The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
IDENTIV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Identiv, Inc. (“Identiv” or 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 our solutions. We empower them to create safe, secure, validated and convenient experiences in schools, government offices, factories, transportation, hospitals and virtually every type of facility and for every type of product.
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 Australia, Germany, Hong Kong, Japan, Singapore, and the U.S. 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 and Basis of Presentation
— 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.
Reverse Stock Split
—
On May 22, 2014, the stockholders approved, and the Company filed a certificate of amendment to its Amended and Restated Certificate of Incorporation with the Secretary of the State of Delaware effecting, a one-for-ten reverse split of the Company's common stock, par value $0.001. T
he reverse stock split did not change the par value of the Company’s common stock or the number of shares of preferred stock authorized for issuance. Upon the effectiveness of the reverse stock split, the Company’s issued shares of common stock decreased from approximately 80 million to approximately 8 million shares, all with a par value of $0.001. The Company has no outstanding shares of preferred stock.
All share, per share and stock option information in the accompanying consolidated finan
cial statements and the notes thereto have been restated for all periods to reflect the
reverse
stock split
.
Discontinued Operations
— Financial information related to certain divested businesses of the Company is reported as discontinued operations for all periods presented as discussed in Note 2,
Discontinued Operations
.
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 allowance and potential write-offs 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.
Property and Equipment
— Property and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are computed using the straight-line 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.
Goodwill —
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Goodwill is not subject to amortization but is subject to annual assessment for impairment in accordance with ASC Topic 350,
Intangibles - Goodwill and Other
(“ASC 350”). The Company evaluates goodwill, at a minimum, on an annual basis and on an interim basis whenever events and changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company performs interim goodwill impairment reviews between its annual reviews if certain events and circumstances have occurred, including a deterioration in general economic conditions, an increased competitive environment, a change in management, key personnel, strategy or customers, negative or declining cash flows, or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods. Impairment of goodwill is tested at
52
the reporting unit level, which is one level below its operating segment. The reporting units are identified in accordance with ASC 350-20-35-33 through 35-46. Prior to testing for goodwill impairment, the Company t
ests long-lived assets for impairment and adjusts the carrying value of each asset group to its fair value and records the associated impairment charge in its consolidated statements of operations. The Company first assesses qualitative factors to determin
e whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, it is determi
ned it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company tests for goodwill impairment using a two-step method as required by ASC 350. The first step of the impairment test compares the fair value
of the reporting unit to its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds the fair value, goodwill is considered impaired and a second step is performed to measure the amount of the impairment loss, if any. Unde
r this second step, the implied fair value of the goodwill is determined, in the same manner as the amount of goodwill recognized in a business combination, to assess the level of goodwill impairment, if any. The second step of the impairment test compares
the implied fair value of goodwill to the carrying value of goodwill. If the carrying value of goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized equal to that excess (i.e., write goodwill down to the implied fair value
of goodwill amount).
Under the first step of the impairment test, the Company determines the fair value of the reporting units using the income, or discounted cash flows, approach (“DCF model”) and verifies the reasonableness of such fair value calculations of the reporting units using the market approach, which utilizes comparable firms in similar lines of business that are publicly traded or which are part of a public or private transaction. The completion of the DCF model requires the Company to make a number of significant assumptions to produce an estimate of future cash flows. These assumptions include, but are not limited to, projections of future revenue, gross profit rates, working capital requirements, and discount rates. In determining an appropriate discount rate for each reporting unit the Company makes assumptions about the estimated cost of capital and relevant risks, as appropriate. The projections used by the Company in its DCF model are updated as required and will change over time based on the historical performance and changing business conditions for each of the Company’s reporting units. The determination of whether goodwill is impaired involves a significant level of judgment in these assumptions, and changes in the Company’s business strategy, government regulations, or economic or market conditions could significantly impact these judgments.
See Note 6,
Goodwill and Intangible Assets
, for more information about the impairment charges recorded in the second quarter ended June 30, 2015 and the fourth quarter ended December 31, 2015.
Intangible and Long-lived Assets
— The Company evaluates its long-lived assets and amortizable intangible assets in accordance with ASC Topic 360,
Property, Plant and Equipment
(“ASC 360”)
.
The Company evaluates its long-lived assets and identifiable amortizable intangible assets for impairment 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. If such assets 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 assets exceeds the fair value of the assets. Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives of the related assets as the straight-line method is considered to align with expected cash flows. Each period the Company evaluates the estimated remaining useful life of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. For intangible assets determined to have an indefinite useful life, no amortization is recognized until the assets´ useful life is determined to be no longer indefinite. As discussed in Note 6,
Goodwill and Intangible Assets
, the Company performed an impairment analysis in the fourth quarter of 2015 and found no indicators of impairment.
Product Warranty
— The Company accrues the estimated cost of product warranties at the time of sale. The Company’s warranty obligation is affected by actual warranty costs, including material usage or service delivery costs incurred in correcting a product failure. If actual material usage or service delivery costs differ from estimates, revisions to the estimated warranty liability would be required. Historically the warranty accrual and the expense amounts have been immaterial.
Revenue Recognition
— Revenue is recognized when all of the following criteria have been met:
|
·
|
Persuasive evidence of an arrangement exists.
The Company generally relies upon sales contracts or agreements, and customer purchase orders to determine the existence of an arrangement.
|
|
·
|
Delivery has occurred.
The Company uses shipping terms and related documents, or written evidence of customer acceptance, when applicable, to verify delivery or performance.
|
53
|
·
|
Sales price is fixed or determinable.
The Company assesses whether the sales price is fixed or determin
able based on the payment terms and whether the sales price is subject to refund or adjustment.
|
|
·
|
Collectability is reasonably assured.
The Company assesses collectability based on creditworthiness of customers as determined by credit checks and customer payment histories. The Company records accounts receivable net of allowance for doubtful accounts, estimated customer returns, and pricing credits.
|
The Company recognizes revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) ASC 605-25,
Revenue Recognition – Multiple Element Arrangements
, and, in certain transactions, ASC 985
Software – Revenue Recognition
.
In multiple-element arrangements, some sales arrangement are accounted for under the software provisions of ASC 985-605 and others under the provisions that relate to the sale of non-software products.
In multiple-element arrangements that include hardware,
bundled with professional services, maintenance contracts, and in some cases with its software products,
t
he Company evaluates each element, delivered and undelivered, in an arrangement to determine whether it represents a separate unit of accounting. In these multiple element arrangements, revenue is allocated among all elements, delivered and undelivered,
based on
a vendor-specific objective evidence (“VSOE”), if available, third-party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available. VSOE of selling price is based on the price charged when the element is sold separately. TPE of selling price is established by evaluating largely interchangeable competitor products or services in stand-alone sales to similarly situated customers. The best estimate of selling price is established considering multiple factors, including pricing practices in different geographies and through different sales channels, gross margin objectives, internal costs, competitor pricing strategies and industry technology lifecycles. Some of the Company’s offerings contain a significant element of proprietary technology and provide substantially unique features and functionality; as a result, the comparable pricing of products with similar functionality typically cannot be obtained. Additionally, as the Company is unable to reliably determine what competitors products’ selling prices are on a stand-alone basis, typically the Company is not able to determine TPE for such products. Therefore ESP is used for such products in the selling price hierarchy for allocating the total arrangement consideration.
In multiple-element arrangements that include software, the Company accounts for each element under the standards of ASC 985-605 related to software. When software is a delivered element, the Company uses the residual method (ASC 605-25) for determining the amount of revenue to recognize for the delivered software component if VSOE for all of the undelivered elements has been established. In sales arrangements where VSOE of fair value has not been established, revenue for all elements is deferred and amortized over the life of the arrangement.
Revenue from professional services contracts is recognized upon completion of services and customer acceptance, if applicable. Professional services include security system integration, system migration and database conversion services. Revenue from maintenance contracts is deferred and recognized ratably over the period of the maintenance contracts. Certain sales arrangement contains hardware, software and professional service elements where professional services are essential to the functionality of the hardware and software system and a test of the functionality of the complete system is required before the customer accepts the system. As a result, hardware, software and professional service elements are accounted for as one unit of accounting and revenue from these arrangements is recognized upon completion of the project.
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. As a result, costs subsequent to achieving technological feasibility have not been significant, and all software development costs generally have been expensed as incurred. The Company capitalizes certain costs for its internal-use software incurred during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use 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, including amounts written-off related to capitalized costs, in the amount of $0.3 million and $0.1 million for the years ended December 31, 2015 and 2014, 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.
54
Income Taxes
— The Company accounts for income taxes in ac
cordance 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.
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 Sheet. See Note 9,
Income Taxes
, for further information regarding the Company’s tax disclosures.
Stock-based Compensation
— The Company accounts for all stock-based payment awards, including employee stock options, restricted stock awards, performance share awards, employee stock purchase plan, in accordance with ASC Topic 718,
Compensation-Stock Compensation
(“ASC 718”). Under the fair value recognition provisions of this topic, stock-based compensation cost is measured at the grant date based on the fair value of the award. Compensation expense for all stock-based payment awards is recognized using the straight-line single-option approach. Employee stock options awards are valued under the single-option approach and amortized on a straight-line basis, net of estimated forfeitures. The value of the portion of the stock options 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 4 for further information regarding the Company’s stock-based compensation assumptions and expenses.
The Company has elected to use the Black-Scholes-Merton (“BSM”) option-pricing model to estimate the fair value of its options, which incorporates various subjective assumptions including volatility, risk-free 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 stock-based payment awards represent management’s best 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 expected-to-vest shares. If the actual forfeiture rate is materially different from the Company’s estimate, the recorded stock-based 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.
Concentration of Credit Risk
— One customer accounted 14% of net revenue for the year ended December 31, 2015, and one customer accounted for 23% of net revenue for the year ended December 31, 2014. No customers accounted for more than 10% of the Company’s accounts receivable balance as of December 31, 2015. Two customers accounted for more than 10% of the Company’s accounts receivable balance at December 31, 2014. 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.
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. Dilutive-potential 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 under stock options are excluded from the computation of diluted net loss per share in the accompanying consolidated statements of operations as their effect is anti-dilutive.
Comprehensive Loss —
ASU No. 2011-05,
Comprehensive Income, ASC Topic 200, Presentation of Comprehensive Income
(“ASU No. 2001-05”) requires an entity to present the total of comprehensive income, the components of net income, and the
55
components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Comprehensive loss for the years ended December 31, 2015 and
2014 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 period-end 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 currencies of the Company are included in the Company’s consolidated statements of operations. The Company recognized a currency loss of $1.2 million in 2015 and $1.3 million in 2014.
Recent Accounting Pronouncements and Accounting Changes
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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 Company does not expect the adoption of ASU 2015-05 will have a material impact on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03,
“Simplifying the Presentation of Debt Issuance Costs”
(“ASU 2015-03”), which changes the presentation of debt issuance costs on the balance sheet by requiring entities to present such costs as a direct deduction from the related debt liability rather than as an asset. ASU 2015-03 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company does not expect the adoption of ASU 2015-03 will have a material impact on its consolidated financial statements.
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 Company does not expect the adoption of ASU 2015-01 will have a material impact on its 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 in the process of evaluating the impact of the adoption on its 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 defer 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 consolidated financial statements
.
56
2.
Discontinued Operations
During the fourth quarter of 2013, the Company committed to sell its Rockwest Technology Group, Inc. d/b/a/ Multicard US (“Multicard US”) subsidiary to George Levy, Matt McDaniel and Hugo Garcia (the “Buyers”), the founders and former owners of the Multicard US business. The sale of the Multicard US subsidiary was completed on February 4, 2014 and was made pursuant to a Share Purchase Agreement dated January 21, 2014 between the Company and the Buyers whereby the Company agreed to sell 80.1% of its holdings in Multicard US, to the Buyers for cash consideration of $1.2 million. Based on the carrying value of the assets and the liabilities attributed to Multicard US on the date of sale, and the estimated costs and expenses incurred in connection with the sale, the Company recorded a gain of $0.4 million, net of income taxes of nil, in the consolidated statement of operations in the year ended December 31, 2014, which is included in income (loss) from discontinued operations, net of income taxes.
On June 30, 2014, the Company entered into an Asset Purchase Agreement with a former employee to sell certain non-core assets consisting of inventory, some prepaid items, certain fully depreciated office equipment and certain intellectual property (“Non-Core Assets”) relating to one of its subsidiaries for cash consideration of $0.1 million. The sale of these Non-Core Assets was completed on July 7, 2014.
In accordance with ASC Topic 205-20,
Discontinued Operations
(“ASC 205”), the results of these businesses have been presented as discontinued operations in the consolidated statements of operations for the year ended December 31, 2014 and 2015.
The key components of income from discontinued operations consist of the following (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Net revenue
|
|
$
|
—
|
|
|
$
|
1,276
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
Income from discontinued operations before income taxes
|
|
$
|
—
|
|
|
$
|
62
|
|
Income tax provision
|
|
|
—
|
|
|
|
—
|
|
Income from discontinued operations,
net of income taxes
|
|
|
—
|
|
|
|
62
|
|
Gain on sale of discontinued operations, net
of income taxes of nil
|
|
|
—
|
|
|
|
459
|
|
Income from discontinued operations, net
of income taxes
|
|
$
|
—
|
|
|
$
|
521
|
|
3. 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, 2015 and 2014, there were no assets that are measured and recognized at fair value on a recurring basis. There were no cash equivalents as of December 31, 2015 and 2014.
The Company’s only liability measured at fair value on a recurring basis is the contingent consideration related to the acquisition of idOnDemand, Inc. (“idOnDemand”). The sellers of idOnDemand (the “Selling Shareholders”) are eligible to receive limited earn-out payments (“Earn-out Consideration”) in the form of shares of common stock subject to certain lock-up periods under the terms of the Stock Purchase Agreement dated April 29, 2011 between the Company and the Selling Shareholders of idOnDemand (the “SPA”). The fair value of the Earn-out Consideration is based on achieving certain revenue and profit targets as defined under the SPA. The accrual of the Earn-out Consideration for periods prior to the year ended December 31, 2015 is probability weighted and
57
discounted to reflect the restriction on the resale or transfer of such shares. The valuation of the Earn-out 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 Earn-out Consideration are highly sens
itive to fluctuations and any changes in the inputs or the probability weighting thereof could significantly change the measured value of the Earn-out Consideration at each reporting period. The number of shares issued to settle the obligation was based on
the 30-calendar day average price of the Company’s common stock immediately preceding the settlement date. Thus, in accordance with ASC
480,
Distinguishing Liabilities from Equity,
the fair value of the Earn-out Consideration was classified as a liability and re-measured each reporting period through December 31, 2014. Once the number of shares to settle the liability was set, the liability was no longer fair valued with the financi
al value being deemed the fair value of the shares set for settlement.
As of December 31, 2014, the maximum amount payable for Earn-out Consideration was $5.0 million. For the period ended December 31, 2014, the Company engaged a third party independent valuation firm to assist in the determination of the Earn-out Consideration liability. The Company recorded an earn-out obligation of $3.51 million as of December 31, 2014. The Earn-out Consideration liability of $3.51 million was settled during the quarter ended June 30, 2015 by the issuance of common stock to the Selling Shareholders, including the Company’s former CEO and former CFO. The common stock issued has a lock-up period of 12 months from the date of issuance
.
|
Fair Value Measurements
(Level 3)
|
|
(in thousands)
|
Earn-out Liability
|
|
Balance at January 1, 2014
|
$
|
-
|
|
Remeasurement of obligation
|
|
3,510
|
|
Balance at December 31, 2014
|
$
|
3,510
|
|
Remeasurement of obligation
|
|
-
|
|
Issuance of shares to settle earn-out obligation
|
|
(3,510
|
)
|
Balance at December 31, 2015
|
$
|
-
|
|
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
Certain of the Company's assets, including intangible assets, goodwill, 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. For additional discussion of measurement criteria used in evaluating potential impairment involving goodwill and intangible assets, refer to Note 6,
Goodwill and 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 December 31, 2015 and 2014, the Company had $0.3 million of privately-held 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 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. The amount of privately-held investments is included in other assets in the accompanying consolidated balance sheets.
As of December 31, 2015 and 2014, 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.
58
4. Stockholders’ Equity
Re
verse
Stock Split
On May 22, 2014, the stockholders approved, and the Company filed a certificate of amendment to its Amended and Restated Certificate of Incorporation with the Secretary of the State of Delaware effecting a one-for-ten reverse stock split. The reverse stock split did not change the par value of the Company’s common stock or the number of shares of preferred stock authorized for issuance.
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. No shares of the Company’s preferred stock, including the Series A Participating Preferred Stock, were outstanding as of December 31, 2015 and 2014. The Company’s board of directors may from time to time, without further action by the Company’s stockholders, direct the issuance of shares of preferred stock in 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 winding-up 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.
Private Placement
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 Private Placement Warrants”) to accredited and other qualified investors (the “Investors”). Aggregate gross consideration of $7.1 million and $0.8 million in issuance costs were recorded in connection with the private placement. The Company engaged a placement agent in connection with private placement outside the United States. As compensation at closing, the Company paid $0.6 million in cash and issued 100,000 shares of common stock to the placement agent on the same terms as those sold to the Investors in the offering. In addition, the placement agent was issued warrants to purchase 100,000 shares of common stock at an exercise price of $10.00 per share as bonus compensation.
Sale of Common Stock
On September 16, 2014, the Company entered into an underwritten public offering of 2,000,000 shares of its common stock at a public offering price of $15.00 per share and also granted the underwriter a 30-day option to purchase up to an additional 300,000 shares of common stock to cover overallotments, if any. The Company received net proceeds of approximately $31.6 million from the sale of 2,300,000 shares of common stock in the public offering, after deducting the underwriting discount of $2.5 million and estimated offering expenses of $0.4 million. The Company used the net proceeds from the offering for working capital and other general corporate purposes.
Common Stock Warrants
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 “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 December 31, 2015, the Consultant Warrant has not been exercised.
In connection with the Company’s entry into a credit agreement with Opus Bank (“Opus”) as discussed in Note 8,
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”). 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 are to be registered at the request of Opus pursuant to a registration rights agreement, dated March 31, 2014 between the Company and Opus. As of December 31, 2015,
the Opus Warrant had not been exercised.
59
The Company issued warrants to purchase
409,763 shares of its common stock at an exercise price of $26.50 per share in a private placement to accredited and other qualified investors in November 2010 (the “2010 Private Placement Warrants”). The 2010 Private Placement Warrants are exercisable beg
inning on the date of issuance and expired on November 14, 2015.
Below is a summary of outstanding warrants issued by the Company as of December 31, 2015:
Warrant Type
|
|
Shares Issuable Pursuant to the Exercise of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Issue Date
|
|
Expiration Date
|
Consultant Warrant
|
|
|
85,000
|
|
|
$
|
10.70
|
|
|
August 13, 2014
|
|
August 13, 2019
|
Opus Warrant
|
|
|
100,000
|
|
|
|
9.90
|
|
|
March 31, 2014
|
|
March 31, 2019
|
2013 Private Placement Warrants
|
|
|
186,878
|
|
|
|
10.00
|
|
|
August 14, 2013
|
|
August 14, 2017
|
Total
|
|
|
371,878
|
|
|
|
|
|
|
|
|
|
2011 Employee Stock Purchase Plan
In June 2011, the Company’s stockholders approved the 2011 Employee Stock Purchase Plan (the “ESPP”). On December 18, 2013, the Compensation Committee of the Board suspended the ESPP effective January 1, 2014. No additional shares will be authorized and no shares will be issued under the ESPP until further notice. As of December 31, 2015, there were 293,888 shares reserved for future purchase under the ESPP.
Since the ESPP was suspended effective January 1, 2014, there was no stock-based compensation expense resulting from the ESPP included in the consolidated statements of operations for the years ended December 31, 2015 and 2014, respectively.
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 executive officers, directors, and key employees with 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 to Participants 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 2007 Plan and 2010 Plan.
60
Stock Option Plans
The Company’s stock option plans are generally time-based and expire seven to ten years from the date of grant. Vesting varies, with some grants vesting 25% each year over four years; some vesting 25% after one year and monthly thereafter over three years; some vesting 100% on the date of grant; some vesting 1/12
th
per month over one year; some vesting 100% after one year; and some vesting monthly over four years. The Director Option Plan and 1997 Stock Option Plan both expired in March 2007. The 2000 Stock Option Plan expired in December 2010 and as noted above, the 2007 Plan was discontinued in June 2011 in connection with the approval of the 2011 Plan. As a result, options will no longer be granted under any of these plans except the 2011 Plan.
As of December 31, 2015, an aggregate of 11,509 options were outstanding under the Director Option Plan and 1997 Stock Option Plan, 15,169 options were outstanding under the 2000 Stock Option Plan, 53,560 options were outstanding under the 2007 Plan, and 709,644 options were outstanding under the 2011 Plan. These outstanding options remain exercisable in accordance with the terms of the original grant agreements under the respective plans.
A summary of activity for the Company’s stock option plans for the year ended December 31, 2015 follows:
|
Number Outstanding
|
|
|
Average Exercise Price per Share
|
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
|
Average Intrinsic Value
|
|
Balance at December 31, 2014
|
|
897,115
|
|
|
$
|
12.09
|
|
|
|
|
|
|
|
|
|
Granted
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
(110,131
|
)
|
|
|
16.64
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(5,180
|
)
|
|
|
8.01
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
781,804
|
|
|
$
|
11.48
|
|
|
6.72
|
|
|
$
|
-
|
|
Vested or expected to vest at
December 31, 2015
|
|
744,258
|
|
|
$
|
11.59
|
|
|
|
6.54
|
|
|
$
|
-
|
|
Exercisable at December 31,
2015
|
|
495,206
|
|
|
$
|
12.88
|
|
|
5.85
|
|
|
$
|
-
|
|
The following table summarizes information about options outstanding as of December 31, 2015:
|
|
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
|
|
$5.20 - $8.40
|
|
|
158,222
|
|
|
|
7.59
|
|
|
$
|
6.40
|
|
|
|
100,345
|
|
|
$
|
6.64
|
|
$8.41 - $8.80
|
|
|
230,688
|
|
|
|
7.84
|
|
|
|
8.80
|
|
|
|
106,382
|
|
|
|
8.80
|
|
$8.81 - $12.00
|
|
|
247,769
|
|
|
|
6.80
|
|
|
|
11.21
|
|
|
|
147,229
|
|
|
|
11.41
|
|
$12.01 - $40.20
|
|
|
140,775
|
|
|
|
3.39
|
|
|
|
21.06
|
|
|
|
136,900
|
|
|
|
21.24
|
|
$40.21 - $43.40
|
|
|
4,350
|
|
|
|
1.22
|
|
|
|
43.38
|
|
|
|
4,350
|
|
|
|
43.38
|
|
$5.20 - $43.40
|
|
|
781,804
|
|
|
|
6.63
|
|
|
|
11.48
|
|
|
|
495,206
|
|
|
|
12.88
|
|
The weighted-average grant date fair value per option for options granted during the years ended December 31, 2015 and 2014 was $0 and $9.71, respectively. A total of 5,180 and 27,733 options were exercised during the years ended December 31, 2015 and 2014, respectively.
The fair value of option grants was estimated using the Black-Scholes-Merton model with the following weighted-average assumptions for the years ended December 31:
|
2015
|
|
2014
|
|
Risk-free interest rate
|
N/A
|
|
|
1.54
|
%
|
Expected volatility
|
N/A
|
|
|
88.7
|
%
|
Expected term in years
|
N/A
|
|
|
4.79
|
|
Dividend yield
|
N/A
|
|
None
|
|
61
At December 31, 2015, there was $1.5 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 2.2 years.
Restricted Stock and Restricted Stock Units
The following is a summary of restricted stock and RSU activity for the year ended December 31, 2015:
|
Number Outstanding
|
|
|
Weighted Average Fair Value
|
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
Average Intrinsic Value
|
|
Balance at December 31, 2014
|
|
542,342
|
|
|
$
|
13.74
|
|
|
|
|
|
|
|
Granted
|
|
285,247
|
|
|
|
12.34
|
|
|
|
|
|
|
|
Vested
|
|
(52,421
|
)
|
|
|
14.53
|
|
|
|
|
|
|
|
Forfeited
|
|
(53,250
|
)
|
|
|
11.17
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
721,918
|
|
|
$
|
13.32
|
|
|
1.3
|
|
$
|
1,436,619
|
|
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 December 31, 2015, there was $5.3 million of unrecognized compensation cost related to unvested RSUs granted, which is expected to be recognized over a weighted average period of 2.5 years. As of December 31, 2015, an aggregate of 721,918 RSUs were outstanding under the 2011 Plan.
Stock-Based Compensation Expense
The following table illustrates all stock-based compensation expense related to the ESPP, stock options and RSUs included in the consolidated statements of operations for the years ended December 31, 2015 and 2014 (in thousands):
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Cost of revenue
|
|
$
|
85
|
|
|
$
|
36
|
|
Research and development
|
|
|
324
|
|
|
|
142
|
|
Selling and marketing
|
|
|
1,085
|
|
|
|
303
|
|
General and administrative
|
|
|
3,022
|
|
|
|
1,396
|
|
Total
|
|
$
|
4,516
|
|
|
$
|
1,877
|
|
Common Stock Reserved for Future Issuance
Common stock reserved for future issuance as of December 31, 2015 was as follows:
Exercise of outstanding stock options and vesting of RSUs
|
|
|
1,503,722
|
|
ESPP
|
|
|
293,888
|
|
Shares of common stock available for grant under the 2011 Plan
|
|
|
218,244
|
|
Noncontrolling interest in Bluehill AG
|
|
|
10,355
|
|
Warrants to purchase common stock
|
|
|
741,047
|
|
Total
|
|
|
2,767,256
|
|
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 years ended December 31, 2015 and 2014, common stock equivalents consisting of outstanding stock options, RSUs and warrants were excluded from the calculation of diluted 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 loss per share relating to these securities was 2,255,124 common stock equivalents for the year ended December 31, 2015, and 1,354,866 common stock equivalents for the year ended December 31, 2014.
62
Accumulated Other Comprehensive Income
Accumulated other comprehensive income
(“AOCI”)
at December 31, 2015 and 2014 consists of foreign currency translation adjustments of $2.2 million and $1.7 million, respectively. As a result of the acquisition of noncontrolling interest, $444.0 thousand was reclassified out of AOCI into earnings during the year ended December 31, 2015.
Stock Repurchases
On October 9, 2014, the Company’s Board of Directors authorized a program to repurchase shares of the Company’s common stock. Under the stock repurchase program, the Company may repurchase up to $5.0 million of its common stock over a period of one year. The program allowed stock repurchases from time to time at management’s discretion in the open market or in private transactions at prevailing market prices. The stock repurchase program may be limited or terminated at any time by the Board of Directors without prior notice. During the year ended December 31, 2015, the Company repurchased 358,502 shares of common stock under the stock repurchase program for total consideration of approximately $1.8 million. Additionally, during the year ended December 31, 2015, the Company repurchased 15,143 shares of common stock surrendered to the Company to satisfy tax withholding obligations in connection with the vesting of RSUs issued to employees.
5. Balance Sheet Components
The Company’s inventories are stated at the lower of cost or market. Inventories consist of (in thousands):
|
December 31,
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
Raw materials
|
$
|
5,033
|
|
|
$
|
3,272
|
|
Work-in-progress
|
|
12
|
|
|
|
571
|
|
Finished goods
|
|
9,681
|
|
|
|
5,411
|
|
Total
|
$
|
14,726
|
|
|
$
|
9,254
|
|
Property and equipment, net consists of (in thousands):
|
December 31,
|
|
|
2015
|
|
|
2014
|
|
Building and leasehold improvements
|
$
|
2,670
|
|
|
$
|
1,298
|
|
Furniture, fixtures and office equipment
|
|
2,242
|
|
|
|
4,236
|
|
Plant and machinery
|
|
8,858
|
|
|
|
6,732
|
|
Purchased software
|
|
2,510
|
|
|
|
2,520
|
|
Total
|
|
16,280
|
|
|
|
14,786
|
|
Accumulated depreciation
|
|
(12,062
|
)
|
|
|
(9,475
|
)
|
Property and equipment, net
|
$
|
4,218
|
|
|
$
|
5,311
|
|
The Company recorded depreciation expense of $1.7 million and $1.6 million during the years ended December 31, 2015 and 2014, respectively.
Other accrued expenses and liabilities consist of (in thousands):
|
December 31,
|
|
|
2015
|
|
|
2014
|
|
Accrued restructuring
|
$
|
633
|
|
|
$
|
1,377
|
|
Accrued professional fees
|
|
1,731
|
|
|
|
679
|
|
Income taxes payable
|
|
282
|
|
|
|
275
|
|
Other accrued expenses
|
|
3,189
|
|
|
|
2,140
|
|
Total
|
$
|
5,835
|
|
|
$
|
4,471
|
|
63
6. Goodwill and Intangible Assets
Goodwill
The following table presents goodwill by reporting unit, which is the same as operating segment, as of December 31, 2015 and 2014 as well as changes in the carrying amount of goodwill (in thousands):
|
|
Premises(1)
|
|
|
Credentials(1)
|
|
|
Identity(1)
|
|
|
All Other(1)
|
|
|
Total
|
|
Balance at December 31, 2014
|
|
$
|
7,783
|
|
|
$
|
—
|
|
|
$
|
1,070
|
|
|
$
|
—
|
|
|
$
|
8,853
|
|
Goodwill impairment during the year
|
|
|
(7,783
|
)
|
|
|
—
|
|
|
|
(988
|
)
|
|
|
—
|
|
|
|
(8,771
|
)
|
Currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
(82
|
)
|
|
|
—
|
|
|
|
(82
|
)
|
Balance at December 31, 2015
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)
|
During the first quarter of 2014, in connection with the Company's 2014 organizational realignment, certain prior period amounts were reclassified to conform to the current period's operating segment presentation. A certain amount of goodwill is designated in a currency other than U. S. dollars and is adjusted each reporting period for the change in foreign exchange rates between balance sheet dates.
|
In accordance with its accounting policy and ASC 350, the Company tests goodwill annually for impairment and assesses whether there are any indicators of impairment on an interim basis. The Company performs interim goodwill impairment reviews between its annual reviews if certain events and circumstances have occurred, including a deterioration in general economic conditions, an increased competitive environment, a change in management, key personnel, strategy or customers, negative or declining cash flows, or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods. The Company believes the methodology that it uses to review impairment of goodwill, which includes a significant amount of judgment and estimates, provides it with a reasonable basis to determine whether impairment has occurred. However, many of the factors employed in determining whether its goodwill is impaired are outside of its control and it is reasonably likely that assumptions and estimates will change in future periods. These changes in assumptions and estimates could result in future impairments.
When performing its annual goodwill impairment test and during its interim assessments, the Company first assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, it is determined it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company tests for goodwill impairment using a two-step method as required by ASC 350. The first step of the impairment test compares the fair value of the reporting unit to its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds the fair value, goodwill is considered impaired and a second step is performed to measure the amount of the impairment loss, if any. Under this second step, the implied fair value of the goodwill is determined, in the same manner as the amount of goodwill recognized in a business combination, to assess the level of goodwill impairment, if any. The second step of the impairment test compares the implied fair value of goodwill to the carrying value of goodwill. If the carrying value of goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized equal to that excess (i.e., goodwill is written down to the implied fair value of goodwill).
If the first step of the impairment test is required after determining it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company calculates the fair value of its reporting units using a combination of market and income approaches. Prior to its goodwill impairment test, the Company first tests its long-lived assets for impairment and adjusts the carrying value of each asset group to its fair value and records the associated impairment charge, if any, in its Consolidated Statements of Operations. The Company then performs its analysis of goodwill impairment using a two-step method as required by ASC 350. The first step of the impairment test compares the fair value of each reporting unit to its carrying value, including the goodwill related to the respective reporting units. The market approach of the fair value calculation estimates the fair value of a business based on a comparison of the Company to comparable firms in similar lines of business that are publicly traded or which are part of a public or private transaction. The income approach requires estimates of expected revenue, gross margin and operating expenses in order to discount the sum of estimated future cash flows using each particular reporting unit’s weighted average cost of capital. The Company’s growth estimates are based on historical data and internal estimates developed as part of its long-term planning process. The Company tests the reasonableness of the inputs and outcomes of its discounted cash flow analysis by comparing these items to available market data. The second step of the impairment test compares the implied fair value of goodwill to the carrying value of goodwill. The implied fair value of goodwill value is determined, in the same manner as the amount of goodwill recognized in a business combination, to assess the level of goodwill impairment, if any. During the second step, management estimates the fair value of the Company’s tangible and intangible net assets. Intangible assets are identified and valued for each reporting unit for which the second step is performed. The difference between the estimated fair value of each reporting unit and the sum of the fair value of the identified net assets results in the implied value of goodwill. If the carrying value of goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized equal to that excess.
64
During the second quarter of 2015, the Company noted certain indicators of impairment, including a sustained decline in its stock price and continued reduced performance in its Identi
ty 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 consolidated statements of operations during the second quarter of 2015.
During the quarter ended December 31, 2015, the Company’s stock price declined significantly which resulted in a significant reduction in its fair value and market capitalization. The stock price declined from $3.64 as of October 1, 2015 to $1.99 as of December 31, 2015, and subsequently dropped further, reaching a low of $1.56 in February 2016. Additionally, the Company’s net losses continued in the quarter ended December 31, 2015, and the Company announced a worldwide restructuring plan designed to refocus resources on its core business segments and to consolidate operations in several worldwide locations. As a result, the Company performed an impairment test and determined that its goodwill was fully impaired based on qualitative factors as the Company’s net fair value exceeded its carrying value.
As a result, the Company recorded an impairment charge of $7.8 million in its consolidated statement of operations in the fourth quarter of 2015.
Intangible Assets
The following table summarizes the gross carrying amount and accumulated amortization for intangible assets resulting from acquisitions (in thousands):
|
|
Existing Technology
|
|
|
Customer Relationships
|
|
|
Trade Name
|
|
|
Total
|
|
Amortization period (in years)
|
|
11.75
|
|
|
4.0 – 11.75
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount at December 31, 2014
|
|
$
|
4,600
|
|
|
$
|
10,701
|
|
|
$
|
570
|
|
|
$
|
15,871
|
|
Accumulated amortization
|
|
|
(1,914
|
)
|
|
|
(4,657
|
)
|
|
|
(570
|
)
|
|
|
(7,141
|
)
|
Intangible Assets, net at December 31, 2014
|
|
$
|
2,686
|
|
|
$
|
6,044
|
|
|
$
|
—
|
|
|
$
|
8,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount at December 31, 2015
|
|
$
|
4,600
|
|
|
$
|
10,639
|
|
|
$
|
570
|
|
|
$
|
15,809
|
|
Accumulated amortization
|
|
|
(2,361
|
)
|
|
|
(5,603
|
)
|
|
|
(570
|
)
|
|
|
(8,534
|
)
|
Intangible Assets, net at December 31, 2015
|
|
$
|
2,239
|
|
|
$
|
5,036
|
|
|
$
|
—
|
|
|
$
|
7,275
|
|
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 straight-line 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 year ended December 31, 2015.
The following table illustrates the amortization expense included in the consolidated statements of operations for the years ended December 31, 2015 and 2014 (in thousands):
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Cost of revenue
|
|
$
|
448
|
|
|
$
|
448
|
|
Selling and marketing
|
|
|
1,007
|
|
|
|
1,007
|
|
Total
|
|
$
|
1,455
|
|
|
$
|
1,455
|
|
65
The estimated annual future amortization expense for purchased intangible assets with definite lives over the next five years is as follows (in thousands):
2016
|
|
$
|
1,455
|
|
2017
|
|
|
1,455
|
|
2018
|
|
|
1,455
|
|
2019
|
|
|
1,455
|
|
Thereafter
|
|
|
1,455
|
|
Total
|
|
$
|
7,275
|
|
7. Long-Term Payment Obligation
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 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 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 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.
The Company included $0.5 million and $0.6 million of interest expense during the years ended December 31, 2015 and 2014, respectively, in its consolidated statements of operations for interest accreted on the long-term payment obligation.
The ongoing payment obligation in connection with the Hirsch acquisition as of December 31, 2015 is as follows (in thousands):
|
|
|
|
|
2016
|
|
$
|
1,160
|
|
2017
|
|
|
1,200
|
|
2018
|
|
|
1,248
|
|
2019
|
|
|
1,298
|
|
2020
|
|
|
1,444
|
|
Thereafter
|
|
|
372
|
|
Present value discount factor
|
|
|
(1,163
|
)
|
Total
|
|
$
|
5,559
|
|
66
8. Financial Liabilities
Financial liabilities consist of (in thousands):
|
December 31,
|
|
|
December 31,
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
Secured term loan
|
$
|
10,000
|
|
|
$
|
10,000
|
|
Bank revolving loan facility
|
|
8,300
|
|
|
|
4,300
|
|
Less: Unamortized discount
|
|
(196
|
)
|
|
|
(362
|
)
|
Long-term financial liabilities
|
$
|
18,104
|
|
|
$
|
13,938
|
|
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”) which was drawn down on March 31, 2014, and an additional $10.0 million revolving loan facility (“Revolving Loan Facility”), of which $4.0 million was drawn down on March 31, 2014 and an additional $2.0 million was drawn down during the three months ended June 30, 2014. On August 8, 2014, the Company repaid $1.7 million on the Revolving Loan Facility. In connection with the closing of the Credit Agreement, the Company repaid all outstanding amounts under its Hercules Debt Facility. The proceeds of the Term Loan and the initial proceeds under the Revolving Loan Facility, after payment of fees and expenses and all outstanding amounts under the Hercules Debt Facility, were approximately $7.8 million. The obligations of the Company under the Credit Agreement are secured by substantially all the assets of the Company. Certain of the Company’s material domestic subsidiaries have guaranteed the Term Loan and the Revolving Loan Facility and have granted Opus security interests in substantially all of their respective assets.
In connection with the Company’s entry into the Credit Agreement, the Company paid $170,000 in customary lender fees and expenses, including facility fees. As discussed in Note 4,
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 option 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. The fair value of the Opus Warrant was determined to be $0.8 million. The Opus Warrant is classified as equity in accordance with ASC 505 as the settlement of the warrant will be in shares and is within the control of the Company. The Company allocated both the cash and warrant (equity) consideration to the Term Loan and Revolving Loan Facility using the relative value of these loans. The Company recorded a total of $0.9 million in issuance costs, both cash and equity, related to the Term Loan and Revolving Loan Facility. Cost consideration of $0.5 million allocated for the Term Loan was recorded as a discount on the Term Loan and is reported in the balance sheet as an adjustment to the carrying amount of the Term Loan. The remaining $0.4 million in issuance costs was allocated to the Revolving Loan Facility as a deferred charge, pursuant to ASC Topic 835-30, Imputation of Interest (“ASC 835-30”). The issuance costs and discounts related to the Credit Agreement are amortized as interest expense in accordance with ASC 835-30 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”). 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 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 facilities continues to be payable monthly. Additionally, the Amended Credit Agreement (i) modifies certain loan covenants applicable to the Company’s stock repurchase plan (see above), (ii) removes from the loan collateral shares of the Company’s capital stock repurchased by the Company and (iii) extends the current tangible net worth covenant by one year. The Company paid .333% of the revolving loan facility as a lender fee in the aggregate amount of $100,000 upon the signing of the Amended Credit Agreement. In addition, the Company paid $75,000 in third party fees related to the debt modification. Under the relevant debt restructuring accounting guidance found in ASC 470, the amendment to the Credit Agreement on November 10, 2014 has been treated as a debt modification. The Opus and third party fees have been allocated to the Revolving Loan Facility as a deferred charge and to the discount on the Term Loan pursuant to ASC Topic 470-50-40 and are being amortized as interest expense over the remaining term of the Amended Credit Agreement. 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 using the proceeds of asset sales or insurance or condemnation events.
67
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 indebte
dness, 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 minimu
m asset coverage ratio.
On December 4, 2015, the Company entered into an amendment (the “Credit Amendment”) to the Amended Credit Agreement. The Credit Amendment amended and restated Section 7.11(a) Financial Covenants to read as follows: “Tangible Net Worth. Permit the sum of the Consolidated Tangible Net Worth
plus
the amount shown on the Borrower’s current balance sheet for the 1994 Settlement Agreement to be less than the sum of $8,000,000
plus
, an amount equal to 50% of the amount of any Cash proceeds from any equity or Subordinated Debt issued by the Borrower after December 1, 2015 as of the end of any fiscal quarter of the Borrower measured quarterly beginning at the end of the fiscal quarter ending December 31, 2015.” In addition, Opus waived any Default or Event of Default arising under the Credit Agreement due to the failure of the Company to comply with the requirements of Section 7.11(a) of the Credit Agreement (
Tangible Net Worth
) for the fiscal quarter ending September 30, 2015. As of December 31, 2015, the Company was in compliance with all financial covenants under the Amended Credit Agreement.
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 (some of which are subject to applicable grace or cure periods), 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 loans, 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. Accordingly, all amounts outstanding under the Amended Credit Agreement are classified as long-term in the accompanying consolidated balance sheets.
The following table summarizes the timing of repayment obligations for the Company’s financial liabilities for the next five years under the terms of the Amended Credit Agreement as of December 31, 2015 (in thousands):
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
Total
|
|
Bank term loan and revolving loan facility
|
|
$
|
—
|
|
|
$
|
18,300
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,300
|
|
9. Income Taxes
Loss before income taxes for domestic and non-U.S. continuing operations is as follows:
(In thousands)
|
|
2015
|
|
|
2014
|
|
Loss from continuing operations before income taxes and noncontrolling interest:
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
(43,518
|
)
|
|
$
|
(16,022
|
)
|
Foreign
|
|
|
4,520
|
|
|
|
(2,307
|
)
|
Loss from continuing operations before income taxes and noncontrolling interest
|
|
$
|
(38,998
|
)
|
|
$
|
(18,329
|
)
|
68
The benefit (provision) for income taxes consisted of the following:
|
|
December 31,
|
|
(In thousands)
|
|
2015
|
|
|
2014
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
44
|
|
State
|
|
|
(16
|
)
|
|
|
56
|
|
Foreign
|
|
|
(206
|
)
|
|
|
(195
|
)
|
Total current
|
|
|
(222
|
)
|
|
|
(95
|
)
|
Total provision for income taxes
|
|
$
|
(222
|
)
|
|
$
|
(95
|
)
|
Significant items making up deferred tax assets and liabilities are as follows:
|
|
December 31,
|
|
(In thousands)
|
|
2015
|
|
|
2014
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowances not currently deductible for tax purposes
|
|
$
|
3,481
|
|
|
$
|
3,555
|
|
Net operating loss carryforwards
|
|
|
62,779
|
|
|
|
60,774
|
|
Accrued and other
|
|
|
8,781
|
|
|
|
2,759
|
|
|
|
|
75,041
|
|
|
|
67,088
|
|
Less valuation allowance
|
|
|
(70,478
|
)
|
|
|
(62,646
|
)
|
|
|
|
4,563
|
|
|
|
4,442
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(2,774
|
)
|
|
|
(3,525
|
)
|
Other
|
|
|
(1,789
|
)
|
|
|
(917
|
)
|
|
|
|
(4,563
|
)
|
|
|
(4,442
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
—
|
|
|
$
|
—
|
|
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 three-year period ended December 31, 2015. Such objective evidence limits the ability to consider other subjective evidence such as the Company’s projections for future growth.
A valuation allowance of $70.5 million and $62.6 million at December 31, 2015 and December 31, 2014, 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, which are not deductible for tax purposes.
As of December 31, 2015, the Company has net operating loss carryforwards of $89.7 million for federal, $17.6 million for state and $117.5 million for foreign income tax purposes. The Company’s loss carryforwards began to expire in 2015, and will continue to expire through 2033 if not utilized.
The Tax Reform Act of 1986 (the “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 on January 4, 2010, which resulted in a stock ownership change as defined by the Reform Act. This transaction resulted in limitations on the annual utilization of federal and state net operating loss carryforwards. As a result, the Company reevaluated its deferred tax assets available under the Reform Act. The loss carryforward 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 Reform Act.
69
The (benefit) provision for income taxes reconcil
es to the amount computed by applying the statutory federal tax rate to the loss before income taxes from continuing operation is as follows:
|
|
December 31,
|
|
(In thousands)
|
|
2015
|
|
|
2014
|
|
Income tax expense (benefit) at statutory federal tax rate of
34%
|
|
$
|
(13,247
|
)
|
|
$
|
(6,035
|
)
|
Earn-out consideration
|
|
|
—
|
|
|
|
1,193
|
|
State taxes, net of federal benefit
|
|
|
11
|
|
|
|
(37
|
)
|
Foreign taxes benefits provided for at rates other than U.S
statutory rate
|
|
|
(1,349
|
)
|
|
|
965
|
|
Change in valuation allowance
|
|
|
11,728
|
|
|
|
3,845
|
|
Goodwill impairment
|
|
|
2,646
|
|
|
|
—
|
|
Permanent differences
|
|
|
731
|
|
|
|
492
|
|
Other
|
|
|
(298
|
)
|
|
|
(328
|
)
|
Total provision for income taxes
|
|
$
|
222
|
|
|
$
|
95
|
|
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.
U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside the United States. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. The determination and presentation of the amount of such temporary differences as of December 31, 2015 and 2014, is not practicable because of complexities of the hypothetical calculation.
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 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 de-recognition, 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)
|
|
2015
|
|
|
2014
|
|
Balance at January 1
|
|
$
|
2,886
|
|
|
$
|
2,800
|
|
Additions based on tax positions related to the current year
|
|
|
352
|
|
|
|
319
|
|
Additions for tax positions of prior years
|
|
|
—
|
|
|
|
4
|
|
Reductions in prior year tax positions
|
|
|
—
|
|
|
|
(125
|
)
|
Reductions in prior year tax positions due to completion of audit
|
|
|
—
|
|
|
|
—
|
|
Other reductions in prior year tax positions
|
|
|
(15
|
)
|
|
|
(112
|
)
|
Balance at December 31
|
|
$
|
3,223
|
|
|
$
|
2,886
|
|
While timing of the resolution and/or finalization of tax audits is uncertain, the Company does not believe that its unrecognized tax benefits as disclosed in the above table would materially change in the next 12 months. The reduction to the amount of unrecognized tax benefits during 2015 was primarily due to the expiration of statutes of limitations on tax attributes carried forward for prior years.
As of December 31, 2015 and 2014, the Company recognized liabilities for unrecognized tax benefits of $3.1 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 2015 and 2014. 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, 2015 and 2014.
70
The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax e
xpense. During fiscal 2015, the Company recorded a reduction to accrued penalties of $400 and a reduction to accrued interest of $3,000 related to the unrecognized tax benefits noted above. As of December 31, 2015, the Company has recognized a total liabil
ity for penalties of $15,000 and interest of $24,000. During fiscal 2014, the Company recorded a reduction to accrued penalties of $51,000 and a reduction to accrued interest of $7,000 related to the unrecognized tax benefits noted above. As of December 31
, 2014, the Company has recognized a total liability for penalties of $15,000 and interest of $21,000.
The Company files U.S. federal, U.S. state and foreign tax returns. The Company generally is no longer subject to tax examinations for years prior to 2010. However, if loss carryforwards of tax years prior to 2010 are utilized in the U.S., these tax years may become subject to investigation by the tax authorities.
10. 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.
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.
71
Net revenue and gross profit information by segment for the years ended December 31, 2015 and 2014 are as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Premises:
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
19,963
|
|
|
$
|
19,033
|
|
Gross profit
|
|
|
11,522
|
|
|
|
11,358
|
|
Gross profit margin
|
|
|
58
|
%
|
|
|
60
|
%
|
Identity:
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
11,950
|
|
|
|
17,045
|
|
Gross profit
|
|
|
5,040
|
|
|
|
8,232
|
|
Gross profit margin
|
|
|
42
|
%
|
|
|
48
|
%
|
Credentials:
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
27,336
|
|
|
|
41,565
|
|
Gross profit
|
|
|
5,613
|
|
|
|
11,898
|
|
Gross profit margin
|
|
|
21
|
%
|
|
|
29
|
%
|
All Other:
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
1,545
|
|
|
|
3,606
|
|
Gross profit
|
|
|
974
|
|
|
|
1,968
|
|
Gross profit margin
|
|
|
63
|
%
|
|
|
55
|
%
|
Total:
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
60,794
|
|
|
|
81,249
|
|
Gross profit
|
|
|
23,149
|
|
|
|
33,456
|
|
Gross profit margin
|
|
|
38
|
%
|
|
|
41
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
9,151
|
|
|
|
6,902
|
|
Selling and marketing
|
|
|
20,236
|
|
|
|
20,635
|
|
General and administrative
|
|
|
19,604
|
|
|
|
12,751
|
|
Earn-out consideration
|
|
|
—
|
|
|
|
3,510
|
|
Impairment of goodwill
|
|
|
8,771
|
|
|
|
—
|
|
Restructuring and severance
|
|
|
1,266
|
|
|
|
3,098
|
|
Total operating expenses:
|
|
|
59,028
|
|
|
|
46,896
|
|
Loss from operations
|
|
|
(35,879
|
)
|
|
|
(13,440
|
)
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(1,908
|
)
|
|
|
(3,619
|
)
|
Foreign currency loss (gain), net
|
|
|
(1,211
|
)
|
|
|
(1,270
|
)
|
Loss from continuing operations before income
taxes and noncontrolling interest
|
|
$
|
(38,998
|
)
|
|
$
|
(18,329
|
)
|
72
Geographic net revenue is based on customer’s ship-to location. Information regarding net revenue by geographic region is as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
40,848
|
|
|
$
|
51,318
|
|
Other
|
|
|
—
|
|
|
|
4
|
|
Total Americas
|
|
|
40,848
|
|
|
|
51,322
|
|
Europe and the Middle East
|
|
|
9,472
|
|
|
|
15,835
|
|
Asia-Pacific
|
|
|
10,474
|
|
|
|
14,092
|
|
Total
|
|
$
|
60,794
|
|
|
$
|
81,249
|
|
Revenues
|
|
|
|
|
|
|
|
|
Americas
|
|
|
67
|
%
|
|
|
63
|
%
|
Europe and the Middle East
|
|
|
16
|
%
|
|
|
20
|
%
|
Asia-Pacific
|
|
|
17
|
%
|
|
|
17
|
%
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
Long-lived assets by geographic location as of December 31, 2015 and 2014 are as follows (in thousands):
|
December 31,
|
|
|
December 31,
|
|
|
2015
|
|
|
2014
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
Americas
|
|
|
|
|
|
|
|
United States
|
$
|
2,096
|
|
|
$
|
2,134
|
|
Other
|
|
—
|
|
|
|
—
|
|
Total Americas
|
|
2,096
|
|
|
|
2,134
|
|
Europe and the Middle East
|
|
|
|
|
|
|
|
Germany
|
|
295
|
|
|
|
1,252
|
|
Total Europe and the Middle East
|
|
295
|
|
|
|
1,252
|
|
Asia-Pacific
|
|
|
|
|
|
|
|
Singapore
|
|
1,807
|
|
|
|
1,867
|
|
Other
|
|
20
|
|
|
|
58
|
|
Total Asia-Pacific
|
|
1,827
|
|
|
|
1,925
|
|
Total property and equipment, net
|
$
|
4,218
|
|
|
$
|
5,311
|
|
The Company’s net revenue is represented by the following product categories as of December 31, 2015 and 2014 (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Tags and transponders
|
|
$
|
20,310
|
|
|
$
|
34,659
|
|
Logical and physical access control readers
|
|
|
17,165
|
|
|
|
21,084
|
|
Controller panels
|
|
|
10,272
|
|
|
|
9,215
|
|
Access cards and provisioning
|
|
|
7,394
|
|
|
|
7,413
|
|
Third party access control products
|
|
|
1,523
|
|
|
|
2,097
|
|
Other
|
|
|
4,130
|
|
|
|
6,781
|
|
Total
|
|
$
|
60,794
|
|
|
$
|
81,249
|
|
11. Restructuring and Severance
During the year ended December 31, 2014, certain employees were terminated as part of management’s efforts to simplify business operations and facilities were closed or are scheduled to close. As a result, the Company recorded $3.1 million in restructuring and severance costs, lease termination costs, stock award modification charges and other closure related costs in its consolidated statement of operations for the year ended December 31, 2014. In addition, the Company recorded an additional $0.4
73
million in severance costs during the year ended December 31, 2014 in general and administrative expenses related to executive position resignations and eliminations in conjunction w
ith recent corporate restructuring and cost reduction activities. During 2015, the Company recorded an additional $1.3 million in severance costs, as part of management’s continuing efforts to simplify business operations.
All unpaid restructuring and severance accruals are included in other accrued expenses and liabilities within current liabilities in the consolidated balance sheets at December 31, 2015 and 2014, respectively. Restructuring and severance activities during the year ended December 31, 2015 were as follows (in thousands):
|
|
Restructuring
|
|
|
|
and Severance
|
|
Balance at December 31, 2014
|
|
$
|
1,377
|
|
Restructuring expense incurred and changes in estimates
|
|
|
1,266
|
|
Other cost reduction activities
|
|
|
81
|
|
Payments and non-cash item adjustment
|
|
|
(2,091
|
)
|
Balance at December 31, 2015
|
|
$
|
633
|
|
In addition to the initiatives noted above, on January 27, 2016, the Company commenced the implementation of a worldwide restructuring plan designed to refocus its resources on its core business segments, including physical access and transponders, and to consolidate its operations in several worldwide locations. The restructuring plan includes a reduction of approximately 25% of its non-manufacturing employee base, reallocating overhead roles into direct business activities and the elimination of certain management and executive roles. See Note 15
Subsequent Events
in the accompanying notes to the consolidated financial statements.
12. Legal Proceedings
On December 7, 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
Ruggiero v. Identiv, Inc.
, et al., Case No. 15-cv-05583. The complaint in that lawsuit alleged 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 based on allegations 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. The complaint sought unspecified monetary damages, reasonable costs and attorneys’ fees, and equitable and injunctive relief. On December 16, 2015, that lawsuit was voluntarily dismissed without prejudice.
Between December 2015 and February 2016, a number of other shareholder lawsuits were filed. 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. 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. 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, 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 be subject to claims arising in the ordinary course of business or be 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.
74
13. Commitments and Contingencies
The Company leases its facilities, certain equipment, and automobiles under non-cancelable operating lease agreements. Those lease agreements existing as of December 31, 2015 expire at various dates during the next six years.
The Company recognized rent expense of $1.8 million and $1.6 million for the years ended December 31, 2015 and 2014, respectively, in its consolidated statements of operations.
The following table summarizes the Company’s principal contractual commitments as of December 31, 2015 (in thousands):
|
|
Operating Leases
|
|
|
Purchase Commitments
|
|
|
Other Contractual Commitments
|
|
|
Total
|
|
2016
|
|
$
|
1,737
|
|
|
$
|
8,153
|
|
|
$
|
9
|
|
|
$
|
9,899
|
|
2017
|
|
|
1,191
|
|
|
|
—
|
|
|
|
6
|
|
|
|
1,197
|
|
2018
|
|
|
430
|
|
|
|
—
|
|
|
|
—
|
|
|
|
430
|
|
2019
|
|
|
328
|
|
|
|
—
|
|
|
|
—
|
|
|
|
328
|
|
2020
|
|
|
329
|
|
|
|
—
|
|
|
|
—
|
|
|
|
329
|
|
Thereafter
|
|
|
110
|
|
|
|
—
|
|
|
|
—
|
|
|
|
110
|
|
|
|
$
|
4,125
|
|
|
$
|
8,153
|
|
|
$
|
15
|
|
|
$
|
12,293
|
|
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 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 May 21, 2015, the Company received notification from NASDAQ that it no longer met the requirements for continued listing under NASDAQ’s listing rules because of the failure to file its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015. The Company subsequently submitted a plan of compliance to NASDAQ, and was given until November 16, 2015 to regain compliance with the continued listing requirements. The plan of compliance included an undertaking to file our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, which had also become delinquent. The Company subsequently was unable to file its Quarterly Report on Form 10-Q for the quarter ended September 30, 2015. On November 17, 2015, the Company received a notice from NASDAQ informing the Company that as a result of its failure to regain compliance with the continued listing requirements by November 16, 2015, and because the September 30, 2015 Form 10-Q was also delinquent, The Company’s common stock was subject to delisting. The Company requested and was granted a hearing before the NASDAQ Listing Qualifications Panel (“the Panel”) to appeal the delisting determination. On January 26, 2016, the Company was notified that the Panel had granted its request to remain listed on The NASDAQ Capital Market, subject to certain conditions. The Panel determined the Company’s common stock would remain listed subject to the Company becoming current with its periodic filings with the SEC by March 30, 2016, and the Company holding its annual meeting of stockholders on or before May 12, 2016. If the Company does not maintain compliance with the remainder of The NASDAQ Capital Market’s continued listing requirements on an ongoing basis and timely comply with the conditions of the Panel’s decision, the Company’s common stock may be immediately delisted from The NASDAQ Capital Market.
14. Related Party Transaction
As discussed in Note 3
Fair Value Measurements
, the Company recorded an earn-out obligation of $3.51 million as of December 31, 2014 related to the SPA (as defined in Note 3). The SPA provided for further consideration to be paid to the Selling Shareholders for each of the years or part years ended December 31, 2011 through 2015 based on the achievement of specific financial and sales performance targets, with the measurement of those achievements to be determined based on the financial records of idOnDemand. However, since the idOnDemand product group has been fully integrated into the Company since the acquisition and, as such, it was impractical to derive the discrete financial records of the related product group, the Company decided to engage a third
75
party independent valuation firm to assist in the validation of the Earn-out Consideration liability a
s of December 31, 2014. The valuation was based on a calculation of the Company’s internal sales performance data as well as consideration of comparable companies’ metrics and data. The Board of Directors of the Company considered this valuation, among oth
er factors, and approved the Earn-out Consideration liability for the period ended December 31, 2014.
As outlined in the SPA, certain of the Selling Shareholders include the Company’s former CEO and former CFO. The $3.51 million Earn-out Consideration liability was settled during the quarter ended June 30, 2015 by the issuance of common stock to the Selling Shareholders in proportion to their former shareholdings, which included approximately 87% held by Jason Hart representing approximately $3,040,000 and approximately 0.3% held by Brian Nelson representing approximately $10,500 of the total Earn-out Consideration. The Company issued 294,750 and 921 shares of common stock to Mr. Hart and Mr. Nelson, respectively, which shares have a lock-up period of 12 months from the date of issuance.
For the year ended December 31, 2014, the Company allocated as additional compensation to Mr. Hart $97,868 of previously reimbursed expenses in 2014 which the Company subsequently determined should not have been reimbursed either because such expenses were not consistent with its expense guidelines and policies or because insufficient documentation was provided to support such expense reimbursements. At the Company’s request, in February 2016 Mr. Hart repaid the Company $35,784 of such amount.
For the year ended December 31, 2014, the Company allocated as additional compensation to Mr. Hart $97,868 of previously reimbursed expenses in 2014 which the Company subsequently determined should not have been reimbursed either because such expenses were not consistent with its expense guidelines and policies or because insufficient documentation was provided to support such expense reimbursements. At the Company’s request, in February 2016 Mr. Hart repaid the Company $35,784 of such amount.
15. Subsequent Events
On January 26, 2016, the Company was notified that the NASDAQ Listing Qualifications Panel (the “Panel”) had granted the Company’s request to remain listed on The NASDAQ Capital Market, subject to certain conditions. The Panel determined the Company’s common stock would remain listed subject to the Company becoming current in its periodic filings with the Securities and Exchange Commission by March 30, 2016, and holding its annual meeting of stockholders on or before May 12, 2016. The Company filed its delinquent Quarterly Reports on Form 10-Q on March 29, 2016. If the Company does not maintain compliance with the remainder of The NASDAQ Capital Market’s continued listing requirements on an ongoing basis and timely comply with the conditions of the Panel’s decision, its common stock may be immediately delisted from The NASDAQ Capital Market. Any such delisting could have a material adverse effect on the price of the Company’s common stock, the liquidity of its stock, the Company’s business and its ability to raise capital.
On January 27, 2016, the Company commenced the implementation of 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 includes a reduction of approximately 25% of the Company’s non-manufacturing employee base, reallocates overhead roles into direct business activities and eliminates certain management and executive roles. In connection with the restructuring, the Company estimates that it will incur aggregate cash charges of approximately $1.6 million to $2.0 million, consisting of approximately $1.5 million to $1.75 million related to severance payments to employees and approximately $100,000 to $250,000 in lease termination fees. The majority of the charges are expected to be paid out during the first quarter of 2016.
76