanying notes to unaudited condensed financial statements.

 

 

7


 

Airgain, Inc.

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 embedded antenna technologies used to enable high performance wireless networking across a broad range of home, enterprise, and industrial devices. The Company designs, develops, and engineers its antenna products for original equipment and design manufacturers worldwide. The Company’s main office is in San Diego, California with office space and research facilities in San Diego, California, Taipei, Taiwan, Shenzhen and Jiangsu, China and Cambridgeshire, United Kingdom.

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 final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on August 12, 2016.

The condensed balance sheet as of December 31, 2015 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 months ended September 30, 2016 and September 30, 2015 and the nine months ended September 30, 2016 and September 30, 2015, and the balance sheet data as of September 30, 2016 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, 2016 or for any future period. 

In July 2016, the Company effected a one-for-ten reverse stock split of its common stock.  All issued and outstanding common stock and per share amounts contained in the financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.  

 

Inventory

The vast 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 name 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.  

 

Segment Information

The Company’s operations are located primarily in the United States, and most of its assets are located in San Diego, California. The Company operates in one segment related to the sale of antenna products. The Company’s chief operating decision-maker is its chief executive officer, who reviews operating results on an aggregate basis and manages the Company’s opertions as a single operating segment.

Initial Public Offering

On August 17, 2016, the Company completed its initial public offering (IPO) in which it issued and sold 1.5 million shares of common stock at a public offering price of $8.00 per share. The Company received net proceeds of approximately $9.3 million after deducting underwriting discounts and commissions of $1.0 million and estimated offering-related transaction costs of approximately $1.7 million. Upon the closing of the IPO, all shares of the Company’s then-outstanding preferred redeemable convertible stock and preferred convertible stock automatically converted into an aggregate of 3,080,733 shares of common stock and the Company issued

8


 

1,957,207 shares of common stock in satisfaction of accumulated dividends.  Additionally, the Company reduced the number of preferred shares authorized to a total of 10,000,000 shares.

On August 29, 2016 the underwriters exercised their over-allotment option to purchase an additional 200,100 shares of common stock at the public offering price of $8.00 per share, which resulted in net proceeds to the Company of approximately $1.5 million, after deducting underwriting discounts, commissions and estimated offering-related transaction costs of approximately $0.1 million.

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 the preferred redeemable convertible stock warrant liability and determining the assumptions used in measuring stock-based compensation expense.

 

 

Note 2. Summary of Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies as described in the Proscpectus that have had a material impact on the Company’s unaudited condensed financial statements and related notes.  

 

Fair Value Measurements

The carrying values of the Company’s financial instruments, including cash, trade accounts receivable, accounts payable, and accrued liabilities approximate their fair values due to the short maturity of these instruments.

Fair value measurements are market-based measurements, not entity-specific measurements. Therefore, fair value measurements are 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 value 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.

Because some of the inputs to the Company’s valuation model were either not observable or were not derived principally from or corroborated by observable market data by correlation or other means, the warrant liability was classified as Level 3 in the fair value hierarchy.

 

The following table provides a summary of the recognized liabilities carried at fair value on a recurring basis:

 

 

 

Balance as of December 31, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Warrant liability (note 10)

 

$

 

 

 

 

 

$

709,504

 

The Company’s accounting policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no transfers into or out of Level 1, Level 2, or Level 3 for the nine months ended September 30, 2016 and the year ended December 31, 2015.

The following table provides a rollforward of the Company’s Level 3 fair value measurements during the nine months ended September 30, 2016 and 2015:

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

Beginning balance

 

$

709,504

 

 

$

809,974

 

Change in fair value of warrant liability

 

 

(460,289

)

 

 

(336,971

)

Conversion of warrants

 

 

(249,215

)

 

 

 

Ending balance

 

$

 

 

$

473,003

 

9


 

 

In May 2016, the warrants were amended such that the warrants became immediately exercisable into shares of the Company’s common stock. Concurrent with such amendment, the holders of the outstanding warrants elected to net exercise the warrants, and the Company issued an aggregate of 127,143 shares of common stock. A final valuation of the warrants was completed and the remaining balance was reclassified to additional paid in capital.

Recent Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board (FASB), issued Accounting Standards Update, or ASU, No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments which simplifies the way cash receipts and cash payments are presented on the statement of cash flows.  For public entities, ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those annual periods.  Early adoption is permitted.  The Company is currently evaluating the impact the guidance will have on its financial statements.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09 Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company has adopted this standard.  The impact on the financial statements was immaterial.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-2), which requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The new standard is effective January 1, 2019. The Company is evaluating the effect that ASU 2014-09 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 the Company’s ongoing financial reporting.

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This guidance simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets all be classified as noncurrent in a classified statement of financial position. The guidance is effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on its financial statements.

In September 2015, the FASB issued Accounting Standards Update No. 2015-16, Business Combinations (Topic 815): Simplifying the Accounting Measurement-Period Adjustments. This guidance requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The guidance is effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2015. The Company does not expect the adoption of this guidance to have a material impact on its financial statements.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory.  The update requires companies to measure certain inventory at the lower of cost and net realizable value.  This guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those years on a prospective basis.  Early application is permitted.  The Company does not expect the adoption of this guidance to have a material impact on its financial statements.  

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with customers (ASU 2014-09), 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. The new standard is effective for us on January 1, 2019. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 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 that standard on the Company’s ongoing financial reporting.

 

 

Note 3. Net Income (Loss) Per Share

Basic net income or loss per share is calculated by dividing net income or loss available to common stockholders by the weighted average shares of common stock outstanding for the period. The per share computations reflect the one-for-ten reverse stock split that was effected in July 2016. Diluted net income or loss per share is calculated by dividing net income or 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. Preferred dividends are deducted from net income or loss in arriving at net income or loss attributable

10


 

to common stockholders. The Company calculates diluted earnings or loss 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 or loss per share:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,183,044

 

 

$

669

 

 

$

2,633,405

 

 

$

(228,183

)

Accretion of dividends on preferred stock

 

 

(322,170

)

 

 

(617,493

)

 

 

(1,537,021

)

 

 

(1,827,461

)

Net income (loss) attributable to common stockholders - basic

 

$

860,874

 

 

$

(616,824

)

 

$

1,096,384

 

 

$

(2,055,644

)

Accretion of dividends on preferred stock

 

 

186,868

 

 

 

 

 

 

125,205

 

 

 

 

Adjustment for change in fair value of warrant liability

 

 

 

 

 

(78,833

)

 

 

(460,289

)

 

 

(336,971

)

Net income (loss) attributable to common stockholders - diluted

 

$

1,047,742

 

 

$

(695,657

)

 

$

761,300

 

 

$

(2,392,615

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

4,133,020

 

 

 

662,415

 

 

 

1,849,647

 

 

 

646,877

 

Diluted

 

 

6,689,332

 

 

 

662,415

 

 

 

3,103,784

 

 

 

646,877

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.21

 

 

$

(0.93

)

 

$

0.59

 

 

$

(3.18

)

Diluted

 

$

0.16

 

 

$

(1.05

)

 

$

0.25

 

 

$

(3.70

)

 

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 (in common stock equivalent shares):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Preferred redeemable convertible stock, including accumulated

   dividends

 

 

788,074

 

 

 

4,836,572

 

 

 

3,253,254

 

 

 

4,781,940

 

Employee stock options

 

 

 

 

 

1,107,929

 

 

 

 

 

 

1,107,929

 

Warrants outstanding

 

 

51,003

 

 

 

 

 

 

51,003

 

 

 

 

Series G preferred stock warrants outstanding

 

 

 

 

 

788,338

 

 

 

 

 

 

788,338

 

Total

 

 

839,077

 

 

 

6,732,839

 

 

 

3,304,257

 

 

 

6,678,207

 

 

 

Note 4. Acquisition

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. As a result of the acquisition, the Company expects to benefit from the acquisition primarily through the addition of new customers. The goodwill of $1,249,956 arising from the acquisition relates to expected synergies and cost reductions through economies of scale. Upon fulfillment of the contingent consideration arrangement, the amount of goodwill expected to be deductible for tax purposes is $1,249,956.

In addition to the $4.0 million paid up front, the purchase price also includes a contingent consideration arrangement. The $1.0 million of deferred consideration is contingent upon the later of (i) the expiration of the Transition Services Agreement between the Company and Skycross, Inc. which defines transition services to be provided by Skycross to the Company and (ii) the date on which the Company has 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 is between $0.0 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.

11


 

The following table summarizes the consideration paid and the amounts of estimated fair value of the assets acquired and liabilities assumed at the acquisition date.

 

Consideration:

 

 

 

 

Cash

 

$

4,000,000

 

Contingent consideration arrangement

 

 

1,000,000

 

Fair value of total consideration transferred

 

$

5,000,000

 

Recognized amounts of identifiable assets acquired and liabilities assumed:

 

 

 

 

Accounts receivable

 

$

429,267

 

Intangible assets

 

 

3,497,000

 

Current liabilities

 

 

(176,223

)

Total identifiable net assets acquired

 

 

3,750,044

 

Goodwill

 

 

1,249,956

 

Total

 

$

5,000,000

 

 

The fair value of accounts receivable was $429,267 at the date of acquisition. The contingent consideration of $1.0 million is included in the deferred purchase price balance on the accompanying balance sheet as of September 30, 2016.

Revenue associated with the acquired Skycross assets since the date of acquisition was $1.4 million and $3.7 million for the three and nine months ended September 30, 2016, respectively. Cost of goods sold associated with the acquired Skycross assets since the date of acquisition was $0.5 million and $1.3 million for the three and nine months ended September 30, 2016, respectively. The acquired assets were not managed as a discrete business by the previous owner. Accordingly, the historical financial information for the assets acquired was impracticable to obtain, and inclusion of pro forma information would require the Company to make estimates and assumptions regarding these assets’ historical financial results that may not be reasonable or accurate. As a result, pro forma results are not presented. It is not practicable to determine net income included in the Company’s operating results relating to Skycross assets since the date of acquisition because the assets have been fully integrated into the Company’s operations, and the operating results of the Skycross assets can therefore not be separately identified.

 

 

Note 5. Goodwill

Changes to the Company’s goodwill balance during the year ended December 31, 2015 and the nine months ended September 30, 2016 are as follows:

 

Balance at December 31, 2014

 

$

 

Skycross acquisition

 

 

1,249,956

 

Balance at December 31, 2015

 

$

1,249,956

 

Current period adjustments

 

 

 

Balance at September 30, 2016

 

$

1,249,956

 

 

 

Note 6. Intangible Assets

The following is a summary of the Company’s acquired intangible assets:

 

 

 

September 30, 2016

 

 

 

Weighted

Average

Amortization

Period

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Intangibles, Net

 

Developed technologies

 

 

5

 

 

$

280,000

 

 

$

24,078

 

 

$

255,922

 

Customer relationships

 

 

10

 

 

 

3,150,000

 

 

 

248,332

 

 

 

2,901,668

 

Non-compete agreement

 

 

3

 

 

 

67,000

 

 

 

17,607

 

 

 

49,393

 

Total intangible assets, net

 

 

10

 

 

$

3,497,000

 

 

$

290,017

 

 

$

3,206,983

 

 

12


 

 

 

December 31, 2015

 

 

 

Weighted

Average

Amortization

Period

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Intangibles, Net

 

Developed technologies

 

 

10

 

 

$

280,000

 

 

$

1,074

 

 

$

278,926

 

Customer relationships

 

 

10

 

 

 

3,150,000

 

 

 

12,082

 

 

 

3,137,918

 

Non-compete agreement

 

 

3

 

 

 

67,000

 

 

 

857

 

 

 

66,143

 

Total intangible assets, net

 

 

10

 

 

$

3,497,000

 

 

$

14,013

 

 

$

3,482,987

 

 

During the three months ended September 30, 2016, the Company reevaluated the useful life of the developed technologies intangible asset and determined the useful life should be reduced from 10 years to 5 years.  

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 results of acquisitions, divestitures, asset impairments, among other factors. Amortization expense was $93,338 and $0 for the three months ended September 30, 2016 and 2015, respectively, and $276,004 and $0 for the nine months ended September 30, 2016 and 2015, respectively.

 

 

 

Estimated Future Amortization

 

2016 (remaining three months)

 

$

97,346

 

2017

 

 

389,385

 

2018

 

 

388,529

 

2019

 

 

367,052

 

2020

 

 

366,333

 

Thereafter

 

 

1,598,338

 

Total

 

$

3,206,983

 

 

 

Note 7. Long-term Notes Payable (including current portion) and Line of Credit

In June 2012, the Company amended its line of credit with Silicon Valley Bank. The amended revolving line of credit facility allows for an advance up to $3.0 million. The facility bears interest at the U.S. prime rate (3.5% as of December 31, 2015) plus 1.25%. The revolving facility is available as long as the Company maintains a liquidity ratio of cash and cash equivalents plus accounts receivable to outstanding debt under the facility of 1.25 to 1.00; otherwise, the facility reverts to its previous eligible receivables financing arrangement. The amended facility matures in April 2018. The bank has a first security interest in all the Company’s assets excluding intellectual property, for which the bank has received a negative pledge. There was no balance owed on the line of credit as of September 30, 2016 and December 31, 2015.

In December 2013, the Company further amended its revolving line of credit with Silicon Valley Bank to include a growth capital term loan of up to $750,000. The growth capital term loan requires interest only payments through June 30, 2014 at which point it is to be repaid in 32 equal monthly installments of interest and principal. The growth capital term loan matures on February 1, 2017, at which time all unpaid principal and accrued and unpaid interest is due. The growth capital term loan interest rate is 6.5%. The Company must maintain a liquidity ratio of cash and cash equivalents plus accounts receivable to outstanding debt under the facility of greater than or equal to 1.00 to 1.00. As of September 30, 2016 and December 31, 2015, $129,967 and $346,895 was outstanding under this loan, respectively.

The remaining principal payments on the growth capital term loan subsequent to September 30, 2016 are as follows:

 

Year ending:

 

 

 

 

2016

 

$

74,747

 

2017

 

 

55,220

 

 

 

$

129,967

 

 

In December 2015, the Company entered into a loan agreement with Silicon Valley Bank in the amount of $4.0 million. The loan requires 36 monthly installments of interest and principal. The loan matures on December 1, 2018. The loan agreement requires the Company to maintain a liquidity ratio of 1.25 to 1.00 as of the last day of each month and a minimum EBITDA, (as defined in the agreement), measured as of the last day of each fiscal quarter for the previous six-month period (for September 30, 2016 the minimum

13


 

EBITDA was $250,000). The interest rate is 5%. As of September 30, 2016 and December 31, 2015, $3,000,000 and $4,000,000 was outstanding under this loan, respectively.

The remaining principal payments on the $4.0 million loan subsequent to September 30, 2016 are as follows:

 

Year ending:

 

 

 

 

2016

 

$

333,333

 

2017

 

 

1,333,333

 

2018

 

 

1,333,334

 

 

 

$

3,000,000

 

 

The Company was in compliance with all financial term loan and line of credit financial covenants as of September 30, 2016.

 

Note 8. Income Taxes

The Company’s effective income tax rate was 0.6% and 0.3% for the three months and nine months ended September 30, 2016. The variance from the U.S. federal statutory tax rate of 34% was primarily attributable to the utilization of deferred tax attributes that had a full valuation allowance as well as nondeductible meals and entertainment expenses, nondeductible incentive stock option compensation expenses, and nontaxable warrant adjustments.    

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) 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, 2016 and December 31, 2015, the Company has a full valuation allowance against net deferred tax assets.  

FASB ASC Topic 740, Income Taxes prescribes a recognition threshold and a measurement criterion for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return.  For those benefits to be recognized, a tax position must be considered more likely than not to be sustained upon examination by taxing authorities.  The Company records interest and penalties related to uncertain tax positions as a component of the provision for income taxes.  As of September 30, 2016 and December 31, 2015 the Company has gross unrecognized tax benefits of $1.5 million and $1.4 million, respectively, which are offsetting deferred tax assets.    

As of September 30, 2016, the Company has $17.7 million in federal and $7.1 million in state net operating loss carryforwards to offset future taxable income.  Current federal and state tax laws include substantial restrictions on the annual utilization of net operating loss and tax credit carryforwards in the event of an ownership change. Accordingly, the Company’s ability to utilize net operating loss and tax credit carryforwards may be limited as a result of such ownership change.  Such information could result in the expiration of carryforwards before they are utilized.  

 

Note 9. Stockholders’ Equity (Deficit)

(a)

Preferred Convertible Stock