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 MARCH 31, 2017

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

 

95-4523882

(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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth 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

 

 

 

 

 

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

As of May 10, 2017, the registrant had 9,520,290 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 March 31, 2017 and December 31, 2016

 

3

Unaudited Condensed Statements of Operations for the Three Months Ended March 31, 2017 and 2016

 

4

Unaudited Condensed Statement of Stockholders’ Equity for the Three Months Ended March 31, 2017

 

5

Unaudited Condensed Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016

 

6

Notes to Unaudited Condensed Financial Statements

 

7

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

 

16

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

23

Item 4. Controls and Procedures

 

23

PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

24

Item 1A. Risk Factors

 

24

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

 

24

Item 3. Defaults Upon Senior Securities

 

24

Item 4. Mine Safety Disclosures

 

24

Item 5. Other Information

 

24

Item 6. Exhibits

 

24

SIGNATURES

 

25

 

 

 

 


 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Airgain, Inc.

Unaudited Condensed Balance Sheets

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

41,859,298

 

 

$

45,161,403

 

Trade accounts receivable, net

 

 

7,512,937

 

 

 

5,154,996

 

Inventory

 

 

108,321

 

 

 

146,815

 

Prepaid expenses and other current assets

 

 

318,937

 

 

 

349,550

 

Total current assets

 

 

49,799,493

 

 

 

50,812,764

 

Property and equipment, net

 

 

812,005

 

 

 

807,086

 

Goodwill

 

 

1,249,956

 

 

 

1,249,956

 

Customer relationships, net

 

 

2,744,168

 

 

 

2,822,918

 

Intangible assets, net

 

 

268,123

 

 

 

286,719

 

Other assets

 

 

189,876

 

 

 

84,060

 

Total assets

 

$

55,063,621

 

 

$

56,063,503

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,992,976

 

 

$

3,949,005

 

Accrued bonus

 

 

599,475

 

 

 

1,748,551

 

Accrued liabilities

 

 

803,936

 

 

 

1,072,242

 

Deferred purchase price

 

 

1,000,000

 

 

 

1,000,000

 

Current portion of long-term notes payable

 

 

1,333,333

 

 

 

1,388,563

 

Current portion of deferred rent obligation under operating lease

 

 

81,332

 

 

 

81,332

 

Total current liabilities

 

 

7,811,052

 

 

 

9,239,693

 

Long-term notes payable

 

 

1,000,000

 

 

 

1,333,333

 

Deferred tax liability

 

 

16,000

 

 

 

6,166

 

Deferred rent obligation under operating lease

 

 

421,170

 

 

 

451,909

 

Total liabilities

 

 

9,248,222

 

 

 

11,031,101

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common shares, par value $0.0001, 200,000,000 shares authorized at March 31, 2017 and December 31, 2016; 9,488,057 and 9,275,062 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively

 

 

949

 

 

 

928

 

Additional paid in capital

 

 

88,980,356

 

 

 

88,582,470

 

Accumulated deficit

 

 

(43,165,906

)

 

 

(43,550,996

)

Total stockholders’ equity

 

 

45,815,399

 

 

 

45,032,402

 

Commitments and contingencies (note 10)

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

55,063,621

 

 

$

56,063,503

 

 

See accompanying notes to unaudited condensed financial statements.

 

 

3


 

Airgain, Inc.

Unaudited Condensed Statements of Operations

 

 

 

For the Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Sales

 

$

11,252,417

 

 

$

8,512,305

 

Cost of goods sold

 

 

5,963,959

 

 

 

4,834,681

 

Gross profit

 

 

5,288,458

 

 

 

3,677,624

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

1,596,799

 

 

 

1,321,686

 

Sales and marketing

 

 

1,628,141

 

 

 

1,241,104

 

General and administrative

 

 

1,638,039

 

 

 

998,040

 

Total operating expenses

 

 

4,862,979

 

 

 

3,560,830

 

Income from operations

 

 

425,479

 

 

 

116,794

 

Other expense (income):

 

 

 

 

 

 

 

 

Interest income

 

 

(37,201

)

 

 

 

Interest expense

 

 

30,764

 

 

 

52,475

 

Fair market value adjustment - warrants

 

 

 

 

 

(78,834

)

Total other income

 

 

(6,437

)

 

 

(26,359

)

Income before income taxes

 

 

431,916

 

 

 

143,153

 

Provision for income taxes

 

 

46,826

 

 

 

4,000

 

Net income

 

 

385,090

 

 

 

139,153

 

Accretion of dividends on preferred convertible stock

 

 

 

 

 

(604,069

)

Net income (loss) attributable to common stockholders

 

$

385,090

 

 

$

(464,916

)

Net income (loss) per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.04

 

 

$

(0.70

)

Diluted

 

$

0.04

 

 

$

(0.82

)

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

 

 

 

 

 

 

 

 

Basic

 

 

9,359,562

 

 

 

665,842

 

Diluted

 

 

10,201,606

 

 

 

665,842

 

See accompanying notes to unaudited condensed financial statements.

 

 

4


 

Airgain, Inc.

Unaudited Condensed Statement of Stockholders’ Equity

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2016

 

 

9,275,062

 

 

$

928

 

 

$

88,582,470

 

 

$

(43,550,996

)

 

$

45,032,402

 

Stock-based compensation

 

 

 

 

 

 

 

 

73,475

 

 

 

 

 

 

73,475

 

Exercise of stock options

 

 

155,520

 

 

 

15

 

 

 

323,636

 

 

 

 

 

 

323,651

 

Shares issued pursuant to stock awards

 

 

57,475

 

 

 

6

 

 

 

(6

)

 

 

 

 

 

 

Reversal of costs related to secondary offering

 

 

 

 

 

 

 

 

781

 

 

 

 

 

 

781

 

Net income

 

 

 

 

 

 

 

 

 

 

 

385,090

 

 

 

385,090

 

Balance at March 31, 2017

 

 

9,488,057

 

 

$

949

 

 

$

88,980,356

 

 

$

(43,165,906

)

 

$

45,815,399

 

See accompanying notes to unaudited condensed financial statements.

 

 

5


 

Airgain, Inc.

Unaudited Condensed Statements of Cash Flows

 

 

 

For the Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

385,090

 

 

$

139,153

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

115,447

 

 

 

117,445

 

Amortization

 

 

97,346

 

 

 

91,333

 

Fair market value adjustment - warrants

 

 

 

 

 

(78,834

)

Stock-based compensation

 

 

73,475

 

 

 

28,893

 

Deferred tax liability

 

 

9,834

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(2,357,941

)

 

 

52,995

 

Inventory

 

 

38,494

 

 

 

73,048

 

Prepaid expenses and other assets

 

 

(75,203

)

 

 

83,248

 

Accounts payable

 

 

42,917

 

 

 

(349,102

)

Accrued bonus

 

 

(1,149,076

)

 

 

(937,250

)

Accrued liabilities

 

 

(268,306

)

 

 

(47,302

)

Deferred obligation under operating lease

 

 

(30,739

)

 

 

(26,683

)

Net cash used in operating activities

 

 

(3,118,662

)

 

 

(853,056

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(119,312

)

 

 

(41,030

)

Net cash used in investing activities

 

 

(119,312

)

 

 

(41,030

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayment of notes payable

 

 

(388,563

)

 

 

(404,469

)

Reversal of costs related to initial public offering

 

 

781

 

 

 

 

Proceeds from exercise of stock options

 

 

323,651

 

 

 

 

Net cash used in financing activities

 

 

(64,131

)

 

 

(404,469

)

Net decrease in cash and cash equivalents

 

 

(3,302,105

)

 

 

(1,298,555

)

Cash and cash equivalents, beginning of period

 

 

45,161,403

 

 

 

5,335,913

 

Cash and cash equivalents, end of period

 

$

41,859,298

 

 

$

4,037,358

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

32,508

 

 

$

52,475

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

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

   amount

 

$

 

 

$

533,203

 

Accrual of property and equipment

 

$

1,054

 

 

$

 

See accompanying notes to unaudited condensed financial statements.

 

 

6


 

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, Rancho Santa Fe, California, Poway, California, Melbourne, Florida, 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2016, from which the balance sheet information herein was derived.  

The condensed balance sheet as of December 31, 2016 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 March 31, 2017 and March 31, 2016, and the balance sheet data as of March 31, 2017 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, 2017 or for any future period.   

 

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 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.  

Inventory is stated at the lower of cost or market.  Cost is determined using the first-in, first-out method (FIFO).

 

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 $9.5 million after deducting underwriting discounts and commissions of $0.8 million and 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 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.

7


 

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.

On December 8, 2016, the Company completed a public offering of common stock in which it issued and sold 1,352,941 shares of common stock  at a public offering price of $17.00 per share and received gross proceeds of $23.0 million, which resulted in net proceeds to the Company of approximately $20.7 million, after deducting underwriting discounts and commissions of approximately $1.5 million and offering-related transaction costs of approximately $0.8 million.  

On December 14, 2016, the underwriters exercised their over-allotment option to purchase an additional 332,941 shares of common stock at the public offering price of $17.00 per share and the Company received gross proceeds of approximately $5.6 million, which resulted in net proceeds to the Company of approximately $5.3 million, after deducting underwriting discounts and commissions of approximately $0.3 million and offering-related transaction costs.  

Fair Value Measurements

The carrying values of the Company’s financial instruments, including cash, trade accounts receivable, accounts payable, accrued liabilities and debt 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.

 

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 three months ended March 31, 2017 and for the year ended December 31, 2016.

The following table provides a rollforward of the Company’s Level 3 fair value measurements during the three months ended March 31, 2017 and 2016:

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Beginning balance

 

$

 

 

$

709,504

 

Change in fair value of warrant liability

 

 

 

 

 

(78,834

)

Ending balance

 

$

 

 

$

630,670

 

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 stock-based compensation expense, intangible assets and goodwill.

 

 

Note 2. Summary of Significant Accounting Policies

During the three months ended March 31, 2017, 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, 2016.  

Recent Accounting Pronouncements

8


 

In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill. For public entities, ASU 2017-04 is effective for fiscal years beginning after December 15, 2019. For nonpublic entities, ASU 2017-04 is effective for fiscal years beginning after December 15, 2021.  Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its financial statements.

In August 2016, the FASB, issued 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. For nonpublic entities, ASU 2016-15 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.  Early adoption is permitted.  The Company is currently evaluating the impact the guidance will have on its financial statements.  

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. For public entities, ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. For nonpublic entities, ASU 2016-02 is effective for fiscal year 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 July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory.  ASU 2015-11 requires companies to measure certain inventory at the lower of cost and net realizable value. For public entities, ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years on a prospective basis. For nonpublic entities, ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted. The Company is evaluating the effect that ASU 2015-11 will have on its financial statements and related disclosure.  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 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. For public entities, ASU 2014-09 is effective for reporting periods beginning after December 15, 2017, including interim periods within that reporting period. For nonpublic entities, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those periods. 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 the 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 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.

9


 

The following table presents the computation of net income or loss per share:

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

Net income

 

$

385,090

 

 

$

139,153

 

Accretion of dividends on preferred stock

 

 

 

 

 

(604,069

)

Net income (loss) attributable to common stockholders - basic

 

$

385,090

 

 

$

(464,916

)

Adjustment for change in fair value of warrant liability

 

 

 

 

 

(78,834

)

Net income (loss) attributable to common stockholders - diluted

 

$

385,090

 

 

$

(543,750

)

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

9,359,562

 

 

 

665,842

 

Diluted

 

 

10,201,606

 

 

 

665,842

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.04

 

 

$

(0.70

)

Diluted

 

$

0.04

 

 

$

(0.82

)

 

Diluted weighted average common shares outstanding as of March 31, 2017 includes 10,532 warrants and 831,512 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 (in common stock equivalent shares):

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Preferred redeemable convertible stock, including accumulated

   dividends

 

 

 

 

 

4,944,630

 

Employee stock options

 

 

6,581

 

 

 

754,192

 

Series G preferred stock warrants outstanding

 

 

 

 

 

788,338

 

Total

 

 

6,581

 

 

 

6,487,160

 

 

 

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.  In addition to the $4.0 million paid up front, the purchase price also included a contingent consideration arrangement.  The $1.0 million of deferred consideration is payable upon the later of (i) the expiration of the Transition Services Agreement between the Company and Skycross 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.  As of March 31, 2017, the contingent consideration was still outstanding.

 

Note 5. Intangible Assets

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

 

 

 

March 31, 2017

 

 

 

Weighted

Average

Amortization

Period

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Intangibles, Net

 

Developed technologies

 

 

5

 

 

$

280,000

 

 

$

50,104

 

 

$

229,896

 

Customer relationships

 

 

10

 

 

 

3,150,000

 

 

 

405,832

 

 

 

2,744,168

 

Non-compete agreement

 

 

3

 

 

 

67,000

 

 

 

28,773

 

 

 

38,227

 

Total intangible assets, net

 

 

10

 

 

$

3,497,000

 

 

$

484,709

 

 

$

3,012,291

 

10


 

 

 

 

December 31, 2016

 

 

 

Weighted

Average

Amortization

Period

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Intangibles, Net

 

Developed technologies

 

 

5

 

 

$

280,000

 

 

$

37,091

 

 

$

242,909

 

Customer relationships

 

 

10

 

 

 

3,150,000

 

 

 

327,082

 

 

 

2,822,918

 

Non-compete agreement

 

 

3

 

 

 

67,000

 

 

 

23,190

 

 

 

43,810

 

Total intangible assets, net

 

 

10

 

 

$

3,497,000

 

 

$

387,363

 

 

$

3,109,637

 

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 $97,346 and $91,333 for the three months ended March 31, 2017 and 2016, respectively.

 

 

 

Estimated Future Amortization

 

2017 (remaining nine months)

 

$

292,039

 

2018

 

 

388,529

 

2019

 

 

367,052

 

2020

 

 

366,333

 

2021

 

 

350,420

 

Thereafter

 

 

1,247,918

 

Total

 

$

3,012,291

 

 

 

Note 6. 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 (4.0% as of March 31, 2017) 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 March 31, 2017 and December 31, 2016.

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 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 December 31, 2016, $55,230 was outstanding under this loan.  As of March 31, 2017, there was no balance owed under this loan.

In December 2015, the Company amended its 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. 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 measured as of the last day of each fiscal quarter for the previous six month period (for March 31, 2017 the minimum EBITDA is $750,000). The interest rate is fixed at 5%. As of March 31, 2017 and December 31, 2016, $2,333,333 and $2,666,666 was outstanding under this loan, respectively.

The remaining principal payments on the $4.0 million loan subsequent to March 31, 2017 are as follows:

 

Year ending:

 

 

 

 

2017

 

$

1,000,000

 

2018

 

 

1,333,333

 

 

 

$

2,333,333

 

 

The Company was in compliance with all financial term loan and line of credit financial covenants as of March 31, 2017.

11


 

 

Note 7. Income Taxes

The Company’s effective income tax rate was 10.84% for the three months ended March 31, 2017. 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, and nondeductible incentive stock option compensation expenses.    

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 March 31, 2017 and December 31, 2016, the Company has a full valuation allowance against net deferred tax assets. Should the Company continue to achieve substantial pre-tax income during 2017 or be better able to forecast taxable income into the future, the Company may need to release a substantial portion of its federal valuation allowance during 2017.

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 March 31, 2017 and December 31, 2016 the Company has gross unrecognized tax benefits of $1.67 million and $1.53 million, respectively, which are offsetting deferred tax assets.    

As of March 31, 2017, the Company has $13.19 million in federal and $7.77 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 8. Stockholders’ Equity

Shares Reserved for Future Issuance

The following common stock is reserved for future issuance at March 31, 2017 and December 31, 2016:

 

 

 

March 31, 2017

 

 

December 31, 2016

 

Warrants issued and outstanding

 

 

51,003

 

 

 

51,003

 

Stock option awards issued and outstanding

 

 

889,862

 

 

 

1,040,387

 

Authorized for grants under the 2016 Equity Incentive Plan

 

 

704,750

 

 

 

709,750

 

Authorized for grants under the 2016 Employee Stock Purchase Plan

 

 

100,000

 

 

 

100,000

 

 

 

 

1,745,615

 

 

 

1,901,140

 

 

12


 

Note 9. 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, 2015

 

 

756,692

 

 

 

2.10

 

 

 

7.60

 

Granted

 

 

359,319

 

 

 

2.60

 

 

 

9.40

 

Exercised

 

 

(58,155

)

 

 

2.36

 

 

 

3.50

 

Expired/Forefeited

 

 

(17,469

)

 

 

2.13

 

 

 

2.60

 

Balance at December 31, 2016

 

 

1,040,387

 

 

 

2.25

 

 

 

7.80

 

Granted

 

 

4,995

 

 

15.85

 

 

 

9.80

 

Exercised

 

 

(155,520

)

 

2.08

 

 

 

6.05

 

Balance at March 31, 2017

 

 

889,862

 

 

2.36

 

 

7.82

 

Vested and exercisable at March 31, 2017

 

 

494,408

 

 

2.07

 

 

7.01

 

Vested and expected to vest at March 31, 2017

 

 

889,862

 

 

2.36

 

 

7.82

 

 

 

 

The weighted average grant-date fair value of options granted during the three months ended March 31, 2017 and for the year ended December 31, 2016 was $6.21 and $1.23, respectively. For fully vested stock options, the aggregate intrinsic value as of March 31, 2017 and December 31, 2016 was $6,470,698 and $7,770,086, respectively. For stock options expected to vest, the aggregate intrinsic value as of March 31, 2017 and December 31, 2016 was $4,942,466 and $4,569,243, respectively.

During the year ended December 31, 2016, a total of 57,475 shares of restricted common stock with a fair value of $2.00 per share were issued to the Company’s Chief Financial Officer and Chief Operating Officer of which 100% of the shares vest six months after the completion of an initial public offering. The shares vested in February 2017. The Company recorded $53,056 and $61,894 in expense  associated with these shares during the three months ended March 31, 2017 and the year ended December 31, 2016, respectively.   

At March 31, 2017 and December 31, 2016 there was $471,071 and $522,818, respectively, of total unrecognized compensation cost related to unvested stock options and restricted stock granted under the plans. These costs are 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 10. 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; Taipei, Taiwan; Shenzhen and Jiangsu, China; and Cambridgeshire, United Kingdom. Rent expense was $183,615 and $189,862, respectively, for the three months ended March 31, 2017 and 2016. The longest lease expires in June 2020. 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.

13


 

The future minimum lease payments required under operating leases in effect at March 31, 2017 were as follows:

 

Year ending:

 

 

 

 

2017 (remaining nine months)

 

$

588,922

 

2018

 

 

571,700

 

2019

 

 

525,297

 

2020

 

 

265,940

 

 

 

$

1,951,859

 

 

 

Note 11. 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 months ended March 31, 2017 and 2016 and customers that accounted for 10% or more of total trade accounts receivable at March 31, 2017 and 2016.

 

 

 

Three Months Ended March 31,

 

 

 

 

2017

 

 

2016

 

 

Percentage of net revenue

 

 

 

 

 

 

 

 

 

Customer A

 

 

22

%

 

 

15

%

 

Customer B

 

 

14

 

 

 

34

 

 

Customer C

 

 

13

 

 

 

5

 

 

Customer D

 

 

8

 

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of  March 31,

 

 

 

 

2017

 

 

2016

 

 

Percentage of gross trade accounts receivable

 

 

 

 

 

 

 

 

 

Customer A

 

 

16

%

 

 

12

%

 

Customer B

 

 

14

 

 

 

1

 

 

Customer C

 

 

14

 

 

 

14

 

 

Customer D

 

 

11

 

 

 

22

 

 

Customer E

 

 

6

 

 

 

11

 

 

(b)

Revenue by Geography

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 March 31,

 

 

 

2017

 

 

2016

 

Percentage of net revenue

 

 

 

 

 

 

 

 

China

 

 

71

%

 

 

73

%

Other Asia

 

 

13

 

 

 

11

 

North America

 

 

10

 

 

 

12

 

Europe

 

 

6

 

 

 

4

 

 

Although the Company ships the majority of antennas to its customers in China (primarily ODM’s and distributors), the end-users of the Company’s products are much more geographically diverse.

(c)

Concentration of Purchases

During the three months ended March 31, 2017 and 2016, all of the Company’s products were manufactured by two vendors in China.

 

Note 13. Subsequent Events

On April 27, 2017, the Company completed the acquisition of substantially all of the assets of Antenna Plus, LLC (Antenna Plus).  Antenna Plus is a privately-held supplier of antenna-based solutions for mobile and automotive fleet applications for government,

14


 

public safety, and Industrial IOT (Internet of Things) 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 $6.4 million in cash.  The purchase price is subject to certain 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.

Given the timing of the acquisition in relation to this filing, the Company has not yet determined the acquisition-date fair value of the total consideration transferred, the acquisition-date fair value of each major class of consideration or the identification and valuation of indemnification assets.  

 

 

15


 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis and the interim unaudited condensed financial statements included in this quarterly report on Form 10-Q should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2016 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact contained in this quarterly report, including statements regarding our future operating results, financial position and cash flows, our business strategy and plans and our objectives for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “would,” “could,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this quarterly report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, operating results, business strategy, short-term and long-term business operations and objectives. These forward-looking statements speak only as of the date of this quarterly report and are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, “Risk Factors.” The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

Overview

We are a leading provider of embedded antenna technologies used to enable high performance wireless networking across a broad range of home, enterprise, and industrial devices. Our innovative antenna systems open up exciting new possibilities in wireless services requiring high speed throughput, broad coverage footprint, and carrier grade quality. Our antennas are found in devices deployed in carrier, enterprise, and residential wireless networks and systems, including set top boxes, access points, routers, gateways, media adapters, and digital televisions. Through our pedigree in the design, integration, and testing of high performance embedded antenna technology, we have become a leading provider to the residential wireless local area networking, also known as WLAN or Wi-Fi, antenna market, supplying to leading carriers, Original Equipment Manufacturers, or OEMs, Original Design Manufacturers, or ODMs, and system designers who depend on us to achieve their wireless performance goals. We also develop embedded antenna technology for adjacent markets, including enterprise Wi-Fi systems for on premises and cloud-based services, small cellular applications using Long-Term Evolution, or LTE, and Digital Enhanced Cordless Telecommunications, or DECT, and Internet of Things, or IOT, devices and automotive connectivity applications.

We shipped approximately 159 million antenna products worldwide in 2016 used in approximately 54 million devices.  For the three months ended March 31, 2017, we shipped approximately 40 million antenna products worldwide used in approximately 13 million devices. Our products are found in a broad range of devices that generally enable Wi-Fi connectivity for data and video coverage. We sell our products to OEMs and ODMs. These companies compete based on product performance, product features, price, and other factors. While our products are found in devices manufactured by global OEMs and ODMs, the products end up primarily in the end-user devices that are deployed in carrier, enterprise, and residential wireless networks including WLAN, access points, routers, residential gateways, set-top boxes, media adapters, and digital televisions. Our global sales force works with telecommunications and broadband carriers and retail-focused customers who seek high performance, reliable wireless solutions. By working with these end-user carriers and retail-focused customers, we seek to have service providers influence OEMs and ODMs to specify our antennas for the products they provide to their end-user customers. Our direct sales team works directly with customers, and also works with indirect channel partners who pursue sales opportunities that are based in the United States, Europe, and Asia.

Our sales cycle can be short or lengthy depending upon the specific situation; however, the majority of our revenues are derived from device designs with life-cycles of over 12 months. For some recurring customers, we are able to design and produce antenna systems for volume production in less than one calendar quarter. In situations where we are selling to a new customer, it may take 12 to 18 months from initial meeting to achieve a design win. Competition generally lengthens the sales process, but our past

16


 

performance and ability to provide high throughput, highly reliable antenna solutions can shorten the process. We intend to continue investing for long-term growth. We have invested and expect to continue to invest heavily in our product development efforts to address customer needs, and enable solutions that can address new end markets, such as alternative wireless connectivity technologies. In addition, we expect to continue to expand our sales force and engineering organizations and to make additional capital expenditures to further penetrate markets both in the United States and internationally, and to continue to expand our research and development for new product offerings and technology solutions.

Although our sales cycle can be lengthy depending on the specific situation, the majority of our revenues are derived from device designs with life-cycles of over a year. In 2016, 43% of our product revenues were from devices in the marketplace for over two years, 37% for devices in the marketplace for one to two years and 20% for devices in the marketplace for less than one year.  For the three months ended March 31, 2017, 24% of our product revenues were from devices in the marketplace for over two years, 47% for devices in the marketplace for one to two years and 29% for devices in the marketplace for less than one year.  

We believe demand is growing rapidly for our antenna solutions and there is a significant market opportunity. As the ability to provide mobile internet access has grown, our solutions and expertise have become more important to prospects and customers. As a passive component, embedded antennas can be viewed as a commodity. However, our design, engineering, and research show that antenna selection, placement, and testing can have significant improvements in device performance. We believe that we are chosen when performance is a more significant factor than price, and our distinctive focus on superior designs that provide increased range and throughput has allowed us to build a leadership position in the in-home WLAN antenna market.

Recent Developments

On April 17, 2017, we completed the acquisition of substantially all of the assets of Antenna Plus, LLC, or Antenna Plus. Antenna Plus is a privately-held supplier of antenna-based solutions for mobile and automotive fleet applications for government, public safety, and Industrial IOT markets.  We believe the acquisition provides leverage for our 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, we paid to Antenna Plus total consideration of approximately $6.4 million in cash.  The purchase price is subject to certain post-closing working capital adjustments.  In addition, we assumed certain contracts and other liabilities of Antenna Plus, as expressly set forth in the Asset Purchase Agreement.  

Factors Affecting Our Operating Results

We believe that our performance and future success depend upon several factors, including the average selling price of our products per device, the number of antennas per device, manufacturing costs, investments in our growth, and our ability to diversify the number of devices that incorporate our antenna products. Our customers are extremely price conscious, and our operating results are affected by pricing pressure which may force us to lower prices below our established list prices. In addition, a few end customer devices which incorporate our antenna products comprise a significant amount of our sales, and the discontinuation or modification of such devices may materially and adversely affect our sales and results of operations. We have seen the number of devices increase 23% and number of antennas per device increase 5% for the three months ended March 31, 2017 when compared to the three months ended March 31, 2016. Our ability to maintain or increase our sales depends on new and existing end customers selecting our antenna solutions for their devices and depends on investments in our growth to address customer needs, target new end markets, develop our product offerings and technology solutions and expand internationally, as well as successfully integrating acquisitions such as Antenna Plus. While each of these areas presents significant opportunities for us, they also pose significant risks and challenges we must successfully address. See the section entitled “Risk Factors.”

Seasonality

Our operating results historically have not been subject to significant seasonal variations.  However, our operating results are affected by how customers make purchasing decisions around local holidays in China.  For example, a national holiday the first week of October in China may cause customers to purchase product in the third quarter ahead of their holiday season to account for higher volume requirements in the fourth quarter.  In addition, although it is difficult to make broad generalizations, our sales tend to be lower in the first quarter of each year compared to other quarters due to the Chinese New Year.  Results for any quarter may not be indicative of the results that may be achieved for the full fiscal year and these patterns may change as a result of general customer demand or product cycles.

17


 

Key Components of Our Results of Operations and Financial Condition

Sales

We primarily generate revenue from the sales of our products. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. We generally recognize sales at the time of shipment to our customers, provided that all other revenue recognition criteria have been met. Although currently insignificant, we may also generate service revenue derived from agreements to provide design, engineering, and testing for a customer.

Cost of Goods Sold

The cost of goods sold reflects the cost of producing antenna products that are shipped for our customers’ devices. This primarily includes manufacturing costs of our products payable to our third-party contract manufacturers. The cost of goods sold that we generate from services provided to customers primarily includes personnel costs.

Operating Expenses

Our operating expenses are classified into three categories: research and development, sales and marketing, and general and administrative. For each category, the largest component is personnel costs, which includes salaries, employee benefit costs, bonuses, and stock-based compensation. Operating expenses also include allocated overhead costs for depreciation of equipment, facilities and information technology. Allocated costs for facilities consist of leasehold improvements and rent. Operating expenses are generally recognized as incurred.

Research and development. Research and development expenses primarily consist of personnel and facility-related costs attributable to our engineering research and development personnel. These expenses include work related to the design, engineering and testing of antenna designs, and antenna integration, validation and testing of customer devices. These expenses include salaries, including stock-based compensation, benefits, bonuses, travel, communications, and similar costs, and depreciation and allocated operating expenses such as office supplies, premises expenses, and insurance. We may also incur expenses from consultants and for prototyping new antenna solutions. We expect research and development expense to increase in absolute dollars as we increase our research and development headcount to further strengthen and enhance our antenna design and integration capabilities and invest in the development of new solutions and markets, although our research and development expense may fluctuate as a percentage of total sales.

Sales and marketing. Sales and marketing expenses primarily consist of personnel and facility-related costs for our sales, marketing, and business development personnel, stock-based compensation and bonuses earned by our sales personnel, and commissions earned by our third-party sales representative firms. Sales and marketing expense also includes the costs of trade shows, marketing programs, promotional materials, demonstration equipment, travel, recruiting, and allocated costs for certain facilities. We expect sales and marketing expense to continue to increase in absolute dollars as we increase the size of our sales and marketing organizations in support of our investment in our growth opportunities, although our sales and marketing expense may fluctuate as a percentage of total sales.

General and administrative. General and administrative expenses primarily consist of personnel and facility-related costs for our executive, finance, and administrative personnel, including stock-based compensation, as well as legal, accounting, and other professional services fees, depreciation, and other corporate expenses. Although our general and administrative expense may fluctuate as a percentage of total sales, we expect general and administrative expense to increase in absolute dollars due to additional legal fees and accounting, insurance, investor relations, and other costs associated with being a public company, as well as, due to costs associated with growing our business.

Interest and Other Expense (Income)

Interest Income. Interest income consists of interest from our cash and cash equivalents.  

Interest Expense. Interest expense consists of interest on our outstanding debt.

Fair Market Value Adjustments - Warrants. This consists of the change in fair value of our convertible preferred stock warrant liability. The preferred stock warrants are classified as liabilities on our balance sheets and their estimated fair value is re-measured at each balance sheet date using a combination of an option-pricing model and current value model under the probability-weighted return method, with the corresponding change recorded within other expense (income). In May 2016, the warrants were amended such that they became immediately exercisable into shares of our common stock. Concurrent with such amendment, the holders of the

18


 

outstanding warrants elected to net exercise the warrants, and were granted an aggregate of 127,143 shares of our common stock. Following such net exercise, there will be no future re-measurement of the warrant liability.

Provision for Income Taxes

Provision for income taxes consists of federal and state income taxes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. 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. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment. It is difficult for us to project future taxable income as the timing and size of sales of our products are variable and difficult to predict. We concluded that it is not more likely than not that we will utilize our deferred tax assets other than those that are offset by reversing temporary differences.  

Results of Operations

The following tables set forth our operating results for the periods presented as a percentage of our total sales for those periods. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.

  

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

(calculated as a percentage of associated sales)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

Sales

 

 

100.0

%

 

 

100.0

%

Cost of goods sold

 

 

53.0

%

 

 

56.8

%

Gross profit

 

 

47.0

%

 

 

43.2

%

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

14.2

%

 

 

15.5

%

Sales and marketing

 

 

14.5

%

 

 

14.6

%

General and administrative

 

 

14.6

%

 

 

11.7

%

Total operating expenses

 

 

43.3

%

 

 

41.8

%

Income from operations

 

 

3.7

%

 

 

1.4

%

Other income

 

 

(0.1

)%

 

 

(0.3

)%

Income before income taxes

 

 

3.8

%

 

 

1.7

%

Provision for income taxes

 

 

0.4

%

 

 

0.0

%

Net income

 

 

3.4

%

 

 

1.7

%

Comparison of the three months ended March 31, 2017 and 2016

Sales

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

Increase/(Decrease)

 

 

% Change

 

 

 

 

 

Sales

 

$

11,252,417

 

 

$

8,512,305

 

 

$

2,740,112

 

 

 

32.2

%

 

The increase in sales of $2.7 million is primarily driven by an increase in product sales. Total devices increased by 2.4 million devices to 12.9 million devices for the three months ended March 31, 2017 when compared to the three months ended March 31, 2016. The average number of antennas per device increased from 2.96 antennas per device for the three months ended March 31, 2016 to 3.12 antennas per device for the three months ended March 31, 2017. The average selling price per device for the three months ended March 31, 2017 increased to $0.86 as compared to $0.80 for the three months ended March 31, 2016.  Additionally, overall demand in the set-top-box and carrier gateway/router markets and the incorporation of our antennas in new devices outpaced products reaching the end of their lifecycle, which contributed to the increase in sales for the three months ended March 31, 2017 when compared to the three months ended March 31, 2016.  

19


 

Cost of Goods Sold

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

Increase/(Decrease)

 

 

% Change

 

 

 

 

 

Cost of goods sold

 

$

5,963,959

 

 

$

4,834,681

 

 

$

1,129,278

 

 

 

23.4

%

The increase in cost of goods sold for the three months ended March 31, 2017 is primarily due to an increase in product sales.

Gross Profit

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

Increase/(Decrease)

 

 

% Change

 

 

 

 

 

Gross profit

 

$

5,288,458

 

 

$

3,677,624

 

 

$

1,610,834

 

 

 

43.8

%

Gross profit (percentage of sales)

 

 

47.0

%

 

 

43.2

%

 

 

 

 

 

 

3.8

%

Gross profit as a percentage of sales increased for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016. The increase in gross profit percentage is primarily driven by a shift in the sales mix to higher margin set-top boxes and carrier gateways routers in the three months ended March 31, 2017 as compared to the three months ended March 31, 2016.  

Operating Expenses

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

Increase/(Decrease)

 

 

% Change

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

1,596,799

 

 

$

1,321,686

 

 

$

275,113

 

 

 

20.8

%

Sales and marketing

 

 

1,628,141

 

 

 

1,241,104

 

 

 

387,037

 

 

 

31.2

%

General and administrative

 

 

1,638,039