inve-10q_20150630.htm

 

 

UNITED STATES    

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

COMMISSION FILE NUMBER: 000-29440

 

IDENTIV, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

 

DELAWARE

 

77-0444317

(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)

 

(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)

2201 Walnut Avenue, Suite 310

Fremont, California 94538

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)

(949) 250-8888

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

N/A

(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  þ  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨

  

Accelerated filer ¨

  

Non-accelerated filer ¨

  

Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

At March 6, 2016, 10,746,911 shares of common stock were outstanding.

 

 

 

 


EXPLANATORY NOTE

 

Identiv, Inc. is filing this Quarterly Report on Form 10-Q late due to an investigation undertaken by a special committee of the Board of Directors, which investigation was completed in late 2015.  For more information, please see Note 14, Subsequent Events, included in Item 1. Unless otherwise indicated, the information in this Quarterly Report on Form 10-Q is as of as June 30, 2015.

 


2


TABLE OF CONTENTS

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements

4

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

 

Controls and Procedures

37

 

 

PART II. OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

39

Item 1A.

 

Risk Factors

39

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

39

Item 6.

 

Exhibits

39

 

 

SIGNATURES

40

EXHIBIT INDEX

41

 

 

 

3


PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

IDENTIV, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited; in thousands, except par value)

 

 

June 30,

 

 

December 31,

 

 

2015

 

 

2014

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash

$

30,846

 

 

$

36,547

 

Accounts receivable, net of allowances of $301 and $156 as of June 30, 2015

   and December 31, 2014, respectively

 

13,004

 

 

 

13,612

 

Inventories

 

12,475

 

 

 

9,254

 

Prepaid expenses

 

1,215

 

 

 

1,002

 

Other current assets

 

3,527

 

 

 

1,200

 

Total current assets

 

61,067

 

 

 

61,615

 

Property and equipment, net

 

4,954

 

 

 

5,311

 

Goodwill

 

7,783

 

 

 

8,853

 

Intangible assets, net

 

8,003

 

 

 

8,730

 

Other assets

 

1,126

 

 

 

1,371

 

Total assets

$

82,933

 

 

$

85,880

 

LIABILITIES AND STOCKHOLDERS´ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

8,732

 

 

$

8,372

 

Earn-out liability

 

 

 

 

3,510

 

Current portion -  payment obligation

 

659

 

 

 

635

 

Deferred revenue

 

4,235

 

 

 

508

 

Accrued compensation and related benefits

 

2,113

 

 

 

2,139

 

Other accrued expenses and liabilities

 

5,000

 

 

 

4,471

 

Total current liabilities

 

20,739

 

 

 

19,635

 

Long-term payment obligation

 

5,218

 

 

 

5,545

 

Long-term financial liabilities

 

18,017

 

 

 

13,938

 

Other long-term liabilities

 

485

 

 

 

630

 

Total liabilities

 

44,459

 

 

 

39,748

 

Commitments and contingencies (see Note 12)

 

 

 

 

 

 

 

Stockholders´ equity:

 

 

 

 

 

 

 

Identiv, Inc. stockholders' equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value: 10,000 shares authorized; none issued and

   outstanding

 

 

 

 

 

Common stock, $0.001 par value: 130,000 shares authorized; 11,365 and 10,884

   shares issued and 11,056 and 10,640 shares outstanding as of June 30, 2015

   and December 31, 2014, respectively

 

11

 

 

 

11

 

Additional paid-in capital

 

394,312

 

 

 

389,401

 

Treasury stock, 308 and 244 shares as of June 30, 2015 and December 31, 2014,

   respectively

 

(5,222

)

 

 

(4,572

)

Accumulated deficit

 

(351,597

)

 

 

(338,670

)

Accumulated other comprehensive income

 

1,119

 

 

 

1,699

 

Total Identiv, Inc. stockholders' equity

 

38,623

 

 

 

47,869

 

Noncontrolling interest

 

(149

)

 

 

(1,737

)

Total stockholders´ equity

 

38,474

 

 

 

46,132

 

Total liabilities and stockholders´equity

$

82,933

 

 

$

85,880

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

4


IDENTIV, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net revenue

 

$

15,587

 

 

$

22,301

 

 

$

30,521

 

 

$

39,155

 

Cost of revenue

 

 

8,941

 

 

 

13,371

 

 

 

17,791

 

 

 

23,623

 

Gross profit

 

 

6,646

 

 

 

8,930

 

 

 

12,730

 

 

 

15,532

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,340

 

 

 

1,731

 

 

 

4,332

 

 

 

3,233

 

Selling and marketing

 

 

5,467

 

 

 

5,731

 

 

 

10,462

 

 

 

10,766

 

General and administrative

 

 

5,536

 

 

 

2,867

 

 

 

8,601

 

 

 

5,910

 

Impairment of goodwill

 

 

988

 

 

 

 

 

 

988

 

 

 

 

Restructuring and severance

 

 

21

 

 

 

612

 

 

 

193

 

 

 

1,049

 

Total operating expenses

 

 

14,352

 

 

 

10,941

 

 

 

24,576

 

 

 

20,958

 

Loss from operations

 

 

(7,706

)

 

 

(2,011

)

 

 

(11,846

)

 

 

(5,426

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(465

)

 

 

(506

)

 

 

(889

)

 

 

(2,590

)

Foreign currency gain (loss), net

 

 

51

 

 

 

(159

)

 

 

(176

)

 

 

(252

)

Loss from continuing operations before income taxes

   and noncontrolling interest

 

 

(8,120

)

 

 

(2,676

)

 

 

(12,911

)

 

 

(8,268

)

Income tax provision

 

 

(63

)

 

 

9

 

 

 

(82

)

 

 

(55

)

Loss from continuing operations before noncontrolling

   interest

 

 

(8,183

)

 

 

(2,667

)

 

 

(12,993

)

 

 

(8,323

)

Income from discontinued operations, net of income

   taxes

 

 

 

 

 

57

 

 

 

 

 

 

544

 

Consolidated net loss

 

 

(8,183

)

 

 

(2,610

)

 

 

(12,993

)

 

 

(7,779

)

Less: Loss attributable to noncontrolling interest

 

 

(1

)

 

 

(6

)

 

 

66

 

 

 

35

 

Net loss attributable to Identiv, Inc. stockholders´ equity

 

$

(8,184

)

 

$

(2,616

)

 

$

(12,927

)

 

$

(7,744

)

Basic and diluted net income (loss) per share attributable to

   Identiv, Inc. stockholders´ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.75

)

 

$

(0.34

)

 

$

(1.20

)

 

$

(1.07

)

Income from discontinued operations

 

 

 

 

 

0.01

 

 

 

 

 

 

0.07

 

Net loss

 

$

(0.75

)

 

$

(0.33

)

 

$

(1.20

)

 

$

(1.00

)

Weighted average shares used to compute basic and diluted loss

   per share

 

 

10,912

 

 

 

7,907

 

 

 

10,804

 

 

 

7,739

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

5


IDENTIV, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(unaudited)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Consolidated net loss

 

$

(8,183

)

 

$

(2,610

)

 

$

(12,993

)

 

$

(7,779

)

Other comprehensive income (loss), net of income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

64

 

 

 

72

 

 

 

(142

)

 

 

181

 

Foreign currency translation reclassified into net loss upon

   acquisition of noncontrolling interest

 

 

 

 

 

 

 

 

(444

)

 

 

 

Total other comprehensive income (loss), net of income taxes

 

 

64

 

 

 

72

 

 

 

(586

)

 

 

181

 

Consolidated comprehensive loss

 

 

(8,119

)

 

 

(2,538

)

 

 

(13,579

)

 

 

(7,598

)

Less: Comprehensive (income) loss attributable to

   noncontrolling interest

 

 

 

 

 

(18

)

 

 

72

 

 

 

21

 

Comprehensive loss attributable to Identiv, Inc.

   common stockholders

 

$

(8,119

)

 

$

(2,556

)

 

$

(13,507

)

 

$

(7,577

)

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

6


IDENTIV, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

Six Months Ended June 30, 2015

(In thousands)

(unaudited)

 

 

 

Identiv, Inc. Stockholders´ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Treasury

 

 

Accumulated

 

 

Comprehensive

 

 

Noncontrolling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Deficit

 

 

Income

 

 

Interest

 

 

Equity

 

Balances, December 31,

   2014

 

 

10,640

 

 

$

11

 

 

$

389,401

 

 

$

(4,572

)

 

$

(338,670

)

 

$

1,699

 

 

$

(1,737

)

 

$

46,132

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,927

)

 

 

 

 

 

(66

)

 

 

(12,993

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(136

)

 

 

(6

)

 

 

(142

)

Issuance of common stock in

   connection with settlement

   of earn-out

 

 

326

 

 

 

 

 

 

3,510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,510

 

Issuance of common stock to

   acquire share of

   noncontrolling interest

 

 

95

 

 

 

 

 

 

(1,216

)

 

 

 

 

 

 

 

 

(444

)

 

 

1,660

 

 

 

 

Issuance of common stock in

   connection with exercise of

   options and vesting of

   stock awards

 

 

58

 

 

 

 

 

 

46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46

 

Stock-based compensation

   expense

 

 

 

 

 

 

 

 

2,571

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,571

 

Repurchase of common stock

 

 

(63

)

 

 

 

 

 

 

 

 

(650

)

 

 

 

 

 

 

 

 

 

 

 

(650

)

Balances, June 30, 2015

 

 

11,056

 

 

$

11

 

 

$

394,312

 

 

$

(5,222

)

 

$

(351,597

)

 

$

1,119

 

 

$

(149

)

 

$

38,474

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

7


IDENTIV, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2015

 

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(12,993

)

 

$

(7,779

)

Gain on sale of discontinued operations

 

 

 

 

 

(449

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,468

 

 

 

1,495

 

Impairment of goodwill and long-lived assets

 

 

988

 

 

 

 

Accretion of interest to related party liability

 

 

265

 

 

 

290

 

Amortization of debt issuance costs

 

 

324

 

 

 

1,877

 

Stock-based compensation expense

 

 

2,571

 

 

 

457

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

3,744

 

 

 

(562

)

Inventories

 

 

(3,513

)

 

 

(1,207

)

Prepaid expenses and other assets

 

 

(2,566

)

 

 

(115

)

Accounts payable

 

 

512

 

 

 

1,558

 

Payment obligation liability

 

 

(568

)

 

 

(555

)

Deferred revenue

 

 

406

 

 

 

(185

)

Accrued expenses and other liabilities

 

 

529

 

 

 

(1,386

)

Net cash used in operating activities

 

 

(8,833

)

 

 

(6,561

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(410

)

 

 

(544

)

Proceeds from sale of business

 

 

 

 

 

1,286

 

Net cash (used in) provided by investing activities

 

 

(410

)

 

 

742

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of debt, net of issuance costs

 

 

4,000

 

 

 

16,000

 

Proceeds from capital raise, net of issuance costs

 

 

 

 

 

4,171

 

Proceeds from issuance of common stock under employee stock purchase plan and

   options and warrants exercised

 

 

46

 

 

 

46

 

Payments on financial liabilities

 

 

 

 

 

(7,211

)

Repurchase of common stock

 

 

(650

)

 

 

 

Net cash provided by financing activities

 

 

3,396

 

 

 

13,006

 

Effect of exchange rates on cash

 

 

146

 

 

 

227

 

Net (decrease) increase in cash

 

 

(5,701

)

 

 

7,414

 

Cash of continuing operations, at beginning of period

 

 

36,547

 

 

 

5,095

 

Add: Cash of discontinued operations, at beginning of period

 

 

 

 

 

16

 

Less: Cash of discontinued operations, at end of period

 

 

 

 

 

 

Cash of continuing operations, at end of period

 

$

30,846

 

 

$

12,525

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Common stock issued to settle earn-out obligation

 

$

3,510

 

 

$

 

Common stock issued in connection with stock bonus and incentive plans

 

$

 

 

$

356

 

Common stock issued to acquire share of noncontrolling interest

 

$

1,216

 

 

$

37

 

Property and equipment included in accounts payable

 

$

51

 

 

$

86

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

8


IDENTIV, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2015

 

1. Organization and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements of Identiv, Inc. (“Identiv” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring adjustments, considered necessary for a fair presentation of the Company’s unaudited condensed consolidated financial statements have been included. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 or any future period. The information included in this document should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” “Quantitative and Qualitative Disclosures About Market Risk,” and the Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The preparation of unaudited condensed consolidated financial statements necessarily requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the condensed consolidated balance sheet dates and the reported amounts of revenues and expenses for the periods presented. The Company may experience significant variations in demand for its products quarter to quarter and typically experiences a stronger demand cycle in the second half of its fiscal year. As a result, the quarterly results may not be indicative of the full year results. The December 31, 2014 balance sheet was derived from the audited financial statements as of that date.

 

Concentration of Credit Risk — One customer represented 13% of net revenue for the three months ended June 30, 2015. One customer represented 17% of net revenue for the six months ended June 30, 2015. One customer represented 31% and 24% of net revenue for the three and six months ended June 30, 2014.  One customer represented approximately 25% of the Company’s accounts receivable balance, and at December 31, 2014, two customers each accounted for approximately 12% of the Company’s accounts receivable balance.

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. Reclassifications of prior period amounts related to discontinued operations have been made to conform to the current period presentation.

Recent Accounting Pronouncements

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 its condensed 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 condensed 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 condensed consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern”, (“ASU 2014-15”), which requires management to perform interim and annual assessments on whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year of the date the financial statements are issued and to provide related disclosures, if required.  The amendments in ASU 2014-15 are effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter.  Early adoption is permitted. The Company is currently in the process of evaluating the impact of the adoption on its condensed consolidated financial statements.

9


In May 2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers" (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. In August 2015, the FASB issued ASU 2015-14, “Revenue From Contracts With Customers (Topic 606)” (“ASU 2015-14”), which defers the effective date of ASU 2014-09 by one year to annual periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The new guidance is effective for the Company beginning January 1, 2018 and will provide the Company additional time to evaluate the method and impact that ASU 2014-09 will have on its condensed consolidated financial statements.

 

 

2. Discontinued Operations

During the fourth quarter of 2013, the Company’s Board of Directors (the “Board”) committed to a plan designed to simplify the Company’s business structure and to focus on high-growth technology trends within the security market. 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 $0.5 million, net of income taxes of nil, in the condensed consolidated statement of operations for the three months ended March 31, 2014, which was included in income 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 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 Accounting Standards Codification (“ASC”) 205-20, Discontinued Operations (“ASC 205”) issued by the FASB, the results of these businesses have been presented as discontinued operations in the condensed consolidated statements of operations for the three and six months ended June 30, 2014.  

The key components of income from discontinued operations consist of the following (in thousands):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net revenue

$

 

 

$

441

 

 

$

 

 

$

1,276

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations,

   net of income taxes of nil

$

 

 

$

60

 

 

$

 

 

$

95

 

Adjustments to amounts reported previously

   for gain on sale of discontinued operations,

   net of income taxes of nil

 

 

 

 

(3

)

 

 

 

 

 

(54

)

Gain on sale of discontinued operations, net

   of income taxes of nil

 

 

 

 

 

 

 

 

 

 

503

 

Income from discontinued operations, net

   of income taxes

$

 

 

$

57

 

 

$

 

 

$

544

 

 

 

10


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 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 June 30, 2015 and December 31, 2014, there were no assets that are measured and recognized at fair value on a recurring basis. There were no cash equivalents as of June 30, 2015 and December 31, 2014.

The Company’s only liability measured at fair value on a recurring basis was the contingent consideration related to the acquisition of idOnDemand, Inc. (“idOnDemand”). The sellers of idOnDemand (the “Selling Shareholders”) were 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 was based on achieving certain revenue and profit targets as defined under the SPA. The calculation of the Earn-out Consideration fair value for periods prior to the year ended December 31, 2014 was probability weighted and discounted to reflect the restriction on the resale or transfer of such shares. The valuation of the Earn-out Consideration was classified as a Level 3 measurement as it was 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 were highly sensitive 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 Company’s 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 is classified as a liability and is 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 financial value being deemed the fair value of the shares set for settlement.

For the year ended December 31, 2014, the maximum amount for the Earn-out Consideration was $5.0 million. For the year 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 shares issued have a lock-up period of 12 months from date of issue.

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. Goodwill and purchased intangible assets are measured at fair value primarily using discounted cash flow projections. During the quarter ended June 30, 2015, the Company noted certain indicators of impairment, including a sustained decline in its stock price and continued reduced performance in its Identity reporting unit. Based on the results of step one of the goodwill impairment analysis, it was determined that the Company’s net adjusted carrying value exceeded its estimated fair value for the Identity reporting unit. As a result, goodwill relating to the Identity segment was determined to be fully impaired resulting in an impairment charge of $1.0 million which was recorded in the condensed consolidated statements of operations for the period. For additional discussion of measurement criteria used in evaluating potential impairment involving 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 June 30, 2015 and December 31, 2014, the Company had $0.3 million of privately-held investments measured at fair value on a nonrecurring basis which were classified as a Level 3 asset due to the absence of quoted market prices and inherent lack of

11


liquidity. The Company reviews its investments to identify and evaluate investments that have an indication of possible impairment. The Company adjusts the carrying value for its privately-held investments for any impairment if the fair value is less than the carrying value of the respective assets on an other-than-temporary basis. During the three months ended June 30, 2015, the Company determined that no privately-held investments were impaired. The amount of privately-held investments is included in other assets in the condensed consolidated balance sheets.

As of June 30, 2015 and December 31, 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.

 

 

4. Stockholders’ Equity  

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 stock split. The reverse stock split did not change the par value of the Company’s common stock or the number of preferred stock authorized for issuance.

Common Stock Warrants  

In connection with the Company’s entry into a consulting agreement in August 2014, the Company issued a consultant a warrant to purchase up to 85,000 shares of the Company’s common stock at a per share exercise price of $10.70 (the “Consultant Warrant”). One fourth of the shares under the warrant are exercisable for cash three months from the date the Consultant Warrant was issued and quarterly thereafter. The Consultant Warrant expires on August 13, 2019. In the event of an acquisition of the Company, the Consultant Warrant shall terminate and no longer be exercisable as of the closing of the acquisition. As of June 30, 2015, the Consultant Warrant is not fully vested and 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 the Registration Rights Agreement, dated March 31, 2014 between the Company and Opus. As of June 30, 2015, the Opus Warrant had not been exercised.

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”). The 2013 Private Placement Warrants have a term of four years and are exercisable beginning six months following the date of issuance. The number of shares issuable upon exercise of the 2013 Private Placement Warrants is subject to adjustment for any stock dividends, stock splits or distributions by the Company, or upon any merger or consolidation or sale of assets of the Company, tender or exchange offer for the Company’s common stock, or a reclassification of the Company’s common stock.

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 beginning on the date of issuance and expire on November 14, 2015.

12


Below is the summary of outstanding warrants issued by the Company as of June 30, 2015:

 

Warrant Type

 

Number of Shares Issuable Upon Exercise

 

 

Weighted Average Exercise Price

 

 

Issue Date

 

Expiration Date

Consultant Warrant

 

 

85,000

 

 

$

10.70

 

 

August 13, 2014

 

August 13, 2019

Opus Warrant

 

 

100,000

 

 

 

9.90

 

 

March 31, 2014

 

March 31, 2019

2013 Private Placement Warrants

 

 

186,878

 

 

 

10.00

 

 

August 14, 2013

 

August 14, 2017

2010 Private Placement Warrants

 

 

369,169

 

 

 

26.50

 

 

November 14, 2010

 

November 14, 2015

Total

 

 

741,047

 

 

 

 

 

 

 

 

 

 

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 June 30, 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 condensed consolidated statements of operations for the three and six months ended June 30, 2015 and 2014.

Stock-Based Compensation Plans

The Company has various stock-based compensation plans to attract, motivate, retain and reward employees, directors and consultants by providing its Board or a committee of the Board the discretion to award equity incentives to these persons. The Company’s stock-based compensation plans consist of the Director Option Plan, 1997 Stock Option Plan, 2000 Stock Option Plan, 2007 Stock Option Plan (the “2007 Plan”), the 2010 Bonus and Incentive Plan (the “2010 Plan”) and the 2011 Incentive Compensation Plan (the “2011 Plan”), as amended.

Stock Bonus and Incentive Plans

In June 2010, the Company’s stockholders approved the 2010 Plan which granted cash and equity-based awards to executive officers, directors and other key employees as designated by the Compensation Committee of the Board. An aggregate of 300,000 shares of the Company’s common stock was reserved for issuance under the 2010 Plan as equity-based awards, including shares, nonqualified stock options, restricted stock or deferred stock awards. These awards provide the Company´s executives, directors and other key employees the opportunity to earn shares of common stock depending on the extent to which certain performance goals are met. Since the adoption of the 2011 Plan (described below), the Company utilizes shares from the 2010 Plan only for performance-based awards and all equity awards granted under the 2010 Plan are issued pursuant to the 2011 Plan.

On June 6, 2011, the Company’s stockholders approved the 2011 Plan, which is administered by the Compensation Committee of the Board. The 2011 Plan provides that stock options, stock units, restricted shares, and stock appreciation rights may be granted to executive officers, directors, consultants, and other key employees. The Company reserved 400,000 shares of common stock under the 2011 Plan, plus 459,956 shares of common stock that remained available for delivery under the 2007 Plan and the 2010 Plan as of June 6, 2011. In aggregate, as of June 6, 2011, 859,956 shares were available for future grants under the 2011 Plan, including shares rolled over from the 2007 Plan and 2010 Plan.    

13


Stock Option Plans

A summary of activity for the Company’s stock option plans for the six months ended June 30, 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

 

 

 

 

 

 

$

3,425,558

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancelled or Expired

 

(70,075

)

 

 

18.14

 

 

 

 

 

 

 

 

 

Exercised

 

(5,180

)

 

 

8.01

 

 

 

 

 

 

 

 

 

Balance at June 30, 2015

 

821,860

 

 

$

11.60

 

 

 

7.12

 

 

$

59,279

 

Vested or expected to vest at

   June 30, 2015

 

763,031

 

 

$

11.80

 

 

 

6.98

 

 

$

53,864

 

Exercisable at June 30, 2015

 

402,168

 

 

$

14.04

 

 

 

5.62

 

 

$

22,627

 

 

The following table summarizes information about options outstanding as of June 30, 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

 

 

164,042

 

 

 

8.01

 

 

$

6.40

 

 

 

86,282

 

 

$

6.75

 

$8.41 - $8.80

 

 

249,385

 

 

 

8.62

 

 

 

8.80

 

 

 

79,232

 

 

 

8.80

 

$8.81 - $10.99

 

 

168,476

 

 

 

8.88

 

 

 

10.85

 

 

 

12,644

 

 

 

9.90

 

$11.00 - $24.00

 

 

175,150

 

 

 

4.21

 

 

 

14.52

 

 

 

159,298

 

 

 

14.59

 

$24.01 - $43.40

 

 

64,807

 

 

 

2.11

 

 

 

29.61

 

 

 

64,712

 

 

 

29.61

 

$5.20 - $43.40

 

 

821,860

 

 

 

7.12

 

 

$

11.60

 

 

 

402,168

 

 

$

14.04

 

 

At June 30, 2015, there was $1.8 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 2.64 years.  

Restricted Stock and Restricted Stock Units

The following is a summary of restricted stock and restricted stock unit (“RSU”) activity for the six months ended June 30, 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

 

 

 

 

$

7,533,132

 

Granted

 

285,247

 

 

 

12.34

 

 

 

 

 

 

 

Vested and settled

 

(52,421

)

 

 

14.53

 

 

 

 

 

 

 

Forfeited

 

(25,000

)

 

 

10.54

 

 

 

 

 

 

 

Balance at June 30, 2015

 

750,168

 

 

$

13.26

 

 

1.52

 

$

4,418,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding - Vested but not

   released

 

31,860

 

 

 

 

 

 

 

 

 

 

 

Outstanding - Unvested

 

718,308

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2015

 

750,168

 

 

 

 

 

 

 

 

 

 

 

 

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 June 30, 2015, there was $6.5 million of unrecognized compensation cost related to

14


unvested RSUs granted, which is expected to be recognized over a weighted average period of 2.91 years. As of June 30, 2015, an aggregate of 718,308 RSUs were outstanding and unvested under the 2011 Plan.

Stock-Based Compensation Expense

The following table illustrates all employee stock-based compensation expense related to stock options and RSUs included in the condensed consolidated statements of operations for the three and six months ended June 30, 2015 and 2014 (in thousands):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Cost of revenue

$

35

 

 

$

6

 

 

$

64

 

 

$

11

 

Research and development

 

70

 

 

 

18

 

 

 

139