Identiv, Inc. (NASDAQ: INVE) — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. The filing identifies the registrant as Identiv, Inc.
Business context
Identiv provides security technology for premises, enterprise identity and credentials, including access-control products, smart-card readers, cloud-based credential services, and RFID/NFC products. In 2014 it reorganized into Premises, Identity, Credentials and All Other segments and continued divesting non-core businesses to focus on security technology and growth opportunities.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $22.7 | $20.9 | $61.9 | $54.7 |
| Gross profit / margin | $9.9 / 43% | $10.0 / 48% | $25.4 / 41% | $24.7 / 45% |
| Operating loss | $(2.5) | $(12.4) | $(8.0) | $(17.8) |
| Net loss attributable to Identiv stockholders | $(3.8) | $(24.2) | $(11.6) | $(31.9) |
| Basic and diluted loss per share | $(0.46) | $(3.53) | $(1.45) | $(5.01) |
- Nine-month cash used in operating activities was $9.3 million, versus $2.1 million in the prior-year period. Investing activities provided $0.2 million; financing activities provided $44.1 million. Cash rose to $41.1 million at September 30, 2014 from $5.1 million at December 31, 2013.
- Working capital was $46.1 million, compared with $8.5 million at December 31, 2013. Total assets were $89.0 million and total liabilities $36.0 million.
- At quarter-end, financial liabilities were $13.9 million net of unamortized discount, including a $10.0 million term loan and $4.3 million drawn on a revolving facility. The facilities were secured by substantially all company assets; Identiv reported covenant compliance at September 30.
- One customer represented 27% of revenue in both the quarter and nine-month period. No customer represented 10% of accounts receivable at quarter-end.
Changes versus the prior comparable periods
- Nine-month revenue rose 13%, principally as Credentials revenue increased 53% to $33.2 million. Premises revenue declined 16% to $13.0 million and Identity revenue declined 13% to $12.6 million. Q3 segment revenue changes were Credentials +49%, Premises −21%, and Identity −25%.
- Higher Credentials sales increased overall revenue but shifted sales mix toward a lower-margin business; consolidated gross margin fell four percentage points in both the quarter and nine-month comparison. Nine-month Credentials margin was 29%, versus 34% a year earlier, partly reflecting production underutilization early in 2014.
- Operating losses narrowed substantially, mainly because 2013 included goodwill impairment charges, including $10.9 million in continuing operations in the comparable quarter, and higher overall operating expenses. 2014 results included $1.8 million of Q3 restructuring and severance charges and $2.9 million for the nine months.
- Nine-month interest expense increased to $3.2 million from $1.6 million. It included a $1.6 million charge related to repaying the former Hercules debt facility. Foreign currency losses were $1.0 million for the nine months, compared with a $0.5 million gain in 2013.
- The company completed sales of several non-core businesses; prior-period results were reclassified as discontinued operations. A public offering of 2.3 million shares generated approximately $31.6 million in net proceeds. Identiv also issued shares through its LPC arrangement, which it terminated in September, and effected a 1-for-10 reverse stock split in May.
Outlook, commentary and risks
- Management said losses and negative operating cash flow were expected to continue for the foreseeable future and anticipated significant cash use over the next 12 months, including for operations, debt service, sales and marketing, cloud services, access control and product development. The filing provides no numerical revenue or earnings guidance.
- Management stated that equity financing and the amended Opus credit facility provided sufficient working capital to fund operations and continue as a going concern for the next 12 months. This assessment depends on revenue generation, cash flow and cost savings; the filing cautions that results may vary and that government spending reductions or delays could adversely affect performance.
- On November 10, 2014, after quarter-end, Identiv amended its Opus agreement: the revolver increased from $10 million to $30 million, its maturity was extended to November 10, 2017, and scheduled term-loan installments were replaced with a balloon payment due March 31, 2017. Interest rates vary with cash held at the lender. The amendment also modified covenants and required a $100,000 lender fee.
- On October 9, 2014, the board authorized repurchases of up to $5 million of shares over one year, subject to the credit agreement and use of cash resources.
- Key risks include volatile and seasonal demand, dependence on government programs and customer budgets, customer concentration, competition and product mix, foreign-exchange exposure, execution of restructuring and cloud-service investments, supplier and manufacturing dependencies, and potential debt covenant or financing constraints.
- Disclosure controls were deemed ineffective because of an existing material weakness in review and oversight of complex and non-routine transactions, linked to insufficient U.S. GAAP accounting expertise and staffing. Remediation was underway; management said the weakness would not be considered remediated until controls operated effectively for a sufficient period and were tested.
Most important facts for investors to verify
- Whether the amended Opus facility’s borrowing capacity, cash-based interest tiers and covenants provide adequate liquidity, and whether the company remains compliant.
- Whether operating cash burn improves and whether management’s stated 12-month going-concern funding outlook is achieved.
- Whether Credentials growth is durable and margins recover from production underutilization and lower-margin sales mix.
- The sustainability of demand given the 27% revenue contribution from one customer and Identiv’s exposure to government procurement and seasonal project timing.
- Progress and testing of the internal-control remediation, and the costs and cash impact of restructuring and the authorized share repurchase program.