The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
1. Organization and Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of Identiv, Inc. (“Identiv” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring adjustments, considered necessary for a fair presentation of the Company’s unaudited condensed consolidated financial statements have been included. The results of operations for the nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 or any future period. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” “Quantitative and Qualitative Disclosures About Market Risk,” and the audited Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The preparation of unaudited condensed consolidated financial statements necessarily requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the condensed consolidated balance sheet dates and the reported amounts of revenues and expenses for the periods presented. The Company may experience significant variations in demand for its products quarter to quarter and typically experiences a stronger demand cycle in the second half of its fiscal year. As a result, the quarterly results may not be indicative of the full year results. The December 31, 2015 balance sheet was derived from the audited financial statements as of that date.
Certain reclassifications, such as the accounting for debt issuance costs consistent with Accounting Standards Update (“ASU”)
,
Simplifying the Presentation of Debt Issuance Costs
(“ASU 2015-03”),
have been made to the fiscal year 2015 financial statements to conform to the fiscal year 2016 presentation.
Concentration of Credit Risk
— No customer represented more than 10% of net revenue for the three months ended September 30, 2016, and one customer accounted for 10% of net revenue for the nine months ended September 30, 2016. One customer represented 19% of net revenue for the three months ended September 30, 2015, and one customer represented 18% of net revenue for the nine months ended September 30, 2015. No
customer represented more than 10% of the Company’s accounts receivable balance at September 30, 2016 or December 31, 2015.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update (“ASU”) 2016-09,
Compensation – Stock Compensation
, which provides
guidance to simplify several aspects of accounting for share-based 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; however, early adoption is permitted. The Company is currently evaluating the impact of the adoption of this guidance will have on its condensed consolidated financial statements.
In February 2016, the FASB issued
ASU 2016-02,
Leases
(“ASU 2016-02”), which
amends accounting for leases. Under the new guidance, a lessee will recognize assets and liabilities but will recognize expenses similar to current lease accounting. The guidance is effective for reporting periods beginning after December 15, 2018; however early adoption is permitted. The new guidance must be adopted using a modified retrospective approach to each prior reporting period presented with various optional practical expedients. The Company is currently evaluating the impact of the adoption of this guidance will have on its condensed consolidated financial statements.
In April 2015, the FASB issued 2015-05,
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
(“ASU 2015-05”), which clarifies the circumstances under which a cloud computing customer would account for the arrangement as a license of internal-use software. ASU 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. The adoption of ASU 2015-05 did not have a material impact on the Company’s condensed consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03,
Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
(“ASU 2015-03”).
The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015. The Company adopted
8
this guidance as of January 1, 2016. The new guidance has been applied on a retrospe
ctive basis, wherein the consolidated balance sheet of December 31, 2015 has been retrospectively adjusted to reflect the effects of applying the new guidance. As a result of the change to the December 31, 2015 consolidated balance sheet, deferred debt is
suance costs included in other assets and long-term financial liabilities decreased by $0.4 million. After the retrospective application to December 31, 2015, subsequent amortization of the deferred debt issuance costs results in an increase to long-term
debt.
In January 2015, the FASB issued ASU 2015-01,
Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items
(“ASU 2015-01”). Under ASU 2015-01, an entity will no longer be allowed to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is unusual in nature and occurs infrequently. ASU 2015-01 is effective for interim and annual reporting periods beginning after December 15, 2015 with early adoption permitted. Upon adoption, the Company may elect prospective or retrospective application. The adoption of ASU 2015-01 did not have a material impact on the Company’s condensed consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15,
Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern
, (“ASU 2014-15”), which requires management to perform interim and annual assessments on whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year of the date the financial statements are issued and to provide related disclosures, if required. The amendments in ASU 2014-15 are effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the impact of the adoption will have on its condensed consolidated financial statements
.
In May 2014, the FASB issued ASU No. 2014-09
Revenue from Contracts with Customers
(“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
In August 2015, the FASB issued ASU 2015-14,
Revenue From Contracts With Customers
(Topic 606) (“ASU 2015-14”), which defers the effective date of ASU 2014-09 by one year to annual periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The new guidance is effective for the Company beginning January 1, 2018 and will provide the Company additional time to evaluate the method and impact that ASU 2014-09 will have on its condensed consolidated financial statements
.
2. 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 the Accounting Standards Codification (“ASC”), ASC 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 September 30, 2016 and December 31, 2015, there were no assets that are measured and recognized at fair value on a recurring basis. There were no cash equivalents as of September 30, 2016 and December 31, 2015.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
Certain of the Company's assets, including intangible assets, and privately-held 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. During the three and nine months ended September 30, 2016, the Company noted no indicators of impairment. During the three and nine months ended September 30, 2015, the Company noted certain indicators of impairment, including a sustained decline in its stock price and continued reduced performance in its Identity reporting unit. Based on the results of step one of the goodwill impairment analysis, it was determined that the Company’s net adjusted carrying value exceeded its estimated fair value for the Identity reporting unit. As a result, goodwill relating to the Identity segment was determined to be fully impaired resulting in an
9
impairment charge of $1.0 million which was recorded in the condensed consolidated statements of operations for the period. For
additional discussion of measurement criteria used in evaluating potential impairment involving intangible assets, refer to Note 5,
Intangible Assets
.
Privately-held 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 near-term prospects of the investee, including recent financing activities and the investee's capital structure.
As of September 30, 2016 and December 31, 2015, the Company had $0.3 million of privately-held investments measured at fair value on a nonrecurring basis which were classified as a Level 3 asset 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 privately-held investments for any impairment if the fair value is less than the carrying value of the respective assets on an other-than-temporary basis. During the
three
and nine months ended
September 30, 2016
, the Company determined that no privately-held investments were impaired. The amount of privately-held investments is included in other assets in the condensed consolidated balance sheets.
As of
September 30, 2016
and December 31, 2015, there were no liabilities that are measured and recognized at fair value on a non-recurring 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.
3. Stockholders’ Equity
Common Stock Warrants
In connection with the Company’s entry into a consulting agreement in August 2014, 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 “Consultant Warrant”). One fourth of the shares under the warrant are exercisable for cash three months from the date the Consultant Warrant was issued and quarterly thereafter. The Consultant Warrant expires on August 13, 2019. In the event of an acquisition of the Company, the Consultant Warrant shall terminate and no longer be exercisable as of the closing of the acquisition. As of September 30, 2016, the Consultant Warrant had not been exercised.
In connection with the Company’s entry into a credit agreement with Opus Bank (“Opus”) as discussed in Note 7,
Financial Liabilities
, the Company issued Opus a warrant to purchase up to 100,000 shares of the Company’s common stock at a per share exercise price of $9.90 (the “Opus Warrant”).
On March 31, 2016, the Company entered into a third amendment to its Credit Agreement increasing the number of shares of common stock underlying the warrant from 100,000 to 200,000 shares and decreased the exercise price from $9.90 to $2.19 per share subject to modification. The Company also agreed to issue new warrants to purchase 100,000 shares of common stock in the event that the outstanding principal balance of the Company’s loans with Opus exceeds specified thresholds on each of September 30, 2016, December 31, 2016 and March 31, 2017. The terms of any new warrants issued will be identical to those of the existing warrant, except that each new warrant issued will be exercisable for 100,000 shares and have an exercise price equal to the average closing price of the Company’s common stock for the five trading days ending on the last day of the quarter with respect to which the new warrant is issued. In addition, the existing registration rights agreement was amended to include the new warrants and change the circumstances under which the Company must register shares underlying the warrants issued to Opus (the “Amended Rights Agreement”).
The Opus Warrant is immediately exercisable for cash or by net exercise and expires on March 31, 2019. The shares issuable upon exercise of the Opus Warrant and new Opus warrants, if any, are to be registered at the request of Opus pursuant to the Registration Rights Agreement, dated March 31, 2014, as amended by Amendment No. 1 to Registration Rights Agreement, dated March 31, 2016, between the Company and Opus. As of September 30, 2016, the Opus Warrant had not been exercised.
On September 30, 2016, the Company’s outstanding principal threshold, as required in its Credit Agreement, as amended, was not attained. As a result, the Company issued a new warrant (“New Opus Warrant”) to purchase 100,000 shares of common stock at a per share exercise price of $2.22 per share to Opus.
The New Opus Warrant is immediately exercisable for cash or by net exercise and expires on September 30, 2021.
On August 14, 2013, in a private placement, the Company issued 834,847 shares of its common stock at a price of $8.50 per share and warrants to purchase an additional 834,847 shares of its common stock at an exercise price of $10.00 per share (the “2013
10
Private Placement Warrants”) to ac
credited and other qualified investors (the “Investors”). The 2013 Private Placement Warrants have a term of four years and are exercisable beginning six months following the date of issuance. The number of shares issuable upon exercise of the 2013 Private
Placement Warrants is subject to adjustment for any stock dividends, stock splits or distributions by the Company, or upon any merger or consolidation or sale of assets of the Company, tender or exchange offer for the Company’s common stock, or a reclassi
fication of the Company’s common stock.
Below is the summary of outstanding warrants issued by the Company as of September 30, 2016:
Warrant Type
|
|
Number of Shares Issuable Upon Exercise
|
|
|
Weighted Average Exercise Price
|
|
|
Issue Date
|
|
Expiration Date
|
Consultant Warrant
|
|
|
85,000
|
|
|
$
|
10.70
|
|
|
August 13, 2014
|
|
August 13, 2019
|
Opus Warrant
|
|
|
200,000
|
|
|
|
2.19
|
|
|
March 31, 2014
|
|
March 31, 2019
|
New Opus Warrant
|
|
|
100,000
|
|
|
|
2.22
|
|
|
September 30, 2016
|
|
September 30, 2021
|
2013 Private Placement Warrants
|
|
|
186,878
|
|
|
|
10.00
|
|
|
August 14, 2013
|
|
August 14, 2017
|
Total
|
|
|
571,878
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation Plans
The Company has various stock-based compensation plans 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 plans consist of the Director Option Plan, 1997 Stock Option Plan, 2000 Stock Option Plan, 2007 Stock Option Plan (the “2007 Plan”), the 2010 Bonus and Incentive Plan (the “2010 Plan”) and the 2011 Incentive Compensation Plan (the “2011 Plan”), as amended.
Stock Bonus and Incentive Plans
In June 2010, the Company’s stockholders approved the 2010 Plan which granted cash and equity-based awards to executive officers, directors and other key employees as designated by the Compensation Committee of the Board. An aggregate of 300,000 shares of the Company’s common stock was reserved for issuance under the 2010 Plan as equity-based awards, including shares, nonqualified stock options, restricted stock or deferred stock awards. These awards provide the Company´s executives, directors and other key employees the opportunity to earn shares of common stock depending on the extent to which certain performance goals are met. Since the adoption of the 2011 Plan (described below), the Company utilizes shares from the 2010 Plan only for performance-based awards and all equity awards granted under the 2010 Plan are issued pursuant to the 2011 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 grants under the 2011 Plan, including shares rolled over from the 2007 Plan and 2010 Plan. Subsequent to June 6, 2011, the number of shares of common stock authorized for issuance under the 2011 Plan has been increased by an aggregate of 3.0 million shares.
11
Stock Option Plans
A summary of activity for the Company’s stock option plans for the nine months ended September 30, 2016 follows:
|
Number
Outstanding
|
|
|
Average Exercise
Price per Share
|
|
|
Weighted Average
Remaining
Contractual Term
(Years)
|
|
|
Average Intrinsic
Value
|
|
Balance at December 31, 2015
|
|
781,804
|
|
|
$
|
11.48
|
|
|
|
|
|
|
$
|
—
|
|
Granted
|
|
444,460
|
|
|
|
4.36
|
|
|
|
|
|
|
|
|
|
Cancelled or Expired
|
|
(299,929
|
)
|
|
|
12.81
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
926,335
|
|
|
$
|
7.40
|
|
|
|
8.15
|
|
|
$
|
—
|
|
Vested or expected to vest at
September 30, 2016
|
|
887,433
|
|
|
$
|
7.49
|
|
|
|
8.10
|
|
|
$
|
—
|
|
Exercisable at September 30, 2016
|
|
458,897
|
|
|
$
|
9.12
|
|
|
|
7.21
|
|
|
$
|
—
|
|
The following table summarizes information about options outstanding as of September 30, 2016:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Number Outstanding
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
Weighted Average Exercise Price
|
|
|
Number Exercisable
|
|
|
Weighted Average Exercise Price
|
|
$4.36 - $7.20
|
|
|
540,363
|
|
|
|
9.15
|
|
|
$
|
4.58
|
|
|
|
183,894
|
|
|
$
|
4.90
|
|
$7.50 - $11.30
|
|
|
320,768
|
|
|
|
7.07
|
|
|
|
9.59
|
|
|
|
210,142
|
|
|
|
9.44
|
|
$12.00 - $19.70
|
|
|
40,009
|
|
|
|
6.46
|
|
|
|
13.56
|
|
|
|
39,666
|
|
|
|
13.55
|
|
$21.70 - $33.90
|
|
|
17,411
|
|
|
|
4.19
|
|
|
|
25.14
|
|
|
|
17,411
|
|
|
|
25.14
|
|
$34.40 - $43.40
|
|
|
7,784
|
|
|
|
0.40
|
|
|
|
41.33
|
|
|
|
7,784
|
|
|
|
41.33
|
|
$4.36 - $43.40
|
|
|
926,335
|
|
|
|
8.15
|
|
|
$
|
7.40
|
|
|
|
458,897
|
|
|
$
|
9.12
|
|
At September 30, 2016, there was $1.7 million of unrecognized stock-based compensation expense, net of estimated forfeitures related to unvested options, that is expected to be recognized over a weighted-average period of 2.28 years.
Restricted Stock and Restricted Stock Units
The following is a summary of restricted stock and restricted stock unit (“RSU”) activity for the nine months ended September 30, 2016:
|
Number
Outstanding
|
|
|
Weighted
Average
Fair Value
|
|
|
Average Intrinsic Value
|
|
Balance at December 31, 2015
|
|
721,918
|
|
|
$
|
13.32
|
|
|
$
|
—
|
|
Granted
|
|
1,756,732
|
|
|
|
2.06
|
|
|
|
|
|
Vested
|
|
(603,869
|
)
|
|
|
7.29
|
|
|
|
|
|
Forfeited
|
|
(243,515
|
)
|
|
|
15.14
|
|
|
|
|
|
Balance at September 30, 2016
|
|
1,631,266
|
|
|
$
|
2.97
|
|
|
$
|
-
|
|
The fair value of the Company’s restricted stock awards and RSUs is calculated based upon the fair market value of the Company’s stock at the date of grant. As of September 30, 2016, there was $2.1 million of unrecognized compensation cost related to unvested RSUs granted, which is expected to be recognized over a weighted average period of 2.89 years. As of September 30, 2016, an aggregate of 1,631,266 RSUs were outstanding under the 2011 Plan.
12
Stock-Based Compensation Expense
The following table illustrates all employee stock-based compensation expense related to stock options and RSUs included in the condensed consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015 (in thousands):
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Cost of revenue
|
$
|
26
|
|
|
$
|
34
|
|
|
$
|
72
|
|
|
$
|
98
|
|
Research and development
|
|
69
|
|
|
|
73
|
|
|
|
205
|
|
|
|
212
|
|
Selling and marketing
|
|
148
|
|
|
|
363
|
|
|
|
433
|
|
|
|
911
|
|
General and administrative
|
|
620
|
|
|
|
659
|
|
|
|
1,535
|
|
|
|
2,316
|
|
Total
|
$
|
863
|
|
|
$
|
1,129
|
|
|
$
|
2,245
|
|
|
$
|
3,537
|
|
Common Stock Reserved for Future Issuance
Common stock reserved for future issuance as of September 30, 2016 was as follows:
Exercise of outstanding stock options and vesting of RSUs
|
|
|
2,557,601
|
|
ESPP
|
|
|
293,888
|
|
Shares of common stock available for grant under the 2011 Plan
|
|
|
697,984
|
|
Noncontrolling interest in Bluehill AG
|
|
|
10,355
|
|
Warrants to purchase common stock
|
|
|
571,878
|
|
Total
|
|
|
4,131,706
|
|
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. For the three and nine months ended September 30, 2016 and 2015, common stock equivalents consisting of outstanding stock options, RSUs and warrants were excluded from the calculation of diluted net loss per share because these securities were anti-dilutive due to the net loss in the respective periods. The total number of common stock equivalents excluded from diluted net loss per share relating to these securities was 3,129,479 common stock equivalents for the three and nine months ended September 30, 2016, and 2,323,430 common stock equivalents for the three and nine months ended September 30, 2015, respectively.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income
(“AOCI”)
at September 30, 2016 and December 31, 2015 consists of foreign currency translation adjustments totaling $2.0 million and $2.2 million, respectively. As a result of the acquisition of the noncontrolling interest in a subsidiary company, $0.5 million was reclassified out of AOCI into net loss during the nine months ended September 30, 2015.
4. Balance Sheet Components
The Company’s inventories are stated at the lower of cost or market. Inventories consist of (in thousands):
|
September 30,
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
Raw materials
|
$
|
3,654
|
|
|
$
|
5,033
|
|
Work-in-progress
|
|
764
|
|
|
|
12
|
|
Finished goods
|
|
7,722
|
|
|
|
9,681
|
|
Total
|
$
|
12,140
|
|
|
$
|
14,726
|
|
13
Property and equipment, net consists of (in thousands):
|
September 30,
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
Building and leasehold improvements
|
$
|
2,252
|
|
|
$
|
2,670
|
|
Furniture, fixtures and office equipment
|
|
2,290
|
|
|
|
2,242
|
|
Plant and machinery
|
|
8,901
|
|
|
|
8,858
|
|
Purchased software
|
|
1,941
|
|
|
|
2,510
|
|
Total
|
|
15,384
|
|
|
|
16,280
|
|
Accumulated depreciation
|
|
(12,712
|
)
|
|
|
(12,062
|
)
|
Property and equipment, net
|
$
|
2,672
|
|
|
$
|
4,218
|
|
The Company recorded depreciation expense of $0.5 million and $0.4 million during the three months ended September 30, 2016 and 2015, respectively, and $1.4 million and $1.2 million during the nine months ended September 30, 2016 and 2015, respectively.
Other accrued expenses and liabilities consist of (in thousands):
|
September 30,
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
Accrued restructuring
|
$
|
487
|
|
|
$
|
633
|
|
Accrued professional fees
|
|
4,138
|
|
|
|
1,731
|
|
Income taxes payable
|
|
187
|
|
|
|
282
|
|
Other accrued expenses
|
|
2,064
|
|
|
|
3,189
|
|
Total
|
$
|
6,876
|
|
|
$
|
5,835
|
|
5. Intangible Assets
Intangible Assets
The following table summarizes the gross carrying amount and accumulated amortization for intangible assets resulting from acquisitions (in thousands):
|
|
Existing
|
|
|
Customer
|
|
|
|
|
|
|
|
Technology
|
|
|
Relationship
|
|
|
Total
|
|
Amortization period (in years)
|
|
|
11.75
|
|
|
4.0 – 11.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount at December 31, 2015
|
|
$
|
4,600
|
|
|
$
|
10,639
|
|
|
$
|
15,239
|
|
Accumulated amortization
|
|
|
(2,361
|
)
|
|
|
(5,603
|
)
|
|
|
(7,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets, net at December 31, 2015
|
|
$
|
2,239
|
|
|
$
|
5,036
|
|
|
$
|
7,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount at September 30, 2016
|
|
$
|
4,600
|
|
|
$
|
10,639
|
|
|
$
|
15,239
|
|
Accumulated amortization
|
|
|
(2,697
|
)
|
|
|
(6,359
|
)
|
|
|
(9,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets, net at September 30, 2016
|
|
$
|
1,903
|
|
|
$
|
4,280
|
|
|
$
|
6,183
|
|
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 over their useful lives as shown in the table above. The Company evaluates its amortizable intangible assets for impairment at the end of each reporting period. The Company did not identify any impairment indicators during the three and nine months ended September 30, 2016.
14
During the second quarter of 2015, the Company note
d certain indicators of impairment, including a sustained decline in its stock price and continued reduced performance in its Identity reporting unit. Based on the results of step one of the goodwill impairment analysis, it was determined that the Company’
s net adjusted carrying value exceeded its estimated fair value for the Identity reporting unit. As a result, the Company
concluded that the carrying value of goodwill for the Identity reporting unit was fully impaired and recorded an impairment charge of
approximately $
1.0
million in its condensed consolidated statements of operations during the second quarter of 2015.
The following table illustrates the amortization expense included in the condensed consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015, respectively (in thousands):
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Cost of revenue
|
$
|
112
|
|
|
$
|
112
|
|
|
$
|
336
|
|
|
$
|
336
|
|
Selling and marketing
|
|
252
|
|
|
|
252
|
|
|
|
756
|
|
|
|
756
|
|
Total
|
$
|
364
|
|
|
$
|
364
|
|
|
$
|
1,092
|
|
|
$
|
1,092
|
|
The estimated annual future amortization expense for purchased intangible assets with definite lives over the next five years is as follows (in thousands):
2016 (remaining three months)
|
|
$
|
363
|
|
2017
|
|
|
1,455
|
|
2018
|
|
|
1,455
|
|
2019
|
|
|
1,455
|
|
2020
|
|
|
1,455
|
|
Total
|
|
$
|
6,183
|
|
6. Long-Term Payment Obligation
Hirsch Acquisition – Secure Keyboards and Secure Networks
. Prior to the 2009 acquisition of Hirsch Electronics Corporation (“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 from the Company effective July 31, 2014.
On April 8, 2009, Secure Keyboards, Secure Networks and Hirsch amended and restated the 1994 Settlement Agreement to replace the royalty-based 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. The Company’s payment obligations under the 2009 Settlement Agreement to Secure Keyboards will continue through the calendar year ending December 31, 2020, with the final payment due on January 30, 2021, unless the Company elects at any time to satisfy its obligations by making a lump-sum payment to Secure Keyboards. The Company does not intend to make a lump-sum payment and therefore a portion of the payment obligation amount is classified as a long-term liability in the condensed consolidated balance sheets.
The Company included $0.1 million and $0.3 million of interest expense during the three and nine months ended September 30, 2016, respectively, and $0.1 million and $0.4 million of interest expense during the three and nine months ended September 30, 2015, respectively, in its condensed consolidated statements of operations for interest accreted on the long-term payment obligation.
15
The ongoing payment obligation in connection with the Hirsch acquisition as of September 30, 2016 is as follows (in thousands):
|
|
|
|
|
2016 (remaining three months)
|
|
$
|
291
|
|
2017
|
|
|
1,200
|
|
2018
|
|
|
1,248
|
|
2019
|
|
|
1,298
|
|
2020
|
|
|
1,444
|
|
Thereafter
|
|
|
372
|
|
Present value discount factor
|
|
|
(884
|
)
|
Total
|
|
$
|
4,969
|
|
7. Financial Liabilities
Financial liabilities consist of (in thousands):
|
September 30,
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
Secured term loan
|
$
|
10,000
|
|
|
$
|
10,000
|
|
Bank revolving loan facility
|
|
8,300
|
|
|
|
8,300
|
|
Total before discount and debt issuance costs
|
|
18,300
|
|
|
|
18,300
|
|
Less: Current portion of financial liabilities
|
|
(10,000
|
)
|
|
|
—
|
|
Less: Long-term portion of unamortized discount and
debt issuance costs
|
|
(11
|
)
|
|
|
(644
|
)
|
Long-term financial liabilities
|
$
|
8,289
|
|
|
$
|
17,656
|
|
Bank Term Loan and Revolving Loan Facility
On March 31, 2014, the Company entered into a credit agreement (the “Credit Agreement”) with Opus. The Credit Agreement provides for a term loan in aggregate principal amount of $10.0 million (“Term Loan”) and an additional $10.0 million revolving loan facility (“Revolving Loan Facility”). The obligations of the Company under the Credit Agreement are secured by substantially all assets of the Company. Certain of the Company’s domestic subsidiaries have guaranteed the credit facilities and have granted Opus security interests in substantially all of their respective assets. The Company may voluntarily prepay the Term Loan and outstanding amounts under the Revolving Loan Facility, without prepayment charges, and is required to make prepayments of the Term Loan in certain circumstances or condemnation events using the proceeds of asset sales or insurance.
In connection with the Company’s entry into the Credit Agreement, the Company paid
customary lender fees and expenses, including facility fees. In addition, as discussed in Note 3,
Stockholders’ Equity
, the Company issued the Opus Warrant to purchase up to 100,000 shares of the Company’s common stock at a per share exercise price of $9.90. The Company calculated the fair value of the Opus Warrant using the Black-Scholes pricing model using the following assumptions: estimated volatility of 92.09%, risk-free interest rate of 1.73%, no dividend yield, and an expected life of five years.
In accordance with ASC 505-50,
Equity-Based Payments to Non-Employees
the fair value of the Opus Warrant of $0.8 million was classified as equity as the settlement of the warrant will be in shares and is within the control of the Company. The Company recognized $0.9 million in costs, both cash and equity, related to the Term Loan and Revolving Loan Facility. In accordance with ASC 835-30,
Interest – Imputation of Interest
amended by ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs,
the costs are recorded as a direct deduction from the carrying amount of the
Term Loan the Revolving Loan Facility and
amortized as interest expense over the term of the Credit Agreement.
On November 10, 2014, the Company entered into an amendment to its Credit Agreement (the “Amended Credit Agreement”) with Opus. Under the Amended Credit Agreement, the Revolving Loan Facility was increased from $10.0 million to $30.0 million and the revolving loan maturity date was extended to November 10, 2017. In addition, the Company is no longer be required to make scheduled monthly installment payments of principal under the Term Loan. Rather, the entire principal balance of the Term Loan will be due on March 31, 2017. Under the terms of the Amended Credit Agreement, both the principal amount of the Term Loan and the principal amount outstanding under the Revolving Loan Facility bear interest at a floating rate equal to: (a) if the Company holds more than $30.0 million in cash with Opus, the greater of (i) the prime rate plus 1.50% and (ii) 4.75%; (b) if the Company holds $30.0 million or less but more than $20.0 million in cash with Opus, the greater of (i) the prime rate plus 2.25% and (ii) 5.50%; or (c) if the Company holds $20.0 million or less in cash with Opus, the greater of (i) the prime rate plus 2.75% and (ii) 6.00%. Interest on both
16
facilities continues to be payable monthly. Additionally, the Amended Credit Agreement (i) modifies certain lo
an covenants applicable to the Company’s stock repurchase plan, (ii) removes from the loan collateral shares of the Company’s common stock repurchased by the Company and (iii) extends the current tangible net worth covenant by one year. The Company paid cu
stomary lender fees and
third party fees related to the debt modification. In accordance with ASC 470-50,
Debt – Modifications and Extinguishments,
the amendment has been treated as a debt modification, and costs related to the amendment are recorded as a
direct deduction from the carrying amount of the Term Loan and Revolving Loan Facility and amortized as interest expense over the remaining term of the Amended Credit Agreement.
The Amended Credit Agreement 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 Amended Credit Agreement also provides for customary financial covenants, including a minimum tangible net worth covenant, a maximum senior leverage ratio and a minimum asset coverage ratio. In addition, it contains customary events of default that entitle Opus to cause any or all of the Company’s indebtedness under the Amended Credit Agreement to become immediately due and payable. Events of default, include, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults. Upon the occurrence and during the continuance of an event of default, Opus may terminate its lending commitments and/or declare all or any part of the unpaid principal of all indebtedness, all interest accrued and unpaid thereon and all other amounts payable under the Amended Credit Agreement to be immediately due and payable. The Company has considered the components of the material adverse change clause of the Amended Credit Agreement and determined the likelihood of default under the existing terms is remote. The Term Loan, net of discount and debt issuance costs, outstanding under the Amended Credit Agreement is classified as short-term and the Revolving Loan Facility, net of discount and debt issuance costs, is classified as long-term in the accompanying condensed consolidated balance sheets as of September 30, 2016.
On December 4, 2015, the Company entered into an additional amendment (the “Second Amendment”) to its Credit Agreement with Opus. The Second Amendment amended the financial covenants and restricts the Company from permitting its consolidated tangible net worth, plus amounts payable to Secure Keyboards (see Note 6), to be less than $8,000,000
plus, 50% of any proceeds from debt or equity issued after December 1, 2015.
On March 31, 2016, the Company entered into an additional amendment (the “Third Amendment”) to its Credit Agreement with Opus. Under the Third Amendment, the Revolving Loan Facility was reduced from $30.0 million to $10.0 million and certain financial covenants were amended and added, including covenants with respect to tangible net worth, maximum senior leverage ratio, minimum asset coverage ratio, minimum EBITDA, minimum cash of at least $7.5 million, and minimum future outstanding principal balance thresholds. In addition, as discussed in Note 3,
Stockholders’ Equity
the Company amended the Opus Warrant. On September 30, 2016, as a result of not attaining a minimum outstanding principal threshold, the Company issued the New Opus Warrant to purchase 100,000 shares of common stock. The Company calculated the fair value of the Opus Warrant and the New Opus Warrant using the Black-Scholes pricing model using the following assumptions: estimated volatility of 83.92%, risk free interest rate of 0.90%, no dividend yield, and an expected life of three years. The fair value of the Opus Warrant and the New Opus Warrant of $0.4 million is
recorded as a direct deduction from the carrying amount of the Term Loan and is being amortized as interest expense over the remaining term of the Credit Agreement, as amended
.
The Company was not in compliance with certain financial covenants under the Credit Agreement, as amended, as of September 30, 2016, which non-compliance was waived by Opus.
The following table summarizes the timing of repayment obligations for the Company’s financial liabilities for the next four years under the current terms of the Credit Agreement, as amended, at September 30, 2016 (in thousands):
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
Total
|
|
Bank term loan and revolving loan facility
|
|
$
|
18,300
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,300
|
|
8. Income Taxes
The Company conducts business globally and, as a result, files federal, state and foreign tax returns. The Company strives to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While the Company has accrued for amounts it believes are the probable outcomes, the final outcome with a tax authority may result in a tax liability that is more or less than that reflected in the condensed consolidated financial statements. Furthermore, the Company may later decide to challenge any assessments, if made, and may exercise its right to appeal.
The Company has no present intention of remitting undistributed retained earnings of any of its foreign subsidiaries. Accordingly, the Company has not established a deferred tax liability with respect to undistributed earnings of its foreign subsidiaries.
17
The Company applies the provisions of, and accounted for uncertain tax positions in accordance with ASC 740,
Income Taxes
, (“ASC 740”), which clarifies the accounting for uncertainty in income taxes recognized in an ente
rprise’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 de-rec
ognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
The Company generally is no longer subject to tax examinations for years prior to 2011. However, if loss carryforwards of tax years prior to 2011 are utilized in the U.S., these tax years may become subject to investigation by the tax authorities. While timing of the resolution and/or finalization of tax audits is uncertain, the Company does not believe that its unrecognized tax benefits would materially change in the next 12 months.
9. Segment Reporting and Geographic Information
ASC 280,
Segment Reporting
(“ASC 280”) establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. 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 its CEO.
The Company is organized into four reportable operating segments: Physical Access Control Systems (“PACS”), previously referred to as Premises, Identity, Credentials and All Other.
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 CODM does not review operating expenses or asset information by operating segment for purposes of assessing performance or allocating resources.
18
Net revenue and gross profit information by segment for the three and nine months ended September 30, 2016 and 2015 is as follows (in thousands):
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
PACS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
7,253
|
|
|
$
|
5,976
|
|
|
$
|
17,908
|
|
|
$
|
15,212
|
|
Gross profit
|
|
4,334
|
|
|
|
3,531
|
|
|
|
10,244
|
|
|
|
9,130
|
|
Gross profit margin
|
|
60
|
%
|
|
|
59
|
%
|
|
|
57
|
%
|
|
|
60
|
%
|
Identity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
3,508
|
|
|
|
3,109
|
|
|
|
8,923
|
|
|
|
8,970
|
|
Gross profit
|
|
1,359
|
|
|
|
1,526
|
|
|
|
3,324
|
|
|
|
3,988
|
|
Gross profit margin
|
|
39
|
%
|
|
|
49
|
%
|
|
|
37
|
%
|
|
|
44
|
%
|
Credentials:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
4,799
|
|
|
|
7,788
|
|
|
|
14,110
|
|
|
|
22,324
|
|
Gross profit
|
|
1,227
|
|
|
|
2,255
|
|
|
|
3,654
|
|
|
|
6,357
|
|
Gross profit margin
|
|
26
|
%
|
|
|
29
|
%
|
|
|
26
|
%
|
|
|
28
|
%
|
All Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
-
|
|
|
|
323
|
|
|
|
580
|
|
|
|
1,211
|
|
Gross profit
|
|
-
|
|
|
|
209
|
|
|
|
261
|
|
|
|
776
|
|
Gross profit margin
|
|
0
|
%
|
|
|
65
|
%
|
|
|
45
|
%
|
|
|
64
|
%
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
15,560
|
|
|
|
17,196
|
|
|
|
41,521
|
|
|
|
47,717
|
|
Gross profit
|
|
6,920
|
|
|
|
7,521
|
|
|
|
17,483
|
|
|
|
20,251
|
|
Gross profit margin
|
|
44
|
%
|
|
|
44
|
%
|
|
|
42
|
%
|
|
|
42
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
1,480
|
|
|
|
2,235
|
|
|
|
4,997
|
|
|
|
6,567
|
|
Selling and marketing
|
|
3,312
|
|
|
|
5,236
|
|
|
|
10,807
|
|
|
|
15,698
|
|
General and administrative
|
|
2,115
|
|
|
|
6,456
|
|
|
|
9,674
|
|
|
|
15,057
|
|
Impairment of goodwill
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
988
|
|
Restructuring and severance
|
|
160
|
|
|
|
215
|
|
|
|
3,100
|
|
|
|
408
|
|
Total operating expenses:
|
|
7,067
|
|
|
|
14,142
|
|
|
|
28,578
|
|
|
|
38,718
|
|
Loss from operations
|
|
(147
|
)
|
|
|
(6,621
|
)
|
|
|
(11,095
|
)
|
|
|
(18,467
|
)
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
(525
|
)
|
|
|
(478
|
)
|
|
|
(1,814
|
)
|
|
|
(1,367
|
)
|
Foreign currency gain (loss), net
|
|
35
|
|
|
|
(10
|
)
|
|
|
309
|
|
|
|
(186
|
)
|
Loss before income taxes and noncontrolling
interest
|
$
|
(637
|
)
|
|
$
|
(7,109
|
)
|
|
$
|
(12,600
|
)
|
|
$
|
(20,020
|
)
|
Geographic net revenue is based on customer’s ship-to location. Information regarding net revenue by geographic region for the three and six months ended September 30, 2016 and 2015 is as follows (in thousands):
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Americas
|
$
|
9,924
|
|
|
$
|
12,473
|
|
|
$
|
27,343
|
|
|
$
|
32,423
|
|
Europe and the Middle East
|
|
2,834
|
|
|
|
2,294
|
|
|
|
6,654
|
|
|
|
7,386
|
|
Asia-Pacific
|
|
2,802
|
|
|
|
2,429
|
|
|
|
7,524
|
|
|
|
7,908
|
|
Total
|
$
|
15,560
|
|
|
$
|
17,196
|
|
|
$
|
41,521
|
|
|
$
|
47,717
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
64
|
%
|
|
|
73
|
%
|
|
|
66
|
%
|
|
|
68
|
%
|
Europe and the Middle East
|
|
18
|
%
|
|
|
13
|
%
|
|
|
16
|
%
|
|
|
15
|
%
|
Asia-Pacific
|
|
18
|
%
|
|
|
14
|
%
|
|
|
18
|
%
|
|
|
17
|
%
|
Total
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
19
Long-lived assets by geographic location as of September 30, 2016 and December 31, 2015 are as follows (in thousands):
|
September 30,
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
Americas
|
$
|
1,152
|
|
|
$
|
2,096
|
|
Europe and the Middle East
|
|
205
|
|
|
|
295
|
|
Asia-Pacific
|
|
1,315
|
|
|
|
1,827
|
|
Total property and equipment, net
|
$
|
2,672
|
|
|
$
|
4,218
|
|
10. Restructuring and Severance
During the nine months ended September 30, 2015, severance costs were incurred for certain employees terminated as part of management’s continuing efforts to simplify business operations. As a result, the Company recorded $0.4 million in restructuring and severance costs and other closure related costs and an additional $0.1 million in severance costs recorded in general and administrative expenses related to the elimination of certain executive positions in conjunction with the corporate restructuring and cost reduction activities.
In the first quarter of 2016, the Company implemented a worldwide restructuring plan designed to refocus the Company’s resources on its core business segments, including physical access and transponders, and to consolidate its operations in several worldwide locations. The restructuring plan included reducing the Company’s non-manufacturing employee base, reallocating overhead roles into direct business activities and eliminating certain management and executive roles. In the third quarter of 2016, the Company incurred additional facilities related restructuring costs of $0.1 million and severance related adjustments of $0.1 million in connection with this restructuring plan. As a result, the Company recorded $3.1 million in restructuring and severance costs in the nine months ended September 30, 2016.
All unpaid restructuring and severance accruals are included in other accrued expenses and liabilities within current liabilities in the condensed consolidated balance sheets at September 30, 2016 and December 31, 2015. Restructuring and severance activities during the nine months ended September 30, 2016 and September 30, 2015 were as follows (in thousands):
|
Nine Months Ended September 30,
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of period
|
$
|
633
|
|
|
$
|
1,377
|
|
Restructuring expense incurred for the period
|
|
3,100
|
|
|
|
408
|
|
Other cost reduction activities for the period
|
—
|
|
|
|
81
|
|
Payments and non-cash item adjustment during the period
|
|
(3,246
|
)
|
|
|
(1,855
|
)
|
Balance at end of period
|
$
|
487
|
|
|
$
|
11
|
|
11. Commitments and Contingencies
The Company leases its facilities, certain equipment, and automobiles under non-cancelable operating lease agreements. Those lease agreements existing as of September 30, 2016 expire at various dates during the next five years.
The Company recognized rent expense of $0.3 million and $1.2 million in the three and nine months ended September 30, 2016, respectively, and $0.4 million and $1.3 million, in the three and nine months ended September 30, 2015, respectively, in its condensed consolidated statements of operations.
Purchases 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.
20
The following table summarizes the Company’s principal contractual commitments as of September 30, 2016 (in thousands):
|
|
Operating Lease
|
|
|
Purchase Commitments
|
|
|
Other Contractual Commitments
|
|
|
Total
|
|
2016 (remaining three months)
|
|
$
|
368
|
|
|
$
|
6,312
|
|
|
$
|
13
|
|
|
$
|
6,693
|
|
2017
|
|
|
1,029
|
|
|
|
2,679
|
|
|
|
11
|
|
|
|
3,719
|
|
2018
|
|
|
266
|
|
|
|
—
|
|
|
|
—
|
|
|
|
266
|
|
2019
|
|
|
171
|
|
|
|
—
|
|
|
|
—
|
|
|
|
171
|
|
2020
|
|
|
159
|
|
|
|
—
|
|
|
|
—
|
|
|
|
159
|
|
Thereafter
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
Total
|
|
$
|
1,995
|
|
|
$
|
8,991
|
|
|
$
|
24
|
|
|
$
|
11,010
|
|
The Company provides warranties on certain product sales for periods ranging from 12 to 24 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.
On December 16, 2015, the Company and certain of its present and former officers and directors were named as defendants in a putative class action lawsuit filed in the United States District Court for the Northern District of California, entitled
Rok v. Identiv, Inc., et al.
, Case No. 15-cv-05775, alleging violations of Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and Section 20(a) of the Exchange Act of 1934. On May 3, 2016, the court-appointed lead plaintiff Thomas Cunningham in the
Rok
lawsuit filed an amended complaint and a notice of dismissal without prejudice of all current or former officers and directors other than Jason Hart and Brian Nelson. On June 6, 2016, each of the Company, Jason Hart, and Brian Nelson filed a motion to dismiss for failure to state a claim upon which relief can be granted in the
Rok
lawsuit; on August 5, 2016, the court granted those motions with leave for the lead plaintiff to file a second amended complaint. On September 12, 2016, the lead plaintiff in the
Rok
lawsuit filed a second amended complaint. On October 10, 2016, the Company, Jason Hart, and Brian Nelson filed a motion to dismiss that second amended complaint for failure to state a claim upon which relief can be granted, which motions are scheduled to be heard on December 16, 2016. In addition, three shareholder derivative actions were filed between January and February 2016. 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. 16-cv-00241-JCS, alleging breach of fiduciary duty and abuse of control 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 pre-lawsuit demand upon 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 has under Section 220 of the Delaware General Corporation Law. 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.
21