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, 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 November 13, 2017, the registrant had 9,578,738 shares of Common Stock (par value $0.0001) outstanding.

 

 

 


 

AIRGAIN, INC.

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

 

3

Unaudited Condensed Balance Sheets as of September 30, 2017 and December 31, 2016

 

3

Unaudited Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016

 

4

Unaudited Condensed Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016

 

5

Unaudited Condensed Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2017

 

6

Unaudited Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016

 

7

Notes to Unaudited Condensed Financial Statements

 

8

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

 

20

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

28

Item 4. Controls and Procedures

 

29

PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

30

Item 1A. Risk Factors

 

30

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

 

30

Item 3. Defaults Upon Senior Securities

 

31

Item 4. Mine Safety Disclosures

 

31

Item 5. Other Information

 

31

INDEX TO EXHIBITS

 

32

SIGNATURES

 

33

 

 

 

 


 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Airgain, Inc.

Unaudited Condensed Balance Sheets

 

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

18,165,647

 

 

$

45,161,403

 

Short term investments

 

 

18,463,148

 

 

 

 

Trade accounts receivable, net

 

 

7,708,893

 

 

 

5,154,996

 

Inventory

 

 

609,850

 

 

 

146,815

 

Prepaid expenses and other current assets

 

 

749,074

 

 

 

349,550

 

Total current assets

 

 

45,696,612

 

 

 

50,812,764

 

Property and equipment, net

 

 

1,069,149

 

 

 

807,086

 

Goodwill

 

 

4,080,447

 

 

 

1,249,956

 

Customer relationships, net

 

 

3,832,501

 

 

 

2,822,918

 

Intangible assets, net

 

 

1,100,930

 

 

 

286,719

 

Other assets

 

 

186,042

 

 

 

84,060

 

Total assets

 

$

55,965,681

 

 

$

56,063,503

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,947,772

 

 

$

3,949,005

 

Accrued bonus

 

 

1,665,411

 

 

 

1,748,551

 

Accrued liabilities

 

 

1,088,385

 

 

 

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

 

 

9,116,233

 

 

 

9,239,693

 

Long-term notes payable

 

 

333,333

 

 

 

1,333,333

 

Deferred tax liability

 

 

73,875

 

 

 

6,166

 

Deferred rent obligation under operating lease

 

 

359,693

 

 

 

451,909

 

Total liabilities

 

 

9,883,134

 

 

 

11,031,101

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common shares, par value $0.0001, 200,000,000 shares authorized at September 30, 2017 and December 31, 2016; 9,577,530 and 9,275,062 shares issued at September 30, 2017 and December 31, 2016, respectively; 9,525,330 and 9,275,062 shares outstanding at September 30, 2017 and December 31, 2016, respectively

 

 

957

 

 

 

928

 

Additional paid in capital

 

 

89,553,782

 

 

 

88,582,470

 

Treasury stock, at cost: 52,200 shares and no shares at September 30, 2017 and December 31, 2016, respectively

 

 

(468,823

)

 

 

 

Accumulated other comprehensive loss

 

 

(1,696

)

 

 

 

Accumulated deficit

 

 

(43,001,673

)

 

 

(43,550,996

)

Total stockholders’ equity

 

 

46,082,547

 

 

 

45,032,402

 

Commitments and contingencies (note 14)

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

55,965,681

 

 

$

56,063,503

 

 

See accompanying notes to unaudited condensed financial statements.

 

 

3


 

Airgain, Inc.

Unaudited Condensed Statements of Operations

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended                                   September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Sales

 

$

12,448,436

 

 

$

12,439,279

 

 

$

36,713,996

 

 

$

30,807,902

 

Cost of goods sold

 

 

6,444,544

 

 

 

6,862,992

 

 

 

19,300,120

 

 

 

17,007,228

 

Gross profit

 

 

6,003,892

 

 

 

5,576,287

 

 

 

17,413,876

 

 

 

13,800,674

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,094,774

 

 

 

1,432,581

 

 

 

5,510,861

 

 

 

4,096,670

 

Sales and marketing

 

 

1,809,037

 

 

 

1,453,391

 

 

 

5,229,188

 

 

 

4,078,250

 

General and administrative

 

 

1,899,449

 

 

 

1,459,993

 

 

 

6,174,869

 

 

 

3,304,790

 

Total operating expenses

 

 

5,803,260

 

 

 

4,345,965

 

 

 

16,914,918

 

 

 

11,479,710

 

Income from operations

 

 

200,632

 

 

 

1,230,322

 

 

 

498,958

 

 

 

2,320,964

 

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

(98,689

)

 

 

(1,735

)

 

 

(189,855

)

 

 

(1,735

)

Interest expense

 

 

22,762

 

 

 

41,735

 

 

 

80,239

 

 

 

141,505

 

Fair market value adjustment - warrants

 

 

 

 

 

 

 

 

 

 

 

(460,289

)

Total other expense (income)

 

 

(75,927

)

 

 

40,000

 

 

 

(109,616

)

 

 

(320,519

)

Income before income taxes

 

 

276,559

 

 

 

1,190,322

 

 

 

608,574

 

 

 

2,641,483

 

Provision for income taxes

 

 

42,206

 

 

 

7,278

 

 

 

59,251

 

 

 

8,078

 

Net income

 

 

234,353

 

 

 

1,183,044

 

 

 

549,323

 

 

 

2,633,405

 

Accretion of dividends on preferred convertible stock

 

 

 

 

 

(322,170

)

 

 

 

 

 

(1,537,021

)

Net income attributable to common stockholders

 

$

234,353

 

 

$

860,874

 

 

$

549,323

 

 

$

1,096,384

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.02

 

 

$

0.21

 

 

$

0.06

 

 

$

0.59

 

Diluted

 

$

0.02

 

 

$

0.16

 

 

$

0.05

 

 

$

0.25

 

Weighted average shares used in calculating income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

9,545,235

 

 

 

4,133,020

 

 

 

9,475,708

 

 

 

1,849,647

 

Diluted

 

 

10,169,559

 

 

 

6,689,332

 

 

 

10,238,987

 

 

 

3,103,784

 

See accompanying notes to unaudited condensed financial statements.

 

4


 

Airgain, Inc.

Unaudited Condensed Statement of Comprehensive Income

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended                                                             September 30,

 

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

Net income

 

$

234,353

 

 

$

1,183,044

 

 

$

549,323

 

 

$

2,633,405

 

 

Unrealized loss on available-for-sale securities

 

 

(1,696

)

 

 

 

 

 

(1,696

)

 

 

 

 

Total comprehensive income

 

$

232,657

 

 

$

1,183,044

 

 

$

547,627

 

 

$

2,633,405

 

 

 

 

See accompanying notes to unaudited condensed financial statements.

 

5


 

Airgain, Inc.

Unaudited Condensed Statement of Stockholders’ Equity

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Treasury

 

 

Accumulated Other Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2016

 

 

9,275,062

 

 

$

928

 

 

$

88,582,470

 

 

$

 

 

$

 

 

$

(43,550,996

)

 

$

45,032,402

 

Stock-based compensation

 

 

 

 

 

 

 

 

463,856

 

 

 

 

 

 

 

 

 

 

 

 

463,856

 

Exercise of stock options

 

 

244,993

 

 

 

24

 

 

 

506,680

 

 

 

 

 

 

 

 

 

 

 

 

506,704

 

Shares issued pursuant to stock awards

 

 

57,475

 

 

 

5

 

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

Common stock repurchases

 

 

(52,200

)

 

 

 

 

 

 

 

 

(468,823

)

 

 

 

 

 

 

 

 

(468,823

)

Reversal of costs related to secondary offering

 

 

 

 

 

 

 

 

781

 

 

 

 

 

 

 

 

 

 

 

 

781

 

Unrealized loss on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,696

)

 

 

 

 

 

(1,696

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

549,323

 

 

 

549,323

 

Balance at September 30, 2017

 

 

9,525,330

 

 

$

957

 

 

$

89,553,782

 

 

$

(468,823

)

 

$

(1,696

)

 

$

(43,001,673

)

 

$

46,082,547

 

See accompanying notes to unaudited condensed financial statements.

 

 

 

 

 

6


 

Airgain, Inc.

Unaudited Condensed Statements of Cash Flows

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

549,323

 

 

$

2,633,405

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

336,817

 

 

 

357,425

 

Amortization

 

 

396,206

 

 

 

276,004

 

Fair market value adjustment - warrants

 

 

 

 

 

(460,289

)

Amortization of discounts on investments, net

 

 

(23,683

)

 

 

 

Stock-based compensation

 

 

463,856

 

 

 

224,039

 

Deferred tax liability

 

 

67,709

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(1,969,507

)

 

 

(2,034,467

)

Inventory

 

 

(30,265

)

 

 

14,714

 

Prepaid expenses and other assets

 

 

(501,506

)

 

 

(214,574

)

Accounts payable

 

 

(123,112

)

 

 

1,309,924

 

Accrued bonus

 

 

(83,140

)

 

 

(193,257

)

Accrued liabilities

 

 

16,143

 

 

 

135,046

 

Deferred obligation under operating lease

 

 

(92,216

)

 

 

(80,049

)

Net cash provided by (used in) operating activities

 

 

(993,375

)

 

 

1,967,921

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of available-for-sale securities

 

 

(18,441,161

)

 

 

 

Cash paid for acquisition

 

 

(6,348,730

)

 

 

 

Purchases of property and equipment

 

 

(195,922

)

 

 

(275,649

)

Net cash used in investing activities

 

 

(24,985,813

)

 

 

(275,649

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayment of notes payable

 

 

(1,055,230

)

 

 

(1,216,928

)

Proceeds from initial public offering

 

 

 

 

 

13,600,800

 

Costs related to initial public offering

 

 

781

 

 

 

(2,697,853

)

Common stock repurchases

 

 

(468,823

)

 

 

 

Proceeds from exercise of stock options

 

 

506,704

 

 

 

112,100

 

Net cash provided by (used in) financing activities

 

 

(1,016,568

)

 

 

9,798,119

 

Net increase (decrease) in cash and cash equivalents

 

 

(26,995,756

)

 

 

11,490,391

 

Cash and cash equivalents, beginning of period

 

 

45,161,403

 

 

 

5,335,913

 

Cash and cash equivalents, end of period

 

$

18,165,647

 

 

$

16,826,304

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

85,085

 

 

$

141,505

 

Taxes paid

 

$

114,639

 

 

$

 

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

 

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 advanced 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.  Additionally, the Company designs and manufactures antennas for cellular, Long-Term Evolution (LTE), Multiple Input Multiple Output (MIMO), Global Positioning System (GPS), Wi-Fi and most radio frequencies. 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 and a design and manufacturing plant/facility in Scottsdale, Arizona.

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 and nine months ended September 30, 2017 and September 30, 2016, and the balance sheet data as of September 30, 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.   

 

 

Segment Information

The Company’s operations are located primarily in the United States, and most of its assets are located in San Diego, California and Scottsdale, Arizona. The Company operates in one segment related to the sale of antenna products. The Company’s chief operating decision-maker is its 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.

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

8


 

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.  

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.

Fair Value Measurements

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

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 nine months ended September 30, 2017 and for the year ended December 31, 2016.

Cash Equivalents and Short-Term Investments

Cash equivalents are comprised of short-term, highly liquid investments with maturities of 90 days or less at the date of purchase.  

Short-term investments consist predominantly of commercial paper, corporate debt securities, U.S. Treasury securities and asset backed securities.  The Company classifies short-term investments based on the facts and circumstances surrounding the investments at the time of purchase and evaluates such classification as of each balance sheet date.  All short-term investments are classified as available-for-sale securities as of September 30, 2017 and are recorded at estimated fair value.  Unrealized gains and losses for available-for-sale securities are included in accumulated other comprehensive income (loss), a component of stockholders’ equity.  Realized gains and losses are included in other expense (income), in the unaudited condensed statement of operations.  The Company evaluates its investments to determine whether those with unrealized loss positions are other than temporarily impaired.  Impairments are considered to be other than temporary if they are related to deterioration in credit risk or if it is likely that the Company will sell the securities before recovery of their cost basis.  

 

Inventory

The majority of the Company’s products are manufactured by third parties that retain ownership of the inventory until title is transferred to the customer at the shipping point.  In certain instances, shipping terms are delivery at place and the Company is responsible for arranging transportation and delivery of goods ready for unloading at the named place.  The Company bears all risk involved in bringing the goods to the named place and records the related inventory in transit to the customer as inventory on the accompanying balance sheet.  With the acquisition of substantially all of the assets of Antenna Plus, LLC (“Antenna Plus”), in April 2017, the Company began manufacting products at its Scottsdale, Arizona and Shullsburg, Wisconsin locations.  In July 2017, the Company relocated all of its product manufacturing produced in Shullsburg, Wisconsin to the Scottsadale, Arizona facility.  See Note 6 for additional information relating to the Company’s acquisition of the Antenna Plus assets.  

9


 

Inventory is stated at the lower of cost or market.  For items manufactured by the Company, cost is determined using the weighted average cost method.  For items manufactured by third parties, cost is determined using the first-in, first-out method (FIFO).  Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period.  As of September 30, 2017, the Company’s inventories consist primarily of raw materials.  

Accumulated Other Comprehensive Income

Comprehensive income is comprised of net income and other comprehensive income.  Accumulated other comprehensive income on the unaudited condensed balance sheet at September 30, 2017 includes unrealized gains and losses on the Company’s available-for-sale securities.  

 

Note 2. Summary of Significant Accounting Policies

During the three and nine months ended September 30, 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

In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updated (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 has adopted this pronouncement.

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 January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information.  For public entities, ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those years on a prospective basis. For nonpublic entities, ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is not permitted. The Company is evaluating the effect that ASU 2016-01 will have on its financial statements and related disclosure.  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 No. 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

10


 

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 Per Share

Basic net income per share is calculated by dividing net income 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 per share is calculated by dividing net income 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 in arriving at net income attributable to common stockholders. The Company calculates diluted earnings per common share using the treasury stock method and the as-if-converted method, as applicable.

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

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

234,353

 

 

$

1,183,044

 

 

$

549,323

 

 

$

2,633,405

 

Accretion of dividends on preferred stock

 

 

 

 

 

(322,170

)

 

 

 

 

 

(1,537,021

)

Net income attributable to common stockholders - basic

 

$

234,353

 

 

$

860,874

 

 

$

549,323

 

 

$

1,096,384

 

Accretion of dividends on preferred stock

 

 

 

 

 

186,868

 

 

 

 

 

 

125,205

 

Adjustment for change in fair value of warrant liability

 

 

 

 

 

 

 

 

 

 

 

(460,289

)

Net income attributable to common stockholders - diluted

 

$

234,353

 

 

$

1,047,742

 

 

$

549,323

 

 

$

761,300

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

9,545,235

 

 

 

4,133,020

 

 

 

9,475,708

 

 

 

1,849,647

 

Diluted

 

 

10,169,559

 

 

 

6,689,332

 

 

 

10,238,987

 

 

 

3,103,784

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.02

 

 

$

0.21

 

 

$

0.06

 

 

$

0.59

 

Diluted

 

$

0.02

 

 

$

0.16

 

 

$

0.05

 

 

$

0.25

 

 

 

Diluted weighted average common shares outstanding for the three months ended September 30, 2017 includes 624,324 options outstanding. Diluted weighted average common shares outstanding for the nine months ended September 30, 2017 includes 6,281 warrants and 756,998 options outstanding.

 

Potentially dilutive securities not included in the calculation of diluted net income 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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Preferred redeemable convertible stock, including accumulated

   dividends

 

 

 

 

 

788,074

 

 

 

 

 

 

3,253,254

 

Employee stock options

 

 

375,277

 

 

 

 

 

 

427,645

 

 

 

 

Warrants outstanding

 

 

51,003

 

 

 

51,003

 

 

 

 

 

 

51,003

 

Total

 

 

426,280

 

 

 

839,077

 

 

 

427,645

 

 

 

3,304,257

 

 

Note 4. Cash, Cash Equivalents and Short-Term Investments

The following table shows the Company’s cash and cash equivalents and short-term investments by significant investment category as of September 30, 2017:

 

11


 

 

 

September 30, 2017

 

 

 

Amortized Cost

 

 

Gross Unrealized Losses

 

 

Estimated Fair Value

 

 

Cash and Cash Equivalents

 

 

Short-Term Investments

 

Cash

 

$

1,309,876

 

 

$

 

 

$

1,309,876

 

 

$

1,309,876

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1 (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

13,855,588

 

 

 

 

 

 

13,855,588

 

 

 

13,855,588

 

 

 

 

U.S. treasury securities

 

 

1,234,813

 

 

 

(88

)

 

 

1,234,725

 

 

 

 

 

 

1,234,725

 

Subtotal

 

 

15,090,401

 

 

 

(88

)

 

 

15,090,313

 

 

 

13,855,588

 

 

 

1,234,725

 

Level 2 (2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

10,430,502

 

 

 

 

 

 

10,430,502

 

 

 

 

 

 

10,430,502

 

Corporate debt obligations

 

 

6,049,066

 

 

 

(1,458

)

 

 

6,047,608

 

 

 

 

 

 

6,047,608

 

Repurchase agreements

 

 

3,000,183

 

 

 

 

 

 

3,000,183

 

 

 

3,000,183

 

 

 

 

Asset-backed securities

 

 

750,463

 

 

 

(150

)

 

 

750,313

 

 

 

 

 

 

750,313

 

Subtotal

 

 

20,230,214

 

 

 

(1,608

)

 

 

20,228,606

 

 

 

3,000,183

 

 

 

17,228,423

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

36,630,491

 

 

$

(1,696

)

 

$

36,628,795

 

 

$

18,165,647

 

 

$

18,463,148

 

 

 

(1)

Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.

 

(2)

Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  

 

The Company’s investments were primarily valued based upon one or more valuations reported by its investment accounting and reporting service provider.  The investment service provider values the securities using a hierarchical security pricing model that relies primarily on valuations provided by a third-party pricing vendor.  Such valuations may be based on trade prices in active markets for identical assets or liabilities (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets or liabilities, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures.  The Company performs certain procedures to corroborate the fair value of its holdings, including comparing valuations obtained from its investment service provider with other pricing sources to validate the reasonableness of the valuations.    

 

The Company typically invests in highly-rated securities, and its investment policy limits the amount of credit exposure to any one issuer.  The policy requires investments in fixed income instruments denominated and payable in U.S. dollars only and requires investments to be investment grade, with a primary objective of minimizing the potential risk of principal loss.  

 

The following table presents the Company’s short-term investments with unrealized losses by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2017:

 

 

Less Than 12 Months

 

Description of Securities

 

Estimated Fair Value

 

 

Unrealized Losses

 

September 30, 2017

 

 

 

 

 

 

 

 

U.S. treasury securities

 

$

1,234,725

 

 

$

(88

)

Corporate debt obligations

 

 

6,047,607

 

 

 

(1,458

)

Asset-backed securities

 

 

750,313

 

 

 

(150

)

Total

 

$

8,032,645

 

 

$

(1,696

)

 

 

The Company considers the declines in market value of its short-term investments to be temporary in nature.  Fair values were determined for each individual security in the investment portfolio.  When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investment’s cost basis.  As of September 30, 2017, the Company does not consider any of its investments to be other-than temporarily impaired.

 

Contractual maturities of short-term investments as of September 30, 2017 are as follows:

 

12


 

 

 

Estimated Fair Value

 

Due within one year

 

$

18,463,148

 

Total

 

$

18,463,148

 

 

 

 

 

Note 5. Property and Equipment

Depreciation and amortization of property and equipment is calculated on the straight-line method based on estimated useful lives of six to ten years for tenant improvements and three years for all other property and equipment.  Property and equipment consist of the following:

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Lab equipment

 

$

1,851,722

 

 

$

1,314,060

 

Computer equipment

 

 

165,415

 

 

 

165,415

 

Computer software

 

 

299,227

 

 

 

299,227

 

Furniture and fixtures

 

 

202,218

 

 

 

184,233

 

Tenant improvements

 

 

763,898

 

 

 

763,898

 

Other office equipment

 

 

63,824

 

 

 

20,591

 

 

 

 

3,346,304

 

 

 

2,747,424

 

Less accumulated depreciation

 

 

(2,277,155

)

 

 

(1,940,338

)

 

 

$

1,069,149

 

 

$

807,086

 

Depreciation expense was $114,358 and $121