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, 2018

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 every Interactive Data File required to be submitted 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 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

 

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 7, 2018, the registrant had 9,914,711 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, 2018 and December 31, 2017

 

3

Unaudited Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017

 

4

Unaudited Condensed Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2018 and 2017

 

5

Unaudited Condensed Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2018

 

6

Unaudited Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

 

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

 

31

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

 

33

Item 3. Defaults Upon Senior Securities

 

33

Item 4. Mine Safety Disclosures

 

33

Item 5. Other Information

 

33

INDEX TO EXHIBITS

 

34

SIGNATURES

 

35

 

 

 

 


 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Airgain, Inc.

Unaudited Condensed Balance Sheets

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,064,656

 

 

$

15,026,068

 

Short term investments

 

 

18,765,236

 

 

 

21,287,064

 

Trade accounts receivable

 

 

7,388,688

 

 

 

8,418,132

 

Inventory

 

 

1,217,831

 

 

 

741,557

 

Prepaid expenses and other current assets

 

 

876,183

 

 

 

609,786

 

Total current assets

 

 

41,312,594

 

 

 

46,082,607

 

Property and equipment, net

 

 

1,366,309

 

 

 

1,036,860

 

Goodwill

 

 

3,700,447

 

 

 

3,700,447

 

Customer relationships, net

 

 

3,713,668

 

 

 

4,075,918

 

Intangible assets, net

 

 

906,545

 

 

 

1,052,333

 

Other assets

 

 

339,000

 

 

 

349,743

 

Total assets

 

$

51,338,563

 

 

$

56,297,908

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,879,235

 

 

$

3,969,083

 

Accrued bonus

 

 

2,378,805

 

 

 

2,224,517

 

Accrued liabilities

 

 

696,482

 

 

 

1,121,833

 

Deferred purchase price

 

 

 

 

 

1,000,000

 

Long-term notes payable

 

 

333,333

 

 

 

1,333,333

 

Current portion of deferred rent obligation under operating lease

 

 

81,332

 

 

 

81,332

 

Total current liabilities

 

 

7,369,187

 

 

 

9,730,098

 

Deferred tax liability

 

 

29,887

 

 

 

7,971

 

Deferred rent obligation under operating lease

 

 

247,157

 

 

 

334,860

 

Total liabilities

 

 

7,646,231

 

 

 

10,072,929

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common shares, par value $0.0001, 200,000,000 shares authorized at September 30, 2018 and December 31, 2017; 9,914,711 and 9,616,992 shares issued at September 30, 2018 and December 31, 2017, respectively, and 9,586,188 and 9,481,992 shares outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

991

 

 

 

961

 

Additional paid in capital

 

 

93,060,369

 

 

 

89,907,766

 

Treasury stock, at cost: 328,523 shares and 135,000 shares at September 30, 2018 and December 31, 2017, respectively

 

 

(3,093,974

)

 

 

(1,257,100

)

Accumulated other comprehensive loss

 

 

(6,434

)

 

 

(16,907

)

Accumulated deficit

 

 

(46,268,620

)

 

 

(42,409,741

)

Total stockholders’ equity

 

 

43,692,332

 

 

 

46,224,979

 

Commitments and contingencies (note 13)

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

51,338,563

 

 

$

56,297,908

 

 

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,

 

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Sales

 

$

15,786,913

 

 

$

12,448,436

 

 

$

44,063,692

 

 

$

36,713,996

 

 

Cost of goods sold

 

 

8,921,571

 

 

 

6,444,544

 

 

 

24,402,658

 

 

 

19,300,120

 

 

Gross profit

 

 

6,865,342

 

 

 

6,003,892

 

 

 

19,661,034

 

 

 

17,413,876

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,474,653

 

 

 

2,094,774

 

 

 

7,162,092

 

 

 

5,510,861

 

 

Sales and marketing

 

 

2,161,143

 

 

 

1,809,037

 

 

 

9,140,356

 

 

 

5,229,188

 

 

General and administrative

 

 

1,922,326

 

 

 

1,899,449

 

 

 

7,864,320

 

 

 

6,174,869

 

 

Total operating expenses

 

 

6,558,122

 

 

 

5,803,260

 

 

 

24,166,768

 

 

 

16,914,918

 

 

Income (loss) from operations

 

 

307,220

 

 

 

200,632

 

 

 

(4,505,734

)

 

 

498,958

 

 

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

(158,790

)

 

 

(98,689

)

 

 

(398,003

)

 

 

(189,855

)

 

Gain on deferred purchase price liability

 

 

 

 

 

 

 

 

(388,733

)

 

 

 

 

Interest expense

 

 

5,756

 

 

 

22,762

 

 

 

29,506

 

 

 

80,239

 

 

Total other income

 

 

(153,034

)

 

 

(75,927

)

 

 

(757,230

)

 

 

(109,616

)

 

Income (loss) before income taxes

 

 

460,254

 

 

 

276,559

 

 

 

(3,748,504

)

 

 

608,574

 

 

Provision for income taxes

 

 

22,995

 

 

 

42,206

 

 

 

110,375

 

 

 

59,251

 

 

Net income (loss)

 

$

437,259

 

 

$

234,353

 

 

$

(3,858,879

)

 

$

549,323

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

 

$

0.02

 

 

$

(0.41

)

 

$

0.06

 

 

Diluted

 

$

0.04

 

 

$

0.02

 

 

$

(0.41

)

 

$

0.05

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

9,566,118

 

 

 

9,545,235

 

 

 

9,495,278

 

 

 

9,475,708

 

 

Diluted

 

 

10,092,501

 

 

 

10,169,559

 

 

 

9,495,278

 

 

 

10,238,987

 

 

See accompanying notes to unaudited condensed financial statements.

 

4


 

Airgain, Inc.

Unaudited Condensed Statements of Comprehensive Income (Loss)

 

 

 

Three Months Ended September 30,

 

 

 

Nine Months Ended    September 30,

 

 

 

2018

 

 

2017

 

 

 

2018

 

 

2017

 

Net income (loss)

 

$

437,259

 

 

$

234,353

 

 

 

$

(3,858,879

)

 

$

549,323

 

Unrealized gain (loss) on available-for-sale securities, net of deferred taxes

 

 

3,486

 

 

 

(1,696

)

 

 

 

10,473

 

 

 

(1,696

)

Total comprehensive income (loss)

 

$

440,745

 

 

$

232,657

 

 

 

$

(3,848,406

)

 

$

547,627

 

 

 

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, 2017

 

 

9,481,992

 

 

$

961

 

 

$

89,907,766

 

 

$

(1,257,100

)

 

$

(16,907

)

 

$

(42,409,741

)

 

$

46,224,979

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,536,132

 

 

 

 

 

 

 

 

 

 

 

 

2,536,132

 

Exercise of stock options

 

 

297,719

 

 

 

30

 

 

 

616,471

 

 

 

 

 

 

 

 

 

 

 

 

616,501

 

Common stock repurchases

 

 

(193,523

)

 

 

 

 

 

 

 

 

(1,836,874

)

 

 

 

 

 

 

 

 

(1,836,874

)

Unrealized gain on available-for-sale securities, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,473

 

 

 

 

 

 

10,473

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,858,879

)

 

 

(3,858,879

)

Balance at September 30, 2018

 

 

9,586,188

 

 

$

991

 

 

$

93,060,369

 

 

$

(3,093,974

)

 

$

(6,434

)

 

$

(46,268,620

)

 

$

43,692,332

 

See accompanying notes to unaudited condensed financial statements.

 

 

 

 

 

6


 

Airgain, Inc.

Unaudited Condensed Statements of Cash Flows

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(3,858,879

)

 

$

549,323

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

422,549

 

 

 

336,817

 

Amortization

 

 

508,038

 

 

 

396,206

 

Amortization of discounts on investments, net

 

 

(94,317

)

 

 

(23,683

)

Stock-based compensation

 

 

2,536,132

 

 

 

463,856

 

Deferred tax liability

 

 

21,916

 

 

 

67,709

 

Gain on deferred purchase price liability

 

 

(388,733

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

667,375

 

 

 

(1,969,507

)

Inventory

 

 

(476,274

)

 

 

(30,265

)

Prepaid expenses and other assets

 

 

(255,654

)

 

 

(501,506

)

Accounts payable

 

 

35,954

 

 

 

(123,112

)

Accrued bonus

 

 

154,288

 

 

 

(83,140

)

Accrued liabilities

 

 

(425,351

)

 

 

16,143

 

Deferred obligation under operating lease

 

 

(87,703

)

 

 

(92,216

)

Net cash used in operating activities

 

 

(1,240,659

)

 

 

(993,375

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Cash paid for acquisition

 

 

 

 

 

(6,348,730

)

Purchases of available-for-sale securities

 

 

(24,328,831

)

 

 

(18,441,161

)

Maturities of available-for-sale securities

 

 

26,955,449

 

 

 

 

Purchases of property and equipment

 

 

(751,998

)

 

 

(195,922

)

Net cash provided by (used in) investing activities

 

 

1,874,620

 

 

 

(24,985,813

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayment of notes payable

 

 

(1,000,000

)

 

 

(1,055,230

)

Payment on deferred purchase price liability

 

 

(375,000

)

 

 

 

Reversal of costs related to initial public offering

 

 

 

 

 

781

 

Common stock repurchases

 

 

(1,836,874

)

 

 

(468,823

)

Proceeds from exercise of stock options

 

 

616,501

 

 

 

506,704

 

Net cash used in financing activities

 

 

(2,595,373

)

 

 

(1,016,568

)

Net decrease in cash and cash equivalents

 

 

(1,961,412

)

 

 

(26,995,756

)

Cash and cash equivalents, beginning of period

 

 

15,026,068

 

 

 

45,161,403

 

Cash and cash equivalents, end of period

 

$

13,064,656

 

 

$

18,165,647

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

 

33,812

 

 

 

85,085

 

Taxes paid

 

 

26,026

 

 

 

114,639

 

 

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 devices and markets, including connected home, enterprise, automotive and Internet of Things (IoT). The Company designs, develops, and engineers its antenna products for original equipment and design manufacturers worldwide.  The Company is headquartered in San Diego, California with office space and research facilities in the United States, United Kingdom and China.  

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Interim financial results are not necessarily indicative of results anticipated for the full year. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, from which the balance sheet information herein was derived.  

The condensed balance sheet as of December 31, 2017 included herein was derived from the audited financial statements as of that date but does not include all disclosures including notes required by GAAP.

The condensed statements of operations for the three and nine months ended September 30, 2018 and September 30, 2017, and the balance sheet data as of September 30, 2018 have been prepared on the same basis as the audited financial statements.

In the opinion of management, the accompanying unaudited condensed financial statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of results of the Company’s operations and financial position for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2018 or for any future period.   

 

Segment Information

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

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include valuation of intangible assets and goodwill.

Fair Value Measurements

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

8


 

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

 

Cash Equivalents and Short-Term Investments

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

Short-term investments consist predominantly of commercial paper, corporate debt securities, U.S. Treasury securities and asset backed securities.  The Company classifies short-term investments based on the facts and circumstances surrounding the investments at the time of purchase and evaluates such classification as of each balance sheet date.  All short-term investments are classified as available-for-sale securities as of September 30, 2018 and are recorded at estimated fair value.  Unrealized gains and losses for available-for-sale securities are included in accumulated other comprehensive income (loss), a component of stockholders’ equity.  Realized gains and losses are included in other income, in the unaudited condensed statements of operations.  The Company evaluates its investments to determine whether those with unrealized loss positions are other than temporarily impaired.  Impairments are considered to be other than temporary if they are related to deterioration in credit risk or if it is likely that the Company will sell the securities before recovery of their cost basis.  

 

Inventory

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

Inventory is stated at the lower of cost or net realizable value.  For items manufactured by the Company, cost is determined using the weighted average cost method.  For items manufactured by third parties, cost is determined using the first-in, first-out (FIFO) method.  Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period.  As of September 30, 2018, the Company’s inventories consist primarily of raw materials.  Provisions for excess and obsolete inventories are estimated based on product life cycles, quality issues, and historical experience.  As of September 30, 2018, there is no provision for excess and obsolete inventories.    

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss).  Accumulated other comprehensive loss on the unaudited condensed balance sheet at September 30, 2018 includes unrealized gains and losses on the Company’s available-for-sale securities.  

 

Note 2. Summary of Significant Accounting Policies

During the three and nine months ended September 30, 2018, there have been no material changes to the Company’s significant accounting policies as described in the Annual Report on Form 10-K for the fiscal year ended December 31, 2017.  

9


 

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.  ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.  Early adoption is permitted.   The Company has adopted this pronouncement on a prospective basis.  The impact on the financial statements are immaterial.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement: Disclosure Framework – Changes to Disclosure for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements.  ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.  Early adoption is permitted.  The Company has adopted this pronouncement on a prospective basis.  The impact on the financial statements are immaterial.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020.  The Company is evaluating the effect that ASU 2016-02 will have on its financial statements and related disclosures.  The Company has not yet selected a transition method, nor has it determined the effect of the standard on its ongoing financial reporting.  

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2018 and interim periods in fiscal years beginning after December 15, 2019. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is in the process of selecting a transition method and determining the effect of the standard on the Company’s ongoing financial reporting, including whether the adoption of ASU 2014-09 will result in a change to the timing of revenue recognition for a portion of the Company’s revenue transactions from a “point in time” upon physical delivery to an “over time” model.

 

 

Note 3. Net Income (Loss) Per Share

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average shares of common stock outstanding for the period. Diluted net income (loss) per share is calculated by dividing net income (loss) by the weighted average shares of common stock outstanding for the period plus amounts representing the dilutive effect of securities that are convertible into common stock. The Company calculates diluted earnings per common share using the treasury stock method and the as-if-converted method, as applicable.

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

 

 

 

Three Months Ended September 30,

 

 

 

Nine Months Ended September 30,

 

 

 

 

2018

 

 

2017

 

 

 

2018

 

 

2017

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

437,259

 

 

$

234,353

 

 

 

$

(3,858,879

)

 

$

549,323

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

9,566,118

 

 

 

9,545,235

 

 

 

 

9,495,278

 

 

 

9,475,708

 

 

Plus dilutive effect of potential common shares

 

 

526,383

 

 

 

624,324

 

 

 

 

 

 

 

763,279

 

 

Weighted average common shares outstanding - diluted

 

 

10,092,501

 

 

 

10,169,559

 

 

 

 

9,495,278

 

 

 

10,238,987

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

 

$

0.02

 

 

 

$

(0.41

)

 

$

0.06

 

 

Diluted

 

$

0.04

 

 

$

0.02

 

 

 

$

(0.41

)

 

$

0.05

 

 

 

 

10


 

Diluted weighted average common shares outstanding for the three months ended September 30, 2018 and 2017, includes 526,383 and 624,324 options outstanding, respectively.  Diluted weighted average 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 (loss) per share because to do so would be anti-dilutive are as follows:

 

 

 

Three Months Ended September 30,

 

 

 

Nine Months Ended September 30,

 

 

 

 

2018

 

 

2017

 

 

 

2018

 

 

2017

 

 

Employee stock options

 

 

244,543

 

 

 

375,277

 

 

 

 

887,287

 

 

 

427,645

 

 

Warrants outstanding

 

 

51,003

 

 

 

51,003

 

 

 

 

51,003

 

 

 

 

 

Total

 

 

295,546

 

 

 

426,280

 

 

 

 

938,290

 

 

 

427,645

 

 

 

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

The following tables show the Company’s cash and cash equivalents and short-term investments by significant investment category as of September 30, 2018 and December 31, 2017:

 

 

September 30, 2018

 

 

 

Amortized Cost

 

 

Gross Unrealized Gain (Loss)

 

 

Estimated Fair Value

 

 

Cash and Cash Equivalents

 

 

Short-Term Investments

 

Cash

 

$

2,215,116

 

 

$

 

 

$

2,215,116

 

 

$

2,215,116

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1 (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

7,848,998

 

 

 

 

 

 

7,848,998

 

 

 

7,848,998

 

 

 

 

U.S. treasury securities

 

 

989,051

 

 

 

89

 

 

 

989,140

 

 

 

 

 

 

989,140

 

Subtotal

 

 

8,838,049

 

 

 

89

 

 

 

8,838,138

 

 

 

7,848,998

 

 

 

989,140

 

Level 2 (2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

8,531,479

 

 

 

 

 

 

8,531,479

 

 

 

 

 

 

8,531,479

 

Corporate debt obligations

 

 

5,936,106

 

 

 

(2,008

)

 

 

5,934,098

 

 

 

 

 

 

5,934,098

 

Repurchase agreements

 

 

3,000,542

 

 

 

 

 

 

3,000,542

 

 

 

3,000,542

 

 

 

 

Asset-backed securities

 

 

3,312,145

 

 

 

(1,626

)

 

 

3,310,519

 

 

 

 

 

 

3,310,519

 

Subtotal

 

 

20,780,272

 

 

 

(3,634

)

 

 

20,776,638

 

 

 

3,000,542

 

 

 

17,776,096

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

31,833,437

 

 

$

(3,545

)

 

$

31,829,892

 

 

$

13,064,656

 

 

$

18,765,236

 

 

 

 

 

December 31, 2017

 

 

 

Amortized Cost

 

 

Gross Unrealized Losses

 

 

Estimated Fair Value

 

 

Cash and Cash Equivalents

 

 

Short-Term Investments

 

Cash

 

$

3,040,696

 

 

$

 

 

$

3,040,696

 

 

$

3,040,696

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1 (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

8,234,751

 

 

 

 

 

 

8,234,751

 

 

 

8,234,751

 

 

 

 

U.S. treasury securities

 

 

2,490,799

 

 

 

(5,540

)

 

 

2,485,259

 

 

 

 

 

 

2,485,259

 

Subtotal

 

 

10,725,550

 

 

 

(5,540

)

 

 

10,720,010

 

 

 

8,234,751

 

 

 

2,485,259

 

Level 2 (2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

9,716,093

 

 

 

 

 

 

9,716,093

 

 

 

 

 

 

9,716,093

 

Corporate debt obligations

 

 

6,829,191

 

 

 

(9,414

)

 

 

6,819,777

 

 

 

 

 

 

6,819,777

 

Repurchase agreements

 

 

3,000,233

 

 

 

 

 

 

3,000,233

 

 

 

3,000,233

 

 

 

 

Asset-backed securities

 

 

3,018,276

 

 

 

(1,953

)

 

 

3,016,323

 

 

 

750,388

 

 

 

2,265,935

 

Subtotal

 

 

22,563,793

 

 

 

(11,367

)

 

 

22,552,426

 

 

 

3,750,621

 

 

 

18,801,805

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

36,330,039

 

 

$

(16,907

)

 

$

36,313,132

 

 

$

15,026,068

 

 

$

21,287,064

 

 

 

(1)

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

11


 

 

(2)

Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs 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, 2018:

 

 

 

Less Than 12 Months

 

Description of Securities

 

Estimated Fair Value

 

 

Unrealized Losses

 

September 30, 2018

 

 

 

 

 

 

 

 

Corporate debt obligations

 

$

4,482,979

 

 

$

(2,091

)

Asset-backed securities

 

 

3,310,519

 

 

 

(1,626

)

Total

 

$

7,793,498

 

 

$

(3,717

)

 

The Company considers the declines in market value of its short-term investments to be temporary in nature.  Fair values were determined for each individual security in the investment portfolio.  When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investment’s cost basis.  As of September 30, 2018, the Company does not consider any of its investments to be other-than temporarily impaired.