ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion and analysis and the interim unaudited condensed financial statements included in this quarterly report on Form 10-Q should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2015 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our final prospectus filed with the Securities and Exchange Commission, or SEC, on August 12, 2016, relating to our Registration Statement on Form S-1, as amended (File No. 333-212542), for our initial public offering, or IPO.
Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact contained in this quarterly report, including statements regarding our future operating results, financial position and cash flows, our business strategy and plans and our objectives for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “would,” “could,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this quarterly report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, operating results, business strategy, short-term and long-term business operations and objectives. These forward-looking statements speak only as of the date of this quarterly report and are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, “Risk Factors.” The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
Overview
We are a leading provider of embedded antenna technologies used to enable high performance wireless networking across a broad range of home, enterprise, and industrial devices. Our innovative antenna systems open up exciting new possibilities in wireless services requiring high speed throughput, broad coverage footprint, and carrier grade quality. Our antennas are found in devices deployed in carrier, enterprise, and residential wireless networks and systems, including set top boxes, access points, routers, gateways, media adapters, and digital televisions. Through our pedigree in the design, integration, and testing of high performance embedded antenna technology, we have become a leading provider to the residential wireless local area networking, also known as WLAN or Wi-Fi, antenna market, supplying to leading carriers, Original Equipment Manufacturers, or OEMs, Original Design Manufacturers, or ODMs, and system designers who depend on us to achieve their wireless performance goals. We also develop embedded antenna technology for adjacent markets, including enterprise Wi-Fi systems for on premises and cloud-based services, and for small cellular applications such as Pico and Femto Cells using Long-Term Evolution, or LTE, and Digital Enhanced Cordless Telecommunications, or DECT, and high-performance designs for the in-building wireless market.
We shipped approximately 87 million antenna products worldwide in 2015 used in approximately 34 million devices. For the nine months ended September 30, 2016, we shipped approximately 115 million antenna products worldwide used in approximately 39 million devices. Our products are found in a broad range of devices that generally enable Wi-Fi connectivity for data and video coverage. We sell our products to OEMs and ODMs. These companies compete based on product performance, product features, price, and other factors. While our products are found in devices manufactured by global OEMs and ODMs, the products end up primarily in the end-user devices that are deployed in carrier, enterprise, and residential wireless networks, access points, routers, residential gateways, set-top boxes, media adapters, and digital televisions. Our global sales force works with telecommunications and broadband carriers and retail-focused customers who seek high performance, reliable wireless solutions. By working with these end-user carriers and retail-focused customers, we seek to have service providers influence OEMs and ODMs to specify our antennas for the products they provide to their end-user customers. Our direct sales team works directly with customers, and also works with indirect channel partners who pursue sales opportunities that are based in the United States, Europe, and Asia.
Our sales cycle can be short or lengthy depending upon the specific situation; however, the majority of our revenues are derived from device designs with life-cycles of over 12 months. For some recurring customers, we are able to commence volume production of equipment that incorporates our products in less than one calendar quarter. In situations where we are selling to a new customer, it
19
may take 12
to 18 months from initial meeting to achieve a design win. Competition generally lengthens the sales process, but our past performance and ability to provide high throughput, highly reliable antenna solutions can shorten the process. We intend to continue
investing for long-term growth. We have invested and expect to continue to invest heavily in our product development efforts to address customer needs, and enable solutions that can address new end markets, such as alternative wireless connectivity techno
logies. In addition, we expect to continue to expand our sales force and engineering organizations and to make additional capital expenditures to further penetrate markets both in the United States and internationally, and to continue to expand our researc
h and development for new product offerings and technology solutions.
Although our sales cycle can be lengthy depending on the specific situation, the majority of our revenues are derived from device designs with life-cycles of over a year. In 2015, 80% of our product revenues were from devices in the marketplace for over two years, 11% for devices in the marketplace for one to two years and 9% for devices in the marketplace for less than one year. For the nine months ended September 30, 2016, 42% of our product revenues were from devices in the marketplace for over two years, 35% for devices in the marketplace for one to two years and 23% for devices in the marketplace for less than one year.
We believe demand is growing rapidly for our antenna solutions and there is a significant market opportunity. As the ability to provide mobile internet access has grown, our solutions and expertise have become more important to prospects and customers. As a passive component, embedded antennas can be viewed as a commodity. However, our design, engineering, and research show that antenna selection, placement, and testing can have significant improvements in device performance. We believe that we are chosen when performance is a more significant factor than price, and our distinctive focus on superior designs that provide increased range and throughput has allowed us to build a leadership position in the in-home WLAN antenna market.
Factors Affecting Our Operating Results
We believe that our performance and future success depend upon several factors, including the average selling price of our products per device, the number of antennas per device, manufacturing costs, investments in our growth, and our ability to diversify the number of devices that incorporate our antenna products. Our customers are extremely price conscious, and our operating results are affected by pricing pressure which may force us to lower prices below our established list prices. In addition, a few end customer devices which incorporate our antenna products comprise a significant amount of our sales, and the discontinuation or modification of such devices may materially and adversely affect our sales and results of operations. We have seen the number of devices increase 69% and number of antennas per device increase 20% for the nine months ended September 30, 2016 when compared to the nine months ended September 30, 2015. Our ability to maintain or increase our sales depends on new and existing end customers selecting our antenna solutions for their devices and depends on investments in our growth to address customer needs, target new end markets, develop our product offerings and technology solutions and expand internationally. While each of these areas presents significant opportunities for us, they also pose significant risks and challenges we must successfully address. See the section entitled “Risk Factors.”
Seasonality
Our operating results historically have not been subject to significant seasonal variations. However, our operating results are affected by how customers make purchasing decisions around local holidays in China. For example, a national holiday the first week of October in China may cause customers to purchase product in the third quarter ahead of their holiday season to account for higher volume requirements in the fourth quarter. In addition, although it is difficult to make broad generalizations, our sales tend to be lower in the first quarter of each year compared to other quarters due to the Chinese New Year. Results for any quarter may not be indicative of the results that may be achieved for the full fiscal year and these patterns may change as a result of general customer demand or product cycles.
Key Components of Our Results of Operations and Financial Condition
Sales
We primarily generate revenue from the sales of our products. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. We generally recognize sales at the time of shipment to our customers, provided that all other revenue recognition criteria have been met. Although currently insignificant, we may also generate service revenue derived from agreements to provide design, engineering, and testing to a customer.
20
Cost of Goods Sold
The cost of goods sold reflects the cost of producing antenna products that are shipped for our customers’ devices. This primarily includes manufacturing costs of our products payable to our third-party contract manufacturers. The cost of goods sold that we generate from services provided to customers primarily includes personnel costs.
Operating Expenses
Our operating expenses are classified into three categories: research and development, sales and marketing, and general and administrative. For each category, the largest component is personnel costs, which includes salaries, employee benefit costs, bonuses, and stock-based compensation. Operating expenses also include allocated overhead costs for depreciation of equipment, facilities and information technology. Allocated costs for facilities consist of leasehold improvements and rent. Operating expenses are generally recognized as incurred.
Research and development
. Research and development expenses primarily consist of personnel and facility-related costs attributable to our engineering research and development personnel. These expenses include work related to the design, engineering and testing of antenna designs, and antenna integration, validation and testing of customer devices. These expenses include salaries, including stock-based compensation, benefits, bonuses, travel, communications, and similar costs, and depreciation and allocated operating expenses such as office supplies, premises expenses, insurance and corporate legal expenses. We may also incur expenses from consultants and for prototyping new antenna solutions. We expect research and development expense to increase in absolute dollars as we increase our research and development headcount to further strengthen and enhance our antenna design and integration capabilities and invest in the development of new solutions and markets, although our research and development expense may fluctuate as a percentage of total sales.
Sales and marketing
. Sales and marketing expenses primarily consist of personnel and facility-related costs for our sales, marketing, and business development personnel, stock-based compensation and bonuses earned by our sales personnel, and commissions earned by our third-party sales representative firms. Sales and marketing expense also includes the costs of trade shows, marketing programs, promotional materials, demonstration equipment, travel, recruiting, and allocated costs for certain facilities. We expect sales and marketing expense to continue to increase in absolute dollars as we increase the size of our sales and marketing organizations in support of our investment in our growth opportunities, although our sales and marketing expense may fluctuate as a percentage of total sales.
General and administrative
. General and administrative expenses primarily consist of personnel and facility-related costs for our executive, finance, and administrative personnel, including stock-based compensation, as well as legal, accounting, and other professional services fees, depreciation, and other corporate expenses. We have recently incurred, and expect to continue to incur, additional expenses as we grow our operations and operate as a public company, including higher legal, corporate insurance and accounting expenses, and the additional costs of achieving and maintaining regulatory compliance. We expect general and administrative expense to increase in absolute dollars due to additional legal fees and accounting, insurance, investor relations, and other costs associated with being a public company, as well as, due to costs associated with growing our business, although our general and administrative expense may fluctuate as a percentage of total sales.
Interest and Other Expense (Income)
Interest Income
. Interest income consists of interest from our cash and cash equivalents.
Interest Expense
. Interest expense consists of interest on our outstanding debt and amortization of loan fees.
Fair Market Value Adjustments - Warrants
. This consists of the change in fair value of our convertible preferred stock warrant liability. The preferred stock warrants are classified as liabilities on our balance sheets and their estimated fair value is re-measured at each balance sheet date using a combination of an option-pricing model and current value model under the probability-weighted return method, with the corresponding change recorded within other expense (income). In May 2016, the warrants were amended such that they became immediately exercisable into shares of our common stock. Concurrent with such amendment, the holders of the outstanding warrants elected to net exercise the warrants, and were granted an aggregate of 127,143 shares of our common stock. Following such net exercise, there will be no future re-measurement of the warrant liability.
Provision (benefit) for Income Taxes
Provision (benefit) for income taxes consists of federal and state income taxes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
21
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductibl
e. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment. We have concluded tha
t it is not more likely than not that we will utilize its deferred tax assets other than those that are offset by reversing temporary differences.
The following tables set forth our operating results for the periods presented as a percentage of our total sales for those periods. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(calculated as a percentage of associated sales)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold
|
|
|
55.2
|
%
|
|
|
58.4
|
%
|
|
|
55.2
|
%
|
|
|
57.7
|
%
|
Gross profit
|
|
|
44.8
|
%
|
|
|
41.6
|
%
|
|
|
44.8
|
%
|
|
|
42.3
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
11.5
|
%
|
|
|
16.1
|
%
|
|
|
13.3
|
%
|
|
|
16.8
|
%
|
Sales and marketing
|
|
|
11.7
|
%
|
|
|
14.1
|
%
|
|
|
13.2
|
%
|
|
|
15.4
|
%
|
General and administrative
|
|
|
11.7
|
%
|
|
|
12.5
|
%
|
|
|
10.7
|
%
|
|
|
13.0
|
%
|
Total operating expenses
|
|
|
34.9
|
%
|
|
|
42.7
|
%
|
|
|
37.2
|
%
|
|
|
45.2
|
%
|
Income (loss) from operations
|
|
|
9.9
|
%
|
|
|
(1.1
|
)%
|
|
|
7.6
|
%
|
|
|
(2.9
|
)%
|
Other expense (income)
|
|
|
0.3
|
%
|
|
|
(1.1
|
)%
|
|
|
(1.0
|
)%
|
|
|
(1.7
|
)%
|
Income (loss) before income taxes
|
|
|
9.6
|
%
|
|
|
0.0
|
%
|
|
|
8.6
|
%
|
|
|
(1.2
|
)%
|
Provision (benefit) for income taxes
|
|
|
0.1
|
%
|
|
|
(0.0
|
)%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Net income (loss)
|
|
|
9.5
|
%
|
|
|
0.0
|
%
|
|
|
8.6
|
%
|
|
|
(1.2
|
)%
|
Comparison of the Three and Nine Months Ended September 30, 2016 and 2015
Sales
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
Increase/(Decrease)
|
|
|
% Change
|
|
|
|
|
|
Sales
|
|
$
|
12,439,279
|
|
|
$
|
6,668,732
|
|
|
$
|
5,770,547
|
|
|
|
86.5
|
%
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
Increase/(Decrease)
|
|
|
% Change
|
|
|
|
|
|
Sales
|
|
$
|
30,807,902
|
|
|
$
|
18,459,590
|
|
|
$
|
12,348,312
|
|
|
|
66.9
|
%
|
The increase in sales is primarily driven by an increase in product sales, of which $1.4 million for the three months ended September 30, 2016 and $3.7 million for the nine months ended September 30, 2016 were associated with sales of products acquired in connection with the acquisition of certain North American assets from Skycross, Inc. Total devices increased by 8.0 million devices to 16.6 million devices and by 15.8 million devices to 38.7 million devices for the three months ended September 30, 2016 and the nine months ended September 30, 2016, when compared to the three months ended and nine months ended September 30, 2015, respectively. The average number of antennas per device increased from 2.47 antennas per device for the three months ended September 30, 2015 to 2.84 antennas per device for the three months ended September 30, 2016. For the nine months ended September 30, 2016, the average number of antennas per device increased from 2.47 antennas per device for the nine months ended September 30, 2015 to 2.98 antennas per device. The average selling price per device for the three months ended September 30, 2016 decreased to $0.72 as compared to $0.76 for the three months ended September 30, 2015. The average selling price per device for the nine months ended September 30, 2016 decreased to $0.77 as compared to $0.79 for the nine months ended September 30, 2015. When compared with the same periods in the prior year, during the three and nine months ended September 30, 2016, we sold significantly more board mounted antennas which do not require cables or connectors. Board mounted antennas tend to have lower per unit pricing and higher margins. Additionally, overall demand in the set-top-box and TV markets and the incorporation of our antennas in new devices offset by products reaching the end of their lifecycle, contributed to the increase in sales for the three months ended and nine months ended September 30, 2016 when compared to the three months ended and nine months ended September 30, 2015, respectively.
22
Cost of Goods Sold
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
Increase/(Decrease)
|
|
|
% Change
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
6,862,992
|
|
|
$
|
3,893,657
|
|
|
$
|
2,969,335
|
|
|
|
76.3
|
%
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
Increase/(Decrease)
|
|
|
% Change
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
17,007,228
|
|
|
$
|
10,657,495
|
|
|
$
|
6,349,733
|
|
|
|
59.6
|
%
|
The increase in cost of goods sold for both the three months ended and nine months ended September 30, 2016 is primarily due to an increase in product sales.
Gross Profit
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
Increase/(Decrease)
|
|
|
% Change
|
|
|
|
|
|
Gross profit
|
|
$
|
5,576,287
|
|
|
$
|
2,775,075
|
|
|
$
|
2,801,212
|
|
|
|
100.9
|
%
|
Gross profit (percentage of sales)
|
|
|
44.8
|
%
|
|
|
41.6
|
%
|
|
|
|
|
|
|
3.2
|
%
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
% Change
|
|
|
|
|
|
Gross profit
|
|
$
|
13,800,674
|
|
|
$
|
7,802,095
|
|
|
$
|
5,998,579
|
|
|
|
76.9
|
%
|
Gross profit (percentage of sales)
|
|
|
44.8
|
%
|
|
|
42.3
|
%
|
|
|
|
|
|
|
2.5
|
%
|
Gross profit as a percentage of sales increased for both the three months ended and nine months ended September 30, 2016 as compared to the three months ended and nine months ended September 30, 2015. The increase in gross profit percentage is primarily driven by an increase in sales of board mounted antennas which do not require cables or connectors. Board mounted antennas tend to have lower per unit pricing and higher gross margins. We anticipate the sales of board mounted antennas as a percentage of sales mix will be lower in future periods which may cause gross profit as a percentage of sales to decline.
Operating Expenses
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
Increase/(Decrease)
|
|
|
% Change
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
1,432,581
|
|
|
$
|
1,075,228
|
|
|
$
|
357,353
|
|
|
|
33.2
|
%
|
Sales and marketing
|
|
|
1,453,391
|
|
|
|
940,155
|
|
|
|
513,236
|
|
|
|
54.6
|
%
|
General and administrative
|
|
|
1,459,993
|
|
|
|
830,723
|
|
|
|
629,270
|
|
|
|
75.7
|
%
|
Total
|
|
$
|
4,345,965
|
|
|
$
|
2,846,106
|
|
|
$
|
1,499,859
|
|
|
|
52.7
|
%
|
23
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
Increase/(Decrease)
|
|
|
% Change
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
4,096,670
|
|
|
$
|
3,099,080
|
|
|
$
|
997,590
|
|
|
|
32.2
|
%
|
Sales and marketing
|
|
|
4,078,250
|
|
|
|
2,840,514
|
|
|
|
1,237,736
|
|
|
|
43.6
|
%
|
General and administrative
|
|
|
3,304,790
|
|
|
|
2,393,433
|
|
|
|
911,357
|
|
|
|
38.1
|
%
|
Total
|
|
$
|
11,479,710
|
|
|
$
|
8,333,027
|
|
|
$
|
3,146,683
|
|
|
|
37.8
|
%
|
Research and Development
Research and development expense increased for the three months ended September 30, 2016 compared to the three months ended September 30, 2015, primarily due to a $0.2 million increase in personnel expenses associated with headcount increases and $0.1 million increase in product development. The increase for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 is primarily due to a $0.7 million increase in personnel expenses associated with headcount increases and increases in premises expenses.
Sales and Marketing
Sales and marketing expense increased for the three months ended September 30, 2016 compared to the three months ended September 30, 2015, primarily due to a $0.4 million increase in personnel expenses associated with headcount increases and a $0.1 million increase in travel and entertainment expenses. For the nine months ended September 30, 2016, sales and marketing expense increased compared to the nine months ended September 30, 2015. This increase was primarily driven by a $0.9 million increase in personnel expenses associated with headcount increases and $0.2 million increase in travel and entertainment expenses.
General and Administrative
General and administrative expense increased for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 primarily due to a $0.5 million cash bonus awarded to our Chief Executive Officer for completion of our IPO and $0.1 million of additional costs related to IPO not expensed against IPO proceeds. General and administrative expense increased for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 primarily due to the $0.5 million cash bonus awarded to our Chief Executive Officer and the $0.1 million of additional costs related to IPO not expensed against IPO proceeds, and an increase of $0.2 in amortization expense associated with the intangible assets acquired from Skycross in December 2015.
Other Expense (Income)
Interest expense for the three months ended September 30, 2016 and the nine months ended September 30, 2016 increased as compared to the three months ended September 30, 2015 and the nine months ended September 30, 2015 due primarily to the addition of the $4.0 million term loan with Silicon Valley Bank (SVB) entered into in December 2015. The fair market value adjustment relating to our warrant liability for the nine months ended September 30, 2016 increased as compared to the nine months ended September 30, 2015 due to the decrease in the underlying value of the Series G preferred shares.
Liquidity and Capital Resources
We had cash and cash equivalents of $16.8 million at September 30, 2016. Cash and cash equivalents consist of cash. We did not have any short-term or long-term investments. In August 2016, we completed our IPO and received net proceeds of approximately $10.9 million, including the sale of shares pursuant to the exercise of the underwriters’ overallotment option and after deducting underwriting discounts and commissions and estimated offering-related transaction costs.
Before 2013, we had incurred net losses in each year since our inception. As a result, we had an accumulated deficit of $44.7 million at September 30, 2016.
Since inception, we have primarily financed our operations and capital expenditures through private sales of preferred stock, convertible promissory notes and cash flows from our operations. We have raised an aggregate of $29.5 million in net proceeds from the issuance of our preferred stock and convertible promissory notes and $10.9 million from the sale of common stock in our IPO.
24
As of September 30, 2016, we had approximately $3.0 million outstanding under a term loan and approximately $0.1 million outstanding under a gro
wth capital term loan pursuant to our amended and restated loan and security agreement with Silicon Valley Bank. In addition, under our amended and restated loan and security agreement with Silicon Valley Bank, we have a revolving line of credit for $3.0 m
illion. As of September 30, 2016, there was no balance owed on the line of credit.
In December 2013, we amended our amended and restated loan and security agreement with Silicon Valley Bank to provide for growth capital term loans of $750,000. The growth capital term loan required interest only payments through June 30, 2014 at which time it was 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%. We must maintain a liquidity ratio of cash and cash equivalents plus accounts receivable to outstanding debt under the loan and security agreement of 1.00 to 1.00 or greater. The line of credit is available as long as we maintain a liquidity ratio of cash and cash equivalents plus accounts receivable to outstanding debt under the loan and security agreement of 1.25 to 1.00. If this liquidity ratio is not met, the line of credit will only allow for maximum advances of 80% of the aggregate face amount of all eligible receivables. The line of credit bears interest at the U.S. prime rate (3.5% as of December 31, 2015) plus 1.25%, and matures in April 2018, subject to certain minimum EBITDA requirements in each of September 2016, December 2016 and March 2017. The lender has a first security interest in all our assets, excluding intellectual property, for which the lender has received a negative pledge. The amended and restated loan and security agreement contains customary affirmative and negative covenants and events of default applicable to us and any subsidiaries.
In December 2015, we further amended our amended and restated loan and security agreement with Silicon Valley Bank to include an additional term loan up to $4.0 million. The additional term loan requires 36 monthly installments of interest and principal and matures on December 1, 2018. The amended and restated loan and security agreement requires that we maintain a liquidity ratio of 1.25 to 1.00 as of the last day of each month and a minimum EBITDA, measured as the last day of each fiscal quarter for the previous nine-month period (for September 30, 2016 the minimum EBITDA is $250,000). The interest rate of the additional term loan is 5.0%. As of September 30, 2016, $3.00 million was outstanding on this additional term loan. We are in compliance with all of the financial covenants in the amended and restated loan and security agreement pertaining to the revolving credit line, growth capital term loan and the additional term loan as of September 30, 2016.
We plan to continue to invest for long-term growth, including expanding our sales force and engineering organizations and making additional capital expenditures to further penetrate markets both in the United States and internationally, as well as expanding our research and development for new product offerings and technology solutions. We anticipate that these investments will continue to increase in absolute dollars. We believe that our existing cash and cash equivalents balance together with cash proceeds from operations will be sufficient to meet our working capital requirements for at least the next 12 months.
The following table presents a summary of our cash flow activity for the periods set forth below:
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Net cash provided by (used in) operating activities
|
|
$
|
1,967,921
|
|
|
$
|
(9,271
|
)
|
Net cash used in investing activities
|
|
|
(275,649
|
)
|
|
|
(93,455
|
)
|
Net cash provided by financing activities
|
|
|
9,798,119
|
|
|
|
99,203
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
11,490,391
|
|
|
$
|
(3,523
|
)
|
Net cash provided by operating activities was $2.0 million for the nine months ended September 30, 2016. This was primarily driven by our net income of $2.6 million, net non-cash operating expenses of $0.9 million offset by a decrease in the warrant liability of $0.5 million and the change in operating assets and liabilities of $1.0 million. Net cash used in operating activities was $9,271 for the nine months ended September 30, 2015. This was primarily driven by our net loss of $0.2 million, net non-cash operating expenses of $0.6 million offset by a decrease in the warrant liability of $0.3 million and the change in operating assets and liabilities of $0.1 million.
Net cash used in investing activities was $0.3 million and $0.1 million for the nine months ended September 30, 2016 and 2015, respectively. Net cash used in the nine months ending September 30, 2016 and 2015 consisted primarily of the purchase of property and equipment.
Financing activities in the nine months ended September 30, 2016 provided net cash of $9.8 million and consisted of net proceeds from the IPO of $10.9 million and $0.1 million from the exercise of stock options, partially offset by the repayment of notes
25
of $1.2 million. Financing activities in the nine months ended September 30, 2015 provided net cash of $0.1 million and consisted of proceeds of $0.3 million from the exercise of warrants and stock options offset by the repayment of notes o
f $0.2 million.
Contractual Obligations and Commitments
As of September 30, 2016, there were no material changes to the contractual obligations and commitments as disclosed in our final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on August 12, 2016, or the Prospectus, other than those made in the ordinary course of business and except for those disclosed in the notes to the unaudited condensed financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements (as defined by applicable regulations of the SEC) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of financial condition and operating results is based on our unaudited condensed financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported sales and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in the Prospectus, other than as set forth in note 2 to the unaudited condensed financial statements included in this quarterly report.
Recent Accounting Pronouncements
Refer to note 2 within the unaudited condensed financial statements.