Notes to Unaudited Condensed Financial Statements
Note 1. Basis of Presentation
Business Description
Airgain, Inc. (the Company) was incorporated in the State of California on March 20, 1995, and reincorporated in the State of Delaware on August 15, 2016. The Company is a leading provider of embedded antenna technologies used to enable high performance wireless networking across a broad range of home, enterprise, and industrial devices. The Company designs, develops, and engineers its antenna products for original equipment and design manufacturers worldwide. The Company’s main office is in San Diego, California with office space and research facilities in San Diego, California, Taipei, Taiwan, Shenzhen and Jiangsu, China and Cambridgeshire, United Kingdom.
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Interim financial results are not necessarily indicative of results anticipated for the full year. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the financial statements and accompanying notes included in the Company’s final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on August 12, 2016.
The condensed balance sheet as of December 31, 2015 included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.
The condensed statement of operations for the three months ended June 30, 2016 and June 30, 2015 and the six months ended June 30, 2016 and June 30, 2015, and the balance sheet data as of June 30, 2016 have been prepared on the same basis as the audited financial statements.
In the opinion of management, the accompanying unaudited condensed financial statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of results of the Company’s operations and financial position for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2016 or for any future period.
In July 2016, the Company effected a one-for-ten reverse stock split of its common stock. All issued and outstanding common stock, and per share amounts contained in the financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.
Inventory
The vast majority of the Company’s products are manufactured by third parties that retain ownership of the inventory until title is transferred to the customer at the shipping point. In certain instances, shipping terms are delivery at place and the Company is responsible for arranging transportation and delivery of goods ready for unloading at the name place. The Company bears all risk involved in bringing the goods to the named place and records the related inventory in transit to the customer as inventory on the accompanying balance sheet.
Segment Information
The Company’s operations are located primarily in the United States, and most of its assets are located in San Diego, California. The Company operates in one segment related to the sale of antenna products. The Company’s chief operating decision-maker is its chief executive officer, who reviews operating results on an aggregate basis and manages the Company’s opertions as a single operating segment.
Initial Public Offering
On August 17, 2016, the Company completed its initial public offering (IPO) in which it issued and sold 1.5 million shares of common stock at a public offering price of $8.00 per share. The Company received net proceeds of approximately $9.8 million after deducting underwriting discounts and commissions of $0.8 million and estimated offering-related transaction costs of approximately $1.4 million. Upon the closing of the IPO, all shares of the Company’s then-outstanding preferred redeemable convertible stock and
8
preferred con
vertible stock automatically converted into an aggregate of 3,080,733 shares of common stock and the Company issued 1,945,892 shares of common stock in satisfaction of accumulated dividends.
On August 29, 2016 the underwriters exercised their over-allotment option to purchase an additional 200,100 shares of common stock at the public offering price of $8.00 per share, which resulted in net proceeds to the Company of approximately $1.5 million, after deducting underwriting discounts, commissions and estimated offering-related transaction costs of approximately $0.1 million.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include valuation of the preferred redeemable convertible stock warrant liability and determining the assumptions used in measuring stock-based compensation expense.
Note 2. Summary of Significant Accounting Policies
There have been no material changes to the Company’s significant accounting policies as described in the Proscpectus that have had a material impact on the Company’s unaudited condensed financial statements and related notes.
Fair Value Measurements
The carrying values of the Company’s financial instruments, including cash, trade accounts receivable, accounts payable, and accrued liabilities approximate their fair values due to the short maturity of these instruments.
Fair value measurements are market-based measurements, not entity-specific measurements. Therefore, fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. The Company follows a three-level hierarchy to prioritize the inputs used in the valuation techniques to derive fair values. The basis for fair value measurements for each level within the hierarchy is described below:
|
•
|
Level 1: Quoted prices in active markets for identical assets or liabilities.
|
|
•
|
Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
|
|
•
|
Level 3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable in active markets.
|
Because some of the inputs to the Company’s valuation model were either not observable or were not derived principally from or corroborated by observable market data by correlation or other means, the warrant liability was classified as Level 3 in the fair value hierarchy.
The following table provides a summary of the recognized liabilities carried at fair value on a recurring basis:
|
|
Balance as of December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability (note 10)
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
709,504
|
|
The Company’s accounting policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no transfers into or out of Level 1, Level 2, or Level 3 for the six months ended June 30, 2016 and the year ended December 31, 2015.
The following table provides a rollforward of the Company’s Level 3 fair value measurements during the six months ended June 30, 2016 and 2015:
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Beginning balance
|
|
$
|
709,504
|
|
|
$
|
809,974
|
|
Change in fair value of warrant liability
|
|
|
(460,289
|
)
|
|
|
(258,138
|
)
|
Conversion of warrants
|
|
|
(249,215
|
)
|
|
|
—
|
|
Ending balance
|
|
$
|
—
|
|
|
$
|
551,836
|
|
9
In May 2016, the warrants were amended such that the warrants became immediately exercisable into shares of the Company’s common stock. Concurrent with such amendment, the holders of the outstanding warrants elected to net exercise the warrants, and the Company issued an aggregate of 127,143 shares of common stock. A final valuation of the warrants was completed and the remaining balance was reclassified to additional paid in capital.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB), issued Accounting Standards Update, or ASU, No. 2016-09 Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact the guidance will have on its financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-2), which requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The new standard is effective January 1, 2019. The Company is evaluating the effect that ASU 2014-09 will have on its financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on the Company’s ongoing financial reporting.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This guidance simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets all be classified as noncurrent in a classified statement of financial position. The guidance is effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on its financial statements.
In September 2015, the FASB issued Accounting Standards Update No. 2015-16, Business Combinations (Topic 815): Simplifying the Accounting Measurement-Period Adjustments. This guidance requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The guidance is effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2015. The Company does not expect the adoption of this guidance to have a material impact on its financial statements.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. The update requires companies to measure certain inventory at the lower of cost and net realizable value. This guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those years on a prospective basis. Early application is permitted. The Company does not expect the adoption of this guidance to have a material impact on its financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with customers (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for us on January 1, 2019. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of that standard on the Company’s ongoing financial reporting.
Note 3. Net Income (Loss) Per Share
Basic net income or loss per share is calculated by dividing net income or loss available to common stockholders by the weighted average shares of common stock outstanding for the period. The per share computations reflect the stock split as noted in note 16. 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.
10
The following table presents the computation of net income or loss per share:
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|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,311,209
|
|
|
$
|
(171,352
|
)
|
|
$
|
1,450,361
|
|
|
$
|
(228,853
|
)
|
Accretion of dividends on preferred stock
|
|
|
(610,781
|
)
|
|
|
(610,337
|
)
|
|
|
(1,214,850
|
)
|
|
|
(1,209,968
|
)
|
Net income (loss) attributable to common stockholders - basic
|
|
$
|
700,428
|
|
|
$
|
(781,689
|
)
|
|
$
|
235,511
|
|
|
$
|
(1,438,821
|
)
|
Accretion of dividends on preferred stock
|
|
|
354,270
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Adjustment for change in fair value of warrant liability
|
|
|
(381,455
|
)
|
|
|
(15,145
|
)
|
|
|
(460,289
|
)
|
|
|
(258,138
|
)
|
Net income (loss) attributable to common stockholders - diluted
|
|
$
|
673,243
|
|
|
$
|
(796,834
|
)
|
|
$
|
(224,778
|
)
|
|
$
|
(1,696,959
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
724,979
|
|
|
|
652,208
|
|
|
|
695,415
|
|
|
|
638,979
|
|
Diluted
|
|
|
4,479,505
|
|
|
|
652,208
|
|
|
|
695,415
|
|
|
|
638,979
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.97
|
|
|
$
|
(1.20
|
)
|
|
$
|
0.34
|
|
|
$
|
(2.25
|
)
|
Diluted
|
|
$
|
0.15
|
|
|
$
|
(1.22
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(2.66
|
)
|
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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Preferred redeemable convertible stock, including accumulated
dividends
|
|
|
3,858,113
|
|
|
|
4,782,335
|
|
|
|
4,998,688
|
|
|
|
4,782,335
|
|
Employee stock options
|
|
|
952,940
|
|
|
|
831,759
|
|
|
|
1,371,666
|
|
|
|
831,759
|
|
Series G preferred stock warrants outstanding
|
|
|
—
|
|
|
|
788,338
|
|
|
|
—
|
|
|
|
788,338
|
|
Total
|
|
|
4,811,053
|
|
|
|
6,402,432
|
|
|
|
6,370,354
|
|
|
|
6,402,432
|
|
Note 4. Acquisition
On December 17, 2015, the Company executed and entered into an asset purchase agreement for certain North American assets of Skycross, Inc. (Skycross), a manufacturer of advanced antenna and radio-frequency solutions. As a result of the acquisition, the Company expects to benefit from the acquisition primarily through the addition of new customers. The goodwill of $1,249,956 arising from the acquisition relates to expected synergies and cost reductions through economies of scale. Upon fulfillment of the contingent consideration arrangement, the amount of goodwill expected to be deductible for tax purposes is $1,249,956.
In addition to the $4.0 million paid up front, the purchase price also includes a contingent consideration arrangement. The $1.0 million of deferred consideration is contingent upon the later of (i) the expiration of the Transition Services Agreement between the Company and Skycross, Inc. which defines transition services to be provided by Skycross to the Company and (ii) the date on which the Company has received copies of third party approvals with respect to each customer and program that was purchased. The potential undiscounted amount of all future payments that could be required to be paid under the contingent consideration arrangement is between $0.0 and $1.0 million. The fair value of the contingent consideration was estimated by applying the income approach. The income approach is based on estimating the value of the present worth of future net cash flows.
11
The following table summarizes the consideration paid and the amounts of estimated fair value of the assets acquired and liabilities assumed at the acquisition
date.
Consideration:
|
|
|
|
|
Cash
|
|
$
|
4,000,000
|
|
Contingent consideration arrangement
|
|
|
1,000,000
|
|
Fair value of total consideration transferred
|
|
$
|
5,000,000
|
|
Recognized amounts of identifiable assets acquired and
liabilities assumed:
|
|
|
|
|
Accounts receivable
|
|
$
|
429,267
|
|
Intangible assets
|
|
|
3,497,000
|
|
Current liabilities
|
|
|
(176,223
|
)
|
Total identifiable net assets acquired
|
|
|
3,750,044
|
|
Goodwill
|
|
|
1,249,956
|
|
Total
|
|
$
|
5,000,000
|
|
The fair value of accounts receivable was $429,267 at the date of acquisition. The contingent consideration of $1.0 million is included in the deferred purchase price balance on the accompanying balance sheet as of June 30, 2016.
Revenue associated with the acquired Skycross assets since the date of acquisition was $1.4 million and $2.4 million for the three months ended June 30, 2016 and for the six months ended June 30, 2016, respectively. Cost of goods sold associated with the acquired Skycross assets since the date of acquisition was $0.4 million and $0.8 million for the three months ended June 30, 2016 and for the six months ended June 30, 2016, respectively. The acquired assets were not managed as a discrete business by the previous owner. Accordingly, the historical financial information for the assets acquired was impracticable to obtain, and inclusion of pro forma information would require the Company to make estimates and assumptions regarding these assets’ historical financial results that may not be reasonable or accurate. As a result, pro forma results are not presented. It is not practicable to determine net income included in the Company’s operating results relating to Skycross assets since the date of acquisition because the assets have been fully integrated into the Company’s operations, and the operating results of the Skycross assets can therefore not be separately identified.
Note 5. Goodwill
Changes to the Company’s goodwill balance during the year ended December 31, 2015 and the six months ended June 30, 2016 are as follows:
Balance at December 31, 2014
|
|
$
|
—
|
|
Skycross acquisition
|
|
|
1,249,956
|
|
Balance at December 31, 2015
|
|
$
|
1,249,956
|
|
Current period adjustments
|
|
|
—
|
|
Balance at June 30, 2016
|
|
$
|
1,249,956
|
|
Note 6. Intangible Assets
The following is a summary of the Company’s acquired intangible assets:
|
|
June 30, 2016
|
|
|
|
Weighted
Average
Amortization
Period
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Intangibles, Net
|
|
Developed technologies
|
|
|
10
|
|
|
$
|
280,000
|
|
|
$
|
15,074
|
|
|
$
|
264,926
|
|
Customer relationships
|
|
|
10
|
|
|
|
3,150,000
|
|
|
|
169,582
|
|
|
|
2,980,418
|
|
Non-compete agreement
|
|
|
3
|
|
|
|
67,000
|
|
|
|
12,023
|
|
|
|
54,977
|
|
Total intangible assets, net
|
|
|
10
|
|
|
$
|
3,497,000
|
|
|
$
|
196,679
|
|
|
$
|
3,300,321
|
|
12
|
|
December 31, 2015
|
|
|
|
Weighted
Average
Amortization
Period
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Intangibles, Net
|
|
Developed technologies
|
|
|
10
|
|
|
$
|
280,000
|
|
|
$
|
1,074
|
|
|
$
|
278,926
|
|
Customer relationships
|
|
|
10
|
|
|
|
3,150,000
|
|
|
|
12,082
|
|
|
|
3,137,918
|
|
Non-compete agreement
|
|
|
3
|
|
|
|
67,000
|
|
|
|
857
|
|
|
|
66,143
|
|
Total intangible assets, net
|
|
|
10
|
|
|
$
|
3,497,000
|
|
|
$
|
14,013
|
|
|
$
|
3,482,987
|
|
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 $91,333 and $0 for the three months ended June 30, 2016 and 2015, respectively, and $182,666 and $0 for the six months ended June 30, 2016 and 2015, respectively.
|
|
Estimated Future Amortization
|
|
2016 (remaining six months)
|
|
$
|
182,667
|
|
2017
|
|
|
365,333
|
|
2018
|
|
|
364,477
|
|
2019
|
|
|
343,000
|
|
2020
|
|
|
343,000
|
|
Thereafter
|
|
|
1,701,844
|
|
Total
|
|
$
|
3,300,321
|
|
Note 7. Long-term Notes Payable (including current portion) and Line of Credit
In June 2012, the Company amended its line of credit with Silicon Valley Bank. The amended revolving line of credit facility allows for an advance up to $3.0 million. The facility bears interest at the U.S. prime rate (3.5% as of December 31, 2015) plus 1.25%. The revolving facility is available as long as the Company maintains a liquidity ratio of cash and cash equivalents plus accounts receivable to outstanding debt under the facility of 1.25 to 1.00; otherwise, the facility reverts to its previous eligible receivables financing arrangement. The amended facility matures in April 2018. The bank has a first security interest in all the Company’s assets excluding intellectual property, for which the bank has received a negative pledge. There was no balance owed on the line of credit as of June 30, 2016 and December 31, 2015.
In December 2013, the Company further amended its revolving line of credit with Silicon Valley Bank to include a growth capital term loan of up to $750,000. The growth capital term loan requires interest only payments through June 30, 2014 at which point it is to be repaid in 32 equal monthly installments of interest and principal. The growth capital term loan matures on February 1, 2017, at which time all unpaid principal and accrued and unpaid interest is due. The growth capital term loan interest rate is 6.5%. The Company must maintain a liquidity ratio of cash and cash equivalents plus accounts receivable to outstanding debt under the facility of greater than or equal to 1.00 to 1.00. As of June 30, 2016 and December 31, 2015, $203,471 and $346,895 was outstanding under this loan, respectively.
The remaining principal payments on the growth capital term loan subsequent to June 30, 2016 are as follows:
Year ending:
|
|
|
|
|
2016
|
|
$
|
148,273
|
|
2017
|
|
|
55,198
|
|
|
|
$
|
203,471
|
|
In December 2015, the Company entered into a loan agreement with Silicon Valley Bank in the amount of $4.0 million. The loan requires 36 monthly installments of interest and principal. The loan matures on December 1, 2018. The loan agreement requires the Company to maintain a liquidity ratio of 1.25 to 1.00 as of the last day of each month and a minimum EBITDA, (as defined in the agreement), measured as of the last day of each fiscal quarter for the previous six-month period (for June 30, 2016 the minimum EBITDA of $1.00). The interest rate is 5%. As of June 30, 2016 and December 31, 2015, $3,333,333 and $4,000,000 was outstanding under this loan, respectively.
13
The remaining principal payments on the $4.0 million loan subsequent to June 30, 2016 are as follows:
Year ending:
|
|
|
|
|
2016
|
|
$
|
666,667
|
|
2017
|
|
|
1,333,333
|
|
2018
|
|
|
1,333,333
|
|
|
|
$
|
3,333,333
|
|
The Company was in compliance with all financial term loan and line of credit financial covenants as of June 30, 2016.
Note 8. Income Taxes
The Company’s effective tax rate may vary from the U.S. federal statutory tax rate due to the change in the mix of earnings in tax jurisdictions with different statutory rates, benefits related to tax credits, and the tax impact of non-deductible expenses and other permanent differences between income before income taxes and taxable income. The effective tax rate for the three and six months ended June 30, 2016 was 0.06%. The variance from the U.S. federal statutory tax rate of 34% was primarily attributable to the utilization of deferred tax attributes that had a full valuation allowance as well as nondeductible meals and entertainment expenses, nondeductible incentive stock option compensation expenses, and nontaxable warrant adjustments.
Deferred income taxes are provided for temporary differences in recognizing certain income and expense items for financial and reporting purposes. A valuation allowance has been recorded to fully offset the deferred tax asset as it is more likely than not that the asset will not be realized.
As of June 30, 2016, the Company has available $25.5 million in federal and $18.7 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 as defined. Accordingly, the Company’s ability to utilize net operating loss and tax credit carryforwards may be limited as a result of such ownership change. Such information could result in the expiration of carryforwards before they are utilized.
Note 9. Stockholders’ Deficit
(a)
|
Preferred Convertible Stock
|
In June 2000, the Company sold 313,500 shares of Series A preferred convertible stock (Series A Preferred Stock) at $3.84 per share for gross proceeds of $1.2 million.
In March 2001, the Company sold 290,993 shares of Series B preferred convertible stock (Series B Preferred Stock) at $4.39 per share for gross proceeds of $1.3 million in cash. At various times during 2003 the company issued a total of 866,613 additional shares of Series B Preferred Stock for cash and as compensation for services received and to satisfy debt obligations totaling approximately $1.2 million.
In September 2003, the Company sold 682,000 shares of Series C preferred convertible stock (Series C Preferred Stock) at $1.00 per share for gross proceeds of $0.7 million.
In November 2003, the Company sold 4,091,068 shares of Series D Preferred Convertible Stock (Series D Preferred Stock) at $0.542 per share for gross proceeds of $2.2 million.
The holders of the Series A, B, C and D Preferred Stock (collectively, Junior Preferred Stock), are entitled to receive cumulative dividends at a rate of $0.0488, $0.00, $0.00 and $0.0488 per share, per annum, respectively, and are payable upon liquidation, redemption or conversion in order of their preference prior to any dividends on common stock.
The holders of the Junior Preferred Stock are entitled to receive liquidation preferences upon certain deemed liquidation events at the rate equal to their purchase price per share plus all accrued and unpaid dividends. Upon completion of this distribution, any remaining assets will be distributed to the holders of the common stock and to holders of the Junior Preferred Stock and to the holders of the Senior Preferred Stock (on an as converted basis) until all amounts received by the holders of the Series A Preferred Stock is equal to $19.20 per share, the Series D Preferred Stock is equal to $2.168 per share, Series E Preferred Stock is equal to $4.44 per share, Series F Preferred Stock is equal to $5.20 per share, and Series G Preferred Stock is equal to $5.20 per share, the remaining assets shall be distributed among holders of shares of the common stock. The holders of the Senior Preferred Stock have priority and are made in preference to any payments to the Junior Preferred Stock up to the Senior Preferred Stock’s liquidation preference. The holders of the Junior Preferred Stock have priority and are made in preference to any payments to the holders of the common stock up
14
to the Junior Preferred Stock’s liquidation preference. After distribution of both the Senior Preferred Stock and
Junior Preferred Stock’s liquidation preferences, any remaining assets of the Company shall be distributed to the holders of the common stock.
Each share of Junior Preferred Stock is convertible, at the option of the holder, at any time, into a number of shares of common stock at a conversion price of $21.70, $24.23, $8.59, $5.42 for the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, respectively, subject to adjustments for stock dividends, combinations, subdivisions, reclassifications and reorganizations. Each share of Junior Preferred Stock is automatically convertible into common stock immediately upon the earlier of (i) the Company’s sale of its common stock in a firm commitment, underwritten public offering registered under the Securities Act of 1933, as amended, in which aggregate proceeds to the Company are at least $15.0 million and at a per share offering price of at least $76.80 per share, as adjusted for any stock dividends, combinations, reclassifications, recapitalizations or splits, or (ii) the date specified by written consent or agreement by the holders of the majority of the then outstanding shares voting together as a single class on an as-converted basis (without giving effect to the conversion dividends).
As long as 1,678,450 shares of Junior Preferred Stock remains outstanding, the Company is prohibited from certain transactions without the consent of at least 50% of the then outstanding shares of Junior Preferred Stock or the majority of the Board of Directors.
The holders of the Junior Preferred Stock are entitled to the number of votes equal to the number of shares of common stock into which such shares of preferred stock could be converted and have voting rights and powers equal to the voting rights and powers of the common stock.
In connection with the completion of the IPO, all 29,515,876 outstanding shares of the Company’s preferred stock automatically converted into an aggregate of 3,080,733 shares of common stock. In addition, the Company issued 1,945,892 shares of its common stock in satisfaction of accumulated dividends on such preferred stock as of the completion of the IPO.
(b)
|
Shares Reserved for Future Issuance
|
The following common stock is reserved for future issuance at June 30, 2016 and December 31, 2015:
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Conversion of Series A, B, C, and D preferred convertible
stock
|
|
|
753,687
|
|
|
|
753,687
|
|
Conversion of Series E, F, and G preferred redeemable
convertible stock
|
|
|
2,327,170
|
|
|
|
2,327,170
|
|
Warrants issued and outstanding
|
|
|
—
|
|
|
|
788,338
|
|
Stock option awards issued and outstanding
|
|
|
1,053,267
|
|
|
|
756,692
|
|
Authorized for grants under the 2013 Equity Incentive Plan
|
|
|
424,383
|
|
|
|
321,313
|
|
|
|
|
4,558,507
|
|
|
|
4,947,200
|
|
Note 10. Preferred Redeemable Convertible Stock
In June 2005 and February 2006, the Company sold a total of 7,984,727 shares of Series E Preferred Redeemable Convertible Stock (Series E Preferred Stock) at $1.11 per share for gross proceeds of $8.8 million in cash.
In February 2007, the Company sold 4,734,374 shares of Series F Preferred Redeemable Convertible Stock (Series F Preferred Stock) at $1.30 per share for gross proceeds of $6.2 million in cash.
In March 2008 and June 2009, the Company completed an offering of Series G Preferred Stock at $1.30 per share for gross proceeds of $4.3 million in cash. In June 2012, the then outstanding convertible promissory notes and accrued interest thereon in the amount of $7.1 million converted to 6,216,607 and 463,856 shares of Series G Preferred Stock at the conversion price of $1.04 or $1.30 per share, respectively.
The holders of the Senior Preferred Stock are entitled to receive cumulative dividends at a rate of 8.0% of the original purchase price per annum and are payable in cash or common shares, at the option of the Company upon liquidation, redemption or conversion in order of their preference prior to any dividends on common stock or Junior Preferred Stock.
The holders of the Senior Preferred Stock are entitled to receive liquidation preferences upon certain deemed liquidation events at the rate equal to their conversion price per share plus all accrued and unpaid dividends.
15
Each share of Senior Preferred Stock is c
onvertible, at the option of the holder, at any time, into a number of shares of common stock at a conversion price of $11.11, $13.00, and $13.00 for the Series E Preferred Stock, Series F Preferred Stock, and Series G Preferred Stock, respectively, subjec
t to adjustments for stock dividends, combinations, subdivisions, reclassifications and reorganizations. Each share of Senior Preferred Stock is automatically convertible into common stock immediately upon the earlier of (i) the Company’s sale of its commo
n stock in a firm commitment, underwritten public offering registered under the Securities Act of 1933, as amended, in which aggregate proceeds to the Company are at least $15.0 million, and at a per share offering price of at least $76.80 per share, as ad
justed for any stock dividends, combinations, reclassifications, recapitalizations or splits, or (ii) the date specified by written consent or agreement by the holders of the majority of the then outstanding shares voting together as a single class, provid
ed that the Junior Preferred Stock will also concurrently convert.
As long as 4,875,000 shares of Senior Preferred Stock remain outstanding, the Company is prohibited from certain transactions without the consent of at least 50% of the then outstanding shares of Senior Preferred Stock or the majority of the Board of Directors.
The holders of the Senior Preferred Stock are entitled to the number of votes equal to the number of shares of common stock into which such shares of preferred stock could be converted and have voting rights and powers equal to the voting rights and powers of the common stock.
The following table provides a rollforward of the preferred redeemable convertible stock during the year ended December 31, 2015 and the six months ended June 30, 2016:
|
|
Preferred
|
|
|
|
redeemable convertible stock
|
|
|
|
Shares
|
|
|
Amount
|
|
Balance at December 31, 2014
|
|
|
23,055,356
|
|
|
$
|
40,724,356
|
|
Exercise of warrants
|
|
|
216,346
|
|
|
|
225,000
|
|
Effect of accretion to redemption value
|
|
|
—
|
|
|
|
2,157,550
|
|
Balance at December 31, 2015
|
|
|
23,271,702
|
|
|
|
43,106,906
|
|
Effect of accretion to redemption value
|
|
|
—
|
|
|
|
1,072,332
|
|
Balance at June 30, 2016
|
|
|
23,271,702
|
|
|
$
|
44,179,238
|
|
In connection with the completion of the IPO, all outstanding shares of the Company’s preferred redeemable convertible stock automatically converted into 3,080,733 shares of common stock.
Note 11. Warrants
As of December 31, 2015, the Company had warrants outstanding that allow the holders to purchase shares of the Company’s Series G Preferred Stock. In May 2016, the warrants were amended such that the warrants became immediately exercisable into shares of the Company’s common stock. Concurrent with such amendment, the holders of the outstanding warrants elected to net exercise the warrants, and the Company issued an aggregate of 127,143 shares of common stock. No warrants were outstanding at June 30, 2016.
Warrants outstanding at December 31, 2015 are summarized as follows:
|
|
December 31, 2015
|
|
|
|
Number of
warrants
outstanding
|
|
|
Issuance date
|
|
Expiration
dates
|
|
Exercise
price(s)
|
|
|
Common
share
equivalent if
exercised and
converted
|
|
Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series G preferred redeemable convertible stock
|
|
|
7,883,377
|
|
|
April 2010
through
September
2012
|
|
Various
through
September
2017
|
|
$
|
1.04
|
|
|
|
788,338
|
|
As the Series G Preferred Stock were redeemable at the option of the Series G preferred stockholders, the Company determined the warrants for Series G Preferred Stock should be classified as liabilities and adjusted to fair value at each reporting date. The fair value of the warrants was estimated using a combination of an option-pricing model and current value model under the probability-weighted return method, using significant unobservable inputs (Level 3 inputs) including: management’s cash flow projections;
16
probability and timing of potential liquidity scenarios; weighted-average cost of capital that included the addition of a company specific risk premium to account for uncertainty associated with the Company achievin
g future cash flows; selection of appropriate market comparable transactions and multiples; expected volatility; and risk-free rate. The Company used a combination of discounted cash flow, guideline public company and market transaction valuation technique
s in estimating the fair value of the warrant liability at each reporting date. The discount rates used were 20% and 21% at May 24, 2016 and December 31, 2015, respectively. The fair value of the warrants was $249,215 and $709,504 as of May 24, 2016 and De
cember 31, 2015, respectively.
On April 2, 2015, the Company and certain holders of the warrants to purchase Series G Preferred Stock adopted an amendment to extend the exercise period for the holders of all outstanding Series G warrants by one year, which resulted in incremental expense of $343,446 during the year ended December 31, 2015.
Note 12. Stock Options
The following table summarizes the outstanding stock option activity during the periods indicated:
|
|
Number
of shares
|
|
|
Weighted
average
exercise
price
|
|
Balance at December 31, 2014
|
|
|
504,550
|
|
|
$
|
2.60
|
|
Granted
|
|
|
512,402
|
|
|
|
2.00
|
|
Exercised
|
|
|
(24,260
|
)
|
|
|
3.18
|
|
Expired
|
|
|
(236,000
|
)
|
|
|
2.77
|
|
Balance at December 31, 2015
|
|
|
756,692
|
|
|
|
2.10
|
|
Granted
|
|
|
339,315
|
|
|
|
1.90
|
|
Exercised
|
|
|
(30,500
|
)
|
|
|
2.37
|
|
Expired
|
|
|
(12,240
|
)
|
|
|
2.20
|
|
Balance at June 30, 2016
|
|
|
1,053,267
|
|
|
$
|
2.02
|
|
Vested and exercisable at June 30, 2016
|
|
|
614,810
|
|
|
$
|
2.06
|
|
Vested and expected to vest at June 30, 2016
|
|
|
1,017,424
|
|
|
$
|
2.02
|
|
The weighted average grant-date fair value of options granted was $0.86 during the six months ended June 30, 2016 and $0.84 for the year ended December 31, 2015. For fully vested stock options and stock options expected to vest, the aggregate intrinsic value was immaterial as of June 30, 2016.
During the year ended December 31, 2014, the Company granted 260,924 shares of restricted common stock with a fair value of $2.20 per share to its Chief Executive Officer of which 68.75% were vested immediately and 6.25% of the shares vest on each of March 31, 2014, June 30, 2014, September 30, 2014, December 31, 2014 and March 31, 2015. During the year ended December 31, 2015, 50,000 shares of restricted stock were granted to other executives contingent upon the Company achieving an initial public offering of its equity securities by December 31, 2015. The performance measures were not met and the shares expired as of December 31, 2015. There was no expense recorded for these shares. During the six months ended June 30, 2016, a total of 57,475 shares of restricted common stock with a fair value of $1.90 per share were issued to the Company’s Chief Financial Officer and Chief Operating Officer of which 100% of the shares vest six months following the completion of the IPO.
At June 30, 2016 and December 31, 2015 there was $386,621 and $214,304, 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 13. Commitments and Contingencies
Operating Leases
The Company has entered into lease agreements for office space and research facilities in San Diego, California; Taipei, Taiwan; Shenzhen and Jiangsu, China; and Cambridgeshire, United Kingdom. Rent expense was $179,288 and $170,388, respectively, for the three months ended June 30, 2016 and 2015 and $369,150 and $316,922, respectively, for the six months ended June 30, 2016 and 2015. The longest lease expires in June 2020. The Company moved into its new facility in San Diego, California during the year ended December 31, 2014. The new San Diego facility lease agreement included a tenant improvement allowance
17
which provided for the landlord to pay for tenant
improvements on behalf of the Company up to $515,000. Based on the terms of this landlord incentive and involvement of the Company in the construction process, the leasehold improvements purchased under the landlord incentive were determined to be property
of the Company.
The future minimum lease payments required under operating leases in effect at June 30, 2016 were as follows:
Year ending:
|
|
|
|
|
2016 (remaining six months)
|
|
$
|
311,706
|
|
2017
|
|
|
635,617
|
|
2018
|
|
|
502,604
|
|
2019
|
|
|
513,893
|
|
2020 and beyond
|
|
|
265,940
|
|
|
|
$
|
2,229,760
|
|
Note 14. Concentration of Credit Risk
(a)
Concentration of Sales and Accounts Receivable
The following represents customers that accounted for 10% or more of total revenue during the three months ended June 30, 2016 and 2015 and the six months ended June 30, 2016 and 2015 and customers that accounted for 10% or more of total trade accounts receivable at June 30, 2016 and 2015.
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Percentage of net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
31
|
%
|
|
|
20
|
%
|
|
|
32
|
%
|
|
|
19
|
%
|
Customer B
|
|
|
20
|
|
|
|
14
|
|
|
|
18
|
|
|
|
16
|
|
Customer C
|
|
|
5
|
|
|
|
15
|
|
|
|
6
|
|
|
|
13
|
|
Customer D
|
|
|
1
|
|
|
|
4
|
|
|
|
2
|
|
|
|
6
|
|
Customer E
|
|
|
1
|
|
|
|
4
|
|
|
|
1
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Percentage of gross trade accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
25
|
%
|
|
|
17
|
%
|
|
|
22
|
%
|
|
|
23
|
%
|
Customer B
|
|
|
12
|
|
|
|
10
|
|
|
|
14
|
|
|
|
12
|
|
Customer C
|
|
|
7
|
|
|
|
12
|
|
|
|
2
|
|
|
|
7
|
|
Customer D
|
|
|
1
|
|
|
|
3
|
|
|
|
4
|
|
|
|
3
|
|
Customer E
|
|
|
1
|
|
|
|
7
|
|
|
|
1
|
|
|
|
—
|
|
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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Percentage of net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
75
|
%
|
|
|
60
|
%
|
|
|
74
|
%
|
|
|
63
|
%
|
Other Asia
|
|
|
10
|
|
|
|
24
|
|
|
|
11
|
|
|
|
20
|
|
North America
|
|
|
9
|
|
|
|
7
|
|
|
|
10
|
|
|
|
9
|
|
Europe
|
|
|
6
|
|
|
|
9
|
|
|
|
5
|
|
|
|
8
|
|
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.
18
(c)
|
Concentration of Purch
ases
|
During the three and six months ended June 30, 2016 and 2015, all of the Company’s products were manufactured by two vendors in China.
Note 15. Subsequent Events
In August 2016, in connection with the completion of the IPO, the Company’s Chief Executive Officer was awarded a bonus in the amount of $500,000.
In August 2016, the Company’s stockholders approved the 2016 Incentive Award Plan (2016 Plan), which became effective in August 2016 in connection with the IPO. Under the 2016 Plan, 300,000 shares are initially reserved for future issuances to the Company’s employees, contractors and directors. The 2016 Plan provides for the grant of stock options, including incentive stock options and non-qualified stock options, restricted stock, dividend equivalents, restricted stock units, stock appreciation rights, and other stock or cash based awards. No shares have been granted under the 2016 Plan.
In August 2016, the Company’s stockholders approved the 2016 Employee Stock Purchase Plan (ESPP). Under the ESPP, 100,000 shares are initially reserved for future issuances to employees. The ESPP permits participants to purchase common stock through payroll deductions of up to 20% of their eligible compensation, which includes a participant’s gross base compensation for services to the Company, including overtime payments and excluding sales commissions, incentive compensation, bonuses, expense reimbursements, fringe benefits and other special payments. No shares have been issued under the ESPP.
19