Identive Group, Inc. — Form 10-Q, quarter ended June 30, 2013
The supplied filing is for Identive Group, Inc. (ticker INVE), not a registrant named INVE Technologies, Inc. It covers the three and six months ended June 30, 2013; financial amounts below are in U.S. dollars. Identive provides secure identification products, systems, software and services through its Identity Management and ID Products segments.
Financial performance
| Metric | Q2 2013 | Q2 2012, restated | Six months 2013 | Six months 2012, restated |
|---|---|---|---|---|
| Revenue | $23.6m | $23.9m | $44.7m | $45.1m |
| Gross profit / margin | $9.2m / 39% | $9.6m / 40% | $17.3m / 39% | $18.3m / 41% |
| Operating loss | $2.7m | $43.3m | $6.9m | $50.0m |
| Net loss attributable to Identive shareholders | $2.9m | $36.4m | $7.7m | $42.6m |
| Basic and diluted loss per share | $0.05 | $0.61 | $0.13 | $0.72 |
Product revenue rose 5% in Q2 and 1% in the first half; services revenue fell 23% and 8%, respectively. By segment, first-half Identity Management revenue decreased 19% to $21.6m, while ID Products revenue increased 27% to $23.0m. Identity Management gross margin was 45% for the first half; ID Products margin was 33%.
First-half research and development, selling and marketing, and general and administrative expenses were $4.2m, $11.5m and $8.5m, respectively, each lower than the prior-year period. Lower expenses and the absence of 2012 impairment charges explain much of the year-over-year improvement in reported losses; the company remained loss-making.
Cash, liquidity and debt
- Cash and cash equivalents were $3.7m at June 30, down from $7.4m at December 31, 2012. Working capital was negative $5.4m; current assets were $32.9m and current liabilities $38.3m.
- For the first six months, operating cash outflow was $2.7m, investing cash outflow $0.9m, and financing cash inflow $0.2m. Cash declined by $3.7m overall. Capital expenditures were $0.9m.
- Financial liabilities totaled $12.9m, including a $8.35m secured note carrying interest at the greater of prime plus 7.75% or 11%. The note is secured by substantially all company assets and matures in November 2015. The company reported covenant compliance at June 30.
- The filing reports $41.2m in total contractual obligations, including $19.6m due in less than one year. Inventory purchase commitments and other obligations were $10.2m; related-party liabilities were also substantial.
- Management and the auditor’s going-concern disclosures identify significant doubt about the company’s ability to continue as a going concern, citing recurring losses, negative operating cash flows, limited working capital and uncertainty around U.S. government demand. Management said available resources were expected to cover requirements for at least 12 months, but acknowledged additional financing might be needed and was not assured.
Changes, outlook and notable items
- Management attributed weak Identity Management results mainly to delayed and deferred U.S. federal access-control projects associated with sequestration and budget uncertainty, as well as timing and lower demand in ID Solutions. Transponder sales benefited from large NFC-related orders; management also cited growth in cloud-based idOnDemand services.
- Management typically expects stronger demand in the second half, but said the usual seasonality of government-related sales was uncertain. It expected to maintain research and development spending in absolute terms, modestly reduce sales and marketing spending, and modestly reduce general and administrative spending in 2013. No specific revenue or earnings guidance was provided in the supplied text.
- On August 7, 2013, the lender amended the secured loan’s EBITDA covenants and required at least $6m in net equity proceeds from July 1 through August 31. On August 14, the company disclosed a private placement expected to raise approximately $7.1m gross through share sales, with additional warrants; closing was expected around August 15. Investors holding more than 94% of subscriptions had waived a withdrawal right tied to an $8m minimum raise. The filing text does not confirm final closing proceeds.
- The company also had a 36-month agreement permitting up to $20m of share sales to Lincoln Park Capital, subject to conditions. It received approximately $2.5m net under that arrangement during the first half. These equity financings create potential dilution.
- Comparative 2012 results were restated to correct an income tax benefit error: the filing says approximately $5.5m of tax benefit had been omitted, overstating the previously reported net loss and loss per share. Prior-period presentation was also reclassified for product/service revenue and contingent-consideration remeasurement.
- Disclosure controls were deemed ineffective because of a material weakness involving insufficient review and oversight of complex and non-routine transactions. Management expected to complete remediation by year-end 2013; the weakness was not yet considered remediated.
- NASDAQ had notified the company in June 2013 that its share price was below the $1.00 minimum bid requirement for 30 consecutive trading days. The company had 180 days to regain compliance and noted a reverse stock split as one possible response.
Most important facts for investors to verify
- Whether the August private placement closed, its net proceeds, and whether the lender’s $6m equity-raise condition was satisfied.
- Near-term cash needs, cash burn, and the company’s ability to meet debt payments and other obligations given negative working capital and the going-concern warning.
- Compliance with the Hercules loan covenants and the effect of its collateral, interest, fees and amendments on liquidity.
- Whether U.S. government project delays ease, and whether transponder/NFC and cloud-service growth can offset weakness in Identity Management and services.
- Progress in remediating the material weakness and restoring effective disclosure controls, as well as NASDAQ minimum-bid-price compliance.