10-K 1 inve-10k_20181231.htm 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10K
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2018
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
COMMISSION FILE NUMBER 029440
IDENTIV, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or other jurisdiction of
Incorporation or organization)
2201 Walnut Avenue, Suite 100, Fremont, California
(Address of Principal Executive Offices)
770444317
(I.R.S. Employer
Identification Number)
94538
(Zip Code)
Registrant’s telephone number, including area code:
(949) 2508888
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value, and associated Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark if the registrant is a wellknown seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation ST (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation SK is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements or any amendment to this Form 10K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b2 of the Exchange Act.
Large accelerated filer
☐
Nonaccelerated filer
☑
Emerging growth company ☐
Accelerated filer
Smaller reporting company
☐
☑
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b2 of the Exchange Act). Yes ☐ No ☑
Based on the closing sale price of the Registrant’s Common Stock on the Nasdaq National Market System on June 30, 2018, the last business
day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of Common Stock held by nonaffiliates of the
Registrant was $51,267,400.
At March 6, 2019, the Registrant had outstanding 16,424,911 shares of Common Stock, excluding 1,072,748 shares held in treasury.
DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of the Company’s Proxy Statement to be filed within 120 days after the Registrant’s fiscal year end of December 31, 2018
are incorporated by reference into Part II, Item 5 and Part III of this Report.
Identiv, Inc.
Form 10K
For the Fiscal Year Ended December 31, 2018
TABLE OF CONTENTS
PART I
PART II
Business
Item 1
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2
Item 3
Item 4
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 5
Item 6
Item 7
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8
Item 9
Item 9A Controls and Procedures
Item 9B Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 10 Directors, Executive Officers and Corporate Governance
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13 Certain Relationships and Related Transactions, and Director Independence
Item 14 Principal Accountant Fees and Services
PART III
Item 15 Exhibits and Financial Statement Schedule
Item 16 Form 10K Summary
Signatures
PART IV
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ITEM 1.
BUSINESS
Statement Regarding Forward Looking Statements
PART I
This Annual Report on Form 10K (“Annual Report”), including the documents incorporated by reference in this Annual Report,
contains forwardlooking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For example,
statements, other than statements of historical facts regarding our strategy, future operations and growth, financial position, projected
results, estimated revenues or losses, projected costs, prospects, plans, market trends, product attributes and benefits, competition,
objectives of management, management judgements and estimates, and the expected impact of changes in laws or accounting
pronouncements constitute forwardlooking statements. In some cases, you can identify forwardlooking statements by terms such as
“will,” “believe,” “could,” “should,” “would,” “may,” “anticipate,” “intend,” “plan,” “estimate,” “expect,” “project” or the negative of
these terms or other similar expressions. Although we believe that our expectations reflected in or suggested by the forwardlooking
statements that we make in this Annual Report are reasonable, we cannot guarantee future results, performance or achievements. You
should not place undue reliance on these forwardlooking statements. All forwardlooking statements speak only as of the date of this
Annual Report. While we may elect to update forwardlooking statements at some point in the future, we specifically disclaim any
obligation to do so, even if our expectations change, whether as a result of new information, future events or otherwise. We also caution
you that such forwardlooking statements are subject to risks, uncertainties and other factors, not all of which are known to us or within
our control, and that actual events or results may differ materially from those indicated by these forwardlooking statements. We
disclose some of the factors that could cause our actual results to differ materially from our expectations discussed elsewhere in this
Annual Report. These cautionary statements qualify all of the forwardlooking statements included in this Annual Report that are
attributable to us or persons acting on our behalf.
Identiv and the Identiv logo are trademarks of Identiv, Inc., registered in many jurisdictions worldwide. Certain product and
service brands are also trademarks or registered trademarks of the Company, including HIRSCH, ScramblePad, TouchSecure, Velocity,
Freedom, Enterphone MESH, 3VR, VisionPoint, Thursby Software, and Thursby SubRosa. Other product and brand names not
belonging to Identiv that appear in this document may be trademarks or registered trademarks of their respective owners.
Each of the terms the “Company,” “Identiv,” “we” and “us” as used herein refers collectively to Identiv, Inc. and its wholly
owned subsidiaries, unless otherwise stated.
Overview
Identiv, Inc. is a global provider of physical security and secure identification. Our products, software, systems, and services
address the markets for physical and logical access control, video analytics and a wide range of Radio Frequency Identification
(“RFID”)enabled applications. Customers in government, enterprise, consumer, education, healthcare, banking, retail, transportation
and other sectors rely on our security and identification solutions. Our mission is to make the physical world digital and secure. Our
platform to deliver on our mission can be deployed through Internet of Things (“IoT”) devices, mobile, client/server, cloud, web,
dedicated hardware and softwaredefined architectures. Our solutions encompass what we believe to be the most complete set of
technologies in the industry. We are a onestop shop for software delivering physical security management, video surveillance, logical
access, analytics and identities; and devices spanning access readers, panels, processing appliances, and identity cards. We provide
services to deliver optimized total solutions, serving as a singlepoint provider for our customers rather than several separate vendors
that the customer would otherwise have to coordinate and manage.
The foundation of our business is our deep technical expertise across RFID, smart card technology, and physical security
technologies from hardware to software. Our close customer relationships and analytics platforms allow us to develop customer
relevant products and applications. This is all underpinned by our core value of uncompromising quality.
To deliver these solutions, we have organized our operations into two reportable business segments, principally by solution
families: Premises and Identity.
In the fourth quarter of 2018, we realigned the way in which we organize our operating segments in making operating decisions
and assessing financial performance by combining our Identity and Credentials segments. The combined segment is now referred to as
the Identity segment. All comparative segment information for fiscal 2017 has been combined to conform to the fiscal 2018
presentation.
Premises
The Premises segment includes our solutions to address the premises security market for government and enterprise, including
access control, video surveillance, analytics, customer experience and other applications.
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Our physical security platform is anchored by the Hirsch Velocity management software, our line of controllers including the
advanced MX line, our TouchSecure access readers, a wide range of integrations and our Identiv Global Services team that develops
optimized solutions for our customers’ total business and security environment, incorporating our products and partner products that
together best serve our customers’ goals. We have further extended our physical access platform with our Identiv Connected Physical
Access Manager (“ICPAM”) software, derived from Cisco’s Physical Access Manager (“CPAM”) system.
In February 2018, we acquired 3VR Security, Inc. (“3VR”), a video technology and analytics company. With the acquisition, we
added the 3VR video security and analytics platform, which is a natural complement to our physical access offering. Nearly all
customers for access control are customers for video security, and vice versa. Additionally, the events and data generated by both
platforms combine to create what we believe to be uniquely valuable information for our customers to provide frictionless yet robust
security. 3VR’s platform is architected as an analytics system, proven across applications in the retail, banking, and other vertical
markets, and valuable to our physical security markets in government, education, critical infrastructure, transportation and others. In
addition to technology, 3VR brought deep market presence, across over 170 banks, installations with over 50,000 cameras under our
software’s management, toptier retailers, and a 100% U.S.made platform.
In January 2019, we acquired substantially all assets of the Freedom, Liberty, and Enterphone™ MESH products and services of
Viscount Systems, Inc. (“Viscount”). The webbased Freedom and Liberty access control and Enterphone MESH IP telephone entry
solutions are known for their early adoption of a web, APIbased, cloudready architecture, creating an ITcentric softwarefocused and
hardwarelight platform. Scaling from small and mediumsized businesses (“SMB”) up to enterprise scale for government and
commercial markets, Freedom and the entrylevel Liberty product line are complementary to our other products. With Freedom,
customers can build integrated access control and video management systems under one centrally managed or distributed network,
seamlessly integrating physical security devices such as card readers, ID management, Active Directory/LDAP, visitor entry, alarm
points, and video applications and analytics. We believe the combination creates one of the mostadvanced, ITcentric solutions for
physical security, delivering a seamless evolution from traditional physical access models to nextgeneration, cloud and webbased, and
mobileenabled systems. Our TouchSecure (“TS”) readers, TS Cards, VMS platform, mobile logical access and our Identiv Global
Services (“IGS”) services are applicable to nearly all Freedom and Liberty customers.
We sell either individual components or complete bundled solutions which can include any or all among software, edge
controllers, IoT devices, multidoor panels, access readers, access cards, 3VR appliances and other components or services, some of
which are detailed below:
Premises Software — Our software platform for premises security ranges from physical access to video analytics and business
intelligence. The Hirsch Velocity software platform enables centralized management of access and security operations across an
organization, including control of doors, gates, turnstiles, elevators and other building equipment, monitoring users as they move
around a facility, preventing unwanted access, maintaining compliance and providing a robust audit trail. Velocity continues to be
especially successful with federal and state government customers. The Freedom and Liberty platforms present an ITcentric and highly
scalable alternative, specifically for the SMB market. We believe our ICPAM software platform is ideal for the Cisco and wider IT
channel, and is tightly integrated with Cisco’s VSM video management system as well as their IP telephony infrastructure. We believe
our 3VR VisionPoint™ VMS (Video Management System) for realtime search is an ideal video management software for forensic
search, case management and business intelligence. Available in both a Standard and Pro version, with an optional enterprise server for
large and remote deployments, VisionPoint VMS provides tools to gather intelligence from video, speed up searches and easily develop
cases. VisionPoint VMS can be installed on commercial offtheshelf hardware, on certified partner hardware, and is included on any of
3VR’s powerful NVR/HVR appliances.
Controllers — Our modular Hirsch MX controllers are designed to be scalable, allowing customers to start with a small system
and expand over time. Hirsch MX controllers can operate autonomously, whether as a single controller or as part of a networked system
with Velocity software. Our Freedom Crypto and IoT Bridges provide hardwarelight solutions, providing lowcost implementations
and building a bridge to fully softwaredefined, hardwarelight (or hardwarefree) access platforms.
FICAM — We believe our Velocity, MX and TS Reader solution is the highest performance, lowest perdoor cost access control
system for the U.S. federal government security mandate known as the Federal Identity, Credential and Access Management
(“FICAM”) architecture. Our solution brings all of the advantages above into the next generation of physical security for the U.S.
government departments and agencies to achieve Federal Information Processing Standard (“FIPS”) 201 compliance. Similar to our
leading Hirsch Velocity solution for the U.S. government market, the Freedom platform acquired from Viscount is also FICAM
compliant and allows customers to choose an evolutionary, alternative architecture going forward. Within FICAM, the most
infrastructureefficient architecture is a specification known as 13.02. With Freedom and Velocity, we now are the only vendor
providing two 13.02compliant solutions, and we represent half of the four 13.02 approved solutions at this time.
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Access Readers — Our TS readers feature multiple layers of security based on a certified hardware security element. These door
readers provide unique features to support a wide range of security standards. We support the majority of legacy cards with a robust
nextgeneration platform that can help companies migrate to more secure credentials and technologies, including smart cards, near field
communication ("NFC") and governmentissued credentials including Common Access Card (“CAC”), Personal Identification
Verification (“PIV”), Personal Identification Verification – Interoperable (“PIVI”) and others. Additionally, our Scramblepad readers
employ numerical scrambling on the keypad to protect access codes from being stolen as they are entered, and providing both secure
twofactor authentication and convenient alternativefactor access.
Identiv Global Services — Identiv Global Services provides a comprehensive catalog of endtoend services that facilitates
customer success, drives deeper adoption of our product portfolio and encourages longterm customer engagement. IGS supports
customers throughout their premises security lifecycle from system design, to integration, deployment and managed services. IGS
experts enable customers to address today’s complex security and IT systems interoperability requirements, and helps them achieve a
tailormade solution.
Identity
The Identity segment includes our products and solutions enabling secure access to information serving the logical access and
cyber security market and protecting assets and objects in the IoT with RFID.
Information security solutions range from securing enterprise information access and secure transactions across PCs, networks,
mobile devices, email, login, secure payments, and printers via delivery of smart card reader products and applications.
Our information security products include smart card readers, which includes a broad range of contact, contactless, portable and
mobile smart card readers, tokens and terminals that are utilized around the world to enable logical access (i.e., PC, network or data
access) and security and identification applications, such as national ID, payment, eHealth and eGovernment. Through our
acquisition of Thursby Software Systems (“TSS”) in November of 2018, as well as our internal product development, we provide
mobile apps, software and systems to enable secure and convenient logical access across smart cards and derived credentials on Apple
iOS and Android mobile devices. Our solutions include:
Mobile Security — TSS’ software solutions provide strong security for enterprise and personal mobility, supporting bringyour
owndevice (“BYOD”) and twofactor authentication (“2FA”) on mobile devices. We enable Department of Defense (“DoD”) issued
CAC, federally issued PIV cards, derived credentials, and commercially issued PIVI cards to access, sign, encrypt, and decrypt
information and emails from Apple iOS and Android mobile phones or tablet devices. These capabilities have allowed over a hundred
thousand DoD and federal employees, including the U.S. Navy Reserve, via the Ready2Serve (“R2S”) mobile application, to use
personal and governmentfurnished mobile devices to access needed information onthego. Prior to the acquisition, TSS had sold more
than one million software licenses to a range of customers and industries, including government, healthcare, finance, energy, education,
research, Fortune 500, Global 2000, and original equipment manufacturers (“OEMs”).
We have established a leading position as a trusted provider of convenient highsecurity solutions to government and enterprise
customers. Our products are customizable to specific customer preferences, providing both high security and excellent enduser
convenience. TSS’ seamless support of both governmentgrade smart card deployments and derived credentials reflects our philosophy
of supporting customers' adoption of technologies at their own pace, optimized for their own use cases.
Smart Card Readers — With over 20 years of smart card reader, application and token experience, and over 40 million smart
card readers and modules deployed, we are known for our expertise in this complex ecosystem. We combine our deep technical
expertise with an optimized supply chain, to provide what we believe to be the most optimal, costeffective and highquality smart
cardbased reader products. Whether Identiv branded products, OEM branded, or embedded chips or modules, we are a trusted
business solution provider for users and issuers of smart cards and embeddedchip applications.
Our RFID based solutions address a wide range of applications from access control to asset tracking, product authenticity, brand
protection, customer engagement, tamper detection, product instrumentation, transportation access and other IoT applications. The
RFID devices enable frictionless interaction with the physical world and are grouped into transponders and access cards.
Transponders — Our transponder products span the full range of high frequency (“HF”) and ultrahigh frequency (“UHF”)
technologies. Our differentiation is analogous to applicationspecific integrated circuits (“ASICS”) in the semiconductor market. We
leverage our flexible platform, our deep technical expertise and our infrastructure and supply chain to deliver solutions optimized for
our customers’ business goals. We believe we are more responsive, more flexible, more experienced in businessoptimized solutions
and have a better track record of sustained delivery of solutionspecific, highquality RFID devices than our competitors. These
products are manufactured in our stateoftheart facility in Singapore and are used in diverse physical applications, including
electronic entertainment such as virtual reality (“VR”), games, loyalty cards, mobile payment systems, transit and event ticketing,
brand authenticity from pharmaceuticals to consumer goods, hospital resource management, coldchain management and many others.
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Access Cards — Our uTrust cards encompass contactless singletechnology, multitechnology, or credentials with a contact chip,
including uTrust Proximity Credentials, uTrust Smart ID Secure Credentials, uTrust MIFARE Classic Credentials, and our uTrust TS
Cards. This gives our customers easy access to RFID technology for reliable data exchange of physical access control system (PACS)
data, up to options for versatile, highfrequency, interoperable, MIFAREcompatible smart cards. Our uTrust TS Cards address
emerging security requirements while maintaining compatibility with existing lowsecurity standards such as prox. We believe they
offer the first complete solution to allow customers to pay only for the most basic lowfrequency proximity access technology while
having the ability to evolve to the highersecurity highfrequency and highestsecurity public key infrastructure (“PKI”) based
credentials. This product line exemplifies our values: we place no burden on our customers, instead providing what we believe to be the
most costeffective solution to their basic needs; and then delivering within this platform the ability for them to move to higherlevel
needs and capabilities, when they want, when they are ready and when they will realize economic and experience benefits.
Leveraging our expertise in RFID, physical access and physical authentication, we are developing new solutions to extend our
platforms across a wide variety of physical use cases. The next major opportunity in our connected world is the IoT, which
fundamentally is about physical things. We believe our core strength in physical access and physical instrumentation markets, our
wellestablished platforms and our deep knowledge of the relevant technologies, position us well in this growth market.
Market Strategy
Our strategy is to drive growth by leveraging our core technology expertise delivered as the industry’s most complete single
vendor solution. We deliver currentarchitecture solutions to our mainstream customers, while providing cuttingedge capabilities to
our early adopter customer. The result is a long term, trusted partnership with enduring customer relationships and therefore a high
lifetime value with our customers.
We build on our experience addressing solutions across multiple markets, including government, transportation, healthcare,
education, banking, retail, critical infrastructure and others. Our common advantages across all of our segments, in addition to a shared
set of technologies and supply chain, is our more than 30 years of expertise and sustained reputation as the goto source for what we
believe to be the topquality, most reliable, most costeffective solution. We drive an intense commitment to our customers, to ensure
we are delivering businesssupporting solutions to them and honoring a straightforward, respectful, trustworthy and businessbased
relationship at all times, and for a long time. In each of our segments we have a long trackrecord within the industry, and this
positions us as a trusted advisor, supplier and business partner.
In our Premises segment, we believe that our more than 30 years’ experience delivering physical security solutions to U.S.
Government customers has provided us with significant expertise and a quality reputation. Our products enable compliance with
federal directives and standards implemented over the past decade, including Homeland Security Presidential Directive (“HSPD”) 12
and FIPS 201, which defines a common standard known as the PIV credential, used by all U.S. Government employees and
contractors. We are a leading supplier of physical access control solutions to both federal and state government customers, including
agencies within the Department of Justice, Department of the Treasury, the FBI, U.S. Marshall and many others. As a pioneering
adopter of physical security technologies and protocols employed on a large scale, the U.S. Government continues to demand the best
of breed, which we have been delivering to an increasing range of agencies and departments.
Since the acquisition of 3VR, our video intelligence solutions provide a single platform for realtime security and customer
insights, enabling organizations to protect employees, customers and assets as well as improve store operations and shopping
experiences. Our new open, pluggable platform leverages existing customer infrastructure and allows customers to expand their
systems’ capabilities seamlessly.
We develop and sell integrated physical security solutions to government and enterprise customers worldwide. Our systems
integrate access control, video surveillance and analytics, intrusion detection, building management and other networkbased systems
using a wide range of access cards, including PIV cards, smart cards, RFID cards and biometrics in order to successfully secure
facilities and resources.
Physical Security and Analytics
Our analytics platform is core to our overall strategy. Security technologies are generating vast amounts of realtime data, which
in practice has often been unmanageable. That has meant a limited capability to show risks in advance, and that manual processing of
vast amounts of data has relegated responses to postfacto, forensic uses. Even those uses have been limited because of the scale of the
security data and the limitations of the existing platforms to effectively manage and turn it into useful, actionable information.
Our systems solve these problems for specific security applications, retail loss prevention, ATM fraud, loitering and other
security risks. The same analytics are being used to turn this security data into business improvement applications. Since the
infrastructure investment has been made for security purposes, costs for incremental systems to apply the data can be limited. We are
doing this in such applications as queue line management, heat mapping, customer service, personnel training and other areas, which
we believe will expand both within vertical applications and horizontally.
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Since virtually all access control customers deploy video security, we believe the opportunity for a combined product with robust
feature sets represents a substantial portion of the overall market, and makes the system more effective. Access control systems manage
the most critical event in a security system: Access granted or access denied. Access control systems are based on rigorous
identification of trusted people within an organization or a community. This provides the two critical ingredients for successful video
security: A list of alreadytrusted people, as well as alarms and events to focus video attention and analytics where they are most
relevant. Without this leverage, video is a massive data stream that is often unmanageable in realtime and cumbersome to sort through
forensically.
As the market understands this need, some of the most progressive video companies have developed their own access control
systems. And vice versa, some access control companies have developed video capabilities. We believe this approach of extending
from one solution to the other has resulted in solutions with limited capabilities.
By combining access control and video security solutions, which developed and competed successfully as standalone products in
each market, we believe we are establishing a comprehensive solution for our customers. First, our 3VR platform has been architected
from the beginning as an analytics and forensics platform, not just as a video streaming and viewing system. Second, by deeply
combining access authorization databases and events with video insights and events, a much narrower solution set is created, since
authorized events and people are preknown, and the remaining events are much easier to tag and respond to as possible security issues.
In addition to our core products, we have a range of product initiatives, partnerships and integrations designed to leverage leading
technology advances across mobile, biometric, machinelearning and other areas, to provide convenient, frictionless, lowcost yet
highly secure physical access. We invest independently and in partnership with other leading technology companies in these emerging
aspects of physical security and analytics platforms.
Connecting the Complete Benefits of a Digitized Physical World: Secure Logical Access, Mobility and RFID
In addition to providing secure and frictionless premises solutions, in our Identity segment, we provide a broad range of smart
card readers, tokens and terminals that enable security applications, including national ID cards, payment and eHealth and
eGovernment. We have supplied millions of smart card readers to the Department of Defense and other federal agencies. Our mobile
applications and readers allow users to securely authenticate on iOS™ or Android™ devices, using their CAC or PIV credentials.
Through the acquisition of Thursby, we envision a growing number of government employees, military service personnel and
commercial users with a complete and convenient BYOD secure mobile information access solution.
We also design and manufacture a broad range of NFC and RFID products across HF and UHF technologies, and from secure
transactional devices to highend microprocessorbased devices. We have expanded our solutions by incorporating advanced flexible,
rechargeable battery technology to bring activedevice capabilities to the Cold Chain market and opening the potential of active sensor
enabled applications. Our products are used in diverse applications, including electronic entertainment, loyalty schemes, mobile
payment, transit and event ticketing, and others.
We believe that the knowhow across RFID, NFC as well as smart card technology positions us to be the goto provider for RFID
and mobile applications utilizing NFC, HF, or UHF technology. We believe the capabilities we are developing in our engineering and
research center in Germany provides a differentiator particularly in the advanced, microprocessorenabled applications that are key to
bringing digital benefits to physical things. Brand authenticity, counterfeiting and consumer engagement applications especially
demand compliance with a high level of technical requirements as well as specific expectations around the appearance of the product,
user experience and reliability. We believe our ability to provide highquality pilot projects in small batches with rapid turnaround
provides a substantial competitive advantage.
Positioned for Growth in Growing Markets
Leveraging our RFID, NFC and mobility expertise, we are bringing the benefits of the IoT to a wide range of physical, connected
items. Market analysts estimate that by 2020 the number of physical things connected to the Internet will grow into the tens of billions.
These will include household appliances, vehicles, medicines, home security systems, books, luggage, jewelry, toys and a host of other
objects. We believe the growth of the IoT creates significant opportunities to provide physical access, authentication and identity into
nearly every industry, worldwide. We are leveraging our physical access, video and analytics solutions as well as our RFIDbased
physical devicemanagement expertise to provide leading solutions as our customers, and our customers’ customers, embrace the IoT.
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Customers
We sell to customers worldwide in a range of markets, including government, enterprise, consumer, financial services, healthcare
and transportation. Sales to our ten largest customers accounted for 28% of total net revenue in 2018 and 33% of total net revenue in
2017. A significant amount of revenue is sourced from sales of products and systems to our OEM partners and an indirect sales
network who sell to various entities within the U.S. federal government sector. U.S. federal government sales are primarily delivered
through our OEM partners and an indirect sales network or are priced using published General Service Administration schedules.
Sales and Marketing
We primarily conduct our own sales and marketing activities in each of the markets in which we compete, utilizing our own sales
and marketing organization to solicit prospective channel partners and customers, provide technical advice and support with respect to
products, systems and services, and manage relationships with customers, distributors and/or OEMs. We sell our smart card readers and
RFID/NFC products directly to end users and utilize indirect sales channels that may include OEMs, dealers, systems integrators, value
added resellers, resellers or Internet sales. We sell our physical access control solutions and access card services primarily through
systems integrators, dealers and value added partners, although we also sell directly to end users. In support of our sales efforts, we
participate in trade shows and conduct sales training courses, targeted marketing programs, and ongoing customer, channel partner and
thirdparty communications programs.
Competition
The market for security solutions is competitive and characterized by rapidly changing technology and evolving standards in the
industry as a whole and within specific markets. We believe that competition for security solutions is likely to intensify as a result of an
ongoing increase in demand for solutions that help converge physical and logical access control systems and RFID and NFC products
to enable expansion of the connected world. The increase in competition will come from two additional factors. First, the vast growth
of data being generated by high bandwidth security devices, especially video, as well as the increasing number of electronicaccess
doors. As data volumes become increasingly unmanageable with classic systems relying on monitoring by guards, realtime analytics
and purposebuilt forensic platforms will deliver these critical security results. Second, technically advanced hardware is moving into
commercial markets, driven by volume cost curves as disruptive consumer and small and medium business focused startups launch
commercialscale capabilities into these high volume markets.
We believe we mitigate competitive risks with several strategies:
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Providing more complete solutions than many of our physical security competitors;
Focusing on microprocessorenabled applications of RFID technology further enhanced by our close partnerships with the
major RFID microprocessor vendors;
Our network of partnerships and integrations;
Our broad IP base, including approximately 50 patents granted or pending;
A trusted relationship with our customers, including a product range that permits us to build business around their preferred
adoption rate, whether slow or fast. We believe many of our competitors do not proactively facilitate customers’
progression to newer technologies, while other competitors seek to drive customers to abandon installed systems and leap
to new platforms. We support our customers, with our own solutions, throughout this spectrum.
Competition for our smart card readers primarily comes from Gemalto NV and OMNIKEY/HID Global (a division of ASSA
ABLOY AB), as well as from a number of smaller suppliers in Asia. Competition for our RFID products comes from a small number
of competitors including SMARTRAC NV and a number of inlay conversion companies in Asia.
Access control and video solutions are available from multiple suppliers in a very fragmented market, where the top 7 providers
represent under a third of the market. We primarily compete with Lenel Systems International, Software House, Gallagher Group Ltd.,
Honeywell International Inc., Exacq, Genetec and Milestone Systems.
We believe that the principal competitive factors affecting the market for our products, systems and solutions include:
•
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technical features;
the ability of channel partners to effectively integrate multiple products and systems in order to address customer
requirements including full system capabilities, cost of ownership and ease of use;
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•
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quality and reliability;
the ability of suppliers to quickly develop new products and integrated solutions to satisfy new customer requirements;
ease of use;
strength of sales and distribution channels; and
price and total cost of system ownership.
We believe that we compete favorably within our market environment, our ability to continue to successfully compete is subject
to a variety of factors, as further discussed below in “Item 1A. Risk Factors” in this Annual Report on Form 10K.
Backlog
We typically do not maintain a significant level of backlog and revenue in any quarter significantly depends on contracts entered
into or orders received and shipped in that quarter. The majority of our sales are made primarily pursuant to purchase orders for current
delivery or agreements covering purchases over a period of time. While our customer contracts generally do not require fixed longterm
purchase commitments, from time to time we do enter into customer contracts where delivery of products, systems or services is
ongoing or is scheduled over multiple quarters or years. In view of our order and shipment patterns, and because of the possibility of
customer changes in delivery schedules or cancellation of orders, we do not believe that the ongoing arrangements we enter into
provide meaningful backlog figures or are necessarily indicative of actual sales for any succeeding period.
Research and Development
We have made and continue to make significant investments in research and development. Research and development expenses
were $7.2 million in 2018 and $6.1 million in 2017. We capitalized payroll related expenses related to development of our card
issuance services of approximately $29,000 and $209,000 in 2018 and 2017, respectively. In addition, we capitalized $401,000 of
software development costs in 2017 for costs incurred subsequent to a product achieving technological feasibility and prior to the
product’s general release to customers. No software development costs were capitalized in 2018.
Proprietary Technology and Intellectual Property
One of our core advantages is our proprietary technology. We currently rely on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality agreements and contractual provisions to protect our proprietary rights. Although we may seek to
protect our proprietary technology through patents, it is possible that no new patents will be issued, that our proprietary products or
technologies are not patentable, and that any issued patent will fail to provide us with any competitive advantages. The core of our
proprietary technology advantage is the combination of our advanced technical expertise combined with our intimate customer
knowledge, enabling us to develop bring to market and sometimes patent products uniquely positioned to deliver benefits to
customers. This is an intellectual property advantage characterized both by trade secrets and unique relationships as well as formal
patents.
We have a portfolio of approximately 30 patent families (designs, patents, utility models, patents pending and exclusive licenses)
in individual or regional filings, covering products, electrical and mechanical designs, software systems and methods and
manufacturing process ideas for our various businesses. Our issued patents expire between 2023 and 2038. We also submitted and have
pending U.S. and foreign patent filings in RFID tags, converged access readers and systems, smart card manufacturing methods,
authentication and NFC offerings. Additionally, we leverage our own ASIC designs for smart card interface in some of our reader
devices.
Manufacturing and Sources of Supply
We utilize a combination of our own manufacturing facilities and the services of contract manufacturers in various countries
around the world to manufacture our products and components. Our physical access keypads, controllers and software are
manufactured primarily in California, using locally sourced components. Our video appliances are manufactured primarily in
Wisconsin and Arizona. The majority of our smart card reader products and components are manufactured in Singapore, Cambodia and
South Korea. Our RFID and NFC inlays and inlaybased products such as labels and tags are predominantly manufactured and
assembled by our own internal manufacturing teams in Singapore primarily using locally sourced components and are certified to the
ISO 9001:2015 and ISO 14001:2015 quality manufacturing standard.
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We have implemented formal quality control programs to satisfy customer requirements for high quality and reliable products. To
ensure that products manufactured by third parties are consistent with internal standards, our quality control programs include
management of all key aspects of the production process, including establishing product specifications, selecting the components to be
used to produce products, selecting the suppliers of these components and negotiating the prices for certain of these components. In
addition, we may work with suppliers to improve process control and product design.
For the majority of our product manufacturing, we utilize a global sourcing strategy that serves all business solution areas within
the company, which allows us to achieve economies of scale and uniform quality standards for our products and support higher gross
margins.
On an ongoing basis, we analyze the need to add alternative sources for both our products and components. For example, we
currently utilize the foundry services of external suppliers to produce our ASICs for smart cards readers and inlays, and we use chips
and antenna components from thirdparty suppliers in our RFID and NFC inlays and contactless smart card readers. Wherever possible,
we have qualified additional sources of supply for components.
Employees
As of December 31, 2018, we had 273 employees, of which 71 were in research and development, 86 were in sales and
marketing, 34 were in general and administrative and 82 were in manufacturing and related functions. We are not subject to any
collective bargaining agreements and, to our knowledge, none of our employees are currently represented by a labor union. To date, we
have experienced no work stoppages and believe that our employee relations are generally good.
Corporate Information
Our corporate headquarters are located in Fremont, California. We maintain research and development facilities in California
and Texas; Chennai, India; Munich, Germany; and local operations and sales facilities in Germany, the United Kingdom, Hong Kong,
Singapore, India and the United States. We were founded in 1990 in Munich, Germany and incorporated in 1996 under the laws of the
State of Delaware.
Legal Proceedings
On January 1, 2016, certain of our present and former officers and directors were named as defendants, and we were named as
nominal defendant, in a shareholder derivative lawsuit filed in the United States District Court for the Northern District of California,
entitled Oswald v. Humphreys, et al., Case No. 16cv00241CRB, alleging breach of fiduciary duty and waste claims. On January 25,
2016, certain of our present and former officers and directors were named as defendants, and we were named as nominal defendant, in
a shareholder derivative lawsuit filed in the Superior Court of the State of California, County of Alameda, entitled Chopra v. Hart, et
al., Case No. RG16801379, alleging breach of fiduciary duty claims. On February 9, 2016, certain of our present and former officers
and directors were named as defendants, and we were named as nominal defendant, in a shareholder derivative lawsuit filed in the
Superior Court of the State of California, County of Alameda, entitled Wollnik v. Wenzel, et al., Case No. HG16803342, alleging
breach of fiduciary duty, corporate waste, gross mismanagement, and unjust enrichment claims. These lawsuits generally allege that
we made false and/or misleading statements and/or failed to disclose information in certain public filings and disclosures between 2013
and 2015. Each of the lawsuits seeks one or more of the following remedies: unspecified compensatory damages, unspecified
exemplary or punitive damages, restitution, declaratory relief, equitable and injunctive relief, and reasonable costs and attorneys’ fees.
On May 2, 2016, the court in the Chopra lawsuit entered an order staying proceedings in the Chopra lawsuit in favor of the Oswald
lawsuit, based on a stipulation to that effect filed by the parties in the Chopra lawsuit on April 28, 2016. Similarly, on June 28, 2016,
the court in the Wollnik lawsuit entered a stipulated order staying proceedings in the Wollnik lawsuit in favor of the Oswald lawsuit.
On June 17, 2016, the plaintiff in the Oswald lawsuit filed an amended complaint. On August 1, 2016, we filed a motion to dismiss for
failure by plaintiff to make a prelawsuit demand on our board of directors, which motion was heard on October 14, 2016. The judge in
the Oswald lawsuit issued an order on November 7, 2016 granting our motion to dismiss, without prejudice. In addition, the court
stayed the case so that plaintiff could exercise whatever rights he had under Section 220 of the Delaware General Corporation Law. On
or around November 30, 2016, the plaintiff purported to serve a books and records demand under Section 220 of the Delaware General
Corporation Law. We responded to that demand. On March 21, 2017, we and the plaintiff in the Oswald lawsuit filed a stipulation and
proposed order lifting the stay of the case, granting the plaintiff leave to amend, and setting a briefing schedule. The plaintiff in the
Oswald lawsuit filed his second amended complaint on April 10, 2017. We then filed a motion to dismiss that second amended
complaint on May 12, 2017. After further briefing and argument, on October 22, 2017, the court issued its written order denying the
motion to dismiss on the basis of demand futility. On January 3, 2018, the court entered a stipulated order setting a response and
briefing schedule for defendants to the second amended complaint.
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Defendants filed motions to dismiss the second amended complaint in the Oswald action under Rule 12(b)(6) on January 16,
2018. After further briefing and argument, on April 13, 2018, the court entered an order granting defendants’ motions to dismiss. On
April 19, 2018, Plaintiff Oswald filed a motion for leave to file a third amended complaint. On that same date, Plaintiff Chopra, a
plaintiff in a related and stayed derivative action in state court, filed a motion to intervene in the Oswald action. After further briefing
and argument, on July 16, 2018, the court entered an order granting the Chopra motion to intervene and denying the Oswald motion for
leave to file a third amended complaint. After the filing of an unopposed administrative motion for entry of judgment by defendants,
on October 1, 2018, the court entered an order granting administrative motion for entry of final judgment and entered final judgment in
favor of all named defendants and against plaintiffs Oswald and Chopra. On October 23, 2018, plaintiff Oswald filed a notice of appeal
with the Ninth Circuit. Oswald’s opening appellate brief was filed on March 4, 2019. In the interim, the state court Chopra and
Wollnik actions have remained stayed with periodic status conferences. The next status conferences have been scheduled in the Chopra
and Wollnik cases on November 5, 2019 before Judge Seligman. We intend to vigorously defend against these lawsuits. We cannot
currently predict the impact or resolution of each of these lawsuits or reasonably estimate a range of possible loss, if any, which could
be material, and the resolution of these lawsuits may harm our business and have a material adverse impact on our financial condition.
From time to time, we could become subject to claims arising in the ordinary course of business or could be named a defendant
in additional lawsuits. The outcome of such claims or other proceedings cannot be predicted with certainty and may have a material
effect on our financial condition, results of operations or cash flows.
Availability of SEC Filings
We make available through our website our Annual Reports on Form 10K,Quarterly Reports on Form 10Q and Current Reports
on Form 8K and amendments to those reports free of charge as soon as reasonably practicable after we electronically file such reports
with the Securities and Exchange Commission (“SEC”). Our Internet address is www.identiv.com. The content on our website is not,
nor should it be deemed to be, incorporated by reference into this Annual Report. Our filings with the SEC are also available to the
public through the SEC’s website at www.sec.gov.
Item 1A.
Risk Factors
The following discussion of risk factors contains forwardlooking statements. These risk factors may be important to
understanding any statement in this Form 10K or elsewhere. The following information should be read in conjunction with Part II,
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial
statements and related notes in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10K.
Because of the following factors, as well as other factors affecting our financial condition and operating results, past financial
performance should not be considered to be an indicator of future performance, and investors should not use historical trends to
anticipate results or trends in future periods.
Our revenues and operating results are subject to significant fluctuations and such fluctuations may lead to a reduced market
price for our stock.
Our revenues and operating results have varied in the past and will likely continue to fluctuate in the future. We believe that
periodtoperiod comparisons of our operating results are not necessarily meaningful, but securities analysts and investors often rely
upon these comparisons as indicators of future performance. If our operating results in any future period fall below the expectations of
securities analysts and investors, or the guidance that we provide, the market price of our stock would likely decline.
Factors that have caused our results to fluctuate in the past and which are likely to affect us in the future include the following:
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business and economic conditions overall and in our markets;
the timing and size of customer orders that may be tied to annual or other budgetary cycles, seasonal demand, product plans
or program rollout schedules;
the effects of the U.S. Government shut downs, spending cuts and other changes in budget allocation or availability that
create uncertainty for customers in certain parts of our business;
the absence of significant backlog in our business;
cancellations or delays of customer orders or the loss of a significant customer;
the length of sales cycles associated with our product or service offerings;
variations in the mix of products and services we sell;
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reductions in the average selling prices that we are able to charge due to competition or other factors;
our ability to obtain an adequate supply of quality components and to deliver our products on a timely basis;
our inventory levels and the inventory levels of our customers and indirect sales channels;
the extent to which we invest in development, sales and marketing, and other expense categories;
acquisitions, dispositions or organizational restructuring;
fluctuations in the value of foreign currencies against the U.S. dollar;
the cost or impact of litigation; and
the writeoff of investments.
Estimating the amount and mix of future revenues is difficult, and our failure to do so accurately could affect our ability to be
profitable or reduce the market price for our stock.
Accurately estimating future revenues is difficult because the purchasing patterns of our customers can vary depending upon a
number of factors. We sell our smart card readers primarily through a channel of distributors who place orders on an ongoing basis
depending on their customers’ requirements. As a result, the size and timing of these orders can vary from quarter to quarter. Market
demand for RFID and NFC technology is resulting in larger program deployments of these products and components, as well as
increasing competition for these solutions. Across our business, the timing of closing larger orders increases the risk of quarterto
quarter fluctuation in revenues. If orders forecasted for a specific group of customers for a particular quarter are not realized or
revenues are not otherwise recognized in that quarter, our operating results for that quarter could be materially adversely affected. In
addition, from time to time, we may experience an unexpected increase or decrease in demand for our products resulting from
fluctuations in our customers’ budgets, purchasing patterns or deployment schedules. These occurrences are not always predictable and
can have a significant impact on our results in the period in which they occur.
Failure to accurately forecast customer demand may result in excess or obsolete inventory, which if written down might
adversely impact our cost of revenues and financial condition.
In addition, our expense levels are based, in significant part, upon our expectations as to future revenues and are largely fixed in
the short term. We may be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in revenues. Any
significant shortfall in revenues in relation to our expectations could have an immediate and significant effect on our operating results
for that quarter and may lead to a reduced market price for our stock.
Our loan covenants may affect our liquidity or limit our ability to incur debt, make investments, sell assets, merge or complete
other significant transactions.
On February 8, 2017, we entered into a Loan and Security Agreement with East West Bank ("EWB"). The Loan and Security
Agreement, as amended, with EWB provides for a $20.0 million revolving loan facility (the “Revolving Loan Facility”). Our
obligations under the agreement are secured by substantially all of our assets. The Revolving Loan Facility contains customary
representations and warranties and customary affirmative and negative covenants, including, limits or restrictions on our ability to incur
liens, incur indebtedness, make certain restricted payments, merge or consolidate and dispose of assets. The Revolving Loan Facility
also contains various financial covenants. In addition, the Revolving Loan Facility contains customary events of default that entitle
EWB to cause any or all of our indebtedness under the Revolving Loan Facility to become immediately due and payable. The events of
default (some of which are subject to applicable grace or cure periods), include, among other things, nonpayment defaults, covenant
defaults, crossdefaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults. Upon the
occurrence and during the continuance of an event of default, EWB may terminate their lending commitments and/or declare all or any
part of the unpaid principal of all loans, all interest accrued and unpaid thereon and all other amounts payable under the Loan and
Security Agreement to be immediately due and payable. If repayment of the indebtedness is accelerated, we could face a substantial
liquidity problem and may be forced to dispose of material assets or operations, seek to obtain equity capital, or restructure or refinance
our indebtedness. Such alternative measures may not be available or successful. Also, our loan covenants may limit our ability to
dispose of material assets or operations or to restructure or refinance our indebtedness. Even if we are able to restructure or refinance
our indebtedness, the economic terms may not be favorable to us. Any of the foregoing could have a material adverse effect on our
financial condition and results of operations. Our ability to make periodic interest payments and to repay our debt when due depends on
our financial and operating performance, which in turn, is subject to prevailing economic and competitive conditions and other factors.
If our cash flow and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems
and may be forced to dispose of material assets or operations, seek to obtain equity capital, or restructure or refinance our indebtedness.
Such alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
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If we are not able to secure additional capital when needed, our business could be adversely affected.
We may seek or need to raise additional funds for general corporate and commercial purposes or for acquisitions. Our ability to
obtain financing depends on our historical and expected future operating and financial performance, and is also subject to prevailing
economic conditions and to financial, business and other factors beyond our control. If we are unable to secure additional financing
when desired, our ability to fund our business operations, make capital expenditures, pursue additional expansion or acquisition
opportunities, or have resources available to capitalize on other opportunities could be limited, and this could adversely impact our
financial results. There can be no assurance that additional capital will be available to us on favorable terms or at all. The sale of
additional debt or equity securities may cause dilution to existing stockholders. Any debt or equity securities issued may also provide
for rights, preferences or privileges senior to those of our common stock and could impose significant restrictions on our operations. In
addition, any capital we raise may be restricted with respect to use.
Acquisitions and strategic investments require substantial resources, expose us to significant risks and may adversely impact our
business.
As part of our growth strategy, we seek to acquire or make investments in companies, products or technologies that we believe
complement or augment our existing business, product offerings or technology portfolio. For example, on February 14, 2018, we
acquired 3VR Security, Inc., or 3VR, a video technology and analytics company for $6.2 million in cash, subordinated unsecured
promissory notes and common stock . In addition, in the event that 3VR achieves specified levels of product shipments in 2018, we
will be obligated to issue further earnout consideration of $3.5 million payable in shares of our common stock (subject to certain
conditions) with a potential maximum earnout value of $7.0 million in the event that such shipments exceed $48.2 million. Further, in
calendar year 2019, we may also be obligated to pay, in cash, and subject to certain conditions, contingent consideration equal to the
lesser of (A) 35% of the gross margin of certain products sold and services rendered by 3VR in 2018 pursuant to a supply arrangement
and (B) $25.0 million, each subject to adjustments.
In addition, on November 2, 2018, we acquired Thursby Software Systems, Inc., or Thursby, for $3.1 million in cash, net of cash
acquired, and common stock . Additionally, in the event that revenue from Thursby products is greater than $8.0 million, $11.0 million,
or $15.0 million in product shipments in 2019, we will be obligated to issue earnout consideration of up to a maximum of $7.5 million
payable in shares of our common stock, subject to certain conditions. In the event that such revenue is less than $15.0 million in 2019,
but 2020 revenue from Thursby products exceeds $15.0 million, we will be obligated to issue an additional $2.5 million in earnout
consideration payable in shares of our common stock. The maximum total earnout consideration payable for all periods is $7.5 million
in the aggregate, payable in shares of our common stock.
On January 2, 2019, we completed the purchase of substantially all the assets of the Freedom, Liberty, and Enterphone™ MESH
products and services of Viscount Systems, Inc., or VSI, and the assumption of certain liabilities for $3.2 million in cash and common
stock. Additionally, in the event that revenue from the assets purchased under the agreement in 2019 is greater than certain specified
revenue targets, we will be obligated to issue earnout consideration of up to a maximum of $3.5 million payable in shares of our
common stock. In the event that such revenue targets are not met in 2019, but 2020 revenue from the assets purchased exceeds certain
higher targets for 2020, then we will be obligated to issue up to a maximum of $2.25 million in earnout consideration payable in shares
of our common stock.
Acquiring and integrating acquired businesses and assets into our business exposes us to certain risks.
Executing acquisition or investment transactions and assimilating personnel and operations from an acquired business may
require significant attention and resources, which may divert the attention of our management and employees from daytoday
operations and disrupt our business. This may adversely impact our results of operations. In addition, there can be no assurances that
the expected benefits of any acquisitions will be achieved.
The costs associated with an acquisition may be significant, whether or not the acquisition transaction is successfully concluded.
As a result, acquisition activities may reduce the amount of capital available to fund our business. To purchase another company or
assets, we may be required to issue additional equity securities, which would result in additional dilution to our stockholders.
Acquisitions may result in the assumption of additional liabilities or debt, including unanticipated liabilities, or charges to earnings for
such items as amortization of purchased intangibles or inprocess research and development expenses. Such liabilities, indebtedness or
charges could have a material and adverse impact on our financial condition and results of operations. Acquisitions and strategic
investments may also lead to substantial increases in noncurrent assets, including goodwill. Writedowns of these assets due to
unforeseen business developments may materially and adversely impact our financial condition and results of operations.
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Additionally, we have in the past acquired companies that we have subsequently divested, in some cases for less than we paid to
acquire the companies. Such divestitures involve risks, such as difficulty separating out portions of or entire businesses, distracting our
management and employees, potential loss of revenue and potentially disrupting customer relationships. We have and may again in the
future incur significant costs associated with exit or disposal activities, related impairment charges, or both, if we exit or divest a
business or product line. If we are not able to successfully integrate or divest products, technologies, or personnel from businesses that
we acquire or divest, or if we are not able to realize the expected benefits of our acquisitions, divestitures, or strategic investments, our
business and financial results could be adversely affected.
Impairment in the value of our goodwill or other intangible assets could have a material adverse effect on our operating results
and financial condition.
We record goodwill and intangible assets at fair value upon the acquisition of a business. Goodwill represents the excess of
amounts paid for acquiring businesses over the fair value of the net assets acquired. Goodwill and indefinitelived intangible assets are
evaluated for impairment annually, or more frequently if conditions warrant, by comparing the carrying value of a reporting unit to its
estimated fair value. Intangible assets with definite lives are reviewed for impairment when events or circumstances indicate that their
carrying value may not be recoverable. Declines in operating results, divestitures, sustained market declines and other factors that
impact the fair value of a reporting unit could result in an impairment of goodwill or intangible assets and, in turn, a charge to net
income. Any such charges could have a material adverse effect on our results of operations or financial condition.
Our business and reputation may adversely affected by information technology system failures or network disruptions.
We may be subject to information technology system failures and network disruptions. These may be caused by natural disasters,
accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic breakins,
or other events or disruptions. System redundancy may be ineffective or inadequate, and our disaster recovery planning may not be
sufficient for all eventualities. Such failures or disruptions could compromise company or customer data and result in delayed or
cancelled orders and expose us to liability. System failures and disruptions could also impede the manufacturing and shipping of
products, delivery of online services, processing of transactions and reporting of financial results. In addition, any such failures or
disruptions could harm our reputation.
Our success depends largely on the continued service and availability of key personnel.
Our future success depends on our ability to continue to attract, retain, and motivate our senior management as well as qualified
technical personnel, particularly software engineers. Competition for these employees is intense and many of our competitors may have
greater name recognition and significantly greater financial resources to better compete for these employees. If we are unable to retain
our existing personnel, or attract and train additional qualified personnel, our growth may be limited. All of our key employees are
employed on an “at will” basis, meaning either we or the employee may terminate their employment with us at any time. The loss of
key employees could slow our product development processes and sales efforts or harm our reputation. Also, our low stock price may
result in difficulty attracting and retaining personnel as equity incentives generally comprise a significant portion of our employee
compensation. Further, restructurings and reductions in force that we have recently experienced may have a negative effect on
employee morale and the ability to attract and retain qualified personnel.
Our business could be adversely affected by reductions or delays in the purchase of our products or services for government
security programs in the United States and globally.
We derive a substantial portion of our revenues from indirect sales to U.S. federal, state and local governments and government
agencies, as well as from subcontracts under federal government prime contracts. Large government programs are an important market for
our business, as highsecurity systems employing physical access, smart card, RFID or other access control technologies are increasingly
used to enable applications ranging from authorizing building and network access for federal employees to paying taxes online, to citizen
identification, to receiving health care. We believe that the success and growth of our business will continue to be influenced by our
successful procurement of government business either directly or through our indirect sales channels. Accordingly, changes in government
purchasing policies or government budgetary constraints, including government shutdowns, could directly affect our financial
performance. Sales to government agencies and customers primarily serving the U.S. Government, including further sales pursuant to
existing contracts, may be adversely affected by factors outside our control, such as the sequester, federal government shutdowns or other
Congressional actions to reduce federal spending, and by adverse economic, political or market conditions. A reduction in current or future
anticipated sales to the U.S. Government sector could harm our results of operations.
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Additionally, we anticipate that an increasingly significant portion of our future revenues will come from government programs
outside the U.S., such as electronic national identity, eGovernment and eHealth programs. We currently supply smart card readers,
RFID products and credential provisioning and management solutions for various government programs in Europe, Asia and Australia
and are actively targeting additional programs in these and other geographic areas. However, the allocation and availability of funding
for such programs are often impacted by economic or political factors over which we have no control, and which may cause delays in
program implementation, which could negatively impact our sales and results of operations.
Our revenues may decline if we cannot compete successfully in an intensely competitive market.
We target our products at the rapidly evolving market for security technologies. Many of our current and potential competitors
have significantly greater financial, technical, marketing, purchasing and other resources than we do. As a result, our competitors may
be able to respond more quickly to new or emerging technologies or standards and to changes in customer requirements. Our
competitors may also be able to devote greater resources to the development, promotion and sale of products or solutions and may be
able to deliver competitive products or solutions at a lower end user price.
We also experience indirect competition from certain of our customers who currently offer alternative products or solutions or are
expected to introduce competitive offerings in the future. For example, in our Premises business, many of our dealer channel partners
act as system integrators, providing installation and service, and therefore carry competitive lines of products and systems. This is a
common practice within the industry as the integrators need access to multiple lines in order to support all potential service and user
requirements. Depending on the technical competence of their sales forces, the comfort level of their technical staff with our systems
and price pressures from customers, these integrators may choose to offer a competitor’s product. There is also business pressure to
provide some level of sales to all vendors to maintain access to a range of products and systems.
We believe that the principal competitive factors affecting the markets for our products and solutions include:
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the extent to which products and systems must support evolving industry standards and provide interoperability;
the extent to which products are differentiated based on technical features, quality and reliability, ease of use, strength of
distribution channels and price;
the ability to quickly develop new products and solutions to satisfy new market and customer requirements; and
the total cost of ownership including installation, maintenance and expansion capability of systems.
Increased competition and increased market volatility in our industry could result in lower prices, reduced margins or the failure
of our product and service offerings to achieve or maintain market acceptance, any of which could have a serious adverse impact on our
business, financial condition and results of operations.
Our percentage of revenue and customer concentration is significant in certain of our businesses.
Sales to our ten largest customers accounted for 28% of total net revenue in 2018 and 33% of total net revenue in 2017. No
customer accounted for 10% or more of our total net revenue in 2018 or 2017. A significant amount of revenue is sourced from sales of
products and systems to our original equipment manufacturer partners and an indirect sales network who sell to various entities within
the U.S. federal government sector. We cannot guarantee that future reductions in U.S. Government budgets will not impact our sales to
these government entities or that the terms of existing contracts will not be subject to renegotiation. Our loss of one or more significant
customers could have a significant adverse impact on our business, financial condition and results of operations.
Our business will not be successful if we do not keep up with the rapid changes in our industry.
The market for security products and related services is characterized by rapid technological developments, frequent new product
introductions and evolving industry standards. To be competitive, we have to continually improve the performance, features and
reliability of our products and services, particularly in response to competitive offerings, and quickly demonstrate the value of new
products and services or enhancements to existing products and services. Our failure to develop and introduce new products and
services successfully on a timely basis and to achieve market acceptance for such products and services could have a significant
adverse impact on our business, financial condition and results of operations.
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Security breaches, whether or not related to our products, could result in the disclosure of sensitive government information or
private personal information that could result in the loss of clients and negative publicity.
Many of the systems we sell manage private personal information or protect sensitive information related to our customers in the
government or commercial markets. A wellpublicized actual or perceived breach of network or computer security in one of these
systems, regardless of whether such a breach is attributable to our products, could adversely affect the market’s perception of us and
our products, and could result in the loss of customers, have an adverse effect on our reputation and reduce demand for our products.
As part of our technical support services, we agree, from time to time, to possess all or a portion of the security system database
of our customers. This service is subject to a number of risks. For example, despite our security measures our systems may be
vulnerable to cyberattacks by hackers, physical breakins and service disruptions that could lead to interruptions, delays or loss of data.
If any such compromise of our security were to occur, it could be very expensive to correct, could damage our reputation and result in
the loss of customers, and could discourage potential customers from using our services. We could also be liable for damages and
penalties. Although we have not experienced attempted cyber or physical attacks, we may experience such attempts in the future. Our
systems also may be affected by outages, delays and other difficulties. Our insurance coverage may be insufficient to cover losses and
liabilities that may result from such events.
Sales of our products could decline and we could be subject to legal claims for damages if our products are found to have
defects.
Despite our testing efforts, our products may contain defects that are not detected until after the products have been shipped. The
discovery of defects or potential defects may result in damage to our reputation, delays in market acceptance of our products and
additional expenditures to resolve issues related to the products’ implementation. If we are unable to provide a solution to actual or
potential product defects that is acceptable to our customers, we may be required to incur substantial costs for product recall, repair and
replacement, or costs related to legal or warranty claims made against us.
The global nature of our business exposes us to operational and financial risks and our results of operations could be adversely
affected if we are unable to manage them effectively.
We market and sell our products and solutions to customers in many countries around the world. To support our global sales,
customer base and product development activities, we maintain offices and/or business operations in several locations around the
world, including Germany, Hong Kong, India, Japan, Singapore and the U.S. We also maintain manufacturing facilities in Singapore
and California and engage contract manufacturers in multiple countries outside the U.S. Managing our global development, sales,
administrative and manufacturing operations places a significant burden on our management resources and our financial processes and
exposes us to various risks, including:
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longer accounts receivable collection cycles;
changes in foreign currency exchange rates;
compliance with and changes in foreign laws and regulatory requirements;
changes in political or economic conditions and stability, particularly in emerging markets;
difficulties managing widespread sales and manufacturing operations;
export controls;
less effective protection of our intellectual property; and
potentially adverse tax consequences.
Any failure to effectively mitigate these risks and effectively manage our global operations could have a material adverse effect
on our business, financial condition or operating results.
A significant portion of our revenue is through an indirect sales channel, and the loss of dealers, systems integrators, resellers,
or other channel partners could result in decreased revenue.
We currently use an indirect sales channel that includes dealers, systems integrators, value added resellers and resellers to sell a
significant portion of our products and solutions, primarily into markets or to customers where the channel partner may have closer
customer relationships or greater access than we do. Some of these channel partners also sell our competitors’ products, and if they
favor our competitors’ products for any reason, they may fail to market our products as effectively or to devote necessary resources that
result in sales of our products, which would cause our sales to suffer. Indirect selling arrangements are intended to benefit both us and
the channel partner, and may be long or shortterm relationships, depending on market conditions, competition in the marketplace and
other factors. If we are unable to maintain effective indirect sales channels, there could be a reduction in the amount of product we are
able to sell, and our revenues could decrease.
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We depend upon thirdparty manufacturers and a limited number of suppliers, and if we experience disruptions in our supply
chain or manufacturing, our business may suffer.
We rely upon a limited number of suppliers for some key components of our products which exposes us to various risks,
including whether or not our suppliers will provide adequate quantities with sufficient quality on a timely basis and the risk that
supplier pricing may be higher than anticipated. In addition, some of the basic components used in some of our products, such as
semiconductors, may at any time be in great demand. This could result in components not being available to us in a timely manner or at
all, particularly if larger companies have ordered significant volumes of those components, or in higher prices being charged for
components we require. Disruption or termination of the supply of components or software used in our products could delay shipments
of our products, which could have a material adverse effect on our business and operating results and could also damage relationships
with current and prospective customers.
Many of our products are manufactured outside the U.S. by contract manufacturers. Our reliance on these manufactures poses a
number of risks, including lack of control over the manufacturing process and ultimately over the quality and timing of delivery of our
products. If any of our contract manufacturers cannot meet our production requirements, we may be required to rely on other contract
manufacturing sources or identify and qualify new contract manufacturers, and we may not be able to do this in a timely manner or on
reasonable terms. Additionally, we may be subject to currency fluctuations, potentially adverse tax consequences, unexpected changes
in regulatory requirements, tariffs and other trade barriers, export controls, or political and economic instability. Any significant delay
in our ability to obtain adequate supplies of our products from our current or alternative manufacturers could materially and adversely
affect our business and operating results. In addition, if we are not successful at managing the contract manufacturing process, the
quality of our products could be jeopardized or inventory levels could be inadequate or excessive, which could result in damage to our
reputation with our customers and in the marketplace, as well as possible shortages of products or writeoffs of excess inventory.
Our U.S. Government business depends upon the continuance of regulations that require federal agencies to implement security
systems such as ours, and upon our ability to receive certain government approvals or certifications and demonstrate compliance in
government audits or investigations. A failure to receive these government approvals or certifications or a negative audit result
could result in a material adverse impact on our business, financial condition and results of operations.
While we are not able to quantify the amount of sales made to end customers in the U.S. Government market due to the indirect
nature of our selling process, we believe that orders from U.S. Government agencies represent a significant portion of our revenues.
The U.S. Government, suppliers to the U.S. Government and certain industries in the public sector currently fall, or may in the future
fall, under particular regulations that require federal agencies to implement security systems that utilize physical and logical access
control products and solutions such as ours. These regulations include, but are not limited to HSPD 12 and FIPS 201 produced by the
National Institute of Standards and Technology (“NIST”). Discontinuance of, changes in, or lack of adoption of laws or regulations
pertaining to security related to sales to end customers in the U.S. Government market could adversely affect our sales.
Our U.S. Government business is also dependent upon the receipt of certain governmental approvals or certifications and failure
to receive such approvals or certifications could have a material adverse effect on our sales in those market segments for which such
approvals or certifications are customary or required. Government agencies in the U.S. and other countries may audit our business as
part of their routine audits and investigations of government procurement programs. Based on the outcome of any such audit, if any of
our costs are found to be improperly allocated to a specific order, those costs may not be reimbursed and any costs already reimbursed
for such order may have to be refunded. If a government agency audit uncovers improper or illegal activities, we may be subject to
civil and criminal penalties and administrative sanctions. A negative audit could materially affect our competitive position and result in
a material adverse impact on our business, financial condition and results of operations.
Fluctuations in foreign exchange rates between the U.S. dollar and other major currencies in which we do business may
adversely affect our business, financial condition and results of operations.
A significant portion of our business is conducted in foreign currencies, principally the euro and Indian Rupee. Fluctuations in
the value of foreign currencies relative to the U.S. dollar will result in currency exchange gains and losses in our reported results. If a
significant portion of operating expenses are incurred in a foreign currency such as the euro or Indian Rupee, and revenues are
generated in U.S. dollars, exchange rate fluctuations might have a positive or negative net financial impact on these transactions,
depending on whether the value of the U.S. dollar decreases or increases compared to that currency. In addition, the valuation of current
assets and liabilities that are denominated in a currency other than the functional currency can result in currency exchange gains and
losses. For example, when one of our subsidiaries uses the euro as the functional currency, and this subsidiary has a receivable in
U.S. dollars, a devaluation of the U.S. dollar against the euro of 10% would result in a foreign exchange loss to the reporting entity of
10% of the value of the underlying U.S. dollar receivable. We cannot predict the effect of exchange rate fluctuations upon future
operating results. The effect of currency exchange rate changes may increase or decrease our costs and/or revenues in any given period,
and we may experience currency losses in the future. To date, we have not adopted a hedging program to protect against the risks
associated with foreign currency fluctuations.
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We may not be able to protect our intellectual property rights, which could make us less competitive and cause us to lose market
share.
Our future success will depend, in part, upon our intellectual property rights and our ability to protect these rights. We rely on a
combination of patent, copyright, trademark and trade secret laws, nondisclosure agreements and other contractual provisions to
establish, maintain and protect our proprietary rights. From time to time we may be required to use litigation to protect our proprietary
technology. This may result in our incurring substantial costs and we may not be successful in any such litigation. Despite our efforts to
protect our proprietary rights, unauthorized third parties may copy aspects of our products, obtain and use information that we regard as
proprietary, or infringe upon our patents. In addition, the laws of some foreign countries do not protect proprietary and intellectual
property rights to the same extent as do the laws in the U.S. Because many of our products are sold and a significant portion of our
business is conducted outside the U.S., our exposure to intellectual property risks may be higher. Our efforts to protect our proprietary
and intellectual property rights may not be adequate. Additionally, there is a risk that our competitors will independently develop
similar technology or duplicate our products or design around patents or other intellectual property rights. If we are unsuccessful in
protecting our intellectual property or our products or technologies are duplicated by others, our competitive position could be harmed
and we could lose market share.
We face risks from future claims of third parties and litigation, which could have an adverse effect on our results of operations.
From time to time, we may be subject to claims of third parties, possibly resulting in litigation, which could include, among other
things, claims regarding infringement of the intellectual property rights of third parties, product defects, employmentrelated claims,
and claims related to acquisitions, dispositions or restructurings. Addressing any such claims or litigation may be timeconsuming and
costly, divert management resources, cause product shipment delays, require us to redesign our products, require us to accept returns of
products and to writeoff inventory, or result in other adverse effects to our business. Any of the foregoing could have a material
adverse effect on our results of operations and could require us to pay significant monetary damages.
We expect the likelihood of intellectual property infringement and misappropriation claims may increase as the number of
products and competitors in the security market grows and as we increasingly incorporate thirdparty technology into our products. As
a result of infringement claims, we could be required to license intellectual property from a third party or redesign our products.
Licenses may not be offered when required or on acceptable terms. If we do obtain licenses from third parties, we may be required to
pay license fees or royalties or we may be required to license some of our intellectual property to others in return for such licenses. If
we are unable to obtain a license necessary for us or our thirdparty manufacturers to manufacture our allegedly infringing products, we
could be required to suspend the manufacture of products or stop our suppliers from using processes that may infringe the rights of
third parties. We may also be unsuccessful in redesigning our products. Our suppliers and customers may be subject to infringement
claims based on intellectual property included in our products. We have historically agreed to indemnify our suppliers and customers
for patent infringement claims relating to our products. The scope of this indemnity varies, but may, in some instances, include
indemnification for damages and expenses, including attorney’s fees. We may periodically engage in litigation as a result of these
indemnification obligations. Our insurance policies exclude coverage for thirdparty claims for patent infringement.
Our stock price has been and is likely to remain volatile.
Over the past few years, The Nasdaq Capital Market has experienced significant price and volume fluctuations that have
particularly affected the market prices of the stocks of technology companies. Volatility in our stock price may result from a number of
factors, including, among others:
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low volumes of trading activity in our stock;
technical trading patterns of our stock;
variations in our or our competitors’ financial and/or operational results;
the fluctuation in market value of comparable companies in any of our markets;
expected or announced news about partner relationships, customer wins or losses, product announcements or organizational
changes;
comments and forecasts by securities analysts;
litigation developments; and
general market downturns.
In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class
action litigation.
18
We have been named as a defendant in putative securities class action and derivative lawsuits. These lawsuits and other
litigation could cause us to incur substantial expenses and divert our attention and resources.
Securities class action lawsuits have often been brought against a company following periods of volatility in the market price of
its securities. Companies such as ours in the technology industry are particularly vulnerable to this kind of litigation due to the volatility
of their stock prices. We and a number of our current and former officers and directors were defendants in a putative class action
lawsuit that was dismissed without prejudice in March 2018 and are defendants in derivative litigation, which is discussed in the
Section entitled “Legal Proceedings.” Any litigation to which we are a party has and may continue to result in the diversion of
management attention and resources from our business and business strategy. In addition, any litigation to which we are a party may
result in onerous or unfavorable judgments that may not be reversed upon appeal and that may require us to pay substantial monetary
damages or fines, or we may decide to settle lawsuits on similarly unfavorable terms, which could have a material adverse effect our
business, financial condition or results of operations.
You may experience dilution of your ownership interests due to the future issuance of additional shares of our stock, and future
sales of shares of our common stock could adversely affect our stock price.
We have issued a significant number of shares of our common stock, together with warrants to purchase shares of our common
stock and convertible preferred stock, in connection with a number of financing transactions and acquisitions in recent years. In the
future, from time to time we may issue additional previously authorized and unissued securities, resulting in additional dilution of the
ownership interests of our current stockholders.
In addition, we have reserved shares of common stock for potential future issuance including stock issuable pursuant to our
equity incentive plans, as contingent consideration related to previous acquisitions, the conversion of our preferred stock and warrants
issued in connection with previous capital raises and other transactions. As of March 6, 2019, 1,975,041 shares of common stock are
reserved for future grants and outstanding equity awards under our equity incentive plans and an additional 9,619,370 shares of
common stock are reserved for future issuance in connection with other potential issuances. We may issue additional shares of common
stock or other securities that are convertible into or exercisable for shares of common stock in connection with the hiring of personnel,
future acquisitions, future financings or for other business purposes. If we issue additional securities, the aggregate percentage
ownership of our existing stockholders will be reduced. In addition, any new securities that we issue may have rights senior to those of
our common stock.
The issuance of additional shares of common stock or preferred stock or other securities, or the perception that such issuances
could occur, may create downward pressure on the trading price of our common stock.
If current or future export laws limit or otherwise restrict our business, we could be prohibited from shipping our products to
certain countries, which could cause our business, financial condition and results of operations to suffer.
Some of our products are subject to export controls or other laws restricting the sale of our products under the laws of the U.S.,
the European Union (“EU”) and other governments. The export regimes and the governing policies applicable to our business are
subject to change. We cannot be certain that such export authorizations will be available to us or for our products in the future. In some
cases, we rely upon the compliance activities of our prime contractors, and we cannot be certain they have taken or will take all
measures necessary to comply with applicable export laws. If we or our prime contractor partners cannot obtain required government
approvals under applicable regulations, we may not be able to sell our products in certain international jurisdictions.
Changes in tax laws or the interpretation thereof, adverse tax audits and other tax matters may adversely affect our future
results.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax Act”), which
significantly changed prior U.S. tax law and includes numerous provisions that affect our business. Accounting for these provisions in
fiscal 2017 required the use of provisional estimates in our financial statements, and the exercise of significant judgment in accounting
for the Tax Act's provisions. As regulations and guidance evolve with respect to the Tax Act, and as we gather more information and
perform more analysis, our results may materially differ from previous estimates, and those differences may materially affect our
financial position. The net impact of such changes are uncertain, and could adversely affect our tax rate and cash flow in future years.
A number of other factors may impact our tax position as well, including:
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the jurisdictions in which profits are determined to be earned and taxed;
the resolution of issues arising from tax audits with various tax authorities;
changes in the valuation of our deferred tax assets and liabilities;
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adjustments to estimated taxes upon finalization of various tax returns;
increases in expenses not deductible for tax purposes; and
the repatriation of nonU.S. earnings for which we have not previously provided for U.S. taxes.
Any of these factors could make it more difficult for us to project or achieve expected tax results. An increase or decrease in our
tax liabilities due to these or other factors could adversely affect our financial results in future periods.
We had a material weakness in our internal controls over financial reporting, and if we fail to maintain adequate internal
control over financial reporting, our business could be materially and adversely affected.
Under the SarbanesOxley Act, our management must establish, maintain and make certain assessments and certifications
regarding our disclosure controls and internal controls over financial reporting. We have dedicated significant resources to comply with
these requirements, including significant actions to develop, evaluate, and test our internal controls. A failure to maintain adequate
internal controls could result in inaccurate or late reporting of our financial results, an investigation by regulatory authorities, a loss of
investor confidence, a decrease in the trading price of our common stock and exposure to costly litigation or regulatory proceedings.
In connection with the audit of our financial statements as of and for the year ended December 31, 2015, we identified a material
weakness in internal control over financial reporting during 2015. Management determined that the design and operating effectiveness
of our controls over the financial statement close process related to the application of our accounting policies and the presentation of
disclosures in the financial statements had been inadequate. Specifically, this material weakness arose from insufficient review and
oversight of the recording of complex and nonroutine transactions, including revenue transactions, due to an insufficient number of
accounting personnel with appropriate knowledge, experience or training in U.S. GAAP. A similar material weakness was previously
identified and disclosed in our Annual Reports on Form 10K for the year ended December 2012 and 2013, and a remediation plan was
implemented.
In 2016, a number of remediation actions and organizational changes were enacted to address specific control weaknesses
identified, but the material weakness had not been fully remediated as of December 31, 2016. During the course of 2016, as part of our
restructuring initiatives announced in the first quarter of 2016, we streamlined our global operations, transitioned to a single accounting
system across substantially all our businesses, and strengthened our global accounting and finance function in Orange County,
California. In 2017, we implemented procedures and controls over the financial statement close process, reallocated worldwide
accounting resources, and continued to strengthen our accounting and finance team by hiring additional personnel with U.S. GAAP
experience. Management has determined that with the remediation measures undertaken in 2016 and through June 30, 2017, the
material weakness was fully remediated as of June 30, 2017. However, we may in the future identify additional internal control
deficiencies that could rise to the level of a material weakness or uncover errors in our financial reporting, and any such material
weaknesses in our internal controls could have a material adverse effect on the accuracy, timeliness and reliability of our financial
reporting, which may have an adverse effect on our financial condition and results of operations as well as the price of our common
stock.
Provisions in our charter documents and Delaware law may delay or prevent our acquisition by another company, which could
decrease the value of your shares.
Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third
party to acquire us or enter into a material transaction with us without the consent of our board of directors. These provisions include a
classified board of directors and limitations on actions by our stockholders by written consent. Delaware law imposes some restrictions
on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. In addition,
our board of directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock
ownership of a potential hostile acquirer. These provisions will apply even if the offer were to be considered adequate by some of our
stockholders. Because these provisions may be deemed to discourage a change of control, they may delay or prevent the acquisition of
our company, which could decrease the value of our common stock.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
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ITEM 2.
PROPERTIES
Our corporate headquarters are located in Fremont, California and we maintain operational headquarters in Santa Ana,
California. We lease additional facilities to house our engineering, sales and marketing, administrative and manufacturing functions. At
December 31, 2018, our major facilities consisted of the following:
Location
Fremont, California
Santa Ana, California
Function
Corporate headquarters
Administration; manufacturing; research and
development
Arlington, Texas
Sauerlach, Germany
Administration; sales
European operations; research and
Chennai, India
Singapore
development; sales
Research and development
RFID/NFC product manufacturing
Square Feet
5,678
Lease Expiration
November 2020
34,599
5,700
5,156
17,500
16,060
January 2023
October 2023
April 2020
October 2020
May 2020
ITEM 3.
LEGAL PROCEEDINGS
On January 1, 2016, certain of our present and former officers and directors were named as defendants, and we were named as
nominal defendant, in a shareholder derivative lawsuit filed in the United States District Court for the Northern District of California,
entitled Oswald v. Humphreys, et al., Case No. 16cv00241CRB, alleging breach of fiduciary duty and waste claims. On January 25,
2016, certain of our present and former officers and directors were named as defendants, and we were named as nominal defendant, in
a shareholder derivative lawsuit filed in the Superior Court of the State of California, County of Alameda, entitled Chopra v. Hart, et
al., Case No. RG16801379, alleging breach of fiduciary duty claims. On February 9, 2016, certain of our present and former officers
and directors were named as defendants, and we were named as nominal defendant, in a shareholder derivative lawsuit filed in the
Superior Court of the State of California, County of Alameda, entitled Wollnik v. Wenzel, et al., Case No. HG16803342, alleging
breach of fiduciary duty, corporate waste, gross mismanagement, and unjust enrichment claims. These lawsuits generally allege that
we made false and/or misleading statements and/or failed to disclose information in certain public filings and disclosures between 2013
and 2015. Each of the lawsuits seeks one or more of the following remedies: unspecified compensatory damages, unspecified
exemplary or punitive damages, restitution, declaratory relief, equitable and injunctive relief, and reasonable costs and attorneys’ fees.
On May 2, 2016, the court in the Chopra lawsuit entered an order staying proceedings in the Chopra lawsuit in favor of the Oswald
lawsuit, based on a stipulation to that effect filed by the parties in the Chopra lawsuit on April 28, 2016. Similarly, on June 28, 2016,
the court in the Wollnik lawsuit entered a stipulated order staying proceedings in the Wollnik lawsuit in favor of the Oswald lawsuit.
On June 17, 2016, the plaintiff in the Oswald lawsuit filed an amended complaint. On August 1, 2016, we filed a motion to dismiss for
failure by plaintiff to make a prelawsuit demand on our board of directors, which motion was heard on October 14, 2016. The judge in
the Oswald lawsuit issued an order on November 7, 2016 granting our motion to dismiss, without prejudice. In addition, the court
stayed the case so that plaintiff could exercise whatever rights he had under Section 220 of the Delaware General Corporation Law. On
or around November 30, 2016, the plaintiff purported to serve a books and records demand under Section 220 of the Delaware General
Corporation Law. We responded to that demand. On March 21, 2017, we and the plaintiff in the Oswald lawsuit filed a stipulation and
proposed order lifting the stay of the case, granting the plaintiff leave to amend, and setting a briefing schedule. The plaintiff in the
Oswald lawsuit filed his second amended complaint on April 10, 2017. We then filed a motion to dismiss that second amended
complaint on May 12, 2017. After further briefing and argument, on October 22, 2017, the court issued its written order denying the
motion to dismiss on the basis of demand futility. On January 3, 2018, the court entered a stipulated order setting a response and
briefing schedule for defendants to the second amended complaint.
Defendants filed motions to dismiss the second amended complaint in the Oswald action under Rule 12(b)(6) on January 16,
2018. After further briefing and argument, on April 13, 2018, the court entered an order granting defendants’ motions to dismiss. On
April 19, 2018, Plaintiff Oswald filed a motion for leave to file a third amended complaint. On that same date, Plaintiff Chopra, a
plaintiff in a related and stayed derivative action in state court, filed a motion to intervene in the Oswald action. After further briefing
and argument, on July 16, 2018, the court entered an order granting the Chopra motion to intervene and denying the Oswald motion for
leave to file a third amended complaint. After the filing of an unopposed administrative motion for entry of judgment by defendants,
on October 1, 2018, the court entered an order granting administrative motion for entry of final judgment and entered final judgment in
favor of all named defendants and against plaintiffs Oswald and Chopra. On October 23, 2018, plaintiff Oswald filed a notice of appeal
with the Ninth Circuit. Oswald’s opening appellate brief was filed on March 4, 2019. In the interim, the state court Chopra and
Wollnik actions have remained stayed with periodic status conferences. The next status conferences have been scheduled in the Chopra
and Wollnik cases on November 5, 2019 before Judge Seligman. We intend to vigorously defend against these lawsuits. We cannot
currently predict the impact or resolution of each of these lawsuits or reasonably estimate a range of possible loss, if any, which could
be material, and the resolution of these lawsuits may harm our business and have a material adverse impact on our financial condition.
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From time to time, we could become subject to claims arising in the ordinary course of business or could be named a defendant
in additional lawsuits. The outcome of such claims or other proceedings cannot be predicted with certainty and may have a material
effect on our financial condition, results of operations or cash flows.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
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Executive Officers of the Registrant
Information concerning our executive officers as of March 1, 2019 is as follows:
Steven Humphreys, 57, has served as our Chief Executive Officer since September 9, 2015 and as a director of the Company
since July 1996. Mr. Humphreys previously served as Chairman of the Board from September 2013 until September 9, 2015.
Previously, he also served as Lead Director from May 2010 until April 2013 and as Chairman of the Board from April 2000 to March
2007. Mr. Humphreys also served as an executive officer of the Company, as President from July 1996 to December 1996 and as
President and Chief Executive Officer from January 1997 to July 1999. From November 2011 to December 2014, Mr. Humphreys
served as chief executive officer of Flywheel Software, Inc., a venturebacked, locationbased mobile solutions company. From
October 2008 until its acquisition by SMSC in February 2011, Mr. Humphreys served as Chief Executive Officer and President of
Kleer Corporation, a venturebacked provider of wireless audio technology. From October 2001 to October 2003, he served as
Chairman of the Board and Chief Executive Officer of ActivIdentity, a provider of digital identity solutions, a publiclylisted company
until its acquisition by HID Global in December 2010. He also served as a director of ActivIdentity from March 2008 until December
2010. Previously, Mr. Humphreys was President of Caere Corporation, a publiclylisted optical character recognition software
company. Prior to Caere, he spent ten years with General Electric in a variety of factory automation and information technology
positions, most recently leading the Information Delivery Services business unit of GE Information Services. Philanthropically, Mr.
Humphreys has been an elected public school board trustee and a contributor to a range of educationoriented charities. He also serves
on the board of Summit Public Schools, a charter school system with schools across the West Coast, and developer of the Summit
Learning System, developed in cooperation with Facebook and deployed in over 1,000 schools nationwide. Mr. Humphreys holds a
B.S. degree from Yale University and M.S. and M.B.A. degrees from Stanford University.
Sandra Wallach, 54, has served as our Chief Financial Officer since February 16, 2017. Ms. Wallach previously served as VP
Finance for MiaSole, a thin film solar technology company, from May 2011 to January 2013. For a six month period from January
2013 to June 2013, she served as Chief Financial Officer of UBM Tech, a whollyowned subsidiary of UBM LLC. In June 2013, she
returned to MiaSole and served as their VP Finance until February 2017. Prior to that, she served as VP Finance at Juniper Networks
(from 20082011) as well as holding different financial management positions with Intuit (20032007). Before joining Intuit, Ms.
Wallach served as Chief Financial Officer of General Electric’s (GE) Industrial Systems, Drives & Controls division. Previously she
held a range of financial and management positions at General Electric since joining GE in 1986. Ms. Wallach holds a B.A. in
Economics and Public Policy from the University of California at Berkeley.
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PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our common stock is traded on The Nasdaq Capital Market under the symbol “INVE.” According to data available at March 6,
2019, we had 140 registered holders of our common stock. Not represented in this figure are individual stockholders in Germany whose
custodian banks do not release stockholder information to us.
We have never declared or paid cash dividends on our common stock. We currently anticipate that we will retain all of our future
earnings for use in the expansion and operation of our business and do not anticipate paying any cash dividends in the foreseeable future.
In addition, our loan agreements with our lenders prohibit the payment of dividends.
The disclosure required by Item 201(d) of Regulation SK is included in Item 12 of this Annual Report on Form 10K.
During the years ended December 31, 2018 and 2017, we repurchased 141,670 shares and 178,207 shares, respectively, of
common stock surrendered to us to satisfy tax withholding obligations in connection with the vesting of RSUs issued to employees.
ITEM 6.
SELECTED FINANCIAL DATA
Not applicable.
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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other parts of this
Annual Report on Form 10K (“Annual Report”) contain forwardlooking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995, that involve risks and uncertainties. Forwardlooking statements reflect current expectations of future
events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward
looking statements can also be identified by words such as “will,” “believe,” “could,” “should,” “would,” “may,” “anticipate,”
“intend,” “plan,” “estimate,” “expect,” “project” or the negative of these terms or other similar expressions. Forwardlooking
statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the
forwardlooking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A
of this Annual Report under the heading “Risk Factors,” which are incorporated herein by reference. The following discussion should
be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8 of this Annual Report.
We assume no obligation to revise or update any forwardlooking statements for any reason, except as required by law.
Each of the terms the “Company,” “Identiv,” “we” and “us” as used herein refers collectively to Identiv, Inc. and its wholly
owned subsidiaries, unless otherwise stated.
Overview
Identiv, Inc. is a global provider of physical security and secure identification. Our products, software, systems, and services
address the markets for physical and logical access control, video analytics and a wide range of Radio Frequency Identification
(“RFID”)enabled applications. Customers in government, enterprise, consumer, education, healthcare, banking, retail, transportation
and other sectors rely on our security and identification solutions. Our mission is to make the physical world digital and secure. Our
platform to deliver on our mission can be deployed through Internet of Things (“IoT”) devices, mobile, client/server, cloud, web,
dedicated hardware and softwaredefined architectures. Our solutions encompass what we believe to be the most complete set of
technologies in the industry. We are a onestop shop for software delivering physical security management, video surveillance, logical
access, analytics and identities; and devices spanning access readers, panels, processing appliances, and identity cards. We provide
services to deliver optimized total solutions, serving as a singlepoint provider for our customers rather than several separate vendors
that the customer would otherwise have to coordinate and manage.
We have organized our operations into two reportable business segments, principally by solution families: Premises and Identity.
In the fourth quarter of 2018, we realigned the way in which we organize our operating segments in making operating decisions and
assessing financial performance by combining our Identity and Credentials segments. The combined segment is now referred to as the
Identity segment. All comparative segment information for fiscal 2017 has been reclassified to conform to the fiscal 2018 presentation.
Premises
The Premises segment includes our solutions to address the premises security market for government and enterprise, including
access control, video surveillance, analytics, customer experience and other applications.
Our physical security platform is anchored by the Hirsch Velocity management software, our line of controllers including the
advanced MX line, our TouchSecure access readers, a wide range of integrations and our Identiv Global Services team that develops
optimized solutions for our customers’ total business and security environment, incorporating our products and partner products that
together best serve our customers’ goals. We have further extended our physical access platform with our Identiv Connected Physical
Access Manager (“ICPAM”) software, derived from Cisco’s Physical Access Manager (“CPAM”) system.
In February 2018, we acquired 3VR Security, Inc. (“3VR”), a video technology and analytics company. With the acquisition, we
added the 3VR video security and analytics platform, which is a natural complement to our physical access offering. Nearly all
customers for access control are customers for video security, and vice versa. Additionally, the events and data generated by both
platforms combine to create what we believe to be uniquely valuable information for our customers to provide frictionless yet robust
security. 3VR’s platform is architected as an analytics system, proven across applications in the retail, banking, and other vertical
markets, and valuable to our physical security markets in government, education, critical infrastructure, transportation and others. In
addition to technology, 3VR brought deep market presence, across over 170 banks, installations with over 50,000 cameras under our
software’s management, toptier retailers, and a 100% U.S.made platform.
25
In January 2019, we acquired substantially all assets of the Freedom, Liberty, and Enterphone™ MESH products and services of
Viscount Systems, Inc. (“Viscount”). The webbased Freedom and Liberty access control and Enterphone MESH IP telephone entry
solutions are known for their early adoption of a web, APIbased, cloudready architecture, creating an ITcentric softwarefocused and
hardwarelight platform. Scaling from small and mediumsized businesses (“SMB”) up to enterprise scale for government and
commercial markets, Freedom and the entrylevel Liberty product line are complementary to our other products. With Freedom,
customers can build integrated access control and video management systems under one centrally managed or distributed network,
seamlessly integrating physical security devices such as card readers, ID management, Active Directory/LDAP, visitor entry, alarm
points, and video applications and analytics. We believe the combination creates one of the mostadvanced, ITcentric solutions for
physical security, delivering a seamless evolution from traditional physical access models to nextgeneration, cloud and webbased, and
mobileenabled systems. Our TouchSecure (“TS”) readers, TS Cards, VMS platform, mobile logical access and our Identiv Global
Services (“IGS”) services are applicable to nearly all Freedom and Liberty customers.
We sell either individual components or complete bundled solutions which can include any or all among software, edge
controllers, IoT devices, multidoor panels, access readers, access cards, 3VR appliances and other components or services, some of
which are detailed below:
Premises Software — Our software platform for premises security ranges from physical access to video analytics and business
intelligence. The Hirsch Velocity software platform enables centralized management of access and security operations across an
organization, including control of doors, gates, turnstiles, elevators and other building equipment, monitoring users as they move
around a facility, preventing unwanted access, maintaining compliance and providing a robust audit trail. Velocity continues to be
especially successful with federal and state government customers. The Freedom and Liberty platforms present an ITcentric and highly
scalable alternative, specifically for the SMB market. We believe our ICPAM software platform is ideal for the Cisco and wider IT
channel, and is tightly integrated with Cisco’s VSM video management system as well as their IP telephony infrastructure. We believe
our 3VR VisionPoint™ VMS (Video Management System) for realtime search is an ideal video management software for forensic
search, case management and business intelligence. Available in both a Standard and Pro version, with an optional enterprise server for
large and remote deployments, VisionPoint VMS provides tools to gather intelligence from video, speed up searches and easily develop
cases. VisionPoint VMS can be installed on commercial offtheshelf hardware, on certified partner hardware, and is included on any of
3VR’s powerful NVR/HVR appliances.
Controllers — Our modular Hirsch MX controllers are designed to be scalable, allowing customers to start with a small system
and expand over time. Hirsch MX controllers can operate autonomously, whether as a single controller or as part of a networked system
with Velocity software. Our Freedom Crypto and IoT Bridges provide hardwarelight solutions, providing lowcost implementations
and building a bridge to fully softwaredefined, hardwarelight (or hardwarefree) access platforms.
FICAM — We believe our Velocity, MX and TS Reader solution is the highest performance, lowest perdoor cost access control
system for the U.S. federal government security mandate known as the Federal Identity, Credential and Access Management
(“FICAM”) architecture. Our solution brings all of the advantages above into the next generation of physical security for the U.S.
government departments and agencies to achieve Federal Information Processing Standard (“FIPS”) 201 compliance. Similar to our
leading Hirsch Velocity solution for the U.S. government market, the Freedom platform acquired from Viscount is also FICAM
compliant and allows customers to choose an evolutionary, alternative architecture going forward. Within FICAM, the most
infrastructureefficient architecture is a specification known as 13.02. With Freedom and Velocity, we now are the only vendor
providing two 13.02compliant solutions, and we represent half of the four 13.02 approved solutions at this time.
Access Readers — Our TS readers feature multiple layers of security based on a certified hardware security element. These door
readers provide unique features to support a wide range of security standards. We support the majority of legacy cards with a robust
nextgeneration platform that can help companies migrate to more secure credentials and technologies, including smart cards, near field
communication ("NFC") and governmentissued credentials including Common Access Card (“CAC”), Personal Identification
Verification (“PIV”), Personal Identification Verification – Interoperable (“PIVI”) and others. Additionally, our Scramblepad readers
employ numerical scrambling on the keypad to protect access codes from being stolen as they are entered, and providing both secure
twofactor authentication and convenient alternativefactor access.
Identiv Global Services — Identiv Global Services provides a comprehensive catalog of endtoend services that facilitates
customer success, drives deeper adoption of our product portfolio and encourages longterm customer engagement. IGS supports
customers throughout their premises security lifecycle from system design, to integration, deployment and managed services. IGS
experts enable customers to address today’s complex security and IT systems interoperability requirements, and helps them achieve a
tailormade solution.
26
Identity
The Identity segment includes our products and solutions enabling secure access to information serving the logical access and
cyber security market and protecting assets and objects in the IoT with RFID.
Information security solutions range from securing enterprise information access and secure transactions across PCs, networks,
mobile devices, email, login, secure payments, and printers via delivery of smart card reader products and applications.
Our information security products include smart card readers, which includes a broad range of contact, contactless, portable and
mobile smart card readers, tokens and terminals that are utilized around the world to enable logical access (i.e., PC, network or data
access) and security and identification applications, such as national ID, payment, eHealth and eGovernment. Through our
acquisition of Thursby Software Systems (“TSS”) in November of 2018, as well as our internal product development, we provide
mobile apps, software and systems to enable secure and convenient logical access across smart cards and derived credentials on Apple
iOS and Android mobile devices. Our solutions include:
Mobile Security — TSS’ software solutions provide strong security for enterprise and personal mobility, supporting bringyour
owndevice (“BYOD”) and twofactor authentication (“2FA”) on mobile devices. We enable Department of Defense (“DoD”) issued
CAC, federally issued PIV cards, derived credentials, and commercially issued PIVI cards to access, sign, encrypt, and decrypt
information and emails from Apple iOS and Android mobile phones or tablet devices. These capabilities have allowed over a hundred
thousand DoD and federal employees, including the U.S. Navy Reserve, via the Ready2Serve (“R2S”) mobile application, to use
personal and governmentfurnished mobile devices to access needed information onthego. Prior to the acquisition, TSS had sold more
than one million software licenses to a range of customers and industries, including government, healthcare, finance, energy, education,
research, Fortune 500, Global 2000, and original equipment manufacturers (“OEMs”).
We have established a leading position as a trusted provider of convenient highsecurity solutions to government and enterprise
customers. Our products are customizable to specific customer preferences, providing both high security and excellent enduser
convenience. TSS’ seamless support of both governmentgrade smart card deployments and derived credentials reflects our philosophy
of supporting customers' adoption of technologies at their own pace, optimized for their own use cases.
Smart Card Readers — With over 20 years of smart card reader, application and token experience, and over 40 million smart
card readers and modules deployed, we are known for our expertise in this complex ecosystem. We combine our deep technical
expertise with an optimized supply chain, to provide what we believe to be the most optimal, costeffective and highquality smart
cardbased reader products. Whether Identiv branded products, OEM branded, or embedded chips or modules, we are a trusted
business solution provider for users and issuers of smart cards and embeddedchip applications.
Our RFID based solutions address a wide range of applications from access control to asset tracking, product authenticity, brand
protection, customer engagement, tamper detection, product instrumentation, transportation access and other IoT applications. The
RFID devices enable frictionless interaction with the physical world and are grouped into transponders and access cards.
Transponders — Our transponder products span the full range of high frequency (“HF”) and ultrahigh frequency (“UHF”)
technologies. Our differentiation is analogous to applicationspecific integrated circuits (“ASICS”) in the semiconductor market. We
leverage our flexible platform, our deep technical expertise and our infrastructure and supply chain to deliver solutions optimized for
our customers’ business goals. We believe we are more responsive, more flexible, more experienced in businessoptimized solutions
and have a better track record of sustained delivery of solutionspecific, highquality RFID devices than our competitors. These
products are manufactured in our stateoftheart facility in Singapore and are used in diverse physical applications, including
electronic entertainment such as virtual reality (“VR”), games, loyalty cards, mobile payment systems, transit and event ticketing,
brand authenticity from pharmaceuticals to consumer goods, hospital resource management, coldchain management and many others.
Access Cards — Our uTrust cards encompass contactless singletechnology, multitechnology, or credentials with a contact chip,
including uTrust Proximity Credentials, uTrust Smart ID Secure Credentials, uTrust MIFARE Classic Credentials, and our uTrust TS
Cards. This gives our customers easy access to RFID technology for reliable data exchange of physical access control system (PACS)
data, up to options for versatile, highfrequency, interoperable, MIFAREcompatible smart cards. Our uTrust TS Cards address
emerging security requirements while maintaining compatibility with existing lowsecurity standards such as prox. We believe they
offer the first complete solution to allow customers to pay only for the most basic lowfrequency proximity access technology while
having the ability to evolve to the highersecurity highfrequency and highestsecurity public key infrastructure (“PKI”) based
credentials. This product line exemplifies our values: we place no burden on our customers, instead providing what we believe to be the
most costeffective solution to their basic needs; and then delivering within this platform the ability for them to move to higherlevel
needs and capabilities, when they want, when they are ready and when they will realize economic and experience benefits.
27
Leveraging our expertise in RFID, physical access and physical authentication, we are developing new solutions to extend our
platforms across a wide variety of physical use cases. The next major opportunity in our connected world is the IoT, which
fundamentally is about physical things. We believe our core strength in physical access and physical instrumentation markets, our
wellestablished platforms and our deep knowledge of the relevant technologies, position us well in this growth market.
For a discussion of our net revenue by segment and geographic location, see Note 13, Segment Reporting and Geographic
Information, in the accompanying notes to our consolidated financial statements.
Trends in our Business
Geographic net revenue, based on each customer’s shipto location, for the years ended December 31, 2018 and 2017 is as
follows (in thousands):
Americas
Europe and the Middle East
AsiaPacific
Total
Americas
Europe and the Middle East
AsiaPacific
Total
Net Revenue Trends
Year Ended December 31,
2017
2018
$
$
60,153
9,943
8,046
78,142
$
$
77%
13%
10%
100%
40,018
7,887
12,314
60,219
67%
13%
20%
100%
Net revenue in 2018 was $78.1 million, an increase of 30% compared with $60.2 million in 2017. Net revenue in our Premises
segment, which accounted for 44% of our net revenue, was $34.6 million in 2018, an increase of 43% compared with $24.2 million in
2017. Net revenue in our Identity segment, which represented 56% of our net revenue, was $43.6 million in 2018, an increase of 21%
compared with $36.1 million in 2017.
Net revenue in the Americas
Net revenue in the Americas was $60.2 million in 2018, accounting for 77% of total net revenue, an increase of 50% compared
with $40.0 million in 2017. Net revenue from our Premises solution for security programs within various U.S. government agencies, as
well as RFID and NFC products, inlays and tags represented approximately 51% of our net revenue in the Americas region.
Net revenue in our Premises segment in the Americas in 2018 increased 43% compared with 2017 primarily due to additional
sales of video technology and analytics hardware and software products and related support services following the acquisition of 3VR
in February 2018, as well as higher sales of physical access control solutions and products and higher software product sales. Net
revenue from our Identity segment increased 59% in 2018 compared with 2017 primarily due to additional sales of mobile security
solution products, including a large bulk order of readers in the fourth quarter of 2018 to the U.S. Air Force following the acquisition of
TSS in November 2018, and higher sales of smart card readers, access cards, and RFID and NFC transponder products.
As a general trend, U.S. Federal agencies continue to be subject to security improvement mandates under programs such as
Homeland Security Presidential Directive (“HSPD”) 12 and reiterated in memoranda from the Office of Management and Budget
(OMB M1111). We believe that our solution for trusted physical access is an attractive offering to help federal agency customers
move towards compliance with federal directives and mandates. To expand our sales opportunities in the United States in general and
with orders sourced from U.S. Government agencies in particular, we have strengthened our U.S. sales organization and our sales
presence in Washington D.C.
Net revenue in Europe, the Middle East, and AsiaPacific
Net revenue in Europe, the Middle East, and AsiaPacific was approximately $18.0 million in 2018, accounting for 23% of total
net revenue, a decrease of 11% compared with 2017 primarily as a result of lower sales in the AsiaPacific, partially offset by higher
sales in the Europe and the Middle East regions. Net revenue in these regions are dependent on the completion of large projects and the
timing of orders placed by some of our larger customers. Sales of Identity readers and RFID and NFC products and tags comprise a
significant proportion of our net revenue in these regions.
28
Net revenue from our Premises products increased 49% in 2018 compared with 2017 due to higher sales of physical access
control solutions in both the Europe and Middle East and the AsiaPacific regions. Net revenue from our Identity products decreased
approximately 20% in 2018 compared with 2017 primarily due to lower transponder product sales in the AsiaPacific region and the
effect of sales of smart card readers for a government project in the AsiaPacific region in 2017. These decreases were partially offset
by higher access card sales across both regions, and higher transponder product sales in the Europe and Middle East region. Identity
reader sales in 2018 and 2017 comprised approximately 35% and 49% of the net revenue in the Europe and Middle East and the Asia
Pacific regions, respectively.
Seasonality and Other Factors
In our business overall, we may experience significant variations in demand for our offerings from quarter to quarter, and
typically experience a stronger demand cycle in the second half of our fiscal year. Sales of our premises solutions to U.S. Government
agencies are subject to annual government budget cycles and generally are highest in the third quarter of each year. However, the usual
seasonal trend can be negatively impacted by actions such as government shutdowns and the passing of continuing resolutions which
can act to delay the completion of certain projects. Sales of our identity reader chips, many of which are sold to government agencies
worldwide, are impacted by testing and compliance schedules of government bodies as well as rollout schedules for application
deployments, both of which contribute to variability in demand from quarter to quarter. Further, this business is typically subject to
seasonality based on differing commercial and global government budget cycles. Lower sales are expected in the U.S. in the first half,
and in particular the first quarter of the year, with higher sales typically in the second half of each year. In Asia and Australia, with
fiscal yearends in March and June, order demand can be high in the first half as customers attempt to complete projects before the end
of their fiscal year. Accordingly, our net revenue levels in the first quarter and first half each year often depend on the relative strength
of project completions and sales mix between our U.S. customer base and our international customer base.
In addition to the general seasonality of demand, overall U.S. Government expenditure patterns have a significant impact on
demand for our products due to the significant portion of revenues that are typically sourced from U.S. Government agencies.
Therefore, any significant reduction in U.S. Government spending could adversely impact our financial results and could cause our
operating results to fall below any guidance we provide to the market or below the expectations of investors or security analysts.
Operating Expense Trends
Base Operating Expenses
Our base operating expenses (i.e., research and development, selling and marketing, and general and administrative) increased
28% in 2018 compared with 2017. Research and development expense increased by 18% in 2018 compared with 2017 resulting from
additional headcount and external contractor costs associated with the acquisition of 3VR in the first quarter of 2018. Selling and
marketing expense in 2018 increased by 22% compared with 2017, due to the additional headcount and related costs, higher external
services and contractor costs, and the amortization of acquired intangibles associated with the acquisition of 3VR in the first quarter of
2018. General and administrative spending in 2018 increased by 49% compared with 2017 primarily due to higher transaction related
costs associated with the acquisition of 3VR in February of 2018, and the effect of reimbursements received in 2017 from our insurance
provider for legal fees incurred in connection with matters related to a complaint by a former employee, related investigations, the class
and derivative litigation and related proceedings.
29
Results of Operations
The following table includes segment net revenue and segment net profit information by business segment and reconciles gross
profit to results of operations before income taxes and noncontrolling interest.
Year Ended December 31,
2017
2018
Premises:
Net revenue
Gross profit
Gross profit margin
Identity:
Net revenue
Gross profit
Gross profit margin
Total:
Net revenue
Gross profit
Gross profit margin
Operating expenses:
Research and development
Selling and marketing
General and administrative
Restructuring and severance
Total operating expenses
Loss from operations
Nonoperating income (expense):
Interest expense, net
Loss on extinguishment of debt, net
Foreign currency gains (losses), net
$
$
34,587
19,373
56%
43,555
13,959
32%
78,142
33,332
43%
7,235
16,391
10,824
747
35,197
(1,865)
(1,518)
(1,369)
204
(4,548) $
24,154
13,669
57%
36,065
8,491
24%
60,219
22,160
37%
6,146
13,452
7,241
(49)
26,790
(4,630)
(2,590)
(788)
(358)
(8,366)
100.0%
63.1
36.9
10.2
22.3
11.9
(0.1)
44.4
(7.5)
(4.3)
(1.3)
(0.6)
(13.7)
0.4
(13.3)
—
Loss before income taxes and noncontrolling interest
$
The following table sets forth our statements of operations as a percentage of net revenue for the periods indicated (in
thousands):
Net revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Selling and marketing
General and administrative
Restructuring and severance
Total operating expenses
Loss from operations
Nonoperating income (expense)
Interest expense, net
Loss on extinguishment of debt, net
Foreign currency gains (losses), net
Loss before income taxes and noncontrolling interest
Income tax (provision) benefit
Loss before noncontrolling interest
Less: Net loss attributable to noncontrolling interest
Year Ended December 31,
2017
2018
100.0%
57.3
42.7
9.3
21.0
13.9
1.0
45.0
(2.3)
(1.9)
(1.8)
0.3
(5.7)
(0.2)
(5.9)
—
Net loss attributable to Identiv, Inc. stockholders’ equity
(5.9)%
(13.3)%
30
Fiscal 2018 Compared with Fiscal 2017
Net Revenue
Net revenue in 2018 was $78.1 million, up 30% compared with $60.2 million in 2017. Net revenue was higher in 2018 driven by
higher sales across both segments.
Net revenue in our Premises segment of $34.6 million in 2018 increased 43% from $24.2 million in 2017. The increase was
primarily due to additional sales of video technology and analytics hardware and software products and related support services
following the acquisition of 3VR in February 2018, as well as higher sales of physical access control solutions, higher sales through our
channel partners, and higher software licensing sales.
Net revenue in our Identity segment of $43.6 million in 2018 increased 21% from $36.1 million in 2017 primarily due to
additional sales of mobile security solution products, including a large bulk order of readers in the fourth quarter of 2018 to the U.S.
Air Force, following the acquisition of TSS in November 2018, and higher access card product sales.
Gross Profit
Gross profit for 2018 was $33.3 million, or 43% of net revenue, compared to $22.2 million or 37% of net revenue in 2017. Gross
profit represents revenues less direct cost of product sales, manufacturing overhead, other costs directly related to preparing the product
for sale including freight, scrap, inventory adjustments and amortization, where applicable.
In our Premises segment, gross profit on sales of physical access control solutions, including panels, controllers, access readers,
and sales of video technology and analytics hardware and software products, and related support services, was $19.4 million in 2018
and $13.7 million in 2017. Gross profit margins in the Premises segment were comparable in 2018 at 56% compared with 57% in 2017.
In our Identity segment, gross profit on sales of physical access credentials and authenticity and tracking applications,
information readers and modules as well as credential provisioning and management services was $14.0 million in 2018 compared with
$8.5 million in 2017. Gross profit margins in the Identity segment in 2018 were 32% compared to 24% in 2017 primarily due to a large
bulk order of readers in the fourth quarter of 2018 to the U.S. Air Force, and a transponder related inventory reserve adjustment
recorded in the fourth quarter of 2017 associated with a customer relationship which ended at the end of 2015 and our decision to
discontinue plans for alternate use of the product.
We expect there will be some variation in our gross profit from period to period, as our gross profit has been and will continue to
be affected by a variety of factors, including, without limitation, competition, product pricing, the volume of sales in any given quarter,
manufacturing volumes, product configuration and mix, the availability of new products, product enhancements, software and services,
risk of inventory writedowns and the cost and availability of components.
Operating Expenses
Information about our operating expenses for the years ended December 31, 2018 and 2017 is set forth below.
Research and Development
Research and development expenses
Percentage of revenue
Year Ended December 31,
2018
2017
$ Change % Change
($ in thousands)
$
7,235
$
9%
6,146
$
10%
1,089
17.7%
Research and development expenses consist primarily of employee compensation and fees for the development of hardware,
software and firmware products. We focus the bulk of our research and development activities on the continued development of
existing products and the development of new offerings for emerging market opportunities.
Research and development expenses in 2018 increased compared with 2017 primarily due to additional headcount and external
contractor costs associated with the acquisition of 3VR in the first quarter of 2018.
31
Selling and Marketing
Selling and marketing expenses
Percentage of revenue
Year Ended December 31,
2018
2017
$ Change % Change
$
16,391
$
21%
($ in thousands)
13,452
$
22%
2,939
21.8%
Selling and marketing expenses consist primarily of employee compensation as well as amortization expense of certain
intangible assets, tradeshow participation, advertising and other marketing and selling costs.
Selling and marketing expenses in 2018 increased compared with 2017 primarily due to additional headcount and related costs,
higher external service provider and contractor costs, and the amortization of acquired intangibles associated with the acquisition of
3VR in the first quarter of 2018.
General and Administrative
General and administrative expenses
Percentage of revenue
Year Ended December 31,
2018
2017
$ Change % Change
($ in thousands)
$
10,824
$
14%
7,241
$
12%
3,583
49.5%
General and administrative expenses consist primarily of compensation expenses for employees performing administrative
functions, and professional fees incurred for legal, auditing and other consulting services.
General and administrative expenses increased primarily due to $1.0 million in transaction related costs associated primarily with
the acquisitions of 3VR in February 2018 and TSS in November 2018, and the impact of reimbursements received of $1.0 million in
2017 from our insurance provider for legal fees incurred in connection with matters related to a complaint by a former employee,
related investigations, the class and derivative litigation and related proceedings.
Restructuring and Severance Charges
Year Ended December 31,
2018
2017
$ Change % Change
($ in thousands)
Restructuring and severance
$
747 $
(49) $
796
N/A
Restructuring and severance expenses in 2018 consisted primarily of facility rental related costs of $0.3 million and severance
related costs of $0.3 million associated with the acquisition of 3VR. In the third quarter of 2018, we entered into an agreement with a
tenant to sublease the newly acquired 3VR office facility over the remaining term of the original lease. In addition, in the fourth quarter
of 2018, we recorded a restructuring accrual of $0.1 million for our future rental payment obligation associated with vacated office
space at our Fremont, California facility.
In 2017, we recorded a credit resulting from actual expenditures being less than originally accrued associated with the worldwide
restructuring plan implemented in the first quarter of 2016.
See Note 14, Restructuring and Severance, in the accompanying notes to our consolidated financial statements for more
information.
Nonoperating Income (Expense)
Information about our nonoperating income (expense) for the years ended December 31, 2018 and 2017 is set forth below.
32
Interest Expense, Net
Interest expense, net
Loss on extinguishment of debt, net
Year Ended December 31,
2018
2017
$ Change % Change
$
$
(1,518) $
(1,369)
($ in thousands)
(2,590) $
(788) $
1,072
(581)
(41.4)%
73.7%
Interest expense, net consists of interest on financial liabilities and interest accretion expense for a liability to a longterm
payment obligation arising from our acquisition of Hirsch Electronics Corporation. The lower net interest expense in 2018 is primarily
attributable to the $5.0 million principal pay down of our $10.0 million term loan payable to Venture Lending & Leasing VII, Inc. and
Venture Lending & Leasing VIII, Inc. (collectively referred to as “VLL7 and VLL8”) in December 2017, and the subsequent
repayment of the remaining principal amounts outstanding of $5.0 million in May 2018.
The loss on extinguishment of debt in 2017 consists of a gain on extinguishment of debt of $1.0 million associated with the
repayment of all amounts outstanding under our previous debt facility with a lender in the first quarter of 2017, and a loss on
extinguishment of debt of $1.8 million related to the pay down of $5.0 million of the $10.0 million outstanding term loan payable to
VLL7 and VLL8. The loss on extinguishment of debt in 2018 represents the difference between the reacquisition price of the remaining
amounts outstanding under our term loan with VLL7 and VLL8 and its net carrying amount.
See Note 7, LongTerm Payment Obligation and Note 8, Financial Liabilities, in the accompanying notes to our consolidated
financial statements for more information.
Foreign Currency Gains (Losses), Net
Year Ended December 31,
2018
2017
$ Change % Change
($ in thousands)
Foreign currency gains (losses), net
$
204 $
(358) $
562
(157.0)%
Changes in currency valuation in the periods mainly were the result of exchange rate movements between the U.S. dollar, the
Indian Rupee, and the Euro. Our foreign currency gains and losses primarily result from the valuation of current assets and liabilities
denominated in a currency other than the functional currency of the respective entity in the local financial statements.
Income Taxes
Income tax (provision) benefit
Year Ended December 31,
2018
2017
$ Change % Change
$
(155) $
($ in thousands)
214 $
(369)
(172.4)%
Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amount of income (loss) we
earn in jurisdictions. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. The
following items had the most significant impact on the difference between our statutory U.S. federal income tax rates of 21% and 34%
and our effective tax rate in 2018 and 2017.
2018 – A decrease of $1.1 million, or 25.1%, to the statutory rate resulted from changes in the valuation allowance during the
year. An increase of $0.2 million, or 4.9%, resulted from rate differences between U.S. and nonU.S. jurisdictions and a trueup of
foreign income tax payables. Significant jurisdictions causing this difference were Germany and Singapore. No U.S. taxes were
provided on foreign 2018 earnings/losses as these earnings are intended to be indefinitely reinvested outside the United States. No
GILTI tax was provided with respect to earnings of foreign subsidiaries due to a net foreign tested loss position. The net effect of all
changes was an income tax provision of $0.2 million recorded in 2018.
33
2017 – A reduction of $15.8 million, or 188.6%, to the statutory rate resulted from revaluation of federal deferred tax assets and
liabilities due to the change in the federal enacted rate from 34% to 21%. An increase of $13.9 million, or 166.5%, to the statutory rate
resulted from changes in the valuation allowance during the year, including a corresponding change in the valuation allowance due to
revaluation of deferred tax assets and liabilities referred to above. A reduction of $0.7 million, or 8.2%, resulted from rate differences
between U.S. and nonU.S. jurisdictions and a trueup of foreign income tax payables. Significant jurisdictions causing this difference
were Germany and Singapore. No U.S. taxes were provided on foreign 2017 earnings/losses as these earnings are intended to be
indefinitely reinvested outside the United States. No repatriation tax was provided with respect to undistributed earnings of foreign
subsidiaries due to a net foreign earnings and profits deficit position. The net effect of all changes was an income tax benefit of $0.2
million recorded in 2017.
Liquidity and Capital Resources
As of December 31, 2018, our working capital, defined as current assets less current liabilities, was $12.7 million, a decrease of
$10.3 million compared to $23.0 million as of December 31, 2017. As of December 31, 2018, our cash balance was $10.9 million.
On February 8, 2017, we entered into Loan and Security Agreements (each, a “Loan and Security Agreement”) with East West
Bank (“EWB”) and VLL7 and VLL8. The Loan and Security Agreement with EWB, as amended, provides for a $16.0 million
revolving loan facility, and the Loan and Security Agreement with VLL7 and VLL8 provided for a term loan in an aggregate principal
amount of $10.0 million. In connection with the closing of both Loan and Security Agreements, we repaid all outstanding amounts
under our credit agreement with our previous lender. See Note 8, Financial Liabilities, in the accompanying notes to our consolidated
financial statements for more information.
On December 28, 2017, we paid down an aggregate principal amount of $5.0 million of the $10.0 million outstanding principal
balance of the term loan under the Loan and Security Agreement with VLL7 and VLL8, and $0.9 million of accrued and unpaid
interest outstanding at the prepayment date, together with all the scheduled interest that would have accrued and been payable through
the stated maturity of the term loan. On May 31, 2018, we repaid the remaining amounts payable under the term loan of approximately
$5.2 million, consisting of $4.6 million in outstanding principal, and $0.6 million of accrued and unpaid interest outstanding at the
prepayment date together with all the scheduled interest that would have accrued and been payable through the stated maturity of the
term loan. See Note 8, Financial Liabilities, in the accompanying notes to our consolidated financial statements for more information.
On February 6, 2019, we entered into an amendment (the “Tenth Amendment”) to our Loan and Security Agreement with EWB.
Under the Tenth Amendment, the revolving loan facility under the Loan and Security Agreement was increased from $16.0 million to
$20.0 million, the interest rate was reduced from prime rate plus 1.0% to prime rate plus 0.75%, the maturity date was extended to
February 8, 2021, and certain financial covenants were amended, including covenants with respect to minimum EBITDA levels. See
Note 8, Financial Liabilities, in the accompanying notes to our consolidated financial statements for more information.
On December 20, 2017, we entered into a Securities Purchase Agreement with each of 21 April Fund, Ltd. and 21 April Fund,
LP (collectively, the “Purchasers”), in which we, through a private placement, agreed to issue and sell an aggregate of up to 5,000,000
shares of Series B nonvoting convertible preferred stock. The Purchasers purchased an aggregate of 3,000,000 preferred shares at a
price of $4.00 per share in cash at the initial closing of the transaction. On May 30, 2018, we completed the second closing of the
private placement of 2,000,000 preferred shares at a price of $4.00 per share. The total purchase price paid to us was $20,000,000, of
which $12,000,000 was paid at the initial closing and $8,000,000 at the second closing. We are required to use the proceeds from the
issuance of the preferred shares to pay off existing debt obligations and to fund future acquisitions of technology, business and other
assets. See Note 9, Stockholders’ Equity, in the accompanying notes to our consolidated financial statements for more information.
As our previously unremitted earnings have been subjected to U.S. federal income tax, we expect any repatriation of these
earnings to the U.S. would not incur significant additional taxes related to such amounts. However, our estimates are provisional and
subject to further analysis. Generally, most of our foreign subsidiaries have accumulated deficits and cash and cash equivalents that are
held outside the United States are typically not cash generated from earnings that would be subject to tax upon repatriation if
transferred to the United States. We have access to the cash held outside the United States to fund domestic operations and obligations
without any material income tax consequences. As of December 31, 2018, the amount of cash included at such subsidiaries was $1.3
million. We have not, nor do we anticipate the need to, repatriate funds to the United States to satisfy domestic liquidity needs arising
in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.
We have historically incurred operating losses and negative cash flows from operating activities, and we may continue to incur
losses in the future. As of December 31, 2018, we had a total accumulated deficit of $404.4 million. During the year ended December
31, 2018, we had a net loss of $4.7 million.
34
We believe our existing cash balance, together with cash generated from operations and available credit under our Loan and
Security Agreement, will be sufficient to satisfy our working capital needs to fund operations for the next twelve months. We may also
use cash to acquire or invest in complementary businesses, technologies, services or products that would change our cash requirements.
We may also choose to finance our cash requirements through public or private equity offerings, debt financings or other arrangements.
However, there can be no assurance that additional capital, if required, will be available to us or that such capital will be available to us
on acceptable terms. If we raise funds by issuing equity securities, dilution to stockholders could result. Any equity securities issued
also may provide for rights, preferences or privileges senior to those of holders of our common stock. The terms of debt securities
issued or borrowings could impose significant restrictions on our operations. The incurrence of additional indebtedness or the issuance
of certain equity securities could result in increased fixed payment obligations and could also result in restrictive covenants, such as
limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license intellectual
property rights and other operating restrictions that could adversely affect our ability to conduct our business. Our Loan and Security
Agreement imposes restrictions on our operations, increases our fixed payment obligations and has restrictive covenants. In addition,
the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our common stock
to decline. If we are not able to secure additional funding when needed, we may have to curtail or reduce the scope of our business or
forgo potential business opportunities.
The following summarizes our cash flows for the years ended December 31, 2018 and 2017 (in thousands):
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Effect of exchange rates on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Cash flows from operating activities
Year Ended December 31,
2017
2018
(5,196) $
(3,373)
808
(425)
(8,186)
19,052
10,866 $
(7,711)
(967)
17,956
658
9,936
9,116
19,052
$
$
Cash used in operating activities for 2018 was primarily due to the net loss of $4.7 million and a decrease in cash from net
changes in operating assets and liabilities of $8.2 million, offset by adjustments for certain noncash items of $7.7 million, consisting
primarily of depreciation, amortization, amortization of debt issuance costs, loss on extinguishment of debt, and stockbased
compensation. For 2017, cash used in operating activities primarily was due to the net loss of $8.2 million and decreases in cash from
net changes in operating assets and liabilities of $6.7 million which was partially offset by adjustments for certain noncash items of
$7.1 million, which primarily consisted of depreciation, amortization, amortization of debt issue costs, stockbased compensation and a
loss on extinguishment of debt, net.
Cash flows from investing activities
Cash used in investing activities during 2018 was $3.4 million, of which $2.0 million related to the acquisitions of 3VR and TSS,
net of cash acquired, and $1.3 million related to capital expenditures. For 2017, cash used in investing activities reflects $1.0 million in
capital expenditures.
Cash flows from financing activities
Cash provided by financing activities during 2018 related primarily to borrowings of debt, net of issuance costs, of $21.8 million,
and issuance of $7.9 million of Series B preferred stock, net of issuance costs, offset by repayments of debt of $28.2 million and taxes
paid related to net share settlement of restricted stock units of $0.7 million. Cash used in financing activities during 2017 related to
borrowings of debt, net of issuance costs, of $53.0 million, proceeds from the sale of our common stock, net of issuance costs, of $12.6
million, and the issuance of Series B preferred stock, net of issuance costs, of $11.9 million, offset by repayments of debt of $58.7
million and taxes paid related to net share settlement of restricted stock units of $0.8 million
OffBalance Sheet Arrangements
We have not entered into offbalance sheet arrangements, or issued guarantees to third parties.
35
Contractual Obligations
The following summarizes expected cash requirements for contractual obligations as of December 31, 2018 (in thousands):
Operating leases
Contractual payment obligation
Revolving loan facility
Promissory note
Purchase commitments and other
obligations
Total obligations
Subleases
Total
Less than 1
Year
13
Years
35
Years
$
$
$
7,333 $
3,038
11,579
2,000
12,846
36,796 $
(2,592) $
2,210 $
1,266
11,579
2,000
11,046
28,101 $
4,590 $
1,772
—
—
1,350
7,712 $
(779) $
(1,813) $
533 $
—
—
—
450
983 $
— $
More
than 5
Years
—
—
—
—
—
—
—
Our contractual payment obligation was assumed upon our acquisition of Hirsch. See Note 7, LongTerm Payment Obligation, in
the accompanying notes to our consolidated financial statements.
Revolving loan facility contractual obligations include payments to be made for principal and interest in accordance with the
terms at December 31, 2018 of the revolving loan facility under our Loan and Security Agreement. See Note 8, Financial Liabilities, in
the accompanying notes to our consolidated financial statements.
We lease facilities, certain equipment, and automobiles under noncancelable operating lease agreements. Purchases for
inventories are highly dependent upon forecasts of customer demand. Due to the uncertainty in demand from our customers, we may
have to change, reschedule, or cancel purchases or purchase orders from our suppliers. These changes may lead to vendor cancellation
charges on these orders or contractual commitments. See Note 16, Commitments and Contingencies, in the accompanying notes to our
consolidated financial statements.
Our other longterm liabilities include gross unrecognized tax benefits, and related interest and penalties. At this time, we are
unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities.
Accordingly, such amounts are not included in the contractual obligation table above.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the
United States (“U.S. GAAP”). The preparation of these financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgments on historical
experience and on various other factors which we believe are reasonable based upon the information available to us at the time these
estimates, judgments and assumptions are made. Actual results may differ from these estimates under different assumptions or
conditions.
Revenue Recognition
We recognize revenue when we transfer control of the promised products or services to our customers, in an amount that reflects
the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various
combinations of our products, software licenses, and services, which are generally capable of being distinct and accounted for as
separate performance obligations. For contracts with multiple performance obligations, we allocate the transaction price of the contract
to each performance obligation, generally on a relative basis using its standalone selling price. The stated contract value is generally the
transaction price to be allocated to the separate performance obligations. Revenue is recognized net of any taxes collected from our
customers that are subsequently remitted to governmental authorities.
Nature of Products and Services
We derive our revenues primarily from sales of hardware products, software licenses, professional services, software
maintenance and support, and extended hardware warranties.
36
Hardware Product Revenues — We generally have two performance obligations in arrangements involving the sale of hardware
products. The first performance obligation is to transfer the hardware product (which includes software integral to the functionality of
the hardware product). The second performance obligation is to provide assurance that the product complies with its agreedupon
specifications and is free from defects in material and workmanship for a period of one to three years (i.e. assurance warranty). The
entire transaction price is allocated to the hardware product and is generally recognized as revenue at the time of delivery because the
customer obtains control of the product at that point in time. We have concluded that control generally transfers at that point in time
because the customer has title to the hardware, physical possession, and a present obligation to pay for the hardware. None of the
transaction price is allocated to the assurance warranty component, as we account for these product warranty costs in accordance with
Accounting Standards Codification (“ASC”) Topic 460, Guarantees. Payments for hardware contracts are generally due 30 to 60 days
to after shipment of the hardware product.
Software License Revenues — Our license arrangements grant customers the perpetual right to access and use the licensed
software products at the outset of an arrangement. Technical support and software updates are generally made available throughout the
term of the support agreement, which is generally one to three years. We account for these arrangements as two performance
obligations: (1) the software licenses, and (2) the related updates and technical support. The software license revenue is recognized
upon delivery of the license to the customer, while the software updates and technical support is recognized over the term of the
support contract. Payments are generally due 30 to 60 days after delivery of the software licenses.
Professional Services Revenues — Professional services revenues consist primarily of programming customization services
performed relating to the integration of our software products with our customers other systems, such as HR systems. Professional
services contracts are generally billed on a time and materials basis and revenue is recognized as the services are performed. For
contracts billed on a fixed price basis, revenue is recognized once the contract is complete. Payments for services are generally due
when services are performed.
Software Maintenance and Support Revenues — Support and maintenance contract revenues consist of the services provided to
support the specialized programming applications performed by our professional services group. Support and maintenance contracts are
typically billed at inception of the contract and recognized as revenue over the contract period, typically over a one to three year to
period.
Extended Hardware Warranties Revenues —Sales of our hardware products may also include optional extended hardware
warranties, which typically provide assurance that the product will continue function as initially intended. Extended hardware warranty
contracts are typically billed at inception of the contract and recognized as revenue over the respective contract period, typically over
one to two year periods after the expiration of the original assurance warranty.
Significant Judgments
Our contracts with customers often include promises to transfer multiple products and services to a customer. For such
arrangements, we allocate the transaction price to each performance obligation based on relative standalone selling price (“SSP”).
Judgment is required to determine the SSP for each distinct performance obligation in a contract. For the majority of items, we estimate
SSP using historical transaction data. We use a range of amounts to estimate SSP when we sell each of our products and services
separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and
services. In instances where SSP is not directly observable, such as when the product or service is not sold separately, we determine the
SSPs using information that may include market conditions and other observable inputs. The determination of SSP is an ongoing
process and information is reviewed regularly in order to ensure SSPs reflect the most current information or trends.
Contract Balances
Amounts invoiced in advance of services being provided are accounted for as deferred revenue. Nearly all of our deferred
revenue balance is related software maintenance contracts. Payment terms and conditions vary by contract type, although payment is
typically due within 30 to 90 days of contract inception. In instances where the timing of revenue recognition differs from the timing of
invoicing, we have determined our contracts do not include a significant financing component. The primary purpose of our invoicing
terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing
from our customers.
37
Inventory Valuation
Inventories are stated at the lower of cost (using average cost or standard cost, as applicable) or market (net realizable value). We
typically plan our production and inventory levels based on internal forecasts of customer demand, which can be highly unpredictable
and can fluctuate significantly. We regularly review inventory quantities on hand and record an estimated provision for excess
inventory reserve based on judgment and assumptions involving an evaluation of technical obsolescence and our ability to sell based
primarily on historical sales patterns and expectations for future demand. Actual demand and market conditions may differ from the
projections utilized by management in establishing our inventory reserves. If we were to use different assumptions or utilize different
estimates, the amount and timing of our inventory reserves could be materially different. Adverse changes in our inventory reserve
valuations could have a material effect on our operating results and financial position.
Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s
assessment of estimated current and future income taxes to be paid. We are subject to income taxes in the United States and in
numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense,
deferred tax assets and liabilities and reserves for unrecognized tax benefits.
Deferred tax assets and liabilities arise from temporary differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements, which are expected to result in taxable or deductible amounts in the future. In evaluating
our ability to recover our deferred tax assets within the jurisdiction from which they arise, for all material jurisdictions, we consider all
available positive and negative evidence, including scheduled reversals of deferred tax balances, projected future taxable income, tax
planning strategies and results of recent operations. In projecting future taxable income, we begin with historical results and incorporate
assumptions about the amount of future state, federal and foreign pretax operating income adjusted for items that do not have tax
consequences. The assumptions about future taxable income require significant judgment and are consistent with the plans and
estimates we use to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider
three years of cumulative operating results.
As of December 31, 2018, we have federal and state income tax net operating loss (“NOL”) carryforwards of $117.4 million and
$63.8 million, respectively, which will expire at various dates. Such NOL carryforwards expire as follows (in thousands):
Years
2018 2023
2024 2029
2030 2035
2036 2040
Total
Amounts
36,943
16,023
45,719
18,813
117,498
$
$
We believe that it is more likely than not that the benefit from these NOL carryforwards will not be realized. Accordingly, we
have provided a full valuation allowance on any potential deferred tax assets relating to these state NOL carryforwards. If our
assumptions change and we determine we will be able to realize these NOLs, the tax benefits relating to any reversal of the valuation
allowance on deferred tax assets as of December 31, 2018, will be accounted for as a reduction of income tax expense.
The calculation of our tax liabilities involves evaluating uncertainties in the application of complex tax laws and regulations in a
multitude of jurisdictions across our global operations. ASC Topic 740, Income Taxes (“ASC 740”) states that a tax benefit from an
uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including
the resolution of any related appeals or litigation processes, on the basis of the technical merits.
We record unrecognized tax benefits as liabilities in accordance with ASC 740 and adjust these liabilities when our judgment
changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these
uncertainties, the ultimate resolution may result in a tax payment that is materially different from our current estimate of the
unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in
which new information is made available.
We believe that none of the unrecognized tax benefits, excluding the associated interest and penalties, which are insignificant,
may be recognized by the end of 2018.
We consider the earnings of all our nonU.S. subsidiaries to be indefinitely invested outside the United States on the basis of
estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for
reinvestment of those subsidiary earnings. Should we decide to repatriate foreign earnings, we would need to adjust our income tax
provision in the period we determined that the earnings will no longer be indefinitely invested outside the United States.
38
Goodwill, Intangible Assets and Longlived Assets
Business combinations. We allocate the purchase price of acquired businesses to the tangible and identifiable intangible assets
acquired and liabilities assumed based on their estimated fair values on the acquisition date. Any residual purchase price is recorded as
goodwill. Goodwill is allocated to reporting units expected to benefit from the business combination. The allocation of purchase price
requires management to make significant estimates and assumptions in determining the fair values of the assets acquired and liabilities
assumed especially with respect to intangible assets.
Critical estimates in valuing intangible assets include, but are not limited to, future expected cash flows from customer
relationships, developed technology, trade names and acquired patents; and discount rates. Management estimates of fair value are
based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Unanticipated events and
circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.
We evaluate our longlived assets and certain identifiable amortizable intangible assets for impairment in accordance with ASC
Topic 360, Property, Plant and Equipment, whenever events or changes in circumstances indicate that the carrying amount of such
assets or intangibles may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net undiscounted cash flows expected to be generated by an asset group. If such asset groups are
considered to be impaired (i.e., if the sum of its estimated future undiscounted cash flows used to test for recoverability is less than its
carrying value), the impairment loss to be recognized is measured by the amount by which the carrying amount of the asset group
exceeds the fair value of the asset group. Intangible assets with definite lives are amortized using the straightline method over the
estimated useful lives of the related assets.
Stockbased Compensation
We recognize stockbased compensation expense for all sharebased payment awards in accordance with ASC Topic 718,
Compensation – Stock Compensation. Stockbased compensation expense for expectedtovest awards is valued under the singleoption
approach and amortized on a straightline basis, net of estimated forfeitures. We utilize the Black Scholes optionpricing model in order
to determine the fair value of stockbased option awards. The Black Scholes pricing model requires various highly subjective
assumptions including volatility, expected option life, and riskfree interest rate. The assumptions used in calculating the fair value of
sharebased payment awards represent management’s best estimates. These estimates involve inherent uncertainties and the application
of management judgment. If factors change and different assumptions are used, our stockbased compensation expense could be
materially different in the future. In addition, we are required to estimate the expected forfeiture rate and recognize expense only for
those expectedtovest shares. If our actual forfeiture rate is materially different from our estimate, our recorded stockbased
compensation expense and operating results could be different.
Recent Accounting Pronouncements
See Note 1, Organization and Summary of Significant Accounting Policies, in the accompanying notes to our consolidated
financial statements in Item 8 of Part II of this Annual Report for a description of recent accounting pronouncements, which is
incorporated herein by reference.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
39
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017
Notes to Consolidated Financial Statements
Page
41
42
43
44
45
46
47
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Identiv, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Identiv, Inc. (a Delaware Corporation) and its subsidiaries (the
“Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive loss,
stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2018, and the related notes
(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally
accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenues from
contracts with customers on January 1, 2018 due to the adoption of Accounting Standard Codification Topic 606, “Revenue from
Contracts with Customers”.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we
express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2015.
/s/ BPM LLP
San Jose, California
March 15, 2019
41
IDENTIV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
Current assets:
ASSETS
Cash and cash equivalents
Accounts receivable, net of allowances of $387 and $306 as of December 31, 2018
and 2017, respectively
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS´ EQUITY
Current liabilities:
Accounts payable
Current portion payment obligation
Current portion financial liabilities, net of discount and debt issuance costs
of $25 and $404, respectively
Notes payable
Deferred revenue
Accrued compensation and related benefits
Other accrued expenses and liabilities
Total current liabilities
Longterm payment obligation
Longterm financial liabilities, net of discount and debt issuance costs
of $0 and $582, respectively (see Note 8)
Longterm deferred revenue
Other longterm liabilities
Total liabilities
Commitments and contingencies (see Note 16)
Stockholders´ equity:
December 31,
2018
2017
$
10,866 $
19,052
$
$
14,952
13,631
2,743
42,192
2,624
10,980
9,286
1,224
66,306 $
5,654 $
1,025
11,554
2,000
2,174
1,794
5,277
29,478
1,860
—
636
632
32,606
12,282
11,126
1,779
44,239
2,043
4,365
—
715
51,362
5,863
888
9,829
—
900
1,515
2,020
21,015
2,998
2,921
190
385
27,509
Identiv, Inc. stockholders' equity:
Series B preferred stock, $0.001 par value: 5,000 shares authorized; 5,000
and 3,000 shares issued and outstanding as of December 31, 2018 and 2017,
respectively
Common stock, $0.001 par value: 50,000 shares authorized; 17,004 and 15,341 shares
issued and 15,967 and 14,436 shares outstanding as of December 31, 2018 and
2017, respectively
Additional paidin capital
Treasury stock, 1,047 and 905 shares as of December 31, 2018 and 2017, respectively
Accumulated deficit
Accumulated other comprehensive income
Total Identiv, Inc. stockholders' equity
Noncontrolling interest
Total stockholders´ equity
Total liabilities and stockholders´equity
$
5
3
17
444,145
(8,153)
(404,353)
2,209
33,870
(170)
33,700
66,306 $
15
428,470
(7,485)
(399,647)
2,675
24,031
(178)
23,853
51,362
The accompanying notes are an integral part of these consolidated financial statements.
42
IDENTIV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Net revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Selling and marketing
General and administrative
Restructuring and severance
Total operating expenses
Loss from operations
Nonoperating income (expense):
Interest expense, net
Loss on extinguishment of debt, net
Foreign currency gains (losses), net
Loss before income taxes and noncontrolling interest
Income tax (provision) benefit
Net loss
Less: (Loss) income attributable to noncontrolling interest
Net loss attributable to Identiv, Inc.
Cumulative dividends on Series B preferred stock
Net loss attributable to common stockholders
Net loss per share:
Basic
Diluted
Year Ended December 31,
2017
2018
$
78,142
44,810
33,332
7,235
16,391
10,824
747
35,197
(1,865)
(1,518)
(1,369)
204
(4,548)
(155)
(4,703)
(5)
(4,708)
(833)
(5,541) $
(0.35) $
(0.35) $
60,219
38,059
22,160
6,146
13,452
7,241
(49)
26,790
(4,630)
(2,590)
(788)
(358)
(8,366)
214
(8,152)
14
(8,138)
—
(8,138)
(0.61)
(0.61)
$
$
$
$
Weighted average shares outstanding, basic and diluted
15,654
13,273
The accompanying notes are an integral part of these consolidated financial statements.
43
IDENTIV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Net loss
Other comprehensive loss, net of income taxes:
Foreign currency translation adjustment
Total other comprehensive (loss) income, net of income taxes
Comprehensive loss
Less: Comprehensive income attributable to noncontrolling interest
Comprehensive loss attributable to Identiv, Inc.
$
Year Ended December 31,
2017
2018
$
(4,703) $
(463)
(463)
(5,166)
(8)
(5,174) $
(8,152)
638
638
(7,514)
(2)
(7,516)
The accompanying notes are an integral part of these consolidated financial statements.
44
IDENTIV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands; except par value)
Identiv, Inc. Stockholders´ Equity
Series B Preferred Stock
Amount
Shares
Common Stock
Amount
— $
—
Shares
— 11,109 $
—
—
Additional
Paidin
Capital
Treasury
Stock
11 $ 400,266 $ (6,708) $
—
—
—
Accumulated
Deficit
(391,509) $
(8,138)
Accumulated
Other
Comprehensive
Income
Noncontrolling
Interest
Total
Equity
2,053 $
—
(180) $
(14)
3,933
(8,152)
—
—
—
—
—
—
—
622
16
638
3,000
3
—
—
11,875
—
—
—
—
11,878
—
—
—
—
2,845
—
3
—
12,557
2,319
—
—
—
—
—
—
—
—
604
—
1
—
—
2,480
—
—
—
—
—
—
(178)
—
—
(777)
—
—
56
—
255
—
—
—
—
—
—
—
—
—
—
—
12,560
2,319
—
—
1
2,480
—
(777)
—
255
—
3,000
—
—
—
3 14,436
—
—
—
15
—
(1,282)
428,470
—
—
(7,485)
—
—
(399,647)
(4,708)
—
2,675
—
—
(178)
5
(1,282)
23,853
(4,703)
—
—
—
—
—
—
—
—
—
—
—
—
—
2
(466)
3
(463)
—
—
2
2,000
2
—
—
7,874
—
—
—
—
7,876
—
—
724
1
2,634
—
—
—
—
2,635
—
—
427
1
2,496
—
—
—
—
2,497
—
—
515
—
—
—
—
—
—
3
—
—
—
13
2,646
—
—
—
—
—
—
—
—
—
—
—
—
13
2,646
—
—
(142)
—
—
(668)
—
—
—
(668)
—
5,000 $
4
—
5 15,967 $
—
12
—
17 $ 444,145 $ (8,153) $
—
(404,353) $
—
2,209 $
—
(170) $
12
33,700
Balances, January 1, 2017
Net loss
Unrealized income (loss)
from foreign currency
translation adjustments
Issuance of Series B
preferred stock,
net of issuance cost
Issuance of common
stock in connection
with public offering
Issuance of warrants
Issuance of common
stock in connection
with vesting of
stock awards
Stockbased compensation
Shares withheld in
payment of taxes
in connection with
net share settlement
of restricted stock units
Issuance of shares to
nonemployees
Cancellation of
reacquired warrants
from extinguishment
of debt
Balances, December 31, 2017
Net loss
Unrealized income (loss)
from foreign currency
translation adjustments
Impact of adoption of ASC
Topic 606 (Note 1)
Issuance of Series B
preferred stock,
net of issuance costs
Issuance of common stock
in connection with
acquisition of
3VR Security
Issuance of common stock
in connection with
acquisition of
Thursby Software Systems
Issuance of common
stock in connection
with vesting of
stock awards
Proceeds of exercise of
stock options
Stockbased compensation
Shares withheld in
payment of taxes
in connection with
net share settlement
of restricted stock units
Issuance of shares to
nonemployees
Balances, December 31, 2018
The accompanying notes are an integral part of these consolidated financial statements.
45
IDENTIV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows used in operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Loss on extinguishment of debt, net
Accretion of interest on longterm payment obligation
Amortization of debt issuance costs
Stockbased compensation expense
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Payment obligation liability
Deferred revenue
Accrued expenses and other liabilities
Net cash used in operating activities
Cash flows from investing activities:
Capital expenditures
Acquisition of business, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of debt, net of issuance costs
Repayments of debt
Proceeds from issuance of common stock, net of issuance costs
Taxes paid related to net share settlement of restricted stock units
Proceeds from issuance of Series B preferred stock, net of issuance costs
Proceeds from exercise of stock options
Net cash provided by financing activities
Effect of exchange rates on cash
Net (decrease) increase in cash
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental Disclosures of Cash Flow Information:
Interest paid
Taxes paid, net
Noncash investing and financing activities:
Warrants issued as debt issuance costs in connection with debt agreement
Liability settled in common stock
Property and equipment included in accounts payable and accruals
Cancellation of reacquired warrants
Cumulative dividends on Series B Preferred Stock
Issuance of shares to nonemployees
Common stock issued for acquisition of businesses
Promissory notes issued in acquisition of business
Year Ended December 31,
2017
2018
$
(4,703) $
(8,152)
3,167
1,369
229
337
2,646
(68)
(959)
(1,297)
(1,819)
(1,230)
(1,449)
(1,419)
(5,196)
(1,346)
(2,027)
(3,373)
21,801
(28,214)
—
(668)
7,876
13
808
(425)
(8,186)
19,052
10,866 $
1,787 $
179 $
— $
— $
— $
— $
833 $
12 $
5,132 $
2,000 $
2,752
788
305
807
2,480
(2,786)
484
(275)
(222)
(1,192)
5
(2,705)
(7,711)
(967)
—
(967)
53,035
(58,741)
12,560
(777)
11,879
—
17,956
658
9,936
9,116
19,052
2,661
140
2,319
255
66
1,282
—
—
—
—
$
$
$
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
46
IDENTIV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business — Identiv, Inc. (the “Company,”) is a global security technology company that secures data, physical
places and things. Global organizations in the government, education, retail, transportation, healthcare and other markets rely upon the
Company’s solutions. The Company’s solutions allow its customers to create safe, secure, validated and convenient experiences in
schools, government offices, factories, transportation, hospitals and other types of facilities. The Company’s corporate headquarters are
in Fremont, California. The Company maintains research and development facilities in California, and Chennai, India and local
operations and sales facilities in Germany, Hong Kong, Japan, Singapore, and the United States. The Company was founded in 1990 in
Munich, Germany and was incorporated in 1996 under the laws of the State of Delaware.
Principles of Consolidation — The accompanying consolidated financial statements include the accounts of the Company and its
wholly and majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications — Certain reclassifications have been made to the fiscal year 2017 financial statements to conform to the fiscal
year 2018 presentation. The reclassifications had no impact on net loss, total assets, or stockholders’ equity.
Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. The Company believes judgment is involved in determining revenue recognition; the
acquisitiondate fair value of intangible assets; the fair value of contingent consideration associated with acquisitions; the recoverability
of longlived assets; impairment of goodwill and intangible assets; stockbased compensation expense; and income tax uncertainties.
The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company
believes are reasonable under the circumstances, including assumptions as to future events. Actual results could differ materially from
those estimates and assumptions.
Concentration of Credit Risk — No customer accounted for 10% or more of net revenue for the years ended December 31, 2018
and 2017, respectively. No customer accounted for 10% or more of the Company’s accounts receivable balance at December 31, 2018
or 2017. The Company does not require collateral or other security to support accounts receivable. To reduce risk, the Company’s
management performs ongoing credit evaluations of its customers’ financial condition. The Company maintains allowances for
potential credit losses in its consolidated financial statements.
Allowance for Doubtful Accounts — The allowance for doubtful accounts is based on the Company’s assessment of the
collectibility of customer accounts. The Company regularly reviews its receivables that remain outstanding past their applicable
payment terms and establishes an allowance and potential writeoffs by considering factors such as historical experience, credit quality,
age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. Although the
Company expects to collect net amounts due as stated on the consolidated balance sheets, actual collections may differ from these
estimated amounts.
Inventories — Inventories are stated at the lower of cost, using standard cost, approximating average cost, or FIFO method, as
applicable, or market value. Inventory is written down for excess inventory, technical obsolescence and the inability to sell based
primarily on historical sales and expectations for future use. The Company operates in an industry characterized by technological
change. The planning of production and inventory levels is based on internal forecasts of customer demand, which are highly
unpredictable and can fluctuate substantially. Should the demand for the Company’s products prove to be significantly less than
anticipated, the ultimate realizable value of the Company’s inventory could be substantially less than amounts in the consolidated
balance sheets. Once inventory has been written down below cost, it is not subsequently written up.
Business Combinations — The tangible and identifiable intangible assets acquired and liabilities assumed in a business
combination are recorded based on their estimated fair values as of the business combination date, including identifiable intangible
assets which either arise from a contractual or legal right or are separable from goodwill. The Company bases the estimated fair value
of identifiable intangible assets acquired in a business combination on independent valuations that use information and assumptions
provided by management, which consider management’s estimates of inputs and assumptions that a market participant would use. Any
excess purchase price over the estimated fair value assigned to the net tangible and identifiable intangible assets acquired and liabilities
assumed is recorded to goodwill. The use of alternative valuation assumptions, including estimated revenue projections, growth rates,
cash flows, discount rates, estimated useful lives and probabilities surrounding the achievement of contingent milestones could result in
different purchase price allocations and amortization expense in current and future periods.
47
In circumstances where an acquisition involves a contingent consideration arrangement that meets the definition of a liability
under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 480, Distinguishing
Liabilities from Equity, the Company recognizes a liability equal to the fair value of the contingent payments the Company expects to
make as of the acquisition date. The Company remeasures this liability each reporting period and records changes in the fair value as a
component of operating expenses.
Transaction costs associated with acquisitions are expensed as incurred in general and administrative expenses. Results of
operations and cash flows of acquired companies are included in the Company’s operating results from the date of acquisition.
Intangible Assets — Amortizable intangible assets include trademarks, developed technology and customer relationships
acquired as part of business combinations. Intangible assets subject to amortization are amortized using the straightline method over
their estimated useful lives ranging from four to twelve years and are reviewed for impairment in accordance with ASC Topic
360, Property, Plant and Equipment.
Goodwill — In accordance with ASC Topic 350, IntangiblesGoodwill and Other (“ASC 350”), the Company’s goodwill is not
amortized but is tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying
amount of these assets may not be recoverable. In testing for goodwill impairment, the Company compares the fair value of its
reporting unit to its carrying value including the goodwill of that unit. If the carrying value, including goodwill, exceeds the reporting
unit’s fair value, the Company will recognize an impairment loss for the amount by which the carrying amount exceeds the reporting
unit’s fair value. The loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit.
Property and Equipment — Property and equipment are stated at cost less accumulated depreciation. Depreciation and
amortization are computed using the straightline method over estimated useful lives of three to ten years for furniture, fixture and
office equipment, five to seven years for machinery, five years for automobiles and three years for computer software. Leasehold
improvements are amortized over the shorter of the lease term or their estimated useful life.
LongLived Assets — The Company reviews long lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. An impairment loss is recognized when the total estimated
future undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying
amount. Impairment, if any, is assessed using discounted cash flows or other appropriate measures of fair value. There were no
impairment losses recorded during the years ended December 31, 2018 or 2017.
Research and Development — Costs to research, design, and develop the Company’s products are expensed as incurred and
consist primarily of employee compensation and fees for the development of prototype products. Software development costs are
capitalized beginning when a product’s technological feasibility has been established and ending when a product is available for
general release to customers. Generally, the Company’s products are released soon after technological feasibility has been established.
Costs incurred subsequent to achieving technological feasibility have not been significant and generally have been expensed as
incurred. At December 31, 2018, the net amount of capitalized software development costs was $381,000 and is included in other
current and long term assets in the accompanying consolidated balance sheets. Software development costs capitalized in 2017 was
$401,000.
The Company capitalizes certain costs for its internaluse software incurred during the application development stage. Costs
related to preliminary project activities and post implementation activities are expensed as incurred. Internaluse software is amortized
on a straight line basis over its estimated useful life, generally three years. The estimated useful life is determined based on
management’s judgment on how long the core technology and functionality serves internal needs and the customer base. Management
evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances
occur that could impact the recoverability of these assets. The Company recorded amortization expense related to software
development costs of $0.2 million and $0.2 million for the years ended December 31, 2018 and 2017, respectively.
Freight Costs — The Company reflects the cost of shipping its products to customers as a cost of revenue. Reimbursements
received from customers for freight costs are recognized as product revenue.
Income Taxes — The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”), which
requires the asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes reflect the
recognition of future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The
carrying value of net deferred tax assets reflects that the Company has been unable to generate sufficient taxable income in certain tax
jurisdictions. A valuation allowance is provided to reduce the deferred tax asset to an amount that is more likely than not to be realized.
The deferred tax assets are still available for the Company to use in the future to offset taxable income, which would result in the
recognition of a tax benefit and a reduction in the Company’s effective tax rate. Actual operating results and the underlying amount and
category of income in future years could render the Company’s current assumptions, judgments and estimates of the realizability of
deferred tax assets inaccurate, which could have a material impact on its financial position or results of operations.
48
The Company accounts for uncertain tax positions in accordance with ASC 740, which clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements. It prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Such changes
in recognition or measurement might result in the recognition of a tax benefit or an additional charge to the tax provision in the period.
The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the
accompanying consolidated statement of operations. Accrued interest and penalties are included within the related tax liability line in
the consolidated balance sheets. See Note 8, Income Taxes, for further information regarding the Company’s tax disclosures.
Stockbased Compensation — The Company accounts for all stockbased payment awards, including employee stock options and
restricted stock awards, in accordance with ASC Topic 718, CompensationStock Compensation (“ASC 718”). Under the fair value
recognition provisions of ASC 718, stockbased compensation cost is measured at the grant date based on the fair value of the award.
Compensation expense for all stockbased payment awards is recognized using the straightline singleoption approach. Employee
stock options awards are valued under the singleoption approach and amortized on a straightline basis, net of estimated forfeitures.
The value of the portion of the stock option award that is ultimately expected to vest is recognized as expense over the requisite service
periods in the Company’s consolidated statements of operations. See Note 11, StockBased Compensation, for further information
regarding the Company’s stockbased compensation assumptions and expenses.
The Company has elected to use the Black Scholes pricing model to estimate the fair value of its options, which incorporates
various subjective assumptions including volatility, riskfree interest rate, expected life, and dividend yield to calculate the fair value of
stock option awards. Since the Company has been publicly traded for many years, it utilizes its own historical volatility in valuing its
stock option grants. The expected life of an award is based on historical experience, the terms and conditions of the stock awards
granted to employees, as well as the potential effect from options that have not been exercised at the time. The assumptions used in
calculating the fair value of stockbased payment awards represent management’s estimates. These estimates involve inherent
uncertainties and the application of management’s judgment. If factors change and the Company uses different assumptions, its stock
based compensation expense could be materially different in the future. In addition, the Company estimates the expected forfeiture rate
and recognizes expense only for those awards which are ultimately expectedtovest shares. If the actual forfeiture rate is materially
different from the Company’s estimate, the recorded stockbased compensation expense could be different. ASC 718 requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates.
Net Loss Per Share — Basic and diluted net loss per share is based upon the weighted average number of common shares
outstanding during the period. Diluted net loss per share is based upon the weighted average number of common shares and dilutive
potential common share equivalents outstanding during the period, if applicable. Dilutivepotential common share equivalents are
excluded from the computation of net loss per share in the loss periods as their effect would be antidilutive. As the Company has
incurred losses from continuing operations during each of the last two fiscal years, shares issuable pursuant to equity awards are
excluded from the computation of diluted net loss per share in the accompanying consolidated statements of operations as their effect is
antidilutive.
Comprehensive Loss — Comprehensive loss for the years ended December 31, 2018 and 2017 has been disclosed within the
consolidated statements of comprehensive loss. Other accumulated comprehensive loss includes net foreign currency translation
adjustments which are excluded from consolidated net loss.
Foreign Currency Translation and Transactions — The functional currencies of the Company’s foreign subsidiaries are the local
currencies, except for the Singapore subsidiary, which uses the U.S. dollar as its functional currency. For those subsidiaries whose
functional currency is the local currency, the Company translates assets and liabilities to U.S. dollars using periodend exchange rates
and translates revenues and expenses using average exchange rates during the period. Exchange gains and losses arising from
translation of foreign entity financial statements are included as a component of other comprehensive loss and gains and losses from
transactions denominated in currencies other than the functional currency of the Company are included in the Company’s consolidated
statements of operations. The Company recognized currency gains of $0.2 million in 2018 and currency losses of $0.4 million in 2017.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company
adopts as of the specified effective date. Unless otherwise discussed, the Company does not believe that the impact of recently issued
standards that are not yet effective will have a material impact on its financial position or results of operations upon adoption.
49
In March 2016, the FASB issued Accounting Standards Update (“ASU”) 201609, Compensation – Stock Compensation, which
provides guidance to simplify several aspects of accounting for sharebased payment transactions, including the accounting for income
taxes, forfeitures, statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance is
effective for reporting periods beginning after December 15, 2016. The Company adopted this guidance effective January 1, 2017. The
Company's adoption of this standard did not have a significant impact on its consolidated financial statements. No excess income tax
benefit or tax deficiencies were recorded as a result of the adoption and there was no change to accumulated deficit with respect to
previously unrecognized excess tax benefits. The Company elected to continue to account for forfeitures on an estimated basis. The
Company has elected to present the consolidated statements of cash flows on a prospective transition method and no prior periods have
been adjusted.
In February 2016, the FASB issued ASU No. 201602, “Leases (Topic 842)” (“ASU 201602”). ASU 201602 requires lessees to
recognize assets and liabilities on the balance sheet for all leases with terms longer than twelve months. The ASU also requires
disclosure of certain information about leasing arrangements. ASU 201602 is effective on January 1, 2019, using a modified
retrospective method of adoption. In August 2018, the FASB issued ASU 201811, “Targeted Improvements to ASC 842”, which
includes an option to not restate comparative periods in transition and elect to use the effective date of ASC Topic 842, “Leases," as the
date of initial application of transition. The Company adopted this ASU on January 1, 2019 and elected the transition option provided
under ASU 201811 to recognize a cumulativeeffect adjustment to the opening balance of retained earnings in the period of adoption.
While the Company continues to review its population of leased assets, it expects to recognize operating lease liabilities ranging from
$5.0 to $6.0 million, with corresponding right of use assets of the same amount based on the present value of the remaining lease
payments over the lease term. This standard is not expected to have a material impact on the Company’s results of operations or cash
flows.
In January 2017, the FASB issued ASU 201704, Intangibles Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment (“ASU 201704”), which eliminates the performance of Step 2 from the goodwill impairment test. In performing
its annual or interim impairment testing, an entity will instead compare the fair value of the reporting unit with its carrying amount and
recognize any impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an
entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when
measuring the goodwill impairment loss. The standard is effective for fiscal years beginning after December 15, 2019. Early adoption
is permitted for interim or annual impairment tests performed on testing dates after January 1, 2017. The Company is currently in the
process of evaluating when it will adopt ASU 201704 and its impact on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU 201409, Revenue from Contracts with Customers (“Topic 606”), which supersedes the
revenue recognition requirements in Revenue Recognition (Topic 605)” and Subtopic 985605 “Software Revenue Recognition.”
Topic 605 and Subtopic 985605 are collectively referred to as “Topic 605” or “prior GAAP.” Under Topic 606, revenue is recognized
when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services. In addition, Topic 606 requires enhanced disclosures, including disclosure of the
nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The Company adopted Topic 606 on January 1, 2018 using the modified retrospective transition method. Under this method, the
Company evaluated contracts that were in effect at the beginning of fiscal 2018 as if those contracts had been accounted for under
Topic 606. Under the modified retrospective transition approach, periods prior to the adoption date were not adjusted and continue to
be reported in accordance with historical, preTopic 606 accounting.
On the adoption date, a cumulative catch up adjustment was recorded to beginning retained earnings to reflect the impact of all
existing arrangements under Topic 606. The Company increased retained earnings and decreased deferred revenue by approximately
$2,000 for an uncompleted software development and technical support services contract with a customer. Under Topic 605 accounting,
since the Company was unable to establish vendorspecific objective evidence (“VSOE”) of fair value for the product development and
technical support services components in the contract, the Company was required to defer the revenue and recognize it over the term of
the contract. Under Topic 606, the Company would have been required to establish the standalone selling price of each of the
performance obligations in the contract and recognize the product development services revenue upon delivery, and recognize the
technical support services revenue ratably over the term of the contract.
The Company does not expect the impact of the adoption of Topic 606 to be material to its annual revenue and net income on an
ongoing basis. Revenue generated under Topic 606 has been materially comparable to revenue recognized under Topic 605 in fiscal
2017 primarily due to the elimination of deferred revenue associated with the product development services discussed above that, under
Topic 605, would have continued to be recognized into revenue in 2018 and 2019, offset by an increase in the revenue recognized
related to the amount and timing of technical support services provided in the contract discussed above. The actual effects on revenue
recognized for the fiscal year ended December 31, 2018 are reported in the table below.
50
No incremental sales commission costs or other costs related to obtaining customer contracts were capitalized at the adoption
date as they were immaterial.
The timing of revenue recognition for hardware and professional services is expected to remain substantially unchanged. The
Company’s overall mix of revenue recognized at a point in time versus over time is expected to increase in the future due to the
intended growth and expansion of its services offerings. For the year ended December 31, 2018, approximately 94% of the Company’s
revenue was recognizable on delivery and 6% over time.
The following table summarizes the effects of adopting Topic 606 on the Company’s consolidated balance sheet as of December
31, 2018 (in thousands):
Deferred revenue
Accumulated deficit
Balance at
December 31, 2017
$
1,090 $
(399,647)
Adjustments
Balance at
January 1, 2018
1,088
(399,645)
(2) $
2
The following table summarizes the effects of adopting Topic 606 on the Company’s consolidated statement of operations for the
year ended December 31, 2018 (in thousands, except per share amounts):
As Reported Under
Topic 606
Balance Under Prior
Adjustments
GAAP
Net revenue
Cost of revenue
Operating expenses
Provision for income taxes
Net loss
Net loss attributable to common stockholders
Basic and diluted net loss per share:
Basic
Diluted
$
$
$
78,142 $
44,810
35,197
(155)
(4,703)
(5,541)
(0.35)
(0.35)
1 $
—
—
—
1
1
— $
— $
78,143
44,810
35,197
(155)
(4,702)
(5,540)
(0.35)
(0.35)
The adoption of Topic 606 had no impact on the Company’s net cash used in operating activities, net cash used in investing
activities or net cash provided by financing activities.
2. Revenue
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the
consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that can
include various combinations of its products, software licenses, and services, which are generally capable of being distinct and
accounted for as separate performance obligations. For contracts with multiple performance obligations, the Company allocates the
transaction price of the contract to each performance obligation, generally on a relative basis using its standalone selling price. The
stated contract value is generally the transaction price to be allocated to the separate performance obligations. Revenue is recognized
net of any taxes collected from customers that are subsequently remitted to governmental authorities.
Nature of Products and Services
The Company derives revenues primarily from sales of hardware products, software licenses, professional services, software
maintenance and support, and extended hardware warranties.
Hardware Product Revenues — The Company generally has two performance obligations in arrangements involving the sale of
hardware products. The first performance obligation is to transfer the hardware product (which includes software integral to the
functionality of the hardware product). The second performance obligation is to provide assurance that the product complies with its
agreedupon specifications and is free from defects in material and workmanship for a period of one to three years (i.e. assurance
warranty). The entire transaction price is allocated to the hardware product and is generally recognized as revenue at the time of
delivery because the customer obtains control of the product at that point in time. The Company has concluded that control generally
transfers at that point in time because the customer has title to the hardware, physical possession, and a present obligation to pay for the
hardware. None of the transaction price is allocated to the assurance warranty component, as the Company accounts for these product
warranty costs in accordance with ASC Topic 460, Guarantees. Payments for hardware contracts are generally due 30 to 60 days after
shipment of the hardware product.
51
Software License Revenues — The Company’s license arrangements grant customers the perpetual right to access and use the
licensed software products at the outset of an arrangement. Technical support and software updates are generally made available
throughout the term of the support agreement, which is generally one to three years. The Company accounts for these arrangements as
two performance obligations: (1) the software licenses, and (2) the related updates and technical support. The software license revenue
is recognized upon delivery of the license to the customer, while the software updates and technical support is recognized over the term
of the support contract. Payments are generally due 30 to 60 days after delivery of the software licenses.
Professional Services Revenues — Professional services revenues consist primarily of programming customization services
performed relating to the integration of the Company’s software products with the customers other systems, such as HR systems.
Professional services contracts are generally billed on a time and materials basis and revenue is recognized as the services are
performed. For contracts billed on a fixed price basis, revenue is recognized once the contract is complete. Payments for services are
generally due when services are performed.
Software Maintenance and Support Revenues — Support and maintenance contract revenues consist of the services provided to
support the specialized programming applications performed by our professional services group. Support and maintenance contracts are
typically billed at inception of the contract and recognized as revenue over the contract period, typically over a one to three year period.
Extended Hardware Warranties Revenues — Sales of our hardware products may also include optional extended hardware
warranties, which typically provide assurance that the product will continue function as initially intended. Extended hardware warranty
contracts are typically billed at inception of the contract and recognized as revenue over the respective contract period, typically over
one to two year periods after the expiration of the original assurance warranty.
When Performance Obligation is
When Payment is
Performance
Obligation
Hardware products
Software licenses
Professional services
Typically Satisfied
When customer obtains control of the
product (pointintime)
When license is delivered to
customer or made available for
download, and the applicable license
period has begun (pointintime)
As services are performed and/or
when the contract is fulfilled (point
intime)
Software maintenance
and support services
Ratably over the course of the
support contract (over time)
Extended hardware
warranties
Ratably over the course of the
support contract (over time)
Significant Judgments
Typically Due
Within 3060 days of
shipment
Within 3060 days of
the beginning of license
period
How Standalone Selling Price is
Typically Estimated
Observable in transactions without multiple
performance obligations
Established pricing practices for software
licenses bundled with software
maintenance, which are separately
observable in renewal transactions
Within 3060 days of
delivery
Observable in transactions without multiple
performance obligations
Within 3060 days of
the beginning of the
contract period
Within 3060 days of
the beginning of the
contract period
Observable in renewal transactions
Observable in renewal transactions
The Company’s contracts with customers often include promises to transfer multiple products and services to a customer. For
such arrangements, the Company allocates the transaction price to each performance obligation based on its relative standalone selling
price (“SSP”).
Judgment is required to determine the SSP for each distinct performance obligation in a contract. For the majority of items, the
Company estimates SSP using historical transaction data. The Company uses a range of amounts to estimate SSP when it sells each of
the products and services separately and needs to determine whether there is a discount to be allocated based on the relative SSP of the
various products and services. In instances where SSP is not directly observable, such as when the product or service is not sold
separately, the Company determines the SSP using information that may include market conditions and other observable inputs.
The determination of SSP is an ongoing process and information is reviewed regularly in order to ensure SSPs reflect the most
current information or trends.
52
Disaggregation of Revenues
The Company disaggregates revenue from contracts with customers based on the timing of transfer of goods or services to
customers (pointintime or over time) and geographic region based on the shipping location of the customer. The geographic regions
that are tracked are the Americas, Europe and the Middle East, and AsiaPacific regions. The Company operates as two operating
segments.
Total net sales based on the disaggregation criteria described above are as follows (in thousands):
Year Ended December 31,
2018
2017
Pointin
Time
$
Over Time
4,247
158
23
4,428
$
55,906
9,785
8,023
73,714
Total
60,153
9,943
8,046
78,142
$
$
$
$
Pointin
Time
Over Time
Total
38,502 $
7,847
12,314
58,663 $
1,516 $
40
—
1,556 $
40,018
7,887
12,314
60,219
Americas
Europe and the Middle East
AsiaPacific
Total
$
$
Contract Balances
Amounts invoiced in advance of services being provided are accounted for as deferred revenue. Nearly all of the Company’s
deferred revenue balance is related software maintenance contracts. Payment terms and conditions vary by contract type, although
payment is typically due within 30 to 90 days of contract inception. In instances where the timing of revenue recognition differs from
the timing of invoicing, the Company has determined its contracts do not include a significant financing component. The primary
purpose of the Company’s invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s
products and services, not to receive financing from its customers.
Changes in deferred revenue during the year ended December 31, 2018 were as follows (in thousands):
Deferred revenue at December 31, 2017
Impact of adoption of Topic 606
Deferred revenue at January 1, 2018
Fair value of deferred revenue acquired in acquisition, net of recognition
Deferral of revenue billed in current period, net of recognition
Recognition of revenue deferred in prior periods
Balance as of December 31, 2018
Amount
1,090
(2)
1,088
1,582
1,098
(958)
2,810
$
$
Unsatisfied Performance Obligations
Revenue expected to be recognized in future periods related to remaining performance obligations, excluding revenue pertaining
to contracts that have an original expected duration of one year or less, and contracts where revenue is recognized as invoiced, was
approximately $1.9 million as of December 31, 2018. Since the Company typically invoices customers at contract inception, this
amount is included in deferred revenue balance. As of December 31, 2018, the Company expects to recognize approximately 66% of
the revenue related to these unsatisfied performance obligations during 2019, 26% during 2020, and 8% thereafter.
Assets Recognized from the Costs to Obtain a Contract with a Customer
The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of
those costs to be longer than one year. The Company has determined that certain sales incentive programs (i.e. commissions) meet the
requirements to be capitalized. Capitalized incremental costs related to contracts are amortized over the respective contract periods. For
the year ended December 31, 2018, total capitalized costs to obtain contracts were immaterial.
53
Practical Expedients
As discussed in Note 1, Organization and Summary of Significant Accounting Policies, and Note 2, Revenue, the Company has
elected the following practical expedients in accordance with Topic 606:
•
•
•
•
The Company expenses costs as incurred for costs to obtain a contract when the amortization period would have been one
year or less. These costs include internal sales force compensation programs and certain partner sales incentive programs as
the Company has determined annual compensation is commensurate with annual sales activities.
The Company generally expenses sales commissions when incurred because the amortization period would have been one
year or less. These costs are recorded within sales and marketing expense.
The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected
length of one year or less.
The Company does not consider the time value of money for contracts with original durations of one year or less.
3. Business Combinations
3VR Security, Inc.
On February 14, 2018, the Company acquired 3VR Security, Inc. (“3VR”), a video technology and analytics company, pursuant
to an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Eagle Acquisition, Inc., a California
corporation and a wholly owned subsidiary of the Company (“Merger Sub”), 3VR, and Fortis Advisors LLC, a Delaware limited
liability company, acting as Security Holder Representative. Pursuant to the Merger Agreement, at the effective time, Merger Sub
merged with and into 3VR and 3VR became a whollyowned subsidiary of the Company (the “Acquisition”).
Under the terms of the Merger Agreement, at the closing of the Acquisition, the Company acquired all of the outstanding shares
of 3VR for total purchase consideration of $6.2 million, consisting of:
(i)
payment in cash of approximately $1.6 million;
(ii)
issuance of subordinated unsecured promissory notes in an aggregate principal amount of $2.0 million;
(iii)
issuance of 609,830 shares of the Company’s common stock with a value of approximately $2.3 million.
An aggregate of up to $1.0 million, or 294,927 shares, of the Company’s common stock were issued subsequent to the closing of
the transaction and were held back for a period of up to 12 months following the closing for the satisfaction of certain indemnification
claims. On May 9, 2018, the Company and the Security Holder Representative reached agreement as to the satisfaction of certain of the
indemnification claims asserted by the Company at the closing of the Acquisition. As a result, the purchase consideration, and the
amount of goodwill recorded, were reduced by $660,000. Of the 294,927 shares that were held back at closing, 181,319 shares were
canceled. On January 25, 2019, subject to the terms of the Merger Agreement, the Company filed an additional dispute with the
security holder representative for an amount exceeding the remaining amount of the holdback shares of approximately $0.3 million, or
93,406 shares.
Additionally, in the event that 3VR achieved $24.1 million in product shipments in 2018, the Company would have been
obligated to issue further earnout consideration of $3.5 million payable in shares of the Company’s common stock (subject to certain
conditions) with a potential maximum earnout value of $7.0 million in the event that such shipments exceeded $48.2 million. Further,
in calendar year 2019, the Company may be obligated to pay, in cash, and subject to certain conditions, contingent consideration equal
to the lesser of (a) 35% of the gross margin of certain products sold and services rendered by 3VR in 2018 pursuant to a supply
arrangement and (b) $25.0 million, each subject to adjustments. Management has assessed the probability of the issuance of shares
related to the payment of the contingent consideration noted above, and determined it as remote. Accordingly, no value was ascribed to
the contingent consideration as of December 31, 2018.
On February 14, 2019, the Company repaid the noteholders an aggregate principal amount, including accrued interest, of
$2,060,000.
54
Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and
assumptions used by the Company. Such estimates and assumptions are subject to change within the measurement period (up to one
year from the Acquisition). The following table summarizes the fair values of assets acquired and liabilities assumed at the date of the
Acquisition (in thousands):
Cash
Accounts receivable
Inventory
Prepaid expenses and other current assets
Property and equipment
Trademarks
Customer relationships
Developed technology
Total identifiable assets acquired
Accounts payable
Accrued expenses and liabilities
Deferred revenue
Debt
Total liabilities assumed
Net identifiable assets acquired
Goodwill
Purchase price
$
$
195
2,029
257
169
334
400
2,900
3,000
9,284
(1,590)
(726)
(2,928)
(3,622)
(8,866)
418
5,796
6,214
In June 2018, the Company recorded an adjustment to its accounting for the amount recorded as accounts receivable at
acquisition. Accordingly, the fair value of accounts receivable was decreased by $561,000, with a corresponding increase to goodwill
and reflected in the Company’s purchase price allocation.
Acquisition related intangibles included in the above table are finitelived and are being amortized on a straightline basis over
their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be
realized, as follows (in thousands):
Trademarks
Customer relationships
Developed technology
Gross Purchased
Intangible
Assets
Estimated Useful
Life
(in Years)
$
$
400
2,900
3,000
6,300
5
10
10
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The
Acquisition resulted in $5.8 million of goodwill which is not deductible for tax purposes. With the addition of the 3VR video security
and analytics platform, the Company believes this goodwill largely reflects the expansion of its Hirsch product and service offerings
through the complementary offerings of 3VR. In accordance with ASC 350, goodwill will not be amortized but tested for impairment at
least annually in the fourth quarter. See Note 5, Goodwill and Intangible Assets.
The results of operations of 3VR for the period from the acquisition date through December 31, 2018 are included in the
accompanying consolidated statements of operations. Pursuant to ASC Topic 805, Business Combinations (“ASC 805”), the Company
incurred and expensed approximately $548,000 and $212,000 in acquisition and transitional costs associated with the Acquisition
during the years ended December 31, 2018 and 2017, respectively, which were primarily general and administrative expenses.
55
Thursby Software Systems
On November 1, 2018, the Company completed the acquisition of Thursby Software Systems, Inc., a provider of security
software for mobile devices, pursuant to an Agreement and Plan of Merger (the “Thursby Agreement”), by and among the Company,
TSS Merger Sub, Inc., a wholly owned subsidiary of the Company (“Merger Sub 1”), TSS Acquisition, LLC., a wholly owned
subsidiary of the Company (“Merger Sub 2” and together with Merger Sub 1, the “Merger Subs”), Thursby Software Systems, Inc.,
(“TSS”), and William Thursby as the sole Shareholder of TSS. Pursuant to the Thursby Agreement, at the effective time, Merger Sub 1
merged with and into TSS and TSS became a whollyowned subsidiary of the Company (“Merger 1”), following which TSS merged
with and into Merger Sub 2, whereupon which the separate corporate existence of TSS ceased with Merger Sub 2 surviving the merger
(“Merger 2”).
Under the terms of the Thursby Agreement, at the closing of the acquisition, the Company acquired all of the outstanding shares
of TSS for total purchase consideration of $3.1 million, consisting of:
(i)
$0.6 million in cash, net of cash acquired;
(ii)
issuance of 426,621 shares of the Company’s common stock with a value of approximately $2.5 million.
An aggregate of up to $0.5 million, or 85,324 shares, of the Company’s common stock issuable at the closing of the transaction
are being held back for a period of up to 12 months following the closing for the satisfaction of certain indemnification claims.
Additionally, in the event that revenue from TSS products is greater than $8.0 million, $11.0 million, or $15.0 million in product
shipments in 2019, the Company will be obligated to issue earnout consideration of up to a maximum of $7.5 million payable in shares
of the Company’s common stock, subject to certain conditions. In the event that such revenue is less than $15.0 million in 2019, but
2020 revenue from TSS products exceeds $15.0 million, the Company will be obligated to issue an additional $2.5 million in earnout
consideration payable in shares of the Company’s common stock. The maximum total earnout consideration payable for all periods is
$7.5 million in the aggregate, payable in shares of the Company’s common stock. Management has assessed the probability of the
issuance of shares related to the earnout consideration, and the payment of the contingent consideration noted above, and determined it
as remote. Accordingly, no value was ascribed to the earnout as of December 31, 2018.
Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and
assumptions used by the Company. Such estimates and assumptions are subject to change within the measurement period (up to one
year from the acquisition). The following table summarizes the fair values of assets acquired and liabilities assumed at the date of
acquisition (in thousands):
Cash
Accounts receivable
Inventory
Prepaid expenses and other current assets
Trademarks
Customer relationships
Developed technology
Total identifiable assets acquired
Accounts payable
Accrued expenses and liabilities
Deferred revenue
Other current liabilities
Total liabilities assumed
Net identifiable assets acquired
Goodwill
Purchase price
Less: cash acquired
Net purchase price
56
$
$
3,485
526
1,361
12
200
1,500
700
7,784
(31)
(67)
(243)
(4,307)
(4,648)
3,136
3,490
6,626
(3,485)
3,141
Acquisition related intangibles included in the above table are finitelived and are being amortized on a straightline basis over
their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be
realized, as follows (in thousands):
Trademarks
Customer relationships
Developed technology
Gross Purchased
Intangible
Assets
Estimated Useful
Life
(in Years)
$
$
200
1,500
700
2,400
5
10
10
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The
acquisition of TSS resulted in $3.5 million of goodwill which is not deductible for tax purposes. With the addition of the TSS security
software for mobile devices, the Company believes this goodwill largely reflects the synergistic strengthening of its Identity offerings
providing complete solutions for secure and convenient logical access across smart cards and derived credentials on Apple iOS and
Android mobile devices. In accordance with ASC 350, goodwill will not be amortized but is tested for impairment at least annually in
the fourth quarter. See Note 5, Goodwill and Intangible Assets.
The results of operations of TSS for the period from the acquisition date through December 31, 2018 are included in the
accompanying consolidated statements of operations. Pursuant to ASC 805, the Company incurred and expensed approximately
$208,000 in acquisition and transitional costs associated with the acquisition of TSS during the year ended December 31, 2018 which
were primarily general and administrative expenses.
4. Fair Value Measurements
The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a
financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement.
Under ASC Topic 820, Fair Value Measurement and Disclosures (“ASC 820”), the fair value hierarchy prioritizes the inputs into three
levels that may be used to measure fair value:
•
•
•
Level 1 – Quoted prices (unadjusted) for identical assets and liabilities in active markets;
Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either
directly or indirectly; and
Level 3 – Unobservable inputs.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of December 31, 2018 and 2017, there were no assets or liabilities that are measured and recognized at fair value on a
recurring basis. There were nominal cash equivalents as of December 31, 2018 and none as of December 31, 2017.
The Company’s only liabilities measured at fair value on a recurring basis are the contingent consideration associated with the
acquisitions of 3VR and TSS. The fair value of the earnout consideration is based on achieving certain revenue and profit targets as
defined under the respective merger agreements. The valuation of the earnout consideration is classified as a Level 3 measurement as
it is based on significant unobservable inputs and involves management judgment and assumptions about achieving revenue and profit
targets and discount rates. The unobservable inputs used in the measurement of the earnout consideration are highly sensitive to
fluctuations and any changes in the inputs or the probability weighting thereof could significantly change the measured value of the
earnout consideration at each reporting period. As of December 31, 2018 the value attributed to earnout consideration was deemed to
be de minimus.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain of the Company's assets, including goodwill, intangible assets, and privatelyheld investments, are measured at fair value
on a nonrecurring basis if impairment is indicated. Purchased intangible assets are measured at fair value primarily using discounted
cash flow projections. For additional discussion of measurement criteria used in evaluating potential impairment involving goodwill
and intangible assets, refer to Note 5, Goodwill and Intangible Assets.
57
Privatelyheld investments, which are normally carried at cost, are measured at fair value due to events and circumstances that
the Company identified as significantly impacting the fair value of investments. The Company estimates the fair value of its privately
held investments using an analysis of the financial condition and nearterm prospects of the investee, including recent financing
activities and the investee's capital structure.
As of December 31, 2018 and 2017, the Company had $0.3 million of privatelyheld investments measured at fair value on a
nonrecurring basis which were classified as Level 3 assets due to the absence of quoted market prices and inherent lack of liquidity.
The Company reviews its investments to identify and evaluate investments that have an indication of possible impairment. The
Company adjusts the carrying value for its privatelyheld investments for any impairment if the fair value is less than the carrying value
of the respective assets on an otherthantemporary basis. The amount of privatelyheld investments is included in other assets in the
accompanying consolidated balance sheets.
As of December 31, 2018 and 2017, there were no liabilities that are measured and recognized at fair value on a nonrecurring
basis.
Assets and Liabilities Not Measured at Fair Value
The carrying amounts of the Company's accounts receivable, prepaid expenses and other current assets, accounts payable,
financial liabilities and other accrued liabilities approximate fair value due to their short maturities.
5. Goodwill and Intangible Assets
Goodwill
The following table summarizes the carrying amount of goodwill resulting from the acquisitions of 3VR and TSS (in thousands):
Balance at December 31, 2017
Acquisition of businesses
Balance at December 31, 2018
Premises
Identity
Total
$
$
— $
5,796
5,796 $
— $
3,490
3,490 $
—
9,286
9,286
In accordance with ASC 350, the Company tests goodwill for impairment on an annual basis, in the fourth quarter, or whenever
events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. In testing for goodwill
impairment, the Company compares the fair value of its reporting unit to its carrying value including the goodwill of that unit. If the
carrying value, including goodwill, exceeds the reporting unit’s fair value, the Company will recognize an impairment loss for the
amount by which the carrying amount exceeds the reporting unit’s fair value. During the quarter ended December 31, 2018, the
Company noted no indicators of goodwill impairment and concluded no further testing necessary.
Intangible Assets
The following table summarizes the gross carrying amount and accumulated amortization for intangible assets resulting from
acquisitions (in thousands):
Amortization period (in years)
Gross carrying amount at December 31, 2017
Accumulated amortization
Intangible assets, net at December 31, 2017
Gross carrying amount at December 31, 2018
Accumulated amortization
Intangible assets, net at December 31, 2018
Developed Customer
Trademarks Technology Relationships
Total
5
10 12
4 12
— $
0
— $
600 $
(77)
523 $
4,600 $
(3,257)
1,343 $
8,300 $
(3,978)
4,322 $
10,639 $
(7,617)
3,022 $
15,039 $
(8,904)
6,135 $
15,239
(10,874)
4,365
23,939
(12,959)
10,980
$
$
$
$
58
Each period, the Company evaluates the estimated remaining useful lives of purchased intangible assets and whether events or
changes in circumstances warrant a revision to the remaining period of amortization. If a revision to the remaining period of
amortization is warranted, amortization is prospectively adjusted over the remaining useful life of the intangible asset. Intangible assets
subject to amortization are amortized on a straightline basis over their useful lives as outlined in the table above. The Company
performs an evaluation of its amortizable intangible assets for impairment at the end of each reporting period. The Company did not
identify any impairment indicators during the years ended December 31, 2018 and 2017.
The following table illustrates the amortization expense included in the consolidated statements of operations for the years ended
December 31, 2018 and 2017 (in thousands):
Cost of revenue
Selling and marketing
Total
Year Ended December 31,
2017
2018
$
$
721 $
1,364
2,085 $
448
1,007
1,455
The estimated annual future amortization expense for purchased intangible assets with definite lives over the next five years is as
follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
$
$
2,386
2,385
930
930
853
3,496
10,980
6. Balance Sheet Components
The Company’s inventories are stated at the lower of cost or market. Inventories consist of (in thousands):
Raw materials
Workinprogress
Finished goods
Total
Property and equipment, net consists of (in thousands):
Building and leasehold improvements
Furniture, fixtures and office equipment
Plant and machinery
Purchased software
Total
Accumulated depreciation
Property and equipment, net
December 31,
2018
2017
4,598 $
77
8,956
13,631 $
3,700
22
7,404
11,126
December 31,
2018
2017
1,250 $
1,806
9,484
2,167
14,707
(12,083)
2,624 $
1,917
1,771
9,411
2,050
15,149
(13,106)
2,043
$
$
$
$
The Company recorded depreciation expense of $1.1 million and $1.3 million during the years ended December 31, 2018 and
2017, respectively.
59
Other accrued expenses and liabilities consist of (in thousands):
Accrued professional fees
Customer deposits
Accrued warranties
Other accrued expenses
Total
7. LongTerm Payment Obligation
December 31,
2018
2017
1,504 $
1,517
316
1,940
5,277 $
1,065
—
—
955
2,020
$
$
Hirsch Acquisition – Secure Keyboards and Secure Networks. Prior to the 2009 acquisition of Hirsch by the Company, effective
November 1994, Hirsch had entered into a settlement agreement (the “1994 Settlement Agreement”) with two limited partnerships,
Secure Keyboards, Ltd. (“Secure Keyboards”) and Secure Networks, Ltd. (“Secure Networks”). At the time, Secure Keyboards and
Secure Networks were related to Hirsch through certain common shareholders and limited partners, including Hirsch’s then President
Lawrence Midland, who resigned as President of the Company effective July 31, 2014. Immediately following the acquisition,
Mr. Midland owned 30% of Secure Keyboards and 9% of Secure Networks. Secure Networks was dissolved in 2012 and Mr. Midland
owned 24.5% of Secure Keyboards upon his resignation effective July 31, 2014.
On April 8, 2009, Secure Keyboards, Secure Networks and Hirsch amended and restated the 1994 Settlement Agreement to
replace the royaltybased payment arrangement under the 1994 Settlement Agreement with a new, definitive installment payment
schedule with contractual payments to be made in future periods through 2020 (the “2009 Settlement Agreement”). The Company was
not an original party to the 2009 Settlement Agreement as the acquisition of Hirsch occurred subsequent to the 2009 Settlement
Agreement being entered into. The Company has, however, provided Secure Keyboards and Secure Networks with a limited guarantee
of Hirsch’s payment obligations under the 2009 Settlement Agreement (the “Guarantee”). The 2009 Settlement Agreement and the
Guarantee became effective upon the acquisition of Hirsch on April 30, 2009. The Company’s annual payment to Secure Keyboards
and Secure Networks in any given year under the 2009 Settlement Agreement is subject to an increase based on the percentage increase
in the Consumer Price Index during the previous calendar year.
The final payment to Secure Networks was made on January 30, 2012 and the final payment to Secure Keyboards is due on
January 30, 2021. The Company’s payment obligations under the 2009 Settlement Agreement will continue through the calendar year
period ending December 31, 2020, unless the Company elects at any time on or after January 1, 2012 to earlier satisfy its obligations by
making a lumpsum payment to Secure Keyboards. The Company does not intend to make a lumpsum payment and therefore a portion
of the payment obligation amount is classified as a longterm liability.
The Company included $0.2 million and $0.3 million of interest expense during the years ended December 31, 2018 and 2017,
respectively, in its consolidated statements of operations for interest accreted on the longterm payment obligation.
The ongoing payment obligation in connection with the Hirsch acquisition as of December 31, 2018 is as follows (in thousands):
2019
2020
2021
Present value discount factor
Total
Less: Current portion payment obligation
Longterm payment obligation
60
$
$
1,266
1,408
364
(153)
2,885
(1,025)
1,860
8. Financial Liabilities
Financial liabilities consist of (in thousands):
Notes payable
Term loan
Revolving loan facility
Total before discount and debt issuance costs
Less: Current portion of notes payable
Less: Current portion of financial liabilities
Less: Current portion of unamortized discount and debt issuance costs
Less: Longterm portion of unamortized discount and debt issuance costs
Longterm financial liabilities
December 31,
2018
2017
$
$
2,000 $
—
11,579
13,579
(2,000)
(11,554)
(25)
—
— $
—
5,000
8,736
13,736
—
(9,829)
(404)
(582)
2,921
On February 8, 2017, the Company entered into Loan and Security Agreements with East West Bank (“EWB”) and Venture
Lending & Leasing VII, Inc. and Venture Lending & Leasing VIII, Inc. (collectively referred to as “VLL7 and VLL8”). The Loan and
Security agreement, as amended, with EWB provides for a $16.0 million revolving loan facility (the “Revolving Loan Facility”), and
the Loan and Security Agreement with a VLL7 & VLL8 provided a $10.0 million term loan facility (“Term Loan Facility”). In
connection with the closing of such agreements, the Company repaid all outstanding amounts under its credit agreement with its
previous lender.
The Revolving Loan Facility, as amended, bears interest at prime rate plus 1.0%, matured and became due and payable on
February 8, 2019 and included a nonformula line of credit sublimit of up to $3.0 million. Interest is payable monthly beginning on
March 1, 2017. On February 6, 2019, the Company entered into an amendment (the “Tenth Amendment”) to its Loan and Security
Agreement with EWB. Under the Tenth Amendment, the Revolving Loan Facility under the Loan and Security Agreement was
increased from $16.0 million to $20.0 million, the interest rate was reduced from prime rate plus 1.0% to prime rate plus 0.75%, the
maturity date was extended to February 8, 2021, and certain financial covenants were amended, including covenants with respect to
minimum EBITDA levels. The Company may voluntarily prepay amounts outstanding under the Revolving Loan Facility, without
prepayment charges. In the event the Revolving Loan Facility is terminated prior to its maturity, the Company would be required to pay
an early termination fee in the amount of 1.0% of the revolving line. Additional borrowing requests under the Revolving Loan Facility
are subject to various customary conditions precedent, including satisfaction of a borrowing base test as more fully described in the
Revolving Loan Facility.
On December 28, 2017, the Company paid down an aggregate principal amount of $5.0 million of the $10.0 million outstanding
principal balance of its Term Loan Facility. The Company paid to VLL7 and VLL8 approximately $5.9 million, consisting of $5.0
million in outstanding principal, and $0.9 million of accrued and unpaid interest outstanding at the prepayment date, together with all
scheduled interest that would have accrued and been payable through the stated maturity of the Term Loan. As a result, the Company
recorded a loss on extinguishment of debt totaling $1.8 million, representing the difference between the reacquisition price of the repaid
portion of the Term Loan and the its net carrying amount.
On May 31, 2018, the Company paid off the remaining amounts payable under its $10.0 million principal amount Term Loan
under the Loan and Security Agreement with VLL7 and VLL8. The Company paid to VLL7 and VLL8 approximately $5.2 million,
consisting of $4.6 million in outstanding principal, and $0.6 million of accrued and unpaid interest outstanding at the prepayment date
together with all the scheduled interest that would have accrued and been payable through the stated maturity of the Term Loan. As a
result, the Company recorded a loss on extinguishment of debt totaling $1.4 million, representing the difference between the
reacquisition price of the repaid portion of the Term Loan and its carrying amount.
The Revolving Loan Facility contains customary representations and warranties and customary affirmative and negative
covenants, including, limits or restrictions on the Company's ability to incur liens, incur indebtedness, make certain restricted
payments, merge or consolidate and dispose of assets. The Revolving Loan Facility also contains various financial covenants, including
but not limited to a liquidity covenant requiring the Company to maintain at least $4.0 million of cash. In addition, the Revolving Loan
Facility contains customary events of default that entitle EWB to cause any or all of the Company's indebtedness under the Revolving
Loan Facility to become immediately due and payable. The events of default (some of which are subject to applicable grace or cure
periods), include, among other things, nonpayment defaults, covenant defaults, crossdefaults to other material indebtedness,
bankruptcy and insolvency defaults and material judgment defaults. Upon the occurrence and during the continuance of an event of
default, EWB may terminate its lending commitment and/or declare all or any part of the unpaid principal of all loans, all interest
accrued and unpaid thereon and all other amounts payable under the Loan and Security Agreement to be immediately due and payable.
As of December 31, 2018, the Company was in compliance with all financial covenants under the Revolving Loan Facility.
61
The proceeds of the Term Loan and the initial draw under the Revolving Loan Facility, after payment of fees and expenses, were
used to repay all outstanding amounts under the credit agreement with the Company’s previous lender. In connection with the
repayment, warrants to purchase an aggregate of 400,000 shares of common stock issued to the Company’s previous lender were
cancelled. The proceeds of any additional draws under the Revolving Loan Facility will be used for working capital and other general
corporate purposes.
On February 14, 2018, the Company completed the acquisition of 3VR. As part of the purchase price consideration paid in the
acquisition of 3VR, the Company issued subordinated unsecured promissory notes (“notes payable”) in the aggregate principal amount
of $2.0 million, with an annual interest rate of 3.0%, payable on the one year anniversary of the closing date. On February 14, 2019, the
Company repaid the noteholders an aggregate principal amount, including accrued interest, of $2,060,000.
On February 21, 2018, the Company paid 3VR’s lender $3.6 million in full repayment of all indebtedness outstanding of 3VR.
9. Income Taxes
Loss before income taxes for domestic and nonU.S. operations is as follows (in thousands):
Loss from operations before income taxes and noncontrolling interest:
U.S.
Foreign
Loss from operations before income taxes and noncontrolling interest
The (provision) benefit for income taxes consisted of the following (in thousands):
Deferred:
Federal
State
Foreign
Current
Federal
State
Foreign
Total current
Total (provision) benefit for income taxes
62
2018
2017
(6,330) $
1,782
(4,548) $
(5,617)
(2,749)
(8,366)
December 31,
2018
2017
— $
—
—
— $
23 $
(26)
(152)
(155)
(155) $
—
—
—
—
—
(33)
247
214
214
$
$
$
$
$
$
Significant items making up deferred tax assets and liabilities are as follows (in thousands):
December 31,
2018
2017
Deferred tax assets:
Allowances not currently deductible for tax purposes
Net operating loss carryforwards
Interest carryforwards
Stock options
Accrued and other
Less valuation allowance
Deferred tax liability:
Depreciation and amortization
State income taxes
$
902 $
59,606
828
1,176
1,568
64,080
(60,824)
3,256
(1,945)
(1,311)
(3,256)
Net deferred tax liability
$
— $
1,177
56,989
—
873
1,104
60,143
(58,248)
1,895
(1,085)
(810)
(1,895)
—
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be
generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss
incurred over the threeyear period ended December 31, 2018. Such objective evidence limits the ability to consider other subjective
evidence such as the Company’s projections for future growth.
A valuation allowance of $60.8 million and $58.3 million at December 31, 2018 and December 31, 2017, respectively, has been
recorded to offset the related net deferred tax assets as the Company is unable to conclude that it is more likely than not that such
deferred tax assets will be realized. The net deferred tax liabilities are primarily from foreign tax liabilities as well as intangibles
acquired as a result of the acquisition of Hirsch and 3VR, which are not deductible for tax purposes.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”). The Act
amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For
businesses, the Act reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate. The rate reduction took effect on
January 1, 2018.
At December 31, 2017, the Company had a net deferred tax asset before valuation allowance totaling $58.3 million. Under
generally accepted accounting principles, the Company uses the asset and liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The Company’s net deferred tax asset before valuation allowance of $58.3 million was determined
at December 31, 2017 based on the current enacted federal tax rate of 21%, or the rate of the statutory rate applicable to the respective
foreign jurisdiction. As a result of the reduction in the corporate income tax rate from 35% to 21% under the Act, the Company has
calculated a decrease in net deferred assets of $15.8 million and a corresponding decrease of $15.8 million in the valuation allowance
which resulted in a net zero effect to the Company’s consolidated financial statements at December 31, 2017.
The Act also amended Internal Revenue Code Section 172 which governs the utilization of net operating losses (“NOLs”). Prior
rules generally allowed NOLs to be carried back two years and forward 20 years, after which time the NOLs expired. The amendment
by the Act disallows any carryback of NOLs arising in a taxable year ending after December 31, 2017, but allows an indefinite
carryforward of such losses, but such losses may only offset a maximum of 80 percent of a taxpayer’s preNOL taxable income.
Further, the Act provides for a onetime "deemed repatriation" of accumulated foreign earnings for the year ended December 31,
2017. We finalized our calculations of the transition tax liability during 2018 and no repatriation tax was provided with respect to
undistributed earnings of foreign subsidiaries due to a net foreign earnings and profits deficit position.
Section 951A is a new provision under the Act which requires a US shareholder of a controlled foreign corporation to include in
taxable income the shareholder’s share of global intangible lowtaxed income (“GILTI”) for the year. The Company has determined
that the new Section 951A provisions do apply to its operations and relationships with its controlled foreign corporations “(CFCs”).
The Company’s GILTI calculation resulted in no GILTI income in 2018 due to net tested losses at its CFCs. As of December 31, 2018,
the Company had net operating loss carryforwards of $117.4 million for federal, $63.8 million for state and $120.7 million for foreign
income tax purposes. Certain of the Company’s federal, state and foreign loss carryforwards have started expiring and will continue to
expire through 2038 if not utilized.
63
The Tax Reform Act of 1986 (the”Tax Reform Act”) limits the use of net operating loss and tax credit carryforwards in certain
situations where changes occur in stock ownership. The Company completed its acquisition of Bluehill ID AG on January 4, 2010,
which resulted in a stock ownership change as defined by the Tax Reform Act. The Company also completed its acquisition of 3VR on
February 14, 2018, which resulted in a stock ownership change as defined by the Tax Reform Act. These transactions resulted in
limitations on the annual utilization of federal and state net operating loss carryforwards and credits. As a result, the Company
reevaluated its available deferred tax assets, and the loss carryforward and credit amounts, excluding the valuation allowance presented
above have been adjusted for the limitation resulting from the change in ownership in accordance with the provisions of the Tax
Reform Act.
The provision for income taxes reconciled to the amount computed by applying the statutory federal tax rate to the loss before
income taxes from operations is as follows (in thousands):
Income tax (benefit) provision at statutory federal tax rate of 21% and 34% for 2018 and
2017, respectively
State taxes, net of federal benefit
Foreign taxes provisions provided for at rates other than U.S statutory rate
Federal rate adjustment
Change in valuation allowance
Permanent differences
Acquisition costs
Other
Total (provision) benefit for income taxes
$
$
December 31,
2018
2017
955 $
(21)
222
—
(1,141)
108
(115)
(163)
(155) $
2,845
(22)
(687)
(15,780)
13,931
200
—
(273)
214
The Company applies the provisions of, and accounted for uncertain tax positions in accordance with, ASC 740. ASC 740
clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements. It prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition.
A reconciliation of the beginning and ending amount of unrecognized tax benefits with an impact on the Company’s consolidated
balance sheets or results of operations is as follows (in thousands):
Balance at January 1
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions in prior year tax positions
Balance at December 31
2018
2017
$
$
2,878 $
2
—
(1)
2,879 $
2,874
2
2
—
2,878
While timing of the resolution and/or finalization of tax audits is uncertain, the Company does not believe that its unrecognized
tax benefits as presented in the above table would materially change in the next 12 months.
As of December 31, 2018 and 2017, the Company recognized liabilities for unrecognized tax benefits of $2.8 million and $2.8
million, respectively, which were accounted for as a decrease to deferred tax assets. Since there was a full valuation allowance against
these deferred tax assets, there was no impact on the Company’s consolidated balance sheets or results of operations for the years 2018
and 2017. Also the subsequent recognition, if any, of these previously unrecognized tax benefits would not affect the effective tax rate.
Such recognition would result in adjustments to other tax accounts, primarily deferred taxes. The amount of unrecognized tax benefits
which, if recognized, would affect the tax rate is $0.1 million as of December 31, 2018 and 2017.
The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. During fiscal
2018, the Company recorded a reduction to accrued penalties of $1,000 and an increase in accrued interest of $1,000 related to the
unrecognized tax benefits noted above. As of December 31, 2018, the Company has recognized a total liability for penalties of $13,000
and interest of $33,000. During fiscal 2017, the Company recorded an increase in accrued penalties of $1,000 and an increase in
accrued interest of $4,000 related to the unrecognized tax benefits noted above. As of December 31, 2017, the Company has recognized
a total liability for penalties of $14,000 and interest of $32,000.
64
The Company files U.S. federal, U.S. state and foreign tax returns. As a result of a federal tax examination for tax year ended
December 31, 2015, which was completed in the year ended December 31, 2018, the Company adjusted NOLs within tax years 2015
and 2016. The adjustments had no net impact on its deferred tax assets or income tax provision. The Company generally is no longer
subject to tax examinations for years prior to 2013. However, if loss carryforwards of tax years prior to 2013 are utilized in the U.S.,
these tax years may become subject to investigation by the tax authorities.
10. Stockholders’ Equity
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock, 40,000 of which have been designated as Series A
Participating Preferred Stock, par value $0.001 per share, and 5,000,000 of which have been designated as Series B NonVoting
Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”). No shares of the Company’s Series A
Participating Preferred Stock were outstanding as of December 31, 2018 and 2017. During 2017, the Company’s board of directors (the
“Board”) authorized the issuance of up to 5,000,000 shares of the Series B Preferred Stock, 5,000,000 and 3,000,000 of which were
outstanding as of December 31, 2018 and 2017, respectively.
The Board may from time to time, without further action by the Company’s stockholders, direct the issuance of shares of
preferred stock in other series and may, at the time of issuance, determine the rights, preferences and limitations of each series,
including voting rights, dividend rights and redemption and liquidation preferences. Satisfaction of any dividend preferences of
outstanding shares of preferred stock would reduce the amount of funds available for the payment of dividends on shares of the
Company’s common stock. Holders of shares of preferred stock may be entitled to receive a preference payment in the event of any
liquidation, dissolution or windingup of the Company before any payment is made to the holders of shares of the Company’s common
stock. Upon the affirmative vote of the Board, without stockholder approval, the Company may issue shares of preferred stock with
voting and conversion rights which could adversely affect the holders of shares of its common stock.
Series B Preferred Stock and Private Placement
On December 20, 2017, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with each of 21
April Fund, Ltd. and 21 April Fund, LP (collectively, the “Purchasers”), pursuant to which the Company, in a private placement, agreed
to issue and sell to the Purchasers an aggregate of up to 5,000,000 shares of the Series B Preferred Stock, $0.001 par value per share
(collectively referred to as the “Shares”). The Purchasers agreed to purchase an aggregate of 3,000,000 Shares (“Tranche 1”) at a price
of $4.00 per share in cash at the initial closing of the transaction, and at the sole option of the Company, an additional 2,000,000 Shares
at a price of $4.00 per share in cash at a second closing, if any (the “Private Placement”). The total purchase price payable to the
Company was $20,000,000, of which $12,000,000 was paid at the initial closing. On May 30, 2018, the Company issued 2,000,000
Shares (“Tranche 2”), at a price of $4.00 per share in the second closing of the Private Placement. Gross proceeds to the Company from
the second closing were approximately $8.0 million, before deducting fees and certain expenses payable by the Company. The proceeds
from the issuance of the Shares are required to be used to pay off existing debt obligations of the Company and to fund future
acquisitions of technology, business and other assets by the Company.
Each Share shall be convertible into the Company’s common stock (i) following the sixth (6th) anniversary of the initial closing
of the Private Placement or (ii) if earlier, during the thirty (30) day period following the last trading day of any period of three (3) or
more consecutive trading days that the closing market price of the Company’s common stock exceeds $10.00. Each Share is
convertible at the option of the holder of the Shares into such number of shares of the Company’s common stock determined by taking
the accreted value of such Share (purchase price plus accrued but unpaid dividends) and dividing such value by the stated value of such
Share ($4.00 per share, subject to adjustment for dilutive issuances, stock splits, stock dividends and the like); provided, however, that
the Company shall not convert any Shares if doing so would cause the holder thereof, along with its affiliates, to beneficially own in
excess of 19.9% of the outstanding common stock immediately after giving effect to the applicable conversion (the “Ownership
Limitation”), unless waiver of this restriction has been effected by the holder requesting conversion of Shares.
Based on the current conversion price, the outstanding shares of Series B Preferred Stock as of December 31, 2018 would be
convertible into 5.0 million shares of the Company’s common stock. However, the conversion rate will be subject to adjustment in the
event of certain instances, such as if the Company issues shares of its common stock at a price less than $4.00 per common share,
subject to a minimum conversion price of $3.27 per share. As of December 31, 2018, none of the contingent conditions to adjust the
total common shares to convert the Shares had been met.
65
Each Share is entitled to an annual dividend of 5% for the first six (6) years following the issuance of such Share and 3% for each
year thereafter, with the Company retaining the option to settle each year’s dividend after the tenth (10th) year in cash. The dividends
accrue and are payable in kind upon such time as the Shares convert into the Company’s common stock. In general, the Shares are not
entitled to vote except in certain limited cases, including in change of control transactions where the expected price per share
distributable to the Company’s stockholders is expected to be less than $4.00 per share. The Certificate of Designation with respect to
the Series B Preferred Stock further provides that in the event of, among other things, any change of control, liquidation or dissolution
of the Company, the holders of the Series B Preferred Stock will be entitled to receive, on a pari passu basis with the holders of the
common stock, the same amount and form of consideration that the holders of the Company’s common stock receive (on an asif
convertedtocommonstock basis and without regard to the Ownership Limitation).
Series B Preferred Stock Dividend Accretion
The following table summarizes Series B Preferred Stock and the accretion of dividends activity for the year ended December
31, 2018 (in thousands):
Series B Preferred Stock
Balance at December 31, 2017
Issuance of Series B Preferred Stock
Cumulative dividends on Series B Preferred Stock
Balance at December 31, 2018
$
$
Number of Common Shares Issuable Upon Conversion
Balance at December 31, 2017
Issuance of Series B Preferred Stock
Cumulative dividends on Series B Preferred Stock
Balance at December 31, 2018
Sale of Common Stock
Tranche 1
Tranche 2
Total
12,000 $
—
600
12,600 $
3,000
—
150
3,150
— $
8,000
233
8,233 $
—
2,000
58
2,058
12,000
8,000
833
20,833
3,000
2,000
208
5,208
In May 2017, the Company sold an aggregate of 2,845,360 shares of its common stock at a public offering price of $4.85 per
share in an underwritten public offering. The Company received net proceeds of approximately $12.6 million from the sale of the
common stock in the public offering, after deducting the underwriting discount and other offering related expenses of $1.2 million.
Common Stock Warrants
On August 13, 2014, in connection with the Company’s entry into a consulting agreement, the Company issued a consultant a
warrant to purchase up to 85,000 shares of the Company’s common stock at a per share exercise price of $10.70 (the “2014 Consultant
Warrant”). One fourth of the shares under the warrant are exercisable for cash three months from the date the 2014 Consultant Warrant
was issued and quarterly thereafter. The 2014 Consultant Warrant expires on August 13, 2019. In the event of an acquisition of the
Company, the 2014 Consultant Warrant shall terminate and no longer be exercisable as of the closing of the acquisition. As of
December 31, 2018, none of the shares under the 2014 Consultant Warrant had been exercised.
On February 8, 2017, the Company entered into Loan and Security Agreements with each of EWB and VLL7 and VLL8 as
discussed in Note 8, Financial Liabilities. The Loan and Security Agreement with EWB provided for a $10.0 million Revolving Loan
Facility, and the Loan Security Agreement with VLL7 and VLL8 provides for a Term Loan Facility in an aggregate principal amount of
$10.0 million. In connection with the Company's Revolving Loan Facility, the Company issued to EWB a warrant (the "EWB
Warrant") to purchase up to 40,000 shares of the Company's common stock at a per share exercise price of $3.64, and in connection
with the Company’s Term Loan Facility, issued to each of VLL7 and VLL8 a warrant to purchase 290,000 shares of the Company's
common stock at a per share exercise price of $2.00 (the “VLL7 Warrant” and the “VLL8 Warrant,” respectively). The Company
calculated the fair value of the EWB Warrant, the VLL7 Warrant and the VLL8 Warrant using the BlackScholes pricing model using
the following assumptions: estimated volatility of 78.8%, riskfree interest rate of 1.94%, no dividend yield, and an expected life of five
years. The fair values of the EWB Warrant, the VLL7 Warrant and the VLL8 Warrant of $125,000, $1,037,500 and $1,037,500,
respectively, were classified as equity as the settlement of the warrants will be in shares and is within the control of the Company. Each
of the EWB Warrant, the VLL7 Warrant and the VLL8 Warrant is immediately exercisable for cash or by net exercise and will expire
five years after its issuance, or on February 8, 2022. In connection with entering into the Loan and Security Agreements with EWB and
VLL7 and VLL8, warrants to purchase an aggregate of 400,000 shares of common stock issued to the Company’s previous lender were
cancelled.
66
In connection with securing of the new credit facilities and cancelling of all the warrants previously issued to the previous lender,
the Company issued a warrant to a consultant to purchase 60,000 shares of its common stock at an exercise price of $4.60 per share (the
“2017 Consultant Warrant”). The Company calculated the fair value of the 2017 Consultant Warrant using the Black Scholes pricing
model using the following assumptions: estimated volatility of 78.8%, riskfree interest rate of 1.22%, no dividend yield, and an
expected life of two years. The fair value of the 2017 Consultant Warrant of $119,000 was classified as equity as the settlement of the
warrant will be in shares and is within the control of the Company. The 2017 Consultant Warrant is immediately exercisable for cash
or by net exercise and expires two years after its issuance, or on February 8, 2019. On January 30, 2019, the Company issued 10,449
shares of its common stock upon the cashless net exercise of the entire 2017 Consultant Warrant.
Below is a summary of outstanding warrants issued by the Company as of December 31, 2018:
Warrant Type
2014 Consultant Warrant
EWB Warrant
VLL7 and VLL8 Warrants
2017 Consultant Warrant
Total
Number of Shares
Issuable Upon
Exercise
Weighted
Average Exercise
Price
Issue Date
Expiration Date
85,000 $
40,000
580,000
60,000
765,000
10.70 August 13, 2014
3.64 February 8, 2017
2.00 February 8, 2017
4.60 February 8, 2017
August 13, 2019
February 8, 2022
February 8, 2022
February 8, 2019
Common Stock Reserved for Future Issuance
Common stock reserved for future issuance as of December 31, 2018 was as follows:
Exercise of outstanding stock options, vesting of RSUs, and issuance of RSUs vested but not released
Employee Stock Purchase Plan
Shares of common stock available for grant under the 2011 Plan
Noncontrolling interest in Bluehill ID AG
Warrants to purchase common stock
Shares of common stock issuable on conversion of Series B Preferred Stock
Total
11. StockBased Compensation
Stock Incentive Plans
2,389,070
293,888
643,138
10,355
765,000
5,208,333
9,309,784
The Company has a stockbased compensation plan to attract, motivate, retain and reward employees, directors and consultants
by providing its Board or a committee of the Board the discretion to award equity incentives to these persons. The Company’s stock
based compensation plan consists of the 2011 Incentive Compensation Plan (the “2011 Plan”), as amended. Shares are no longer
available for issuance under the Company’s 2010 Bonus and Incentive Plan (the “2010 Plan”) and 2007 Stock Option Plan (the “2007
Plan”).
On June 6, 2011, the Company’s stockholders approved the 2011 Plan, which is administered by the Compensation Committee of
the Board. The 2011 Plan provides that stock options, stock units, restricted shares, and stock appreciation rights may be granted to
executive officers, directors, consultants, and other key employees. The Company reserved 400,000 shares of common stock under the
2011 Plan, plus 459,956 shares of common stock that remained available for delivery under the 2007 Plan and the 2010 Plan as of
June 6, 2011. In aggregate, as of June 6, 2011, 859,956 shares were available for future grant under the 2011 Plan, including shares
rolled over from 2007 Plan and 2010 Plan. Subsequent to June 6, 2011 through December 31, 2017, the number of shares of common
stock authorized for issuance under the 2011 Plan has been increased by 3.0 million shares. On May 31, 2018, the Company’s
stockholders approved an amendment to the 2011 Plan to increase the number of shares of common stock authorized for issuance by
500,000 shares.
67
Stock Options
A summary of activity for the Company’s stock options for the year ended December 31, 2018 follows:
Balance at December 31, 2017
Granted
Cancelled or Expired
Exercised
Balance at December 31, 2018
Number
Outstanding
Average Exercise
Price per Share
6.28
—
11.58
5.20
5.87
672,441 $
—
(48,339)
(2,500)
621,602 $
Vested or expected to vest at December 31, 2018
Exercisable at December 31, 2018
619,572 $
538,266 $
5.87
6.10
Weighted Average
Remaining
Contractual Term
(Years)
Average
Intrinsic
Value
7.48 $
6.32 $
6.31 $
6.14 $
—
—
—
2,100
—
—
—
The following table summarizes information about stock options outstanding as of December 31, 2018:
Options Outstanding
Options Exercisable
Range of Exercise Prices
$4.36 $7.20
$7.50 $11.30
$12.00 $19.70
$21.70 $24.20
$4.36 $24.20
Number
Outstanding
472,810
127,198
17,244
4,350
621,602
Weighted Average
Remaining
Contractual Life
(Years)
Weighted Average
Exercise
Price
Number
Exercisable
Weighted Average
Exercise
Price
7.22 $
3.48
3.50
2.67
4.47
9.42
13.60
23.27
389,474 $
127,198
17,244
4,350
538,266
4.49
9.42
13.60
23.27
At December 31, 2018, there was $0.2 million of unrecognized stockbased compensation expense, net of estimated forfeitures
related to unvested stock options, that is expected to be recognized over a weightedaverage period of 0.7 years.
Restricted Stock Units
The following is a summary of restricted stock unit (“RSU”) activity for the year ended December 31, 2018:
Balance at December 31, 2017
Granted
Vested
Forfeited
Balance at December 31, 2018
Shares vested but not released
Number
Outstanding
Weighted Average
Fair Value
1,460,044 $
912,955
(606,218)
(399,151)
1,367,630
399,838
3.08
4.42
3.61
2.84
3.81
3.24
The fair value of the Company’s RSUs is calculated based upon the fair market value of the Company’s common stock at the
date of grant. As of December 31, 2018, there was $4.7 million of unrecognized compensation cost related to unvested RSUs granted,
which is expected to be recognized over a weighted average period of 2.8 years.
68
StockBased Compensation Expense
The following table summarizes stockbased compensation expense related to stock options and RSUs included in the
consolidated statements of operations for the years ended December 31, 2018 and 2017 (in thousands):
Cost of revenue
Research and development
Selling and marketing
General and administrative
Total
Year Ended December 31,
2017
2018
$
$
89 $
488
689
1,380
2,646 $
82
480
651
1,267
2,480
Restricted Stock Unit Net Share Settlements
During the years ended December 31, 2018 and 2017, the Company repurchased 141,670 and 178,207 shares, respectively of
common stock surrendered to the Company to satisfy tax withholding obligations in connection with the vesting of RSUs issued to
employees.
12. Net Loss per Common Share Attributable to Identiv Stockholders’ Equity
Basic and diluted net loss per share is based upon the weighted average number of common shares outstanding during the
period. The following table sets forth the computation of basic EPS:
Numerator:
Net loss attributable to Identiv, Inc.
Accretion of Series B Preferred Stock dividends
Numerator for basic EPS income available to common stockholders
Denominator:
Weighted average shares outstanding
Net loss per share basic
Year Ended December 31,
2017
2018
$
$
(4,708) $
(833)
(5,541)
15,654
(0.35) $
(8,138)
—
(8,138)
13,273
(0.61)
The following common stock equivalents have been excluded from diluted net loss per share for the fiscal years ended December
31, 2018 and 2017 because their inclusion would be antidilutive:
Shares of common stock subject to outstanding RSUs
Shares of common stock subject to outstanding stock options
Shares of common stock subject to outstanding warrants
Shares of common stock reserved to acquire remaining share of noncontrolling interest
Shares of common stock issuable upon conversion of Series B Preferred Stock
Total
69
December 31,
2018
2017
1,367,630
621,602
765,000
10,355
5,208,333
7,972,920
1,460,044
672,441
765,000
10,355
3,000,000
5,907,840
13. Segment Reporting and Geographic Information
ASC Topic 280, Segment Reporting (“ASC 280”) establishes standards for the reporting by public business enterprises of
information about operating segments, products and services and by geographic areas. The method for determining what information to
report is based on the way management organizes the operating segments within the Company for making operating decisions and
assessing financial performance. An operating segment is defined as a component of an enterprise that engages in business activities
from which it may earn revenue and incur expenses and about which separate financial information is available to its chief operating
decision makers (“CODM”). The Company’s CODM is considered its CEO.
In the fourth quarter of 2018, the Company realigned the way in which it organized its operating segments in making operating
decisions and assessing financial performance by combining the Identity and Credential segments. The combined segment is referred to
as the Identity segment. All comparative segment information for fiscal 2017 has been reclassified to conform to the fiscal 2018
presentation.
The CODM reviews financial information and business performance for each operating segment. The Company evaluates the
performance of its operating segments at the revenue and gross profit levels. The Company does not report total assets, capital
expenditures or operating expenses by operating segment as such information is not used by the CODM for purposes of assessing
performance or allocating resources or has not been accounted for at the segment level.
Net revenue and gross profit information by segment for the years ended December 31, 2018 and 2017 are as follows (in
thousands):
Premises:
Net revenue
Gross profit
Gross profit margin
Identity:
Net revenue
Gross profit
Gross profit margin
Total:
Net revenue
Gross profit
Gross profit margin
Operating expenses:
Research and development
Selling and marketing
General and administrative
Restructuring and severance
Total operating expenses:
Loss from operations
Nonoperating income (expense):
Interest expense, net
Loss on extinguishment of debt, net
Foreign currency gains (losses), net
Loss before income taxes and noncontrolling interest
$
70
Year Ended December 31,
2017
2018
$
$
34,587
19,373
56%
24,154
13,669
57%
36,065
8,491
24%
60,219
22,160
37%
6,146
13,452
7,241
(49)
26,790
(4,630)
(2,590)
(788)
(358)
(8,366)
43,555
13,959
32%
78,142
33,332
43%
7,235
16,391
10,824
747
35,197
(1,865)
(1,518)
(1,369)
204
(4,548) $
Geographic net revenue is based on the customer’s shipto location. Information regarding net revenue by geographic region is as
follows (in thousands):
Americas
Europe and the Middle East
AsiaPacific
Total
Revenues:
Americas
Europe and the Middle East
AsiaPacific
Total
Year Ended December 31,
2017
2018
$
$
60,153
9,943
8,046
78,142
$
$
77%
13%
10%
100%
40,018
7,887
12,314
60,219
67%
13%
20%
100%
Longlived assets by geographic location as of December 31, 2018 and 2017 are as follows (in thousands):
Property and equipment, net:
Americas
Europe and the Middle East
AsiaPacific
Total property and equipment, net
December 31,
2018
2017
$
$
1,060 $
43
1,521
2,624 $
868
89
1,086
2,043
The Company’s net revenue is represented by the following product categories as of December 31, 2018 and 2017 (in
thousands):
Physical access and identity control readers
Controller panels
Access cards and provisioning
Tags and transponders
Video technology and analytics
Services
Third party access control products
Software
Total
14. Restructuring and Severance
Year Ended December 31,
2017
2018
$
$
21,680 $
14,509
14,237
12,953
6,293
6,152
1,205
1,113
78,142 $
18,601
14,637
8,396
13,089
—
3,816
1,014
666
60,219
On February 14, 2018, the Company acquired 3VR. As a result of the acquisition, during the year ended December 31, 2018, the
Company incurred restructuring and severance expenses of $0.6 million, consisting of facility rental related costs of $0.3 million, and
severance related costs of $0.3 million. In the third quarter of 2018, the Company entered into an agreement with a tenant to sublease
the 3VR office facility over the remaining term of the original lease. In the fourth quarter of 2018, the Company recorded a
restructuring accrual of $0.1 million for future its rental payment obligation associated with vacated office space at its Fremont,
California facility.
In 2017, the Company recorded a credit resulting from actual expenditures being less than originally accrued associated with the
worldwide restructuring plan implemented in the first quarter of 2016.
71
Restructuring and severance activities during the years ended December 31, 2018 and December 31, 2017 were as follows (in
thousands):
Balance at beginning of period
Restructuring expense incurred for the period
Payments during the period
Balance at end of period
15. Legal Proceedings
Year Ended December 31,
2017
2018
$
$
— $
747
(618)
129 $
237
(49)
(188)
—
On January 1, 2016, certain of the Company’s present and former officers and directors were named as defendants, and the
Company was named as nominal defendant, in a shareholder derivative lawsuit filed in the United States District Court for the
Northern District of California, entitled Oswald v. Humphreys, et al., Case No. 16cv00241CRB, alleging breach of fiduciary duty
and waste claims. On January 25, 2016, certain of the Company’s present and former officers and directors were named as defendants,
and the Company was named as nominal defendant, in a shareholder derivative lawsuit filed in the Superior Court of the State of
California, County of Alameda, entitled Chopra v. Hart, et al., Case No. RG16801379, alleging breach of fiduciary duty claims. On
February 9, 2016, certain of the Company’s present and former officers and directors were named as defendants, and the Company was
named as nominal defendant, in a shareholder derivative lawsuit filed in the Superior Court of the State of California, County of
Alameda, entitled Wollnik v. Wenzel, et al., Case No. HG16803342, alleging breach of fiduciary duty, corporate waste, gross
mismanagement, and unjust enrichment claims. These lawsuits generally allege that the Company made false and/or misleading
statements and/or failed to disclose information in certain public filings and disclosures between 2013 and 2015. Each of the lawsuits
seeks one or more of the following remedies: unspecified compensatory damages, unspecified exemplary or punitive damages,
restitution, declaratory relief, equitable and injunctive relief, and reasonable costs and attorneys’ fees. On May 2, 2016, the court in the
Chopra lawsuit entered an order staying proceedings in the Chopra lawsuit in favor of the Oswald lawsuit, based on a stipulation to that
effect filed by the parties in the Chopra lawsuit on April 28, 2016. Similarly, on June 28, 2016, the court in the Wollnik lawsuit entered
a stipulated order staying proceedings in the Wollnik lawsuit in favor of the Oswald lawsuit. On June 17, 2016, the plaintiff in the
Oswald lawsuit filed an amended complaint. On August 1, 2016, the Company filed a motion to dismiss for failure by plaintiff to make
a prelawsuit demand on the Company’s board of directors, which motion was heard on October 14, 2016. The judge in the Oswald
lawsuit issued an order on November 7, 2016 granting the Company’s motion to dismiss, without prejudice. In addition, the court
stayed the case so that plaintiff could exercise whatever rights he had under Section 220 of the Delaware General Corporation Law. On
or around November 30, 2016, the plaintiff purported to serve a books and records demand under Section 220 of the Delaware General
Corporation Law. The Company responded to that demand. On March 21, 2017, the Company and the plaintiff in the Oswald lawsuit
filed a stipulation and proposed order lifting the stay of the case, granting the plaintiff leave to amend, and setting a briefing schedule.
The plaintiff in the Oswald lawsuit filed his second amended complaint on April 10, 2017. The Company then filed a motion to dismiss
that second amended complaint on May 12, 2017. After further briefing and argument, on October 22, 2017, the court issued its
written order denying the motion to dismiss on the basis of demand futility. On January 3, 2018, the court entered a stipulated order
setting a response and briefing schedule for defendants to the second amended complaint.
Defendants filed motions to dismiss the second amended complaint in the Oswald action under Rule 12(b)(6) on January 16,
2018. After further briefing and argument, on April 13, 2018, the court entered an order granting defendants’ motions to dismiss. On
April 19, 2018, Plaintiff Oswald filed a motion for leave to file a third amended complaint. On that same date, Plaintiff Chopra, a
plaintiff in a related and stayed derivative action in state court, filed a motion to intervene in the Oswald action. After further briefing
and argument, on July 16, 2018, the court entered an order granting the Chopra motion to intervene and denying the Oswald motion for
leave to file a third amended complaint. After the filing of an unopposed administrative motion for entry of judgment by defendants,
on October 1, 2018, the court entered an order granting administrative motion for entry of final judgment and entered final judgment in
favor of all named defendants and against plaintiffs Oswald and Chopra. On October 23, 2018, plaintiff Oswald filed a notice of appeal
with the Ninth Circuit. Oswald’s opening appellate brief was filed on March 4, 2019. In the interim, the state court Chopra and
Wollnik actions have remained stayed with periodic status conferences. The next status conferences have been scheduled in the Chopra
and Wollnik cases on November 5, 2019 before Judge Seligman. The Company intends to vigorously defend against these lawsuits.
The Company cannot currently predict the impact or resolution of each of these lawsuits or reasonably estimate a range of possible
loss, if any, which could be material, and the resolution of these lawsuits may harm its business and have a material adverse impact on
its financial condition.
From time to time, the Company could become subject to claims arising in the ordinary course of business or could be named a
defendant in additional lawsuits. The outcome of such claims or other proceedings cannot be predicted with certainty and may have a
material effect on the Company’s financial condition, results of operations or cash flows.
72
16. Commitments and Contingencies
The Company leases its facilities, certain equipment, and automobiles under noncancelable operating lease agreements. Those
lease agreements existing as of December 31, 2018 expire at various dates during the next five years.
The Company recognized rent expense of $1.9 million and $1.6 million for the years ended December 31, 2018 and 2017,
respectively, in its consolidated statements of operations.
The following table summarizes the Company’s principal contractual commitments, excluding the financial liabilities and long
term payment obligation, as of December 31, 2018 (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
Operating
Leases (a)
Purchase
Commitments
Other
Contractual
Commitments
Total
$
$
$
2,210
2,050
1,706
834
533
—
7,333 $
$
10,893
450
450
450
450
—
12,693 $
$
153
—
—
—
—
—
153 $
13,256
2,500
2,156
1,284
983
—
20,179
(a) Operating lease payments have not been reduced by sublease rentals of $2.6 million due in the future under noncancelable
subleases.
Purchase commitments for inventories are highly dependent upon forecasts of customer demand. Due to the uncertainty in
demand from its customers, the Company may have to change, reschedule, or cancel purchases or purchase orders from its suppliers.
These changes may lead to vendor cancellation charges on these purchases or contractual commitments.
The Company provides warranties on certain product sales for periods ranging from 12 to 36 months, and allowances for
estimated warranty costs are recorded during the period of sale. The determination of such allowances requires the Company to make
estimates of product return rates and expected costs to repair or to replace the products under warranty. The Company currently
establishes warranty reserves based on historical warranty costs for each product line combined with liability estimates based on the
prior 12 months’ sales activities. If actual return rates and/or repair and replacement costs differ significantly from the Company’s
estimates, adjustments to recognize additional cost of sales may be required in future periods. Historically the warranty accrual and the
expense amounts have been immaterial.
17. Subsequent Events
On January 2, 2019, the Company completed the purchase of substantially all the assets of the Freedom, Liberty, and
Enterphone™ MESH products and services of Viscount Systems, Inc. (“VSI”) and the assumption of certain liabilities (the “Asset
Purchase”). Under the terms of the Asset Purchase, the Company was obligated to pay at closing aggregate consideration of
approximately $3.2 million, consisting of (i) approximately $1.2 million in cash, and (ii) the issuance of shares of the Company’s
common stock with a value of approximately $2.0 million. An aggregate of approximately $0.15 million of the Company’s common
stock issuable at the closing of the transaction were held back for 12 months following the closing for the satisfaction of certain
indemnification claims.
Additionally, in the event that revenue from the assets purchased under the agreement in 2019 is greater than certain specified
revenue targets, the Company will be obligated to issue earnout consideration of up to a maximum of $3.5 million payable in shares of
the Company’s common stock (subject to certain conditions). In the event that such revenue targets are not met in 2019, but 2020
revenue from the assets purchased exceeds certain higher targets for 2020, then the Company will be obligated to issue up to a
maximum of $2.25 million in earnout consideration in the form of stock. The maximum total earnout consideration payable for all
periods is $3.5 million in the aggregate, payable in the Company’s common stock.
On February 6, 2019, the Company entered into the Tenth Amendment to its Loan and Security Agreement with EWB. Under the
Tenth Amendment, the Revolving Loan Facility under the Loan and Security Agreement was increased from $16.0 million to $20.0
million, the interest rate was reduced from prime rate plus 1.0% to prime rate plus 0.75%, the maturity date was extended to February
8, 2021, and certain financial covenants were amended, including covenants with respect to minimum EBITDA levels.
73
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the fiscal year ended December 31, 2018, as required in Rule 13a15(b) under the Exchange Act, we carried out an
evaluation under the supervision and with the participation of members of our senior management, including our CEO and CFO, of the
effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a15(e) under the
Exchange Act). Disclosure controls and procedures are those controls and other procedures that are designed to provide reasonable
assurance that the information required to be disclosed in our SEC reports that we file or submit under the Exchange Act (i) is recorded,
processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated
to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Based on our evaluation, our management, including our CEO and CFO, concluded that as of December 31, 2018, our disclosure
controls and procedures were effective at the reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in
Rule 13a15(f) under the Exchange Act, to provide reasonable assurance regarding the reliability of our financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United
States, or U.S. GAAP. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S.
GAAP. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in
accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations
of management and or directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a material effect on the interim or annual consolidated financial
statements.
A control system, no matter how well designed and operated, can only provide reasonable assurance that the objectives of the
control system are met. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected.
A deficiency in internal control over financial reporting exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely
basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or
detected on a timely basis.
Our management, including our CEO and CFO, assessed our internal control over financial reporting as of December 31,
2018. In making the assessment of internal control over financial reporting, our management based its assessment on the criteria issued
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control — Integrated Framework
of 2013.” Our management’s assessment included evaluation of such elements as the design and operating effectiveness of key
financial reporting controls, process documentation, accounting policies, and our overall control environment. This assessment is
supported by testing and monitoring performed by our internal accounting and finance organization, but has not been reviewed by our
independent registered public accounting firm.
Based on management’s assessment, management has concluded that the Company’s internal control over financial reporting was
effective as of December 31, 2018.
Changes in Internal Controls over Financial Reporting
We have made no changes to our internal control over financial reporting during the three months ended December 31, 2018 that
have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
74
ITEM 9B.
OTHER INFORMATION
Not applicable.
75
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 concerning our directors will be set forth under the captions “Business Experience of
Directors” and “Policy for Director Recommendations and Nominations” in our Proxy Statement relating to our 2019 Annual Meeting
of Stockholders, referred to in this Annual Report on Form 10K as the “Proxy Statement,” which we expect to file within 120 days of
the end of our fiscal year pursuant to General Instruction G(3) of Form 10K. Such information is incorporated herein by reference.
Certain information required by this item concerning executive officers is set forth in Part I of this Report under the caption “Executive
Officers of the Registrant” and is incorporated herein by reference. The information required by this item concerning compliance with
Section 16(a) of the Exchange Act is incorporated by reference to the section captioned “Section 16(a) Beneficial Ownership Reporting
Compliance” that will be set forth in our Proxy Statement. The information required by this item concerning our code of ethics is
incorporated by reference to the section captioned “Code of Conduct and Ethics” in our Proxy Statement. To date, there have been no
waivers under our Code of Conduct and Ethics. We intend to disclose future amendments to certain provisions of our Code of Conduct
and Ethics or waivers of such Code granted to executive officers and directors on our website at http://www.identiv.com within four
business days following the date of such amendment or waiver. The information required by this item concerning the Audit Committee
of our board of directors is incorporated by reference to the section captioned “Committees of the Board of Directors” in our Proxy
Statement.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by Item 11 will be contained in our Proxy Statement under the captions “Compensation of Directors”
and “Executive Compensation”, which information is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by Item 12 will be set forth under the captions “Security Ownership of Certain Beneficial Owners and
Management” and “Equity Compensation Plan Information” in our Proxy Statement, which information is incorporated herein by
reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 will be set forth under the captions “Certain Relationships and Related Transactions” and
“Director Independence” in our Proxy Statement, which information is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 will be set forth under the captions “Principal Accountant Fees and Services” and “Policy
on Audit Committee PreApproval of Audit and Permissible NonAudit Services of Our Independent Registered Public Accountants”
in our Proxy Statement, which information is incorporated herein by reference.
76
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this report:
PART IV
1. Financial Statements: Consolidated Financial Statements filed as part of this report are listed under Item 8. Financial
Statements and Supplementary Data.
2. Financial Statement Schedules: None.
3. Exhibits: See Item 15(b) below.
3. Exhibits
Exhibit
Number
2.1†
2.2†
2.3†
3.1
3.2
3.3
3.4
3.5
3.6
3.7
4.1
4.2
Description of Document
Share Purchase Agreement dated March 30, 2010 between SCM Microsystems, Inc. d/b/a/ Identive Group, Dr. George
Levy, Mr. Matt McDaniel, GL Investments, LLC, Mr. Hugo Garcia, Mr. Stan Kenney and RockWest Technology Group
LLC. (Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8K filed on March 31, 2010.)
Agreement and Plan of Merger dated February 6, 2018 among the Company, Eagle Acquisition, Inc., 3VR Security, Inc.,
and Fortis Advisors LLC, as Securityholder Representative. (Incorporated by reference to Exhibit 2.1 to the Company’s
Current Report on Form 8K filed on February 6, 2018.)
Agreement and Plan of Merger, by and among Identiv, Inc., Thursby Software Systems, Inc., TSS Merger Sub, Inc., TSS
Acquisition, LLC and William Thursby as the sole Stockholder of Thursby Software Systems, Inc., dated as of October
25, 2018. (Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8K filed on October 25,
2018.)
Fourth Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to the Company’s
Registration Statement on Form S4/A, filed on November 10, 2009 (SEC File No. 333162618).)
Certificate of Amendment to Fourth Amended and Restated Certificate of Incorporation. (Incorporated by reference to
Exhibit 3.4 to the Company’s Quarterly Report on Form 10Q for the quarter ended March 31, 2010.)
Certificate of Amendment to Fourth Amended and Restated Certificate of Incorporation. (Incorporated by reference to
Exhibit 3.1 to the Company’s Current Report on Form 8K filed on June 17, 2010.)
Certificate of Amendment to Fourth Amended and Restated Certificate of Incorporation. (Incorporated by reference to
Exhibit 3.1 to the Company’s Current Report on Form 8K filed on June 7, 2011.)
Certificate of Amendment to Fourth Amended and Restated Certificate of Incorporation. (Incorporated by reference to
Exhibit 3.1 to the Company’s Current Report on Form 8K filed on May 23, 2014.)
Certificate of Amendment to Fourth Amended and Restated Certificate of Incorporation, as amended. (Incorporated by
reference to Exhibit 3.1 to the Company’s Current Report on Form 8K filed on May 18, 2016.)
Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form
10Q for the quarter ended September 30, 2002.)
Specimen Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on
Form 10Q for the quarter ended June 30, 2010.)
Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of SCM
Microsystems, Inc. (Incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement on Form 8A filed
on November 14, 2002.)
77
Exhibit
Number
4.3
4.4
4.5
4.6
10.1*
10.2
10.3
10.4*
10.5*
10.6*
10.7*
10.8
10.9
10.10
10.11
10.12
10.14
10.15
Description of Document
Certificate of Designation of Preferences, Rights and Limitations of Series B NonVoting Convertible Preferred Stock
dated December 21, 2017. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8K filed
on December 21, 2017.)
Warrant issued to East West Bank dated February 8, 2017. (Incorporated by reference to Exhibit 4.1 to the Company’s
Current Report on Form 8K filed on February 14, 2017.)
Warrant issued to Venture Lending & Leasing VII, Inc. dated February 8, 2017. (Incorporated by reference to Exhibit 4.2
to the Company’s Current Report on Form 8K filed on February 14, 2017.)
Warrant issued to Venture Lending & Leasing VIII, Inc. dated February 8, 2017. (Incorporated by reference to Exhibit 4.3
to the Company’s Current Report on Form 8K filed on February 14, 2017.)
Form of Director and Officer Indemnification Agreement. (Incorporated by Reference to Exhibit 10.1 to the Company’s
Annual Report on Form 10K for the year ended December 31, 2015).
Amended and Restated Settlement Agreement dated April 8, 2009 among Hirsch Electronics Corporation, Secure
Keyboards, Ltd. and Secure Networks, Ltd. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8K filed on May 4, 2009.)
Limited Guarantee dated April 8, 2009 by SCM Microsystems, Inc. in favor of Secure Keyboards, Ltd. and Secure
Networks, Ltd. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8K filed on April 9,
2009.)
2011 Incentive Compensation Plan, as amended through March 6, 2018. (Incorporated by reference to Exhibit 10.3 of the
Company’s Quarterly Report on Form 10Q for the quarter ended June 30, 2018.)
2011 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on
Form 8K filed on June 7, 2011.)
Letter Agreement dated September 14, 2015 between the Company and Steven Humphreys. (Incorporated by reference to
Exhibit 10.2 of the Company’s Current Report on Form 8K filed on September 16, 2015.)
Offer Letter dated January 19, 2017 between the Company and Sandra Wallach. (Incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8K filed on February 17, 2017.)
Share Purchase Agreement dated December 10, 2013 between Bluehill ID AG, Identive Services AG and Sandpiper
Assets SA regarding the sale and purchase of shares of and loans provided to Multicard AG. (Incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8K filed on December 26, 2013.)
Share Purchase Agreement dated December 10, 2013 between Bluehill ID AG and Sandpiper Assets SA regarding the
sale and purchase of shares of and loans provided to Payment Solution AG. (Incorporated by reference to Exhibit 10.2 to
the Company’s Current Report on Form 8K filed on December 26, 2013.)
Loan and Security Agreement dated February 8, 2017 between the Company and East West Bank. (Incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8K filed on February 14, 2017.)
First Amendment to Loan and Security Agreement dated March 27, 2017 between the Company and East West Bank.
(Incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10K filed on March 28, 2018.)
Second Amendment to Loan and Security Agreement dated December 19, 2017 between the Company and East West
Bank. (Incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10K filed on March 28,
2018.)
Third Amendment to Loan and Security Agreement dated January 31, 2018 between the Company and East West Bank.
(Incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 8K filed on February 1, 2018.)
Fourth Amendment to Loan and Security Agreement dated February 5, 2018 between the Company and East West Bank.
(Incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10Q filed on May 15, 2018.)
78
Exhibit
Number
10.16
10.17
10.18
10.19
10.20^
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28†
Description of Document
Fifth Amendment to Loan and Security Agreement dated March 6, 2018 between the Company, 3VR Security, Inc. and
East West Bank. (Incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10Q filed on
May 15, 2018.)
Sixth Amendment to Loan and Security Agreement dated April 18, 2018 between the Company, 3VR Security, Inc. and
East West Bank. (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10Q filed on
August 13, 2018.)
Seventh Amendment to Loan and Security Agreement dated July 17, 2018 between the Company, 3VR Security, Inc. and
East West Bank. (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10Q filed on
November 13, 2018.)
Eighth Amendment to Loan and Security Agreement dated November 1, 2018 between the Company, 3VR Security, Inc.
Thursby Software Systems and East West Bank. (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly
Report on Form 10Q filed on November 13, 2018.)
Ninth Amendment to Loan and Security Agreement dated January 2, 2019 between the Company, 3VR Security, Inc.
Thursby Software Systems and East West Bank.
Tenth Amendment to Loan and Security Agreement dated February 6, 2019 between the Company, Thursby Software
Systems and East West Bank. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8K
filed on February 12, 2019.)
Loan and Security Agreement dated February 8, 2017 between the Company and Venture Lending & Leasing VII, Inc.,
and Venture Lending & Leasing VIII, Inc. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on
Form 8K filed on February 14, 2017.)
Supplement to the Loan and Security Agreement dated February 8, 2017 between the Company and Venture Lending &
Leasing VII, Inc., and Venture Lending & Leasing VIII, Inc. (Incorporated by reference to Exhibit 10.3 to the Company’s
Current Report on Form 8K filed on February 14, 2017.)
Securities Purchase Agreement dated December 21, 2017 among the Company, 21 April Fund, Ltd. and 21 April Fund,
LP. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8K filed on December 21,
2017.)
Stockholder Agreement dated December 21, 2017 among the Company, 21 April Fund, Ltd. and 21 April Fund, LP.
(Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8K filed on December 21, 2017.)
Form of Securityholder Agreement dated as of February 6, 2018 between the Company, each of the shareholders and
noteholders of 3VR Security, Inc., the Management Carveout Participants (Incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8K filed on February 6, 2018).
Form of Subordinated Unsecured Promissory Note (incorporated by reference to Exhibit 10.2 to the Company’s Current
Report on Form 8K filed on February 6, 2018).
Asset Purchase Agreement, by and among Identiv, Inc., Viscount Acquisition ULC, Viscount Systems, Inc., Viscount
Communications and Control Systems, Freedom Access and Indemnity, LLC, and VS225LLC, dated as of December 19,
2018. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8K filed on December 20,
2018.)
21.1^
Subsidiaries of the Registrant.
23.1^
Consent of Independent Registered Public Accounting Firm.
31.1^
Certification of Chief Executive Officer pursuant to Rule 13a14(a) of the Securities Exchange Act of 1934.
31.2^
Certification of Chief Financial Officer pursuant to Rule 13a14(a) of the Securities Exchange Act of 1934.
32+
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the SarbanesOxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
79
Exhibit
Number
Description of Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
†
^
*
+
Schedules and attachments have been omitted pursuant to Item 601(b)(2) of Regulation SK. The registrant undertakes to furnish
supplemental copies of any of the omitted schedules and attachments upon request by the Securities and Exchange Commission.
Filed herewith.
Denotes management compensatory contract or arrangement.
Furnished herewith and not “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended (the
“Exchange Act”). Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act
of 1933 or the Exchange Act, except to the extent that the registrant specifically incorporates by reference.
ITEM 16.
FORM 10K SUMMARY
Not applicable.
80
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
Registrant
IDENTIV, INC.
By:
/s/ Steven Humphreys
Steven Humphreys
Chief Executive Officer
March 15, 2019
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints
Steven Humphreys and Sandra Wallach, and each of them, his or her true and lawful attorneys in fact, each with full power of
substitution, for him or her in any and all capacities, to sign any amendments to this report on Form 10K and to file the same, with
exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys in fact or their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ STEVEN HUMPHREYS
Steven Humphreys
/s/ SANDRA WALLACH
Sandra Wallach
/s/ JAMES E. OUSLEY
James E. Ousley
/s/ NINA B. SHAPIRO
Nina B. Shapiro
/s/ GARY KREMEN
Gary Kremen
Capacity in Which Signed
Date
Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
March 15, 2019
March 15, 2019
Chairman of the Board and Director
March 15, 2019
Director
Director
March 15, 2019
March 13, 2019
81