Notes to Condensed Financial Statements
(Unaudited)
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 markets, including consumer, enterprise and automotive. The Company designs, develops, and engineers its antenna products for original equipment and design manufacturers worldwide. The Company’s headquarters is in San Diego, California with office space and research, design and test 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, 2018, from which the balance sheet information herein was derived.
The unaudited condensed balance sheet as of December 31, 2018, 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 unaudited condensed statements of operations for the three and nine months ended September 30, 2019 and 2018, and the balance sheet data as of September 30, 2019, 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, 2019, or for any future period.
Segment Information
The Company’s operations are located primarily in the United States and most of its assets are located in San Diego, California and Scottsdale, Arizona. The Company operates in one segment related to the sale of antenna products. The Company’s chief operating decision-maker is its chief executive officer, who reviews operating results on an aggregate basis and manages the Company’s operations 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.
Reclassifications
Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements.
Fair Value Measurements
The carrying values of the Company’s financial instruments, including cash and cash equivalents, 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-
8
Airgain, Inc.
Notes to Condensed Financial Statements
(Unaudited)
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, 2019, 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. The Company also manufactures certain of its products at its facility located in Scottsdale, Arizona.
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, 2019, 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, 2019, there is no provision for excess and obsolete inventories.
Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Accumulated other comprehensive income (loss) on the unaudited condensed balance sheet at September 30, 2019, 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, 2019, 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, 2018.
9
Airgain, Inc.
Notes to Condensed Financial Statements
(Unaudited)
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. The Company adopted this pronouncement during the year ended December 31, 2018, on a prospective basis. The impact on the financial statements is immaterial.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods and 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 Company will adopt the new guidance for the annual period ended December 31, 2019, using the modified retrospective approach. The Company is in the process of finalizing the new accounting policies, processes, and internal controls necessary to support the requirements of Topic 606, however, the expected impact the standard will have on its financial reporting is 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, 2020 and interim periods within fiscal years beginning after December 15, 2021. The Company is evaluating the effect that ASU 2016-02 will have on its financial statements and related disclosures. The Company has not yet selected a transition method, nor has it determined the effect of the standard on its ongoing financial reporting.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the test for goodwill impairment by removing Step 2 which requires a hypothetical purchase price allocation and may require the services of valuation experts. An entity will, therefore, perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, recognizing an impairment charge for the amount by which the carrying amount exceeds the fair value, not to exceed the total amount of goodwill allocated to the reporting unit. An entity still has the option to perform a qualitative assessment to determine if the quantitative impairment test is necessary. ASU 2017-04 will be effective for the Company in annual periods beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has not yet determined whether it will early adopt ASU 2017-04 and is evaluating the impact the standard will have on its ongoing financial reporting.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for fiscal years beginning after December 15, 2020, and interim periods within the fiscal year beginning after December 15, 2021, using a modified retrospective adoption method. The Company continues to evaluate the impact of the standard on its consolidated financial statements.
In May 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326), Targeted Transition Relief, which provides entities that have certain instruments within the scope of ASC 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost, with an option to irrevocably elect the fair value option for eligible instruments. The effective date and transition methodology for this standard are the same as in ASU 2016-13.
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 income (loss) per common share using the treasury stock method and the as-if-converted method, as applicable.
10
Airgain, Inc.
Notes to Condensed Financial Statements
(Unaudited)
The following table presents the computation of net income (loss) per share (in thousands except per share data):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(135
|
)
|
|
$
|
437
|
|
|
$
|
863
|
|
|
$
|
(3,858
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
9,711
|
|
|
|
9,566
|
|
|
|
9,678
|
|
|
|
9,495
|
|
Plus dilutive effect of potential common shares
|
|
|
—
|
|
|
|
527
|
|
|
|
405
|
|
|
|
—
|
|
Weighted average common shares outstanding - diluted
|
|
|
9,711
|
|
|
|
10,093
|
|
|
|
10,083
|
|
|
|
9,495
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
0.05
|
|
|
$
|
0.09
|
|
|
$
|
(0.41
|
)
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
0.04
|
|
|
$
|
0.09
|
|
|
$
|
(0.41
|
)
|
Diluted weighted average common shares outstanding for the nine months ended September 30, 2019, includes 3,000 warrants and 402,000 options outstanding.
Potentially dilutive securities not included in the calculation of diluted net income (loss) per share because to do so would be anti-dilutive are as follows (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Employee stock options
|
|
|
721
|
|
|
|
245
|
|
|
|
457
|
|
|
|
887
|
|
Warrants outstanding
|
|
|
51
|
|
|
|
51
|
|
|
|
—
|
|
|
|
51
|
|
Total
|
|
|
772
|
|
|
|
296
|
|
|
|
457
|
|
|
|
938
|
|
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, 2019 and December 31, 2018 (in thousands):
|
|
September 30, 2019
|
|
|
|
Amortized Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Estimated Fair Value
|
|
|
Cash and Cash Equivalents
|
|
|
Short-Term Investments
|
|
Cash
|
|
$
|
2,968
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,968
|
|
|
$
|
2,968
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
6,903
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,903
|
|
|
|
6,903
|
|
|
|
—
|
|
U.S. treasury securities
|
|
|
3,855
|
|
|
|
4
|
|
|
|
—
|
|
|
|
3,859
|
|
|
|
—
|
|
|
|
3,859
|
|
Subtotal
|
|
|
10,758
|
|
|
|
4
|
|
|
|
—
|
|
|
|
10,762
|
|
|
|
6,903
|
|
|
|
3,859
|
|
Level 2(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
9,641
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,641
|
|
|
|
—
|
|
|
|
9,641
|
|
Corporate debt obligations
|
|
|
3,740
|
|
|
|
6
|
|
|
|
—
|
|
|
|
3,746
|
|
|
|
—
|
|
|
|
3,746
|
|
Repurchase agreements
|
|
|
3,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
—
|
|
Asset-backed securities
|
|
|
3,752
|
|
|
|
3
|
|
|
|
—
|
|
|
|
3,755
|
|
|
|
—
|
|
|
|
3,755
|
|
Subtotal
|
|
|
20,133
|
|
|
|
9
|
|
|
|
—
|
|
|
|
20,142
|
|
|
|
3,000
|
|
|
|
17,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,859
|
|
|
$
|
13
|
|
|
|
—
|
|
|
$
|
33,872
|
|
|
$
|
12,871
|
|
|
$
|
21,001
|
|
11
Airgain, Inc.
Notes to Condensed Financial Statements
(Unaudited)
|
|
December 31, 2018
|
|
|
|
Amortized Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Estimated Fair Value
|
|
|
Cash and Cash Equivalents
|
|
|
Short-Term Investments
|
|
Cash
|
|
$
|
3,044
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,044
|
|
|
$
|
3,044
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
5,482
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,482
|
|
|
|
5,482
|
|
|
|
—
|
|
U.S. treasury securities
|
|
|
1,988
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,988
|
|
|
|
—
|
|
|
|
1,988
|
|
Subtotal
|
|
|
7,470
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,470
|
|
|
|
5,482
|
|
|
|
1,988
|
|
Level 2(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
10,639
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,639
|
|
|
|
2,095
|
|
|
|
8,544
|
|
Corporate debt obligations
|
|
|
5,964
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
5,957
|
|
|
|
—
|
|
|
|
5,957
|
|
Repurchase agreements
|
|
|
3,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
—
|
|
Asset-backed securities
|
|
|
3,682
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
3,680
|
|
|
|
—
|
|
|
|
3,680
|
|
Subtotal
|
|
|
23,285
|
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
23,276
|
|
|
|
5,095
|
|
|
|
18,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,799
|
|
|
|
—
|
|
|
$
|
(9
|
)
|
|
$
|
33,790
|
|
|
$
|
13,621
|
|
|
$
|
20,169
|
|
|
(1)
|
Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.
|
|
(2)
|
Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
The Company’s investments were primarily valued based upon one or more valuations reported by its investment accounting and reporting service provider. The investment service provider values the securities using a hierarchical security pricing model that relies primarily on valuations provided by a third-party pricing vendor. Such valuations may be based on trade prices in active markets for identical assets or liabilities (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets or liabilities, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. The Company performs certain procedures to corroborate the fair value of its holdings, including comparing valuations obtained from its investment service provider with other pricing sources to validate the reasonableness of the valuations.
The Company typically invests in highly rated securities, and its investment policy limits the amount of credit exposure to any one issuer. The policy requires investments in fixed income instruments denominated and payable in U.S. dollars only and requires investments to be investment grade, with a primary objective of minimizing the potential risk of principal loss.
The 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, 2019, the Company does not consider any of its investments to be other-than temporarily impaired.
Contractual maturities of short-term investments as of September 30, 2019, are as follows (in thousands):
|
|
Estimated Fair Value
|
|
Due within one year
|
|
$
|
21,001
|
|
Note 5. Property and Equipment
Depreciation and amortization of property and equipment is calculated on the straight-line method based on estimated useful lives of six to ten years for tenant improvements and three to fifteen years for all other property and equipment. Property and equipment consist of the following (in thousands):
12
Airgain, Inc.
Notes to Condensed Financial Statements
(Unaudited)
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Computers and software
|
|
$
|
496
|
|
|
$
|
361
|
|
Furniture, fixtures, and equipment
|
|
|
375
|
|
|
|
339
|
|
Manufacturing and testing equipment
|
|
|
3,083
|
|
|
|
2,503
|
|
Leasehold improvements
|
|
|
907
|
|
|
|
895
|
|
|
|
|
4,861
|
|
|
|
4,098
|
|
Less accumulated depreciation
|
|
|
(3,070
|
)
|
|
|
(2,697
|
)
|
|
|
$
|
1,791
|
|
|
$
|
1,401
|
|
Depreciation expense was $105,000 and $156,000 for the three months ended September 30, 2019 and 2018, respectively, and $373,000 and $423,000 for the nine months ended September 30, 2019 and 2018, respectively.
Note 6. Intangible Assets
The following is a summary of the Company’s acquired intangible assets (dollars in thousands):
|
|
Weighted
Average
Amortization
Period (years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Intangibles, Net
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
10
|
|
|
$
|
4,830
|
|
|
$
|
1,599
|
|
|
$
|
3,231
|
|
Developed technologies
|
|
|
9
|
|
|
|
1,080
|
|
|
|
374
|
|
|
|
706
|
|
Tradename
|
|
|
3
|
|
|
|
120
|
|
|
|
96
|
|
|
|
24
|
|
Total intangible assets, net
|
|
|
|
|
|
$
|
6,030
|
|
|
$
|
2,069
|
|
|
$
|
3,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
10
|
|
|
$
|
4,830
|
|
|
$
|
1,237
|
|
|
$
|
3,593
|
|
Developed technologies
|
|
|
9
|
|
|
|
1,080
|
|
|
|
274
|
|
|
|
806
|
|
Tradename
|
|
|
3
|
|
|
|
120
|
|
|
|
67
|
|
|
|
53
|
|
Total intangible assets, net
|
|
|
|
|
|
$
|
6,030
|
|
|
$
|
1,578
|
|
|
$
|
4,452
|
|
The estimated annual amortization of intangible assets for the next five years and thereafter is shown
in the following table (in thousands):
|
|
Estimated Future Amortization
|
|
2019 (remaining three months)
|
|
$
|
164
|
|
2020
|
|
|
628
|
|
2021
|
|
|
598
|
|
2022
|
|
|
563
|
|
2023
|
|
|
563
|
|
Thereafter
|
|
|
1,445
|
|
Total
|
|
$
|
3,961
|
|
Actual amortization expense to be reported in future periods could differ from these estimates as a result of acquisitions, divestitures, and asset impairments, among other factors. Amortization expense was $163,000 and $169,000 for the three months ended September 30, 2019 and 2018, respectively, and $491,000 and $508,000 for the nine months ended September 30, 2019 and 2018, respectively.
Note 7. Notes Payable and Line of Credit
In December 2015 the Company amended its amended and restated loan and security agreement with Silicon Valley Bank to include a term loan in the amount of $4.0 million. The loan requires 36 monthly installments of interest and principal. The loan matured on December 1, 2018, The interest rate was fixed at 5.0%.
13
Airgain, Inc.
Notes to Condensed Financial Statements
(Unaudited)
In January 2018 the Company entered into a second amended and restated loan and security agreement (the Amended Loan Agreement) with Silicon Valley Bank. The Amended Loan Agreement modified the amended and restated loan and security agreement to, among other things, increase the aggregate principal amount available under the revolving line of credit from $3.0 million to $10.0 million. It also removed a minimum EBITDA requirement previously applicable to the line of credit and former term loan and maintained the liquidity ratio financial covenant such that the Company must maintain a ratio of cash and cash equivalents plus accounts receivable to outstanding debt under the Amended Loan Agreement minus deferred revenue of 1.25 to 1.00. The Amended Loan Agreement also set a borrowing base limit of 80% of the aggregate face amount of all eligible receivables. No balance was owed on the line of credit as of September 30, 2019 and December 31, 2018.
The Company will be required to pay interest on borrowings outstanding, if any, under the revolving line of credit at a floating rate per annum equal to 1% above the Wall Street Journal prime rate (5.0% as of September 30, 2019) (or, if unavailable, the Silicon Valley Bank prime rate) on a monthly basis, so long as the Company maintains a liquidity ratio of cash and cash equivalents plus accounts receivable to outstanding debt under the Amended Loan Agreement minus deferred revenue of 1.25 to 1.00. If this liquidity ratio is not met, the Company will be subject to a minimum interest charge of $3,000 per month and borrowings outstanding, if any, under the revolving line of credit will accrue interest at a floating rate per annum equal to 2% above the Wall Street Journal prime rate (5.0% as of September 30, 2019) (or, if unavailable the Silicon Valley Bank prime rate) on a monthly basis. Prior to the amendment in January 2018, the revolving line of credit bore interest rate at the U.S. prime rate plus 1.25%. The revolving line of credit matures on January 31, 2020.
Silicon Valley Bank maintains a first security interest over the Company’s assets, excluding intellectual property, for which Silicon Valley Bank has received a negative pledge. The Amended Loan Agreement contains customary affirmative and negative covenants and events of default applicable to the Company and any of its subsidiaries.
The Company was in compliance with its financial covenants in the Amended Loan Agreement as of September 30, 2019.
Note 8. Treasury Stock
In August 2017, the Company’s Board of Directors (the Board) approved a share repurchase program (the 2017 Program) pursuant to which the Company could purchase up to $7.0 million of shares of its common stock over the twelve-month period following the establishment of the program. The repurchases under the 2017 Program were made from time to time in the open market or in privately negotiated transactions and were funded from the Company’s working capital. Repurchases were made in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, subject to market conditions, available liquidity, cash flow, applicable legal requirements and other factors. All shares of common stock repurchased under the Company’s 2017 Program were returned to the status of authorized but unissued shares of common stock. On August 7, 2018, the Board approved an extension to the 2017 Program for an additional twelve-month period ending on August 14, 2019.
On September 9, 2019, the Board approved a new share repurchase program pursuant to which the Company may purchase up to $7.0 million of shares of its common stock over the following twelve-months. All shares purchased in the three months ended September 30, 2019 were subject to the new share repurchase program. This newly adopted share repurchase program mirrors all aspects and terms of the 2017 Program as described above.
During the three and nine months ended September 30, 2019, the Company repurchased 48,000 and 63,000 shares of common stock, respectively, under the share repurchase programs. For the three months ended September 30, 2019, the shares were repurchased at an average price per share of $12.54 per share, for a total cost of $0.6 million. For the nine months ended September 30, 2019, the shares were repurchased at an average price of $12.75 per share, for a total cost of $0.8 million. As of September 30, 2019, the Company repurchased a total of $3.6 million in common stock under the recently expired 2017 Program.
Note 9. Income Taxes
The Company’s effective income tax rate was 16.1% and (2.9)% for the nine months ended September 30, 2019 and 2018, respectively. The variance from the U.S. federal statutory tax rate of 21% for each of the nine months ended September 30, 2019 and 2018, was primarily attributable to the utilization of deferred tax attributes that had a full valuation allowance.
Management assesses its deferred tax assets quarterly to determine whether all or any portion of the asset is more likely than not unrealizable under Accounting Standards Codification (ASC) Topic 740. The Company is required to establish a valuation allowance for any portion of the asset that management concludes is more likely than not to be unrealizable. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become
14
Airgain, Inc.
Notes to Condensed Financial Statements
(Unaudited)
deductible. The Company’s assessment considers all evidence, both positive and negative, including the nature, frequency and severity of any current and cumulative losses, taxable income in carryback years, the scheduled reversal of deferred tax liabilities, tax planning strategies, and projected future taxable income in making this assessment. At September 30, 2019, and December 31, 2018, the Company has a valuation allowance against net deferred tax assets but for the exclusion of a deferred tax liability generated by goodwill (an indefinite lived intangible) that may not be considered a future source of taxable income in evaluating the need for a valuation allowance.
Note 10. Stockholders’ Equity
Shares Reserved for Future Issuance
The following common stock (in thousands) is reserved for future issuance at(1):
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Warrants issued and outstanding
|
|
|
51
|
|
|
|
51
|
|
Stock option awards issued and outstanding
|
|
|
1,866
|
|
|
|
1,407
|
|
Authorized for grants under the 2016 Equity Incentive Plan
|
|
|
145
|
|
(2)
|
|
464
|
|
Authorized for grants under the 2016 Employee Stock Purchase Plan
|
|
|
186
|
|
(3)
|
|
100
|
|
|
|
|
2,248
|
|
|
|
2,022
|
|
(1) Treasury stock in the amount of 420,000 and 357,000 as of September 30, 2019, and December 31, 2018, respectively, are excluded from the table above.
(2) On January 1, 2019, the number of authorized shares in the 2016 Equity Incentive Plan increased by 384,045 shares pursuant to the evergreen provisions of the 2016 Equity Incentive Plan.
(3) On January 1, 2019, the number of authorized shares in the 2016 Employee Stock Purchase Plan increased by 96,000 shares pursuant to the evergreen provisions of the 2016 Employee Stock Purchase Plan.
Note 11. Stock Based Compensation
Stock Options
The following table summarizes the outstanding stock option activity during the periods indicated (shares in thousands):
|
|
|
|
|
|
Weighted average
|
|
|
|
Number
of shares
|
|
|
Exercise price
|
|
|
Remaining contractual term (years)
|
|
Balance at December 31, 2018
|
|
|
1,407
|
|
|
$
|
8.73
|
|
|
|
|
|
Granted
|
|
|
770
|
|
|
|
11.79
|
|
|
|
|
|
Exercised
|
|
|
(148
|
)
|
|
|
4.59
|
|
|
|
|
|
Expired/Forfeited
|
|
|
(163
|
)
|
|
|
11.36
|
|
|
|
|
|
Balance at September 30, 2019
|
|
|
1,866
|
|
|
$
|
10.09
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at September 30, 2019
|
|
|
756
|
|
|
$
|
8.38
|
|
|
|
6.6
|
|
Vested and expected to vest at September 30, 2019
|
|
|
1,866
|
|
|
$
|
10.09
|
|
|
|
8.1
|
|
The weighted average grant date fair value of options granted during the nine months ended September 30, 2019, and for the year ended December 31, 2018, was $4.18 and $3.97, respectively. For fully vested stock options, the aggregate intrinsic value as of September 30, 2019, and December 31, 2018, was $3,043,000 and $2,485,000, respectively. For stock options expected to vest, the aggregate intrinsic value as of September 30, 2019 and December 31, 2018 was $935,000 and $993,000, respectively.
At September 30, 2019, and December 31, 2018, there was $4,090,000 and $2,781,000, respectively, of total unrecognized compensation cost related to unvested stock options granted under the Company’s equity plans. That cost is expected to be recognized over the next three years and is based on the date the options were granted.
15
Airgain, Inc.
Notes to Condensed Financial Statements
(Unaudited)
Restricted Stock
During the nine months ended September 30, 2019, the Company granted 95,478 Restricted Stock Units (RSUs) at a weighted average grant date fair value of $11.35 per share. No RSUs vested during the three and nine months ended September 30, 2019. As of September 30, 2019, the Company has 96,605 RSUs outstanding at a weighted average grant date fair value of $11.42 per share and a weighted average remaining contractual term of 1.8 years. As of September 30, 2019, there was $919,000 of total unrecognized compensation cost related to unvested RSUs.
Employee Stock Purchase Plan (ESPP)
The Company maintains the Employee Stock Purchase Plan (ESPP) that provides employees an opportunity to purchase common stock through payroll deductions. The ESPP is implemented through consecutive 6-month offering periods commencing on March 1 and September 1 of each year. The first offering period under the ESPP commenced on March 1, 2019. The purchase price is set at 85% of the fair market value of the Company's common stock on either the first or last trading day of the offering period, whichever is lower, and annual contributions are limited to the lower of 20% of an employee's eligible compensation or such other limits as apply under Section 423 of the Internal Revenue Code for such plans such as the ESPP. The ESPP is intended to qualify as an employee stock purchase plan for purposes of Section 423 of the Internal Revenue Code.
Based on the 15% discount and the fair value of the option feature of the ESPP, it is considered compensatory. Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model. The Company currently uses authorized and unissued shares to satisfy share award exercises.
The Company received proceeds of $97,000 from the issuance of 10,000 shares under the ESPP in August 2019.
Note 12. Commitments and Contingencies
(a) Operating Leases
The Company has entered into lease agreements for office space and research facilities in San Diego County, California; Melbourne, Florida; Scottsdale, Arizona; Taipei, Taiwan; Shenzhen and Jiangsu, China; and Cambridgeshire, United Kingdom. Rent expense was $239,000 and $220,000 for the three months ended September 30, 2019 and 2018, respectively, and $729,000 and $687,000 for the nine months ended September 30, 2019 and 2018, respectively. The longest lease expires in June 2024. The Company moved into its facility in San Diego, California during the year ended December 31, 2014. The San Diego facility lease agreement included a tenant improvement allowance which provided for the landlord to pay for tenant improvements on behalf of the Company up to $515,000. Based on the terms of this landlord incentive and involvement of the Company in the construction process, the leasehold improvements purchased under the landlord incentive were determined to be property of the Company.
The future minimum lease payments required under operating leases in effect at September 30, 2019, were as follows (in thousands):
Year ending:
|
|
|
|
|
2019 (remaining three months)
|
|
$
|
290
|
|
2020
|
|
|
854
|
|
2021
|
|
|
387
|
|
2022
|
|
|
104
|
|
2023
|
|
|
72
|
|
2024
|
|
|
34
|
|
|
|
$
|
1,741
|
|
(b) Indemnification
In some agreements to which the Company is a party, the Company has agreed to indemnify the other party for certain matters, including, but not limited to, product liability and intellectual property. To date, there have been no known events or circumstances that have resulted in any material costs related to these indemnification provisions and no liabilities have been recorded in the accompanying financial statements.
16
Airgain, Inc.
Notes to Condensed Financial Statements
(Unaudited)
Note 13. 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 and nine months ended September 30, 2019 and 2018, and customers that accounted for 10% or more of total trade accounts receivable at September 30, 2019 and 2018.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Percentage of net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
34%
|
|
|
38%
|
|
|
38%
|
|
|
35%
|
|
Customer B
|
|
|
18
|
|
|
|
9
|
|
|
|
14
|
|
|
|
8
|
|
Customer C
|
|
|
10
|
|
|
|
0
|
|
|
|
6
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
Percentage of gross trade accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
38%
|
|
|
24%
|
|
|
|
|
|
|
|
|
|
Customer B
|
|
|
15
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Customer C
|
|
|
13
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Percentage of net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
71%
|
|
|
79%
|
|
|
72%
|
|
|
73%
|
|
Other Asia
|
|
|
2
|
|
|
|
5
|
|
|
|
4
|
|
|
|
6
|
|
North America
|
|
|
25
|
|
|
|
13
|
|
|
|
21
|
|
|
|
16
|
|
Europe
|
|
|
2
|
|
|
|
3
|
|
|
|
3
|
|
|
|
5
|
|
Although the Company ships the majority of antennas to its customers in China (primarily Original Design Manufacturers and distributors), the end-users of the Company’s products are much more geographically diverse.
(c)
|
Concentration of Purchases
|
During the three and nine months ended September 30, 2019, primarily all of the Company’s products were manufactured by two vendors in China and by the Company’s facilities in Arizona.
Note 14. Termination Costs
On June 30, 2018, the Company terminated a marketing-related agreement to better align its sales and marketing efforts with its longer-term growth objectives and near-to-intermediate term profitability goals. In consideration of terminating the agreement, the Company paid $1.3 million in termination costs. The termination costs were included in sales and marketing expense on the unaudited condensed statements of operations for the nine months ended September 30, 2018.
On May 2, 2018, Charles Myers, the Company’s Chief Executive Officer, President and member of the Board resigned from all positions with the Company, effective immediately, to pursue other opportunities. The Board accepted Mr. Myers resignation on May 2, 2018. Mr. Myer’s decision to resign was not related to a disagreement with the Company over any of its operations, policies, or practices.
In connection with his resignation, Mr. Myers, upon a general release of claims as set forth in his employment agreement, received a lump sum cash payment in the amount of $484,000; a lump sum cash payment in the amount of $3,200 covering twelve months of monthly premiums for disability insurance under the Company’s disability insurance plan; a lump sum cash payment in the amount of
17
Airgain, Inc.
Notes to Condensed Financial Statements
(Unaudited)
$20,000 covering certain other employment benefits; the acceleration of all his unvested options for a total of 283,000 shares and the continuation of his health coverage pursuant to COBRA at the Company’s expense for a period of twelve months following his last day of employment. In connection with Mr. Myers’ resignation, the Company recognized stock compensation expense of $1.2 million and Mr. Myer’s costs were included in general and administrative expense on the unaudited condensed statements of operations for the nine months ended September 30, 2018. As of September 30, 2019, there were no further amounts owed to Mr. Myers.
On April 2, 2018, Glenn Selbo, the Company’s Chief Operating Officer, resigned from his position with the Company. Following his resignation, Mr. Selbo began providing consulting services to the Company. Mr. Selbo’s outstanding stock options continued to vest until the termination of his consulting services in March 2019.
In connection with his resignation, Mr. Selbo, upon a general release of claims as set forth in his employment agreement, received a lump sum cash payment in the amount of $150,000 and the continuation of his health coverage pursuant to COBRA at the Company’s expense for a period of six months following his last day of employment. Mr. Selbo’s costs were included in sales and marketing expense on the unaudited condensed statements of operations for the nine months ended September 30, 2018.
18