SEC Info - Identiv, Inc. - ‘10-Q’ for 9/30/19

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		Alternative Formats (Word, et al.) Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 Condensed Consolidated Statement of Stockholders' Equity for the Three and Nine Months Ended September 30,2019 and 2018 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2018 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 Controls and Procedures Exhibits Financial Statements (Unaudited) Legal Proceedings Management's Discussion and Analysis of Financial Condition and Results of Operations Notes to Unaudited Condensed Consolidated Financial Statements Part I. Financial Information Part Ii. Other Information Risk Factors Signatures Unregistered Sales of Equity Securities and Use of Proceeds
1	1st Page – Filing Submission
"	Part I. Financial Information
"	Financial Statements (Unaudited)
"	Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018
"	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018
"	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2018
"	Condensed Consolidated Statement of Stockholders' Equity for the Three and Nine Months Ended September 30,2019 and 2018
"	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018
"	Notes to Unaudited Condensed Consolidated Financial Statements
"	Management's Discussion and Analysis of Financial Condition and Results of Operations
"	Controls and Procedures
"	Part Ii. Other Information
"	Legal Proceedings
"	Risk Factors
"	Unregistered Sales of Equity Securities and Use of Proceeds
"	Exhibits
"	Signatures

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 ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☑ No ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

	September 30,			December 31,
	2019			2018
ASSETS
Current assets:
Cash	$	11,052		$	10,866
Accounts receivable, net of allowances of $314 and $387 as of September 30, 2019 and December 31, 2018, respectively		19,261			14,952
Inventories		13,964			13,631
Prepaid expenses and other current assets		2,812			2,743
Total current assets		47,089			42,192
Property and equipment, net		2,202			2,624
Operating lease right-of-use assets		5,133			—
Intangible assets, net		10,722			10,980
Goodwill		10,128			9,286
Other assets		1,216			1,224
Total assets	$	76,490		$	66,306
LIABILITIES AND STOCKHOLDERS´ EQUITY
Current liabilities:
Accounts payable	$	7,596		$	5,654
Current portion - payment obligation		1,192			1,025
Current portion - financial liabilities, net of discount and debt issuance costs of $51 and $25 as of September 30, 2019 and December 31, 2018, respectively		14,812			11,554
Operating lease liabilities		1,914			—
Notes payable		—			2,000
Deferred revenue		2,880			2,174
Accrued compensation and related benefits		1,853			1,794
Other accrued expenses and liabilities		4,179			5,277
Total current liabilities		34,426			29,478
Long-term payment obligation		860			1,860
Long-term operating lease liabilities		3,409			—
Long-term deferred revenue		685			636
Other long-term liabilities		366			632
Total liabilities		39,746			32,606
Commitments and contingencies (see Note 17)
Stockholders´ equity:
Identiv, Inc. stockholders' equity:
Series B preferred stock, $0.001 par value: 5,000 shares authorized; 5,000 shares issued and outstanding as of September 30, 2019 and December 31, 2018		5			5
Common stock, $0.001 par value: 50,000 shares authorized; 18,066 and 17,004 shares issued and 16,883 and 15,967 shares outstanding as of September 30, 2019 and December 31, 2018, respectively		18			17
Additional paid-in capital		447,371			444,145
Treasury stock, 1,183 and 1,047 shares as of September 30, 2019 and December 31, 2018, respectively		(8,841	)		(8,153	)
Accumulated deficit		(403,683	)		(404,353	)
Accumulated other comprehensive income		1,874			2,209
Total Identiv, Inc. stockholders' equity		36,744			33,870
Noncontrolling interest		—			(170	)
Total stockholders´ equity		36,744			33,700
Total liabilities and stockholders' equity	$	76,490		$	66,306

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net revenue	$	23,026		$	20,022		$	64,785		$	56,844
Cost of revenue		12,500			11,538			35,672			33,699
Gross profit		10,526			8,484			29,113			23,145
Operating expenses:
Research and development		2,125			1,860			6,229			5,384
Selling and marketing		4,470			3,915			13,689			12,176
General and administrative		2,591			2,641			7,492			7,952
Increase in fair value of earnout liability		175			—			175			—
Restructuring and severance		(87	)		223			(101	)		591
Total operating expenses		9,274			8,639			27,484			26,103
Income (loss) from operations		1,252			(155	)		1,629			(2,958	)
Non-operating income (expense):
Interest expense, net		(246	)		(291	)		(766	)		(1,239	)
Loss on extinguishment of debt, net		—			—			—			(1,369	)
Foreign currency gains, net		168			200			96			354
Income (loss) before income taxes and noncontrolling interest		1,174			(246	)		959			(5,212	)
Income tax provision		(105	)		(41	)		(289	)		(121	)
Net income (loss)		1,069			(287	)		670			(5,333	)
Less: Loss attributable to noncontrolling interest		—			—			—			(5	)
Net income (loss) attributable to Identiv, Inc.	$	1,069		$	(287	)	$	670		$	(5,338	)

Net income (loss) per common share:							`
Basic	$	0.05		$	(0.02	)	$	(0.01	)	$	(0.34	)
Diluted	$	0.05		$	(0.02	)	$	(0.01	)	$	(0.34	)
Weighted average shares used in computing net income (loss) per common share:
Basic		17,006			15,750			16,933			15,484
Diluted		17,766			15,750			16,933			15,484

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

	Series B Preferred Stock				Common Stock					Additional Paid-in			Treasury			Accumulated			Accumulated Other Comprehensive			Noncontrolling			Total Stockholders'
	Shares		Amount		Shares			Amount		Capital			Stock			Deficit			Income			Interest			Equity
Balances, December 31, 2018		5,000	$	5		15,967		$	17	$	444,145		$	(8,153	)	$	(404,353	)	$	2,209		$	(170	)	$	33,700
Net loss		—		—		—			—		—			—			(815	)		—			—			(815	)
Unrealized loss from foreign currency translation adjustments		—		—		—			—		—			—			—			(129	)		—			(129	)
Issuance of common stock in connection with acquisition of business		—		—		419			1		1,634			—			—			—			—			1,635
Issuance of common stock in connection with vesting of stock awards		—		—		126			—		—			—			—			—			—			—
Stock-based compensation		—		—		—			—		687			—			—			—			—			687
Shares withheld in payment of taxes in connection with net share settlement of restricted stock units		—		—		(43	)		—		—			(228	)		—			—			—			(228	)
Issuance of common stock in connection with warrant exercise		—		—		10			—		—			—			—			—			—			—
Balances, March 31, 2019		5,000	$	5		16,479		$	18	$	446,466		$	(8,381	)	$	(405,168	)	$	2,080		$	(170	)	$	34,850
Net income		—		—		—			—		—			—			416			—			—			416
Unrealized income from foreign currency translation adjustments		—		—		—			—		—			—			—			196			—			196
Issuance of common stock in connection with vesting of stock awards		—		—		456			—		—			—			—			—			—			—
Stock-based compensation		—		—		—			—		693			—			—			—			—			693
Shares withheld in payment of taxes in connection with net share settlement of restricted stock units		—		—		(56	)		—		—			(275	)		—			—			—			(275	)
Cancellation of holdback shares in connection with acquisition		—		—		(93	)		—		(340	)		—			—			—			—			(340	)
Balances, June 30, 2019		5,000	$	5		16,786		$	18	$	446,819		$	(8,656	)	$	(404,752	)	$	2,276		$	(170	)	$	35,540
Net income		—		—		—			—		—			—			1,069			—			—			1,069
Unrealized loss from foreign currency translation adjustments		—		—		—			—		—			—			—			(369	)		—			(369	)
Issuance of common stock in connection with vesting of stock awards		—		—		136			—		—			—			—			—			—			—
Stock-based compensation		—		—		—			—		689			—			—			—			—			689
Shares withheld in payment of taxes in connection with net share settlement of restricted stock units		—		—		(39	)		—		—			(185	)		—			—			—			(185	)
Liquidation of subsidiary with noncontrolling interest		—		—		—			—		(137	)		—			—			(33	)		170			—
Balances, September 30, 2019		5,000	$	5		16,883		$	18	$	447,371		$	(8,841	)	$	(403,683	)	$	1,874		$	—		$	36,744

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

	Series B Preferred Stock				Common Stock					Additional Paid-in			Treasury			Accumulated			Accumulated Other Comprehensive			Noncontrolling			Total Stockholders'
	Shares		Amount		Shares			Amount		Capital			Stock			Deficit			Income			Interest			Equity
Balances, December 31, 2017		3,000	$	3		14,436		$	15	$	428,470		$	(7,485	)	$	(399,647	)	$	2,675		$	(178	)	$	23,853
Net loss		—		—		—			—		—			—			(2,306	)		—			5			(2,301	)
Unrealized income from foreign currency translation adjustments		—		—		—			—		—			—			—			109			3			112
Impact of adoption of Topic 606		—		—		—			—		—			—			2			—			—			2
Issuance of common stock in connection with acquisition of business		—		—		610			1		2,293			—			—			—			—			2,294
Issuance of common stock in connection with vesting of stock awards		—		—		139			—		—			—			—			—			—			—
Stock-based compensation		—		—		—			—		635			—			—			—			—			635
Shares withheld in payment of taxes in connection with net share settlement of restricted stock units		—		—		(42	)		—		—			(162	)		—			—			—			(162	)
Issuance costs associated with issuance of Series B preferred stock		—		—		—			—		(20	)		—			—			—			—			(20	)
Issuance of shares to non-employees		—		—		—			—		5			—			—			—			—			5
Balances, March 31, 2018		3,000	$	3		15,143		$	16	$	431,383		$	(7,647	)	$	(401,951	)	$	2,784		$	(170	)	$	24,418
Net loss		—		—		—			—		—			—			(2,745	)		—			—			(2,745	)
Unrealized loss from foreign currency translation adjustments		—		—		—			—		—			—			—			(412	)		—			(412	)
Issuance of Series B preferred stock, net of issuance costs		2,000		2		—			—		7,913			—			—			—			—			7,915
Issuance of common stock in connection with acquisition of business		—		—		113			—		341			—			—			—			—			341
Issuance of common stock in connection with vesting of stock awards		—		—		110			—		—			—			—			—			—			—
Stock-based compensation		—		—					—		649			—			—			—			—			649
Shares withheld in payment of taxes in connection with net share settlement of restricted stock units		—		—		(30	)		—					(116	)		—			—			—			(116	)
Issuance of shares to non-employees		—		—		3			—		3			—			—			—			—			3
Balances, June 30, 2018		5,000	$	5		15,339		$	16	$	440,289		$	(7,763	)	$	(404,696	)	$	2,372		$	(170	)	$	30,053
Net loss		—		—		—			—		—			—			(287	)		—			—			(287	)
Unrealized loss from foreign currency translation adjustments		—		—		—			—		—			—			—			(226	)		—			(226	)
Issuance of common stock in connection with vesting of stock awards		—		—		145			—		13			—			—			—			—			13
Proceeds from exercise of stock options		—		—		3			—		—			—			—									—
Stock-based compensation		—		—		—			—		703			—			—			—			—			703
Shares withheld in payment of taxes in connection with net share settlement of restricted stock units		—		—		(38	)		—		—			(224	)		—			—			—			(224	)
Issuance of shares to non- employees		—		—		—			—		3			—			—			—			—			3
Balances, September 30, 2018		5,000	$	5		15,449		$	16	$	441,008		$	(7,987	)	$	(404,983	)	$	2,146		$	(170	)	$	30,035

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

	Nine Months Ended
	September 30,
	2019			2018
Cash flows from operating activities:
Net income (loss)	$	670		$	(5,333	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		2,704			2,362
Loss on extinguishment of debt, net		—			1,369
Accretion of interest on long-term payment obligation		115			180
Stock-based compensation expense		2,069			1,987
Amortization of debt issuance costs		42			280
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable		(3,667	)		202
Inventories		(72	)		(614	)
Prepaid expenses and other assets		(33	)		(866	)
Accounts payable		1,556			(1,871	)
Payment obligation liability		(948	)		(920	)
Deferred revenue		721			(525	)
Accrued expenses and other liabilities		(1,787	)		738
Net cash provided by (used in) operating activities		1,370			(3,011	)
Cash flows from investing activities:
Capital expenditures		(202	)		(634	)
Acquisition of business, net of cash acquired		(1,287	)		(1,384	)
Net cash used in investing activities		(1,489	)		(2,018	)
Cash flows from financing activities:
Proceeds from issuance of debt, net of issuance costs		5,427			16,941
Repayments of debt		(2,144	)		(23,612	)
Repayments of notes payable		(2,000	)		—
Taxes paid related to net share settlement of restricted stock units		(688	)		(502	)
Proceeds from issuance of Series B preferred stock, net of issuance costs		—			7,895
Proceeds from exercise of stock options		—			13
Net cash provided by financing activities		595			735
Effect of exchange rates on cash		(290	)		(518	)
Net increase (decrease) in cash		186			(4,812	)
Cash at beginning of period		10,866			19,052
Cash at end of period	$	11,052		$	14,240
Supplemental Disclosures of Cash Flow Information:
Interest paid	$	713		$	1,571
Taxes paid, net	$	155		$	109
Non-cash investing and financing activities:
Issuance of shares to non-employees	$	—		$	11
Common stock issued for acquisition of business, net	$	1,635		$	2,635
Promissory notes issued in acquisition of business	$	—		$	2,000
Liquidation of subsidiary with noncontrolling interest	$	170		$	—
Cancelation of holdback shares in connection with acquisition	$	340		$	—

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

The accompanying unaudited condensed consolidated financial statements include the accounts of Identiv, Inc. (“Identiv” or the “Company”) and its wholly and majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the fiscal year 2018 financial statements to conform to the fiscal year 2019 presentation. The reclassifications had no impact on net income (loss), total assets, or stockholders’ equity.

The accompanying unaudited condensed consolidated financial statements of 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, consisting of 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 nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any future period. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” and the audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Except for the adoption of the new accounting standard for leases mentioned below, no material changes have been made to the Company's significant accounting policies disclosed in Note 1, Summary of Significant Accounting Policies, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Leases — The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities, and long-term operating lease liabilities on the Company’s condensed consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives and initial direct costs incurred. The Company’s lease terms may include options to extend the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which is accounted for as a single lease component.

In February 2016, the Financial Accounting Standards Board (“FASB”) amended the existing accounting standards for leases, Accounting Standards Update (“ASU”) 2016-02, Leases. The amendments require lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases. The accounting by lessors will remain largely unchanged from that applied under previous U.S. GAAP.

The Company adopted the new standard in the first quarter of 2019, effective January 1, 2019, using the modified retrospective method, under which the new standard was applied prospectively rather than restating the prior periods presented. The Company elected the practical expedients under the transition guidance, which include the use of hindsight in determining the lease term and the practical expedient package to not reassess whether any expired or existing contracts are or contain leases, to not reassess the classification of any expired or existing leases, and to not reassess initial direct costs for any existing leases. In addition, the Company elected the practical expedient to recognize lease and non-lease components as a single lease component. The Company has elected not to record on the balance sheet leases with an initial term of twelve months or less. Upon adoption, the Company recognized both operating lease ROU assets and corresponding operating lease liabilities of approximately $5.8 millio n and $5.9 million, respectively, on its condensed consolidated balance sheet. There was no impact on the condensed consolidated statements of operations or the condensed consolidated statements of cash flows.

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of its products, software licenses, and services, which are generally capable of being distinct and accounted for as separate performance obligations. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation, generally on a relative basis using its standalone selling price. The stated contract value is generally the transaction price to be allocated to the separate performance obligations. Revenue is recognized net of any taxes collected from customers that are subsequently remitted to governmental authorities.

The Company derives revenues primarily from sales of hardware products, software licenses, professional services, software maintenance and support, and extended hardware warranties.

Hardware Product Revenues — The Company generally has two performance obligations in arrangements involving the sale of hardware products. The first performance obligation is to transfer the hardware product (which includes software integral to the functionality of the hardware product). The second performance obligation is to provide assurance that the product complies with its agreed-upon specifications and is free from defects in material and workmanship for a period of one to three years (i.e. assurance warranty). The entire transaction price is allocated to the hardware product and is generally recognized as revenue at the time of delivery because the customer obtains control of the product at that point in time. The Company has concluded that control generally transfers at that point in time because the customer has title to the hardware, physical possession, and a present obligation to pay for the hardware. None of the transaction price is allocated to the assurance warranty component, as the Company accounts for these product warranty costs in accordance with Accounting Standards Codification ("ASC”) 460, Guarantees (“ASC 460”). Payments for hardware contracts are generally due 30 to 60 days after shipment of the hardware product.

Software License Revenues — The Company’s license arrangements grant customers the perpetual right to access and use the licensed software products at the outset of an arrangement. Technical support and software updates are generally made available throughout the term of the support agreement, which is generally one to three years. The Company accounts for these arrangements as two performance obligations: (1) the software licenses, and (2) the related updates and technical support. The software license revenue is recognized upon delivery of the license to the customer, while the software updates and technical support revenue is recognized over the term of the support contract. Payments are generally due 30 to 60 days after delivery of the software licenses.

Professional Services Revenues — Professional services revenues consist primarily of programming customization services performed relating to the integration of the Company’s software products with the customers other systems, such as HR systems. Professional services contracts are generally billed on a time and materials basis and revenue is recognized as the services are performed. Payments for services are generally due when services are performed.

Software Maintenance and Support Revenues — Support and maintenance contract revenues consist of the services provided to support the specialized programming applications performed by the Company’s professional services group. Support and maintenance contracts are typically billed at inception of the contract and recognized as revenue over the contract period, typically over a one to three year period.

Extended Hardware Warranties Revenues — Sales of the Company’s hardware products may also include optional extended hardware warranties, which typically provide assurance that the product will continue function as initially intended. Extended hardware warranty contracts are typically billed at inception of the contract and recognized as revenue over the respective contract period, typically over one to two year periods after the expiration of the original assurance warranty.

The Company’s contracts with customers often include promises to transfer multiple products and services to a customer. For such arrangements, the Company allocates revenues to each performance obligation based on its relative standalone selling price (“SSP”).

Judgment is required to determine the SSP for each distinct performance obligation in a contract. For the majority of items, the Company estimates SSP using historical transaction data. The Company uses a range of amounts to estimate SSP when it sells each of the products and services separately and needs to determine whether there is a discount to be allocated based on the relative SSP of the various products and services. In instances where SSP is not directly observable, such as when the product or service is not sold separately, the Company determines the SSP using information that may include market conditions and other observable inputs.

The determination of SSP is an ongoing process and information is reviewed regularly in order to ensure SSPs reflect the most current information or trends.

The Company disaggregates revenue from contracts with customers based on the timing of transfer of goods or services to customers (point-in-time or over time) and geographic region based on the shipping location of the customer. The geographic regions that are tracked are the Americas, Europe and the Middle East, and Asia-Pacific regions. The Company operates as two operating segments.

Total net revenue based on the disaggregation criteria described above were as follows (in thousands):

	Three Months Ended September 30,
	2019						2018
	Point-in- Time		Over Time		Total		Point-in- Time		Over Time		Total
Americas	$	16,471	$	1,354	$	17,825	$	13,930	$	1,105	$	15,035
Europe and the Middle East		2,344		92		2,436		2,117		44		2,161
Asia-Pacific		2,765		—		2,765		2,803		23		2,826
Total	$	21,580	$	1,446	$	23,026	$	18,850	$	1,172	$	20,022

	Nine Months Ended September 30,
	2019						2018
	Point-in- Time		Over Time		Total		Point-in- Time		Over Time		Total
Americas	$	44,755	$	3,740	$	48,495	$	41,150	$	3,022	$	44,172
Europe and the Middle East		8,541		249		8,790		6,921		71		6,992
Asia-Pacific		7,500		—		7,500		5,657		23		5,680
Total	$	60,796	$	3,989	$	64,785	$	53,728	$	3,116	$	56,844

Amounts invoiced in advance of services being provided are accounted for as deferred revenue. Nearly all of the Company’s deferred revenue balance is related to software maintenance contracts. Payment terms and conditions vary by contract type, although payment is typically due within 30 to 90 days of contract inception. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined its contracts generally do not include a significant financing component.

Changes in deferred revenue during the nine months ended September 30, 2019 were as follows (in thousands):

Revenue expected to be recognized in future periods related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, and contracts where revenue is recognized as invoiced, was approximately $1.8 million as of September 30, 2019. Since the Company typically invoices customers at contract inception, this amount is included in its deferred revenue balance. As of September 30, 2019, the Company expects to recognize approximately 36% of the revenue related to these unsatisfied performance obligations during the remainder of 2019, 48% during 2020, and 16% thereafter.

The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. The Company has determined that certain sales incentive programs (i.e. commissions) meet the requirements to be capitalized. Capitalized incremental costs related to contracts are amortized over the respective contract periods. For the nine months ended September 30, 2019, total capitalized costs to obtain contracts were immaterial.

On February 14, 2018, the Company acquired 3VR Security, Inc. (“3VR”), a video technology and analytics company, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Eagle Acquisition, Inc., a California corporation and a wholly owned subsidiary of the Company (“Merger Sub”), 3VR, and Fortis Advisors LLC, a Delaware limited liability company, acting as Security Holder Representative. Pursuant to the Merger Agreement, at the effective time, Merger Sub merged with and into 3VR and 3VR became a wholly-owned subsidiary of the Company (the “Acquisition”).

Under the terms of the Merger Agreement, at the closing of the Acquisition, the Company acquired all of the outstanding shares of 3VR for total purchase consideration of $5.9 million, consisting of:

An aggregate of up to $1.0 million, or 294,927 shares, of the Company’s common stock issuable at the closing of the transaction were held back for a period of up to 12 months following the closing for the satisfaction of certain indemnification claims. On May 9, 2018, the Company and the Security Holder Representative reached agreement as to the satisfaction of certain of the indemnification claims asserted by the Company at the closing of the Acquisition. As a result, the purchase consideration, and the amount of goodwill recorded, were reduced by $660,000. Of the 294,927 shares that were held back at closing, 181,319 shares were canceled. On January 25, 2019, the Company filed an additional claim with the Security Holder Representative for an amount exceeding the remaining amount of the holdback shares of approximately $0.3 million, or 93,406 shares. On April 15, 2019, the Company and the Security Holder Representative reached agreement as to the satisfaction of the remaining indemnification claims asserted by the Company at the closing of the Acquisition. As a result, the purchase consideration, and the amount of goodwill recorded, was reduced by the remaining $340,000 and the remaining 93,406 holdback shares were canceled.

Additionally, in the event 3VR achieved specified targets in 2018, the Company would have been obligated to issue earnout consideration. Such earnout targets were not achieved.

On February 14, 2019, the Company repaid the noteholders an aggregate principal amount, including accrued interest, of $2.1 million.

Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. The following table summarizes the fair values of assets acquired and liabilities assumed, adjusted for the settlement of the indemnification claims noted above, (in thousands):

Acquisition related intangibles included in the above table are finite-lived and are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized, as follows (in thousands):

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of 3VR resulted in $5.5 million of goodwill, which is not deductible for tax purposes. With the addition of the 3VR video security and analytics platform, the Company believes this goodwill largely reflects the expansion of its Hirsch product and service offerings through the complementary offerings of 3VR. In accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”), goodwill will not be amortized but will be tested for impairment at least annually in the fourth quarter. See Note 6, Goodwill and Intangible Assets.

Pursuant to ASC 805, Business Combinations (“ASC 805”), the Company incurred and expensed approximately $39,000, and $548,000 in acquisition and transactional costs associated with the acquisition of 3VR during the nine months ended September 30, 2019 and the year ended December 31, 2018, respectively, which were primarily general and administrative expenses.

On November 1, 2018, the Company completed the acquisition of Thursby Software Systems, Inc. (“Thursby”), a provider of security software for mobile devices, pursuant to an Agreement and Plan of Merger (the “Thursby Agreement”), by and among the Company, TSS Merger Sub, Inc., a wholly owned subsidiary of the Company (“Merger Sub 1”), TSS Acquisition, LLC., a wholly owned subsidiary of the Company (“Merger Sub 2” and together with Merger Sub 1, the “Merger Subs”), Thursby, and William Thursby as the sole Shareholder of Thursby. Pursuant to the Thursby Agreement, at the effective time, Merger Sub 1 merged with and into Thursby and Thursby became a wholly-owned subsidiary of the Company (“Merger 1”), following which Thursby merged with and into Merger Sub 2, whereupon which the separate corporate existence of Thursby ceased with Merger Sub 2 surviving the merger (“Merger 2”).

Under the terms of the Thursby Agreement, at the closing of the acquisition, the Company acquired all of the outstanding shares of Thursby for total purchase consideration of $3.1 million, consisting of:

An aggregate of up to $0.5 million, or 85,324 shares, of the Company’s common stock issuable at the closing of the transaction are being held back for a period of up to 12 months following the closing for the satisfaction of certain indemnification claims.

Additionally, in the event that revenue from Thursby products is greater than $8.0 million, $11.0 million, or $15.0 million in product shipments in 2019, the Company will be obligated to issue earnout consideration of up to a maximum of $7.5 million payable in shares of the Company’s common stock, subject to certain conditions. In the event that such revenue is less than $15.0 million in 2019, but 2020 revenue from Thursby products exceeds $15.0 million, the Company will be obligated to issue an additional $2.5 million in earnout consideration payable in shares of the Company’s common stock. The maximum total earnout consideration payable for all periods is $7.5 million in the aggregate, payable in shares of the Company’s common stock. Management has assessed the probability of the issuance of shares related to the earnout consideration, and the payment of the contingent consideration noted above, and determined it as remote. Accordingly, no value was ascribed to the earnout consideration as of September 30, 2019.

Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. Such estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition). The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of Thursby resulted in $3.5 million of goodwill, which is not deductible for tax purposes. With the addition of the Thursby security software for mobile devices, the Company believes this goodwill largely reflects the synergistic strengthening of its Identity offerings providing complete solutions for secure and convenient logical access across smart cards and derived credentials on Apple iOS and Android mobile devices. In accordance with ASC 350, goodwill will not be amortized but is tested for impairment at least annually in the fourth quarter. See Note 6, Goodwill and Intangible Assets.

Pursuant to ASC 805, the Company incurred and expensed approximately $27,000 and $208,000 in acquisition and transactional costs associated with the acquisition of Thursby during the nine months ended September 30, 2019 and the year ended December 31, 2018, respectively, which were primarily general and administrative expenses.

On January 2, 2019, the Company completed the purchase of substantially all the assets of the Freedom, Liberty, and Enterphone™ MESH products and services of Viscount Systems, Inc. (“Viscount”) and the assumption of certain liabilities (the “Asset Purchase”). Under the terms of the Asset Purchase, the Company was obligated to pay at closing aggregate consideration of $2.9 million consisting of:

An aggregate of approximately 31,446 shares of the Company’s common stock issuable at the closing of the transaction were held back for 12 months following the closing for the satisfaction of certain indemnification claims.

Additionally, in the event that revenue from the assets purchased under the agreement in 2019 is greater than certain specified revenue targets, the Company will be obligated to issue earnout consideration of up to a maximum of $3.5 million payable in shares of the Company’s common stock (subject to certain conditions). In the event that such revenue targets are not met in 2019, but 2020 revenue from the assets purchased exceeds certain higher targets for 2020, then the Company will be obligated to issue up to a maximum of $2.25 million in earnout consideration in the form of stock. The maximum total earnout consideration liability for all periods is $3.5 million in the aggregate, payable in the Company’s common stock. In the first quarter of 2019, management assessed the probability of the issuance of shares related to the earnout consideration and determined its fair value to be $200,000. In the third quarter of 2019, the Company reassessed the probability and increased the fair value of the earnout consideration liability by $175,000 to $375,000. This increase was included in operating expenses in the Company’s condensed consolidated statements of operations.

Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. Such estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition. The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The Asset Purchase resulted in $1.2 million of goodwill. With the addition of Viscount’s products and services, the Company believes this goodwill largely reflects the expansion of its Premises offerings with advanced, complementary solutions for the commercial and small- and medium-sized business markets, leveraging Freedom’s IT-centric software, defined architecture, and hardware-light platform. In accordance with ASC 350, goodwill will not be amortized but is tested for impairment at least annually in the fourth quarter. See Note 6, Goodwill and Intangible Assets.

Pursuant to ASC 805, the Company incurred and expensed approximately $27,000 and $227,000 in acquisition and transactional costs associated with the Asset Purchase during the nine months ended September 30, 2019 and the year ended December 31, 2018, respectively, which were primarily general and administrative expenses.

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 (“ASC 820”), the fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value:

The Company’s only liabilities measured at fair value on a recurring basis are the contingent consideration associated with the acquisitions of 3VR, Thursby and Viscount. The fair value of the earnout consideration is based on achieving certain revenue and profit targets as defined under the respective acquisition agreements. The valuation of the earnout 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 earnout consideration are highly sensitive to fluctuations and any changes in the inputs or the probability weighting thereof could significantly change the measured value of the earnout consideration at each reporting period. In the first quarter of 2019, the fair value attributed to the earnout consideration related to the acquisition of Viscount was $200,000. In the third quarter of 2019, the Company reassessed the probability of achieving certain revenue targets, and increased the fair value of the earnout consideration liability to $375,000. No fair value was assigned to the earnout consideration in the 3VR and Thursby acquisitions.

Changes in the fair value of liabilities classified in Level 3 of the fair value hierarchy were as follows (in thousands):

Certain of the Company's assets, including intangible assets and privately-held investments, are measured at fair value on a nonrecurring basis if impairment is indicated. Purchased intangible assets are measured at fair value primarily using discounted cash flow projections. 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 the investments. The Company estimates the fair value of its privately-held investments using an analysis of the financial condition and near-term prospects of the investee, including recent financing activities and the investee's capital structure.

As of September 30, 2019 and December 31, 2018, the Company had $368,000 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 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 condensed consolidated balance sheets.

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.

The following table summarizes the carrying amount of goodwill resulting from the acquisitions of 3VR, Thursby, and Viscount (in thousands):

In accordance with ASC 350, the Company tests goodwill for impairment on an annual basis, in the fourth quarter, or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. In testing for goodwill impairment, the Company compares the fair value of its reporting unit to its carrying value including the goodwill of that unit. If the carrying value, including goodwill, exceeds the reporting unit’s fair value, the Company will recognize an impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value. During the nine months ended September 30, 2019, the Company noted no indicators of goodwill impairment and concluded no further testing was necessary.

The following table summarizes the gross carrying amount and accumulated amortization for intangible assets resulting from acquisitions (in thousands):

Each period, the Company evaluates the estimated remaining useful lives of its intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. If a revision to the remaining period of amortization is warranted, amortization is prospectively adjusted over the remaining useful life of the intangible asset. Intangible assets subject to amortization are amortized over their useful lives as shown in the table above. The Company evaluates its amortizable intangible assets for impairment at the end of each reporting period. The Company did not identify any impairment indicators during the nine months ended September 30, 2019.

The following table illustrates the amortization expense included in the condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018, respectively (in thousands):

The estimated annual future amortization expense for purchased intangible assets with definite lives as of September 30, 2019 was as follows (in thousands):

The Company’s inventories are stated at the lower of cost or net realizable value. Inventories consists of (in thousands):

The Company recorded depreciation expense of $0.3 million during each of the three months ended September 30, 2019 and 2018, and $0.8 million and $0.6 million during the nine months ended September 30, 2019 and 2018, respectively.

Hirsch Electronics Corporation (“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 January 30, 2021, 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 approximately $32,000 and $113,000 of interest expense during the three and nine months ended September 30, 2019, respectively, and approximately $55,000 and $179,000 during the three and nine months ended September 30, 2018, respectively, in its condensed 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 September 30, 2019 was as follows (in thousands):

On February 8, 2017, the Company entered into Loan and Security Agreements with East West Bank (“EWB”) and Venture Lending & Leasing VII, Inc. and Venture Lending & Leasing VIII, Inc. (collectively referred to as “VLL7 and VLL8”). The Loan and Security agreement, as amended, with EWB provided for a $16.0 million revolving loan facility (“Revolving Loan Facility”), and the Loan and Security Agreement with VLL7 and VLL8 provided for a $10.0 million term loan facility (“Term Loan Facility”).

The Revolving Loan Facility, as amended, bears interest at prime rate plus 1.0%, matured and became due and payable on February 8, 2019. On February 6, 2019, the Company entered into an amendment (the “Tenth Amendment”) to its Loan and Security Agreement with EWB which increased the Revolving Loan Facility from $16.0 million to $20.0 million, lowered the interest rate from prime rate plus 1.0% to prime rate plus 0.75%, extended the maturity date to February 8, 2021, and amended certain financial covenants, including covenants with respect to minimum EBITDA levels. The Company may voluntarily prepay amounts outstanding under the Revolving Loan Facility without prepayment charges. In the event the Revolving Loan Facility is terminated prior to its maturity, the Company would be required to pay an early termination fee in the amount of 1.0% of the revolving line. Additional borrowing requests under the Revolving Loan Facility are subject to various customary conditions precedent, including satisfaction of a borrowing base test as more fully described in the Revolving Loan Facility.

On December 28, 2017, the Company paid down an aggregate principal amount of $5.0 million of the $10.0 million outstanding principal balance of its Term Loan Facility. The Company paid to VLL7 and VLL8 approximately $5.9 million, consisting of $5.0 million in outstanding principal, and $0.9 million of accrued and unpaid interest outstanding at the prepayment date, together with all scheduled interest that would have accrued and been payable through the stated maturity of the Term Loan.

On May 31, 2018, the Company paid off the remaining amounts payable under its $10.0 million principal amount term loan under the Loan and Security Agreement with VLL7 and VLL8. The Company paid to VLL7 and VLL8 approximately $5.2 million, consisting of $4.6 million in outstanding principal, and $0.6 million of accrued and unpaid interest outstanding at the prepayment date together with all the scheduled interest that would have accrued and been payable through the stated maturity of the term loan. As a result, the Company recorded a loss on extinguishment of debt totaling $1.4 million, representing the difference between the reacquisition price of the repaid portion of the Term Loan and its carrying amount.

The Revolving Loan Facility contains customary representations and warranties and customary affirmative and negative covenants, including, limits or restrictions on the Company's ability to incur liens, incur indebtedness, make certain restricted payments, merge or consolidate and dispose of assets. The Revolving Loan Facility also contains various financial covenants, including but not limited to a liquidity covenant requiring the Company to maintain at least $4.0 million of cash. In addition, the Revolving Loan Facility contains customary events of default that entitle EWB to cause any or all of the Company's indebtedness under the Revolving Loan Facility to become immediately due and payable. The 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, EWB may terminate its lending commitment 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 Loan and Security Agreement to be immediately due and payable.

As of September 30, 2019, the Company was in compliance with all financial covenants under the Revolving Loan Facility.

The proceeds of the Term Loan and the initial draw under the Revolving Loan Facility, after payment of fees and expenses, were used to repay all outstanding amounts under the credit agreement with the Company’s previous lender. In connection with the repayment, warrants to purchase an aggregate of 400,000 shares of common stock issued to the Company’s previous lender were cancelled. The proceeds of any additional draws under the Revolving Loan Facility will be used for working capital and other general corporate purposes.

On February 14, 2018, the Company completed the acquisition of 3VR. As part of the purchase price consideration paid in the acquisition of 3VR, the Company issued subordinated unsecured promissory notes (“notes payable”) in the aggregate principal amount of $2.0 million, with an annual interest rate of 3.0%, payable on the one year anniversary of the closing date. On February 14, 2019, the Company repaid the noteholders an aggregate principal amount, including accrued interest of $2.1 million.

The Company conducts business globally and, as a result, files federal, state and foreign tax returns. The Company strives to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While the Company has accrued for amounts it believes are the probable outcomes, the final outcome with a tax authority may result in a tax liability that is more or less than that reflected in the condensed consolidated financial statements. Furthermore, the Company may later decide to challenge any assessments, if made, and may exercise its right to appeal.

The Company applies the provisions of, and accounted for uncertain tax positions in accordance with ASC 740, Income Taxes (“ASC 740”), which clarifies the accounting for uncertainty in income taxes recognized in an 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.

The Company generally is no longer subject to tax examinations for years prior to 2015. However, if loss carryforwards of tax years prior to 2015 are utilized in the U.S., these tax years may become subject to investigation by the tax authorities. While timing of the resolution and/or finalization of tax audits is uncertain, the Company does not believe that its unrecognized tax benefits would materially change in the next 12 months.

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, and 5,000,000 of which have been designated as Series B Non-Voting Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”). No shares of the Company’s Series A Participating Preferred Stock were outstanding as of September 30, 2019 and December 31, 2018. During 2017, the Company’s board of directors (the “Board”) authorized the issuance of up to 5,000,000 shares of the Series B Preferred Stock, 5,000,000 of which were outstanding as of September 30, 2019 and December 31, 2018.

The Board may from time to time, without further action by the Company’s stockholders, direct the issuance of shares of preferred stock in other 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.

On December 20, 2017, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with each of 21 April Fund, Ltd. and 21 April Fund, LP (collectively, the “Purchasers”), pursuant to which the Company, in a private placement, agreed to issue and sell to the Purchasers an aggregate of up to 5,000,000 shares of the Series B Preferred Stock, (collectively referred to as the “Shares”). The Purchasers agreed to purchase an aggregate of 3,000,000 Shares (“Tranche 1”) at a price of $4.00 per share in cash at the initial closing of the transaction, and at the sole option of the Company, an additional 2,000,000 Shares at a price of $4.00 per share in cash at a second closing, if any (the “Private Placement”). The total purchase price payable to the Company was $20.0 million, of which $12.0 million was paid at the initial closing. On May 30, 2018, the Company issued 2,000,000 Shares (“Tranche 2”), at a price of $4.00 per share in the second closing of the Private Placement. Gross proceeds to the Company from the second closing were approximately $8.0 million, before deducting fees and certain expenses payable by the Company. The proceeds from the issuance of the Shares are required to be used to pay off existing debt obligations of the Company and to fund future acquisitions of technology, business and other assets by the Company.

Each Share shall be convertible into the Company’s common stock (i) following the sixth (6th) anniversary of the initial closing of the Private Placement or (ii) if earlier, during the thirty (30) day period following the last trading day of any period of three (3) or more consecutive trading days that the closing market price of the Company’s common stock exceeds $10.00. Each Share is convertible at the option of the holder of shares of Series B Preferred Stock into such number of shares of the Company’s common stock determined by taking the accreted value of such Share (purchase price plus accrued but unpaid dividends) and dividing such value by the stated value of such Share ($4.00 per share, subject to adjustment for dilutive issuances, stock splits, stock dividends and the like); provided, however, that the Company shall not convert any Shares if doing so would cause the holder thereof, along with its affiliates, to beneficially own in excess of 19.9% of the outstanding common stock immediately after giving effect to the applicable conversion (the “Ownership Limitation”), unless waiver of this restriction has been effected by the holder requesting conversion of Shares.

Based on the current conversion price, the outstanding Shares, including the accretion of dividends, of Series B Preferred Stock as of September 30, 2019 would be convertible into 5,403,125 shares of the Company’s common stock. However, the conversion rate will be subject to adjustment in the event of certain instances, such as if the Company issues shares of its common stock at a price less than $4.00 per common share, subject to a minimum conversion price of $3.27 per share. As of September 30, 2019, none of the contingent conditions to adjust the total common shares to convert the Shares had been met.

Each Share is entitled to a cumulative annual dividend of 5% for the first six (6) years following the issuance of such Share and 3% for each year thereafter, with the Company retaining the option to settle each year’s dividend after the tenth (10^th) year in cash. The dividends accrue and are payable in kind upon such time as the Shares convert into the Company’s common stock. In general, the Shares are not entitled to vote except in certain limited cases, including in change of control transactions where the price per share distributable to the Company’s stockholders is expected to be less than $4.00 per share. The Certificate of Designation with respect to the Series B Preferred Stock further provides that in the event of, among other things, any change of control, liquidation or dissolution of the Company, the holders of the Series B Preferred Stock will be entitled to receive, on a pari passu basis with the holders of the common stock, the same amount and form of consideration that the holders of the Company’s common stock receive (on an as-if-converted-to-common-stock basis and without regard to the Ownership Limitation).

The following table summarizes Series B Preferred Stock and the accretion of dividend activity for the nine months ended September 30, 2019 (in thousands):

On August 13, 2014, 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 “2014 Consultant Warrant”). One fourth of the shares under the warrant were exercisable for cash three months from the date the 2014 Consultant Warrant was issued and quarterly thereafter. The 2014 Consultant Warrant expired unexercised on August 13, 2019.

On February 8, 2017, the Company entered into Loan and Security Agreements (each, a “Loan and Security Agreement”) with each of EWB and VLL7 and VLL8 as discussed in Note 9, Financial Liabilities. In connection with the Revolving Loan Facility, the Company issued to EWB a warrant (the "EWB Warrant") to purchase up to 40,000 shares of the Company's common stock at a per share exercise price of $3.64, and in connection with the Term Loan Facility, issued to each of VLL7 and VLL8 a warrant to purchase 290,000 shares of the Company's common stock at a per share exercise price of $2.00 (the “VLL7 Warrant” and the “VLL8 Warrant,” respectively). The Company calculated the fair value of the EWB Warrant, the VLL7 Warrant and the VLL8 Warrant using the Black-Scholes pricing model using the following assumptions: estimated volatility of 78.8%, risk-free interest rate of 1.94%, no dividend yield, and an expected life of five years. The fair values of the EWB Warrant, the VLL7 Warrant and the VLL8 Warrant of $125,000, $1,037,500 and $1,037,500, respectively, were classified as equity as the settlement of the warrants will be in shares and is within the control of the Company. Each of the EWB Warrant, the VLL7 Warrant and the VLL8 Warrant is immediately exercisable for cash or by net exercise and will expire five years after its issuance, or on February 8, 2022. In connection with entering into the Loan and Security Agreements with EWB and VLL7 and VLL8, warrants to purchase an aggregate of 400,000 shares of common stock issued to the Company’s previous lender were cancelled.

In connection with securing of the new credit facilities and cancelling of all the warrants previously issued to the previous lender, the Company issued a warrant to a consultant to purchase 60,000 shares of its common stock at an exercise price of $4.60 per share (the “2017 Consultant Warrant”). The Company calculated the fair value of the 2017 Consultant Warrant using the Black Scholes pricing model using the following assumptions: estimated volatility of 78.8%, risk-free interest rate of 1.22%, no dividend yield, and an expected life of two years. The fair value of the 2017 Consultant Warrant of $119,000 was classified as equity as the settlement of the warrant would be in shares and within the control of the Company. The 2017 Consultant Warrant was immediately exercisable for cash or by net exercise and had an expiration date of February 8, 2019. On January 30, 2019, the Company issued 10,449 shares of its common stock upon the cashless net exercise of the entire 2017 Consultant Warrant.

Common stock reserved for future issuance as of September 30, 2019 was as follows:

The Company has a stock-based compensation plan 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 plan consists of the 2011 Incentive Compensation Plan (the “2011 Plan”), as amended. Shares are no longer available for issuance under the Company’s 2010 Bonus and Incentive Plan (the “2010 Plan”) and the 2007 Stock Option Plan (the “2007 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 the 2010 Plan. Subsequent to June 6, 2011 through December 31, 2018, the number of shares of common stock authorized for issuance under the 2011 Plan has been increased by an aggregate of 3,500,000 shares.

The aggregate intrinsic value in the table above represents the difference between the fair value of the Company’s common stock and the option exercise price of in-the-money options multiplied by the number of such options.

The following table summarizes information about options outstanding as of September 30, 2019:

At September 30, 2019, there was no unrecognized stock-based compensation expense.

The following is a summary of RSU activity for the nine months ended September 30, 2019:

The fair value of the Company’s RSUs is calculated based upon the fair market value of the Company’s stock on the date of grant. As of September 30, 2019, there was $4.4 million of unrecognized compensation expense related to unvested RSUs granted, which is expected to be recognized over a weighted average period of 2.6 years.

The following table illustrates all employee stock-based compensation expense related to stock options and RSUs included in the condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018 (in thousands):

During the nine months ended September 30, 2019 and 2018, the Company repurchased 136,519 and 109,666 shares, respectively, of common stock surrendered to the Company to satisfy tax withholding obligations in connection with the vesting of RSUs issued to employees.

13. Net Income (Loss) per Common Share Attributable to Identiv Stockholders’ Equity

Basic net income (loss) per share is computed by dividing net income (loss) during the period by the weighted average number of common shares outstanding during that period. Diluted net income (loss) per share is impacted by equity instruments considered to be potential common shares, if dilutive, computed using the treasury stock or the if-converted method of accounting. The calculations for basic and diluted net income (loss) per share for the three and nine months ended September 30, 2019 are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Basic EPS:
Numerator:
Net income (loss) attributable to Identiv, Inc.	$	1,069		$	(287	)	$	670		$	(5,338	)
Less: accretion of Series B preferred stock dividends		(262	)		—			(780	)		—
Net income (loss) available to common stockholders	$	807		$	(287	)	$	(110	)	$	(5,338	)

Denominator:
Weighted average common shares outstanding - basic		17,006			15,750			16,933			15,484
Net income (loss) per common share - basic	$	0.05		$	(0.02	)	$	(0.01	)	$	(0.34	)

Diluted EPS:
Numerator:
Net income (loss) available to common stockholders	$	807		$	(287	)	$	(110	)	$	(5,338	)
Plus: accretion of Series B preferred stock dividends, if dilutive		—			—			—			—
Net income (loss) available to common stockholders	$	807		$	(287	)	$	(110	)	$	(5,338	)

Denominator:
Weighted average common shares outstanding - basic		17,006			15,750			16,933			15,484
Dilutive securities:
Stock options		52			—			—			—
RSUs		353			—			—			—
Warrants		355			—			—			—
Total dilutive securities		760			—			—			—
Weighted average common shares outstanding - diluted		17,766			15,750			16,933			15,484
Net income (loss) per common share - diluted	$	0.05		$	(0.02	)	$	(0.01	)	$	(0.34	)

The following common stock equivalents have been excluded from diluted net income (loss) per share for the three and nine months ended September 30, 2019 and 2018 because their inclusion would have been anti-dilutive (in thousands):

ASC 280, Segment Reporting (“ASC 280”) establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenue and incur expenses and about which separate financial information is available to its chief operating decision makers (“CODM”). The Company’s CODM is its CEO.

In the fourth quarter of 2018, the Company realigned the way in which it organized its operating segments in making operating decisions and assessing financial performance by combining the Identity and Credential segments. The combined segment is referred to as the Identity segment. All comparative segment information for fiscal 2018 has been reclassified to conform to the fiscal 2019 presentation.

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.

Net revenue and gross profit information by segment for the three and nine months ended September 30, 2019 and 2018 is as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Premises:
Net revenue	$	12,938		$	9,364		$	32,939		$	25,691
Gross profit		7,212			5,363			17,573			14,336
Gross profit margin		56	%		57	%		53	%		56	%
Identity:
Net revenue		10,088			10,658			31,846			31,153
Gross profit		3,314			3,121			11,540			8,809
Gross profit margin		33	%		29	%		36	%		28	%
Total:
Net revenue		23,026			20,022			64,785			56,844
Gross profit		10,526			8,484			29,113			23,145
Gross profit margin		46	%		42	%		45	%		41	%
Operating expenses:
Research and development		2,125			1,860			6,229			5,384
Selling and marketing		4,470			3,915			13,689			12,176
General and administrative		2,591			2,641			7,492			7,952
Increase in fair value of earnout liability		175			—			175			—
Restructuring and severance		(87	)		223			(101	)		591
Total operating expenses:		9,274			8,639			27,484			26,103
Income (loss) from operations		1,252			(155	)		1,629			(2,958	)
Non-operating income (expense):
Interest expense, net		(246	)		(291	)		(766	)		(1,239	)
Loss on extinguishment of debt, net		—			—			—			(1,369	)
Foreign currency gains, net		168			200			96			354
Income (loss) before income taxes and noncontrolling interest	$	1,174		$	(246	)	$	959		$	(5,212	)

Geographic net revenue is based on the customer’s ship-to location. Information regarding net revenue by geographic region for the three and nine months ended September 30, 2019 and 2018 is as follows (in thousands):

No customer accounted for 10% or more of net revenue for either of the three or nine months ended September 30, 2019 or 2018. No customer accounted for 10% of net accounts receivable at September 30, 2019 or December 31, 2018.

On February 14, 2018, the Company acquired 3VR. As a result of the acquisition, in the three and nine months ended September 30, 2018, the Company incurred restructuring and severance expenses of $223,000 and $591,000, respectively, consisting of facility rental related costs of $102,000 and $280,000, respectively, and severance related costs of $121,000 and $311,000, respectively. In the fourth quarter of 2018, the Company recorded a restructuring accrual of $129,000 for future rental payment obligations associated with vacated office space at its Fremont, California facility. In the third quarter of 2019, the Company sublet the previously vacated office space, and as a result, reversed the remaining restructuring accrual of $91,000. Other restructuring income recorded in the three and nine months ended September 30, 2019 consists of sublease income received in excess of lease payment obligations.

Restructuring and severance activities during the three and nine months ended September 30, 2019 and 2018 were as follows (in thousands):

The Company’s leases consist primarily of operating leases for administrative office space, research and development facilities, a manufacturing facility, and sales offices in various countries around the world. The Company determines if an arrangement is a lease at inception. Some lease agreements contain lease and non-lease components, which are accounted for as a single lease component. Total rent expense was approximately $0.4 million and $1.1 million for the three and nine months ended September 30, 2019, respectively. Rent expense was approximately $0.4 million and $1.l million for the three and nine months ended September 30, 2018, respectively.

Initial lease terms are determined at commencement and may include options to extend or terminate the lease when it is reasonably certain the Company will exercise the option. Remaining lease terms range from one to seven years, some of which include options to extend for up to five years. Leases with an initial term of twelve months or less are not recorded on the condensed consolidated balance sheets. As the Company’s leases do not provide an implicit rate, the present value of future lease payments is determined using the Company’s incremental borrowing rate based on information available at the lease commencement date.

The table below reconciles the undiscounted cash flows for the first five years and the total of the remaining years to the operating lease liabilities recorded on the condensed consolidated balance sheet as of September 30, 2019 (in thousands):

As of September 30, 2019, the weighted average remaining lease term for the Company’s operating leases was 3.4 years, and the weighted average discount rate used to determine the present value of the Company’s operating leases was 6.4%. Sublease rental income due in the future under non-cancelable subleases was $2.1 million.

Cash paid for amounts included in the measurement of operating lease liabilities was $0.5 million and $1.6 million for the three and nine months ended September 30, 2019, respectively. Cash received from sublease rentals was $0.2 million and $0.6 million for the three and nine months ended September 30, 2019, respectively.

The following table summarizes the Company’s principal contractual commitments, excluding operating leases, as of September 30, 2019 (in thousands):

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 36 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.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other parts of this Quarterly Report on Form 10-Q (“Quarterly Report”) contain forward-looking statements, within the meaning of the safe harbor provisions under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. Forward-looking statements reflect current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “will,” “believe,” “could,” “should,” “would,” “may,” “anticipate,” “intend,” “plan,” “estimate,” “expect,” “project” or the negative of these terms or other similar expressions. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018 under the heading “Risk Factors,” The following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2018. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Each of the terms the “Company,” “Identiv,” “we” and “us” as used herein refers collectively to Identiv, Inc. and its wholly-owned subsidiaries, unless otherwise stated.

Identiv, Inc. is a global provider of physical security and secure identification. Our products, software, systems, and services address the markets for physical and logical access control, video analytics and a wide range of Radio Frequency Identification (“RFID”)-enabled applications. Customers in government, enterprise, consumer, education, healthcare, banking, retail, transportation and other sectors rely on our security and identification solutions. Our mission is to make the physical world digital and secure. Our platform to deliver on our mission can be deployed through Internet of Things (“IoT”) devices, mobile, client/server, cloud, web, dedicated hardware and software-defined architectures. Our solutions encompass what we believe to be the most complete set of technologies in the industry. We are a one-stop provider of software delivering physical security management, video surveillance, logical access, analytics and identities; and devices spanning access readers, panels, processing appliances, and identity cards. We provide services to deliver optimized total solutions, serving as a single-point provider for our customers rather than several separate vendors that the customer would otherwise have to coordinate and manage.

We have organized our operations into two reportable business segments: Premises and Identity.

In the fourth quarter of 2018, we realigned the way in which we organize our operating segments in making operating decisions and assessing financial performance by combining our Identity and Credentials segments. The combined segment is now referred to as the Identity segment. All comparative segment information for fiscal 2018 has been reclassified to conform to the fiscal 2019 presentation.

Our Premises segment includes solutions to address the premises security market for customers in government, enterprise, consumer, education, healthcare, banking, retail, transportation and other sectors, including access control, video surveillance, analytics, customer experience and other applications. We sell either individual components or complete bundled solutions, which can include any or all among software, edge controllers, IoT devices, multi-door panels, access readers, access cards, 3VR appliances and other components or services, some of which are detailed below:

Software — Our software platform for premises security ranges from physical access to video analytics and business intelligence. The Hirsch Velocity software platform enables centralized management of access and security operations across an organization, including control of doors, gates, turnstiles, elevators and other building equipment, monitoring users as they move around a facility, preventing unwanted access, maintaining compliance and providing a robust audit trail. Velocity continues to be especially successful with federal and state government customers. The Freedom and Liberty platforms, acquired from Viscount in January 2019, present an IT-centric and highly scalable alternative, specifically for the SMB market. We believe our VisionPoint™ VMS (Video Management System) for real-time search is an ideal video management software for forensic search, case management and business intelligence. Available in both a Standard and Pro version, with an optional enterprise server for large and remote deployments, VisionPoint VMS provides tools to gather intelligence from video, speed up searches and easily develop cases. VisionPoint VMS can be installed on commercial off-the-shelf hardware, on certified partner hardware, and is included on any of our powerful NVR/HVR appliances.

Controllers — Our modular Hirsch MX controllers are designed to be scalable, allowing customers to start with a small system and expand over time. Hirsch MX controllers can operate autonomously, whether as a single controller or as part of a networked system with Velocity software. Our Freedom Crypto and IoT Bridges provide hardware-light solutions, providing low-cost implementations and building a bridge to fully software-defined, hardware-light (or hardware-free) access platforms.

FICAM — We believe our Velocity, MX and TS Reader solution is the highest performance, lowest per-door cost access control system for the U.S. federal government security mandate known as the Federal Identity, Credential and Access Management (“FICAM”) architecture. Our solution brings all of the advantages above into the next generation of physical security for the U.S. government departments and agencies to achieve Federal Information Processing Standard (“FIPS”) 201 compliance. Similar to our leading Hirsch Velocity solution for the U.S. government market, the Freedom platform is also FICAM-compliant and allows customers to choose an evolutionary, alternative architecture going forward. Within FICAM, the most infrastructure-efficient architecture is a specification known as 13.02. With Freedom and Velocity, we now are the only vendor providing two 13.02-compliant solutions, and we deliver certain or all of the components of three of the five 13.02 approved solutions at this time.

Access Readers — Our TS readers feature multiple layers of security based on a certified hardware security element. These door readers provide unique features to support a wide range of security standards. We support the majority of legacy cards with a robust next-generation platform that can help companies migrate to more secure credentials and technologies, including smart cards, near field communication ("NFC") and government-issued credentials including Common Access Card (“CAC”), Personal Identification Verification (“PIV”), Personal Identification Verification – Interoperable (“PIV-I”) and others. Additionally, our Scramblepad readers employ numerical scrambling on the keypad to protect access codes from being stolen as they are entered, and providing both secure two-factor authentication and convenient alternative-factor access.

Identiv Global Services — Identiv Global Services provides a comprehensive catalog of end-to-end services that facilitates customer success, drives deeper adoption of our product portfolio and encourages long-term customer engagement. IGS supports customers throughout their premises security lifecycle from system design, to integration, deployment and managed services. IGS experts enable customers to address today’s complex security and IT systems interoperability requirements, and helps them achieve a tailor-made solution.

Our Identity segment includes products and solutions enabling secure access to information serving the logical access and cyber security market, and protecting assets and objects in the IoT with RFID.

Our information security solutions range from securing enterprise information access and secure transactions across PCs, networks, mobile devices, email, login, secure payments, and printers via delivery of smart card reader products and applications. Our information security products include smart card readers, which includes a broad range of contact, contactless, portable and mobile smart card readers, tokens and terminals that are utilized around the world to enable logical access (i.e., PC, network or data access) and security and identification applications, such as national ID, payment, e-Health and e-Government. In addition, we provide mobile apps, software and systems to enable secure and convenient logical access across smart cards and derived credentials on Apple iOS and Android mobile devices. Our solutions include:

Mobile Security — Our mobile security software solutions provide strong security for enterprise and personal mobility, supporting bring-your-own-device (“BYOD”) and two-factor authentication (“2FA”) on mobile devices. We enable Department of Defense (“DoD”) issued Common Access Card (“CAC”), federally issued PIV cards, derived credentials, and commercially issued PIV-I cards to access, sign, encrypt, and decrypt information and emails from Apple iOS and Android mobile phones or tablet devices. These capabilities have allowed over a hundred thousand DoD and federal employees, including the U.S. Navy Reserve, via the Ready-2-Serve (“R2S”) mobile application, to use personal and government-furnished mobile devices to access needed information on-the-go. Our products are customizable to specific customer preferences, providing both high security and excellent end-user convenience. Our seamless support of both government-grade smart card deployments and derived credentials reflects our philosophy of supporting customers' adoption of technologies at their own pace, optimized for their own use cases.

Smart Card Readers — With over 20 years of smart card reader, application and token experience, and over 40 million smart card readers and modules deployed, we are known for our expertise in this complex ecosystem. We combine our deep technical expertise with an optimized supply chain, to provide what we believe to be the most optimal, cost-effective and high-quality smart card-based reader products. Whether Identiv branded products, OEM branded, or embedded chips or modules, we are a trusted business solution provider for users and issuers of smart cards and embedded-chip applications.

Our RFID based solutions address a wide range of applications from access control to asset tracking, product authenticity, brand protection, customer engagement, tamper detection, product instrumentation, transportation access and other IoT applications. The RFID devices enable frictionless interaction with the physical world and are grouped into transponders and access cards. Our solutions include:

Transponders — Our transponder products span the full range of high frequency (“HF”) and ultra-high frequency (“UHF”) technologies. Our differentiation is analogous to application-specific integrated circuits (“ASICS”) in the semiconductor market. We leverage our flexible platform, our deep technical expertise and our infrastructure and supply chain to deliver solutions optimized for our customers’ business goals. We believe we are more responsive, more flexible, more experienced in business-optimized solutions and have a better track record of sustained delivery of solution-specific, high-quality RFID devices than our competitors. Our transponders are manufactured in our state-of-the-art facility in Singapore and are used in diverse physical applications, including electronic entertainment such as virtual reality (“VR”), games, loyalty cards, mobile payment systems, transit and event ticketing, brand authenticity from pharmaceuticals to consumer goods, hospital resource management, cold-chain management and many others.

Access Cards — Our uTrust cards encompass contactless single-technology, multi-technology, or credentials with a contact chip, including uTrust Proximity Credentials, uTrust Smart ID Secure Credentials, uTrust MIFARE Classic Credentials, and our uTrust TS Cards. This gives our customers easy access to RFID technology for reliable data exchange of physical access control system (PACS) data, up to options for versatile, high-frequency, interoperable, MIFARE-compatible smart cards. Our uTrust TS Cards address emerging security requirements while maintaining compatibility with existing low-security standards such as prox. We believe they offer the first complete solution to allow customers to pay only for the most basic low-frequency proximity access technology while having the ability to evolve to the higher-security high-frequency and highest-security public key infrastructure (“PKI”) based credentials. This product line exemplifies our values: we place no burden on our customers, instead providing what we believe to be the most cost-effective solution to their basic needs; and then delivering within this platform the ability for them to move to higher-level needs and capabilities, when they want, when they are ready and when they will realize economic and experience benefits.

Leveraging our expertise in RFID, physical access and physical authentication, we are developing new solutions to extend our platforms across a wide variety of physical use cases. The next major opportunity in our connected world is the IoT, which fundamentally is about physical things. We believe our core strength in physical access and physical instrumentation markets, our well-established platforms and our deep knowledge of the relevant technologies, position us well in this growth market.

In January 2019, we acquired the Freedom, Liberty, and Enterphone™ MESH product and service lines of Viscount Systems, Inc. (“Viscount”). The web-based Freedom and Liberty access control and Enterphone MESH IP telephone entry solutions are known for their early adoption of a web, API-based, cloud-ready architecture, creating an IT-centric software-focused and hardware-light platform. Scaling from small- and medium-sized businesses (“SMB”) up to enterprise scale for government and commercial markets, Freedom and the entry-level Liberty product line are complementary to our other products. With Freedom, customers can build integrated access control and video management systems under one centrally managed or distributed network, seamlessly integrating physical security devices such as card readers, ID management, Active Directory/LDAP, visitor entry, alarm points, and video applications and analytics. We believe the combination creates one of the most-advanced, IT-centric solutions for physical security, delivering a seamless evolution from traditional physical access models to next-generation, cloud and web-based, and mobile-enabled systems. Our TouchSecure (“TS”) readers, TS Cards, VMS platform, mobile logical access and our Identiv Global Services (“IGS”) services are applicable to nearly all Freedom and Liberty customers.

Geographic net revenue based on each customer’s ship-to location is as follows (in thousands):

Net revenue for the nine months ended September 30, 2019 increased 14% compared with the nine months ended September 30, 2018. Approximately 51% of our net revenue for the nine months ended September 30, 2019 came from our Premises segment. Net revenue from our Premises segment was $32.9 million and $25.7 million for the nine months ended September 30, 2019 and 2018, respectively. Net revenue from our Identity segment, which represented approximately 49% of total net revenue, was $31.8 million for the nine months ended September 30, 2019 compared to $31.2 million in the prior year period.

Net revenue in the Americas was approximately $48.5 million for the nine months ended September 30, 2019, representing approximately for 75% of total net revenue, and was up 10% compared to $44.2 million for the nine months ended September 30, 2018. Net revenue from our Premises solutions for security programs within various U.S. government agencies and commercial customers for access control and video solutions, as well as reader, controller and appliance products, represented approximately 61% of our net revenue in the Americas region.

Net revenue in our Premises segment for the nine months ended September 30, 2019 increased 30% compared to the prior year period primarily due to sales of Freedom, Liberty, and Enterphone™ MESH products and services following the acquisition of Viscount in January 2019, higher sales of video technology and analytics software products and related support services, as well as higher sales of physical access control solutions and products, and higher software product sales. Net revenue from our Identity segment decreased 12% for the nine months ended September 30, 2019 compared to the prior year period primarily due to lower smart card reader and access card sales, partially offset by sales of mobile security solution products, including a large bulk order of readers to the U.S. Navy Reserve in the first quarter of 2019.

As a general trend, U.S. Federal agencies continue to be subject to security improvement mandates under programs such as Homeland Security Presidential Directive-12 (“HSPD-12”) and reiterated in memoranda from the Office of Management and Budget (“OMB M-11-11”). We believe that our solution for trusted physical access is an attractive offering to help federal agency customers move towards compliance with federal directives and mandates. To address our sales opportunities in the United States in general and with our U.S. Government customers in particular, we focus on a strong U.S. sales organization and our sales presence in Washington D.C.

Net revenue in Europe, the Middle East, and Asia-Pacific was approximately $16.3 million for the nine months ended September 30, 2019, accounting for 25% of total net revenue, was up 29% compared to $12.7 million for the nine months ended September 30, 2018 primarily as a result of higher sales in both regions. Net revenue in these regions are very dependent on the completion of large projects and the timing of orders placed by some of our customers. Sales of Identity readers and RFID and NFC products and tags comprise a significant proportion of our net revenue in these regions.

Net revenue from our Premises products increased 11% for the nine months ended September 30, 2019 from the prior year period primarily due to higher sales of physical access control solutions in the Europe and Middle East region partially offset by lower sales of physical access control products in the Asia-Pacific region. Net revenue from our Identity products increased 34% for the nine months ended September 30, 2019 compared with the same period of the prior year primarily due to higher sales of smart card readers and access cards in both regions. Identity smart card readers and access cards comprised approximately 49% of net revenue in both regions for the nine months ended September 30, 2019.

In our business overall, we may experience significant variations in demand for our offerings from quarter to quarter, and typically experience a stronger demand cycle in the second half of our fiscal year. Sales of our physical access control solutions and related products to U.S. Government agencies are subject to annual government budget cycles and generally are highest in the third quarter of each year. However, the usual seasonal trend can be negatively impacted by actions such as government shutdowns and the passing of continuing resolutions, which can act to delay the completion of certain projects. Sales of our identity reader chips, many of which are sold to government agencies worldwide, are impacted by testing and compliance schedules of government bodies as well as roll-out schedules for application deployments, both of which contribute to variability in demand from quarter to quarter. Further, this business is typically subject to seasonality based on differing commercial and global government budget cycles. Lower sales are expected in the U.S. in the first half, and in particular, the first quarter of the year, with higher sales typically in the second half of each year. In Asia-Pacific, with fiscal year-ends in March and June, order demand can be higher in the first quarter as customers attempt to complete projects before the end of the fiscal year. Accordingly, our net revenue levels in the first quarter each year often depend on the relative strength of project completions and sales mix between our U.S. customer base and our international customer base.

In addition to the general seasonality of demand, overall U.S. Government expenditure patterns have a significant impact on demand for our products due to the significant portion of revenues that are typically sourced from U.S. Government agencies. Therefore, any significant reduction in U.S. Government spending could adversely impact our financial results and could cause our operating results to fall below any guidance we provide to the market or below the expectations of investors or security analysts.

Our base operating expenses (i.e., research and development, selling and marketing, and general and administrative expense) increased 8% for the nine months ended September 30, 2019 compared with the same period in 2018. Research and development expenses increased 16% for the nine months ended September 30, 2019 compared with the same period in 2018 primarily due to additional headcount and related costs associated with the acquisitions of Thursby in the fourth quarter of 2018 and Viscount in the first quarter of 2019. Selling and marketing expenses increased 12% for the nine months ended September 30, 2019 compared with the same period in 2018, primarily due to additional headcount and related costs, and the amortization of acquired intangibles associated with the acquisitions of Thursby in the fourth quarter of 2018 and Viscount in the first quarter of 2019. General and administrative expenses decreased 2% for the nine months ended September 30, 2019, compared with the same period in 2018 primarily due to integration efforts across general and administrative functions, and lower legal and other professional fees.

The following table includes segment net revenue and segment net profit information by business segment and reconciles gross profit to results of operations before income taxes and noncontrolling interest (in thousands):

	Three Months Ended September 30,									Nine Months Ended September 30,
	2019			2018			% Change			2019			2018			% Change
Premises:
Net revenue	$	12,938		$	9,364			38	%	$	32,939		$	25,691			28	%
Gross profit		7,212			5,363			34	%		17,573			14,336			23	%
Gross profit margin		56	%		57	%					53	%		56	%
Identity:
Net revenue		10,088			10,658			(5	%)		31,846			31,153			2	%
Gross profit		3,314			3,121			6	%		11,540			8,809			31	%
Gross profit margin		33	%		29	%					36	%		28	%
Total:
Net revenue		23,026			20,022			15	%		64,785			56,844			14	%
Gross profit		10,526			8,484			24	%		29,113			23,145			26	%
Gross profit margin		46	%		42	%					45	%		41	%
Operating expenses:
Research and development		2,125			1,860			14	%		6,229			5,384			16	%
Selling and marketing		4,470			3,915			14	%		13,689			12,176			12	%
General and administrative		2,591			2,641			(2	%)		7,492			7,952			(6	%)
Increase in fair value of earnout liability		175			—		N/A				175			—		N/A
Restructuring and severance		(87	)		223		N/A				(101	)		591		N/A
Total operating expenses:		9,274			8,639			7	%		27,484			26,103			5	%
Income (loss) from operations		1,252			(155	)		(908	%)		1,629			(2,958	)		(155	%)
Non-operating income (expense):
Interest expense, net		(246	)		(291	)		(15	%)		(766	)		(1,239	)		(38	%)
Loss on extinguishment of debt, net		—			—			100	%		—			(1,369	)		(100	%)
Foreign currency gains, net		168			200		N/A				96			354		N/A
Income (loss) before income taxes and noncontrolling interest	$	1,174		$	(246	)		(577	%)	$	959		$	(5,212	)		(118	%)

For the three months ended September 30, 2019, net revenue was $23.0 million, up 15% compared with $20.0 million for the comparable period in 2018. For the nine months ended September 30, 2019, net revenue was $64.8 million, up 14% compared with $56.8 million for the comparable period in 2018. Net revenue was higher for the three and nine months ended September 30, 2019, as a result of higher sales across both segments.

For the three months ended September 30, 2019, net revenue in our Premises segment was $12.9 million, an increase of 38% from $9.4 million for the comparable period in 2018. For the nine months ended September 30, 2019, net revenue in our Premises segment was $32.9 million, an increase of 28% from $25.7 million for the comparable period in 2018. The increase for the three and nine months ended September 30, 2019 was primarily due to sales of Freedom, Liberty, and Enterphone™ MESH products and services following the acquisition of Viscount in January 2019, higher sales of video technology and analytics software products and related support services, higher sales of physical access control solutions, as well as higher software sales.

For the three months ended September 30, 2019, net revenue in our Identity segment was $10.1 million, a decrease of 5% from $10.7 million for the comparable period in 2018. The decrease was primarily due to lower sales of smart card readers and access card product sales, offset by sales of mobile security solution products and higher sales of transponder products. For the nine months ended September 30, 2019, net revenue in our Identity segment was $31.8 million, an increase of 2% from $31.2 million for the comparable period in 2018. The increase was primarily due to sales of mobile security solution products and higher sales of transponder products, offset by lower sales of access card product sales.

Gross profit in the three months ended September 30, 2019 was $10.5 million, or 46% of net revenue, compared with $8.5 million, or 42% of net revenue in the comparable period of 2018. Gross profit in the nine months ended September 30, 2019 was $29.1 million, or 45% of net revenue, compared with $23.1 million, or 41% of net revenue in the comparable period of 2018.Gross profit represents net revenue less direct cost of product sales, manufacturing overhead, other costs directly related to preparing the product for sale including freight, scrap, inventory adjustments and amortization, where applicable.

In our Premises segment, gross profit was $7.2 million in the three months ended September 30, 2019 compared with $5.4 million in the comparable period of 2018, and $17.6 million and $14.3 million in the nine months ended September 30, 2019 and 2018, respectively. Gross profit margins in the Premises segment of 56% in the three months ended September 30, 2019 were comparable to 57% in the three months ended September 30, 2018. Gross profit margins in this segment for the nine months ended September 30, 2019 of 53% were lower than the comparable period of 2018 of 56% primarily due to adjustments to our inventory reserves in the first quarter of 2019 as a result of management’s assessment of on-hand inventory levels and demand forecasts.

In our Identity segment, gross profit was $3.3 million in the three months ended September 30, 2019 compared with $3.1 million in the comparable period of 2018, and $11.5 million and $8.8 million in the nine months ended September 30, 2019 and 2018, respectively. Gross profit margins in the Identity segment increased to 33% in the three months ended September 30, 2019 from 29% in the comparable period of 2018 and was primarily attributable to the change in product mix, with a lower proportion of lower margin third party access card sales and a higher percentage of software and service sales compared to the prior year period. Gross profit margins in this segment for the nine months ended September 30, 2019 of 36% were higher than the comparable period of 2018 of 28% primarily due to a large bulk order of readers to the U.S. Navy Reserve in the first quarter of 2019.

We expect there will be variation in our gross profit from period to period, as our gross profit has been and will continue to be affected by a variety of factors, including, without limitation, competition, product pricing, the volume of sales in any given quarter, manufacturing volumes, product configuration and mix, the availability of new products, product enhancements, software and services, risk of inventory write-downs and the cost and availability of components.

Information about our operating expenses for the three and nine months ended September 30, 2019 and 2018 is set forth below (dollars in thousands).

Research and development expenses consist primarily of employee compensation and fees for the development of hardware, software and firmware products. We focus the bulk of our research and development activities on the continued development of existing products and the development of new offerings for emerging market opportunities.

Research and development expenses for the three and nine months ended September 30, 2019 increased compared to the comparable prior year periods primarily due to additional headcount and related costs associated with the acquisitions of Thursby in the fourth quarter of 2018 and Viscount in the first quarter of 2019.

Selling and marketing expenses consist primarily of employee compensation as well as amortization expense of certain intangible assets, customer lead generation activities, tradeshow participation, advertising and other marketing and selling costs.

Selling and marketing expenses for the three and nine months ended September 30, 2019 increased compared to the prior year periods primarily due to additional headcount and related costs, and the amortization of acquired intangibles associated with the acquisitions of Thursby in the fourth quarter of 2018 and Viscount in the first quarter of 2019.

General and administrative expenses consist primarily of compensation expense for employees performing administrative functions as well as professional fees arising from legal, auditing and other professional services.

General and administrative expense for the three months ended September 30, 2019 decreased compared with the prior year period primarily due to lower legal and other professional fees. General and administrative expense for the nine months ended September 30, 2019 decreased compared with the prior year period primarily due to integration efforts across general and administrative functions, and lower legal and other professional fees in the third quarter of 2019.

Earnout consideration expense for the three and nine months ended September 30, 2019 was attributable to the increase in fair value of earnout liability associated with the Viscount acquisition from $200,000 to $375,000 in the third quarter of 2019.

In the three and nine months ended September 30, 2018, we incurred restructuring and severance expenses consisting primarily of facility rental related costs and severance related costs associated with the acquisition of 3VR in the first quarter of 2018.

In the fourth quarter of 2018, we recorded a restructuring accrual of $129,000 for future rental payment obligations associated with vacated office space at our Fremont, California facility. In the third quarter of 2019, we sublet the previously vacated office space and reversed the remaining restructuring accrual of $91,000. Other restructuring income recorded in the three and nine months ended September 30, 2019 consists of sublease income received in excess of lease payment obligations.

See Note 15, Restructuring and Severance, in the accompanying notes to our unaudited condensed consolidated financial statements for more information.

Interest expense, net consists of interest on financial liabilities and interest accretion expense for a liability on a long-term payment obligation arising from our acquisition of Hirsch Electronics Corporation. The lower net interest expense for the three months ended September 30, 2019 compared to the comparable period of 2018 was primarily attributable to lower interest related costs associated with the amendment of our revolving loan facility in the first quarter of 2019. The lower net interest expense for the nine months ended September 30, 2019 was primarily attributable to the $5.0 million principal repayment under our previous term loan payable with Venture Lending & Leasing VII, Inc. and Venture Lending & Leasing VIII, Inc. (collectively referred to as “VLL7 and VLL 8”) in May 2018.

For the nine months ended September 30, 2018, the loss on extinguishment of debt represents the difference between the reacquisition price of the remaining amounts outstanding under our term loan with our previous lender and its net carrying amount.

Changes in currency valuation in the periods mainly were the result of exchange rate movements between the U.S. dollar, the Indian Rupee, and the Euro. Our foreign currency gains and losses primarily result from the valuation of current assets and liabilities denominated in a currency other than the functional currency of the respective entity in the local financial statements.

As of September 30, 2019, our deferred tax assets are fully offset by a valuation allowance. Accounting Standards Codification (“ASC”) 740, Income Taxes, provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes historical operating performance, reported cumulative net losses since inception and difficulty in accurately forecasting our future results, we provided a full valuation allowance against all of our net U.S. and foreign deferred tax assets. We reassess the need for our valuation allowance on a quarterly basis. If it is later determined that a portion or all of the valuation allowance is not required, it generally will be a benefit to the income tax provision in the period such determination is made.

We recorded an income tax provision during the three and nine months ended September 30, 2019. The effective tax rates for the three and nine months ended September 30, 2019 and 2018 differ from the federal statutory rate of 21% primarily due to a change in valuation allowance, and the provision or benefit in certain foreign jurisdictions, which are subject to higher tax rates. The annual effective tax rate (“AETR”) as calculated under ASC 740 based on annual projected book income (loss) is highly sensitive to changes in such book income (loss) due to marginal projected book income and relatively significant permanent items (state and foreign taxes). The AETR as calculated is deemed highly sensitive to changes in estimates of total ordinary income or loss in periods of marginal statutory net income and actual year-to-date has been determined to be the best estimate of AETR.

On February 8, 2017, we entered into Loan and Security Agreements (each, a “Loan and Security Agreement”) with East West Bank (“EWB”) and VLL7 and VLL8. The Loan and Security Agreement with EWB provided for a $10.0 million revolving loan facility, and the Loan and Security Agreement with VLL7 and VLL8 provided for a term loan in an aggregate principal amount of $10.0 million. On February 6, 2019, we amended our Loan and Security Agreement with EWB, which increased the Revolving Loan Facility from $16.0 million to $20.0 million, lowered the interest rate from prime rate plus 1.0% to prime rate plus 0.75%, extended the maturity date to February 8, 2021, and amended certain financial covenants, including covenants with respect to minimum EBITDA levels. See Note 9, Financial Liabilities, in the accompanying notes to our condensed consolidated financial statements for more information.

On December 28, 2017, we paid down an aggregate principal amount of $5.0 million of the $10.0 million outstanding principal balance of the term loan under the Loan and Security Agreement with VLL7 and VLL8, and $0.9 million of accrued and unpaid interest outstanding at the prepayment date, together with all the scheduled interest that would have accrued and been payable through the stated maturity of the term loan. On May 31, 2018, we repaid the remaining amounts payable under the term loan of approximately $5.2 million, consisting of $4.6 million in outstanding principal, and $0.6 million of accrued and unpaid interest outstanding at the prepayment date together with all the scheduled interest that would have accrued and been payable through the stated maturity of the term loan. See Note 9, Financial Liabilities, in the accompanying notes to our condensed consolidated financial statements for more information.

On December 20, 2017, we entered into a Securities Purchase Agreement with each of 21 April Fund, Ltd. and 21 April Fund, LP (collectively, the “Purchasers”), in which we, through a private placement, agreed to issue and sell an aggregate of up to 5,000,000 shares of Series B non-voting convertible preferred stock. The Purchasers purchased an aggregate of 3,000,000 preferred shares at a price of $4.00 per share in cash at the initial closing of the transaction. On May 30, 2018, we completed the second closing of the private placement of 2,000,000 preferred shares at a price of $4.00 per share. The total purchase price paid to us was $20.0 million, of which $12.0 million was paid at the initial closing and $8.0 million at the second closing. We are required to use the proceeds from the issuance of the preferred shares to pay off existing debt obligations and to fund future acquisitions of technology, business and other assets. See Note 11, Stockholders’ Equity, in the accompanying notes to our condensed consolidated financial statements for more information.

As our previously unremitted earnings have been subjected to U.S. federal income tax, we expect any repatriation of these earnings to the U.S. would not incur significant additional taxes related to such amounts. However, our estimates are provisional and subject to further analysis. Generally, most of our foreign subsidiaries have accumulated deficits and cash and cash equivalents that are held outside the United States are typically not cash generated from earnings that would be subject to tax upon repatriation if transferred to the United States. We have access to the cash held outside the United States to fund domestic operations and obligations without any material income tax consequences. As of September 30, 2019, the amount of cash included at such subsidiaries was $1.9 million. We have not, nor do we anticipate the need to, repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.

While we have historically incurred operating losses and negative cash flows from operating activities, and we may continue to incur losses in the future. As of September 30, 2019, we had a total accumulated deficit of $403.7 million

We believe our existing cash balance, together with cash generated from operations and available credit under our Loan and Security Agreement, will be sufficient to satisfy our working capital needs to fund operations for the next twelve months. We may also use cash to acquire or invest in complementary businesses, technologies, services or products that would change our cash requirements. We may also choose to finance our cash requirements through public or private equity offerings, debt financings or other arrangements. However, there can be no assurance that additional capital, if required, will be available to us or that such capital will be available to us on acceptable terms. If we raise funds by issuing equity securities, dilution to stockholders could result. Any equity securities issued also may provide for rights, preferences or privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings could impose significant restrictions on our operations. The incurrence of additional indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely affect our ability to conduct our business. Our Loan and Security Agreement imposes restrictions on our operations, increases our fixed payment obligations and has restrictive covenants. In addition, the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our common stock to decline. If we are not able to secure additional funding when needed, we may have to curtail or reduce the scope of our business or forgo potential business opportunities.

The following summarizes our cash flows for the nine months ended September 30, 2019 and 2018 (in thousands):

Cash provided by operating activities for the nine months ended September 30, 2019 was primarily due to net income of $0.7 million and adjustments for certain non-cash items of $4.9 million, consisting primarily of depreciation, amortization, amortization of debt issuance costs, and stock-based compensation, partially offset by a decrease in cash from net changes in operating assets and liabilities of $4.2 million. Cash used in operating activities for the nine months ended September 30, 2018 was primarily due to the net loss of $5.3 million and a decrease in cash from net changes in operating assets and liabilities of $3.9 million, partially offset by adjustments for certain non-cash items of $6.2 million, consisting primarily of depreciation, amortization, amortization of debt issuance costs, loss on extinguishment of debt, and stock-based compensation.

Cash used in investing activities for the nine months ended September 30, 2019 was $1.5 million, of which $1.3 million related to the acquisition of Viscount, and $0.2 million related to capital expenditures. Cash used in investing activities for the nine months ended September 30, 2018 was $2.0 million, of which $1.4 million related to the acquisition of 3VR, net of cash acquired, and $0.6 million related to capital expenditures.

Cash provided by financing activities during the nine months ended September 30, 2019 was primarily due to borrowings under our revolving loan facility of $5.4 million, partially offset by repayment of notes payable of $2.0 million associated with the acquisition of 3VR, repayments under our revolving loan facility of $2.1 million, and taxes paid related to net share settlement of restricted stock units of $0.7 million. Cash provided by financing activities during the nine months ended September 30, 2018 related primarily to borrowings of debt, net of issuance costs, of $16.9 million, and issuance of $7.9 million of Series B preferred stock, net of issuance costs, offset by repayment of debt of $23.6 million and taxes paid related to net share settlement of restricted stock units of $0.5 million.

We have not entered into off-balance sheet arrangements, or issued guarantees to third parties.

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these financial statements requires management to establish accounting policies that contain estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. These policies relate to revenue recognition, inventory, income taxes, goodwill, intangible and long-lived assets and stock-based compensation. We have other important accounting policies and practices; however, once adopted, these other policies either generally do not require us to make significant estimates or assumptions or otherwise only require implementation of the adopted policy and not a judgment as to the policy itself. Management bases its estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Despite our intention to establish accurate estimates and assumptions, actual results may differ from these estimates under different assumptions or conditions.

As a result of adopting ASC 842 as of January 1, 2019, there has been a material change in our critical accounting policies during the nine months ended September 30, 2019, as described in Note 1, Significant Accounting Policies and Recent Accounting Pronouncements, and Note 16, Leases, to our condensed consolidated financial statements included in Part I, Item I of this Form 10-Q. With the exception of this change, during the three months ended September 30, 2019, management believes there have been no significant changes to the items that we disclosed within our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2018.

See Note 2, Significant Accounting Policies and Recent Accounting Pronouncements, in the accompanying notes to our condensed consolidated financial statements in Item 1 of Part I of this Quarterly Report for a description of recent accounting pronouncements, which is incorporated herein by reference.

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

We have made no changes to our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the three months ended September 30, 2019, that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

On January 1, 2016, certain of our present and former officers and directors were named as defendants, and we were 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-CRB, alleging breach of fiduciary duty and waste claims. On January 25, 2016, certain of our present and former officers and directors were named as defendants, and we were 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 our present and former officers and directors were named as defendants, and we were 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 we made false and/or misleading statements and/or failed to disclose information in certain public filings and disclosures between 2013 and 2015. Each of the lawsuits seeks one or more of the following remedies: unspecified compensatory damages, unspecified exemplary or punitive damages, restitution, declaratory relief, equitable and injunctive relief, and reasonable costs and attorneys’ fees. On May 2, 2016, the court in the Chopra lawsuit entered an order staying proceedings in the Chopra lawsuit in favor of the Oswald lawsuit, based on a stipulation to that effect filed by the parties in the Chopra lawsuit on April 28, 2016. Similarly, on June 28, 2016, the court in the Wollnik lawsuit entered a stipulated order staying proceedings in the Wollnik lawsuit in favor of the Oswald lawsuit. On June 17, 2016, the plaintiff in the Oswald lawsuit filed an amended complaint. On August 1, 2016, we filed a motion to dismiss for failure by plaintiff to make a pre-lawsuit demand on our board of directors, which motion was heard on October 14, 2016. The judge in the Oswald lawsuit issued an order on November 7, 2016 granting our motion to dismiss, without prejudice. In addition, the court stayed the case so that plaintiff could exercise whatever rights he had under Section 220 of the Delaware General Corporation Law. On or around November 30, 2016, the plaintiff purported to serve a books and records demand under Section 220 of the Delaware General Corporation Law. We responded to that demand. On March 21, 2017, we and the plaintiff in the Oswald lawsuit filed a stipulation and proposed order lifting the stay of the case, granting the plaintiff leave to amend, and setting a briefing schedule. The plaintiff in the Oswald lawsuit filed his second amended complaint on April 10, 2017. We then filed a motion to dismiss that second amended complaint on May 12, 2017. After further briefing and argument, on October 22, 2017, the court issued its written order denying the motion to dismiss on the basis of demand futility. On January 3, 2018, the court entered a stipulated order setting a response and briefing schedule for defendants to the second amended complaint.

Defendants filed motions to dismiss the second amended complaint in the Oswald action under Rule 12(b)(6) on January 16, 2018. After further briefing and argument, on April 13, 2018, the court entered an order granting defendants’ motions to dismiss. On April 19, 2018, plaintiff Oswald filed a motion for leave to file a third amended complaint. On that same date, plaintiff Chopra, a plaintiff in a related and stayed derivative action in state court, filed a motion to intervene in the Oswald action. After further briefing and argument, on July 16, 2018, the court entered an order granting the Chopra motion to intervene and denying the Oswald motion for leave to file a third amended complaint. After the filing of an unopposed administrative motion for entry of judgment by defendants, on October 1, 2018, the court entered an order granting administrative motion for entry of final judgment and entered final judgment in favor of all named defendants and against plaintiffs Oswald and Chopra. On October 23, 2018, plaintiff Oswald filed a notice of appeal with the Ninth Circuit. Responsive appellate briefs were filed July 19, 2019. Plaintiff’s reply appellate brief was filed on August 9, 2019. In the interim, the state court Chopra and Wollnik actions have remained stayed with periodic status conferences. The next status conferences have been scheduled in the Chopra and Wollnik cases on June 16, 2020. We intend to vigorously defend against these lawsuits. We cannot currently predict the impact or resolution of each of these lawsuits or reasonably estimate a range of possible loss, if any, which could be material, and the resolution of these lawsuits may harm our business and have a material adverse impact on our financial condition.

From time to time, we may become subject to claims arising in the ordinary course of business or could be named 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 our financial condition, results of operations or cash flows.

Our business and results of operations are subject to numerous risks, uncertainties, and other factors that you should be aware of. You should carefully review and consider the information regarding certain factors that could materially affect our business, financial condition or future results set forth under Part I - Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. There have been no material changes from the risk factors disclosed in our 2018 Annual Report on Form 10-K. The risks, uncertainties and other factors described in the risk factors are not the only ones facing our company. Additional risks, uncertainties and other factors not presently known to us or that we currently deem immaterial may also impair our business operations. Any of the risks, uncertainties and other factors could have a materially adverse effect on our business, financial condition, results of operations, cash flows or product market share and could cause the trading price of our common stock to decline substantially.

During the nine months ended September 30, 2019 and 2018, we repurchased 136,519 shares and 109,666 shares, respectively, of common stock surrendered to us to satisfy tax withholding obligations in connection with the vesting of restricted stock units issued to employees.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DELAWARE	77-0444317
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2201 Walnut Avenue, Suite 100 Fremont, California	94538
(Address of principal executive offices)	(Zip Code)

Title of each class		Trading Symbol(s)		Name of exchange on which registered
Common Stock, $0.001 par value per share		INVE		The Nasdaq Stock Market LLC

Performance Obligation	When Performance Obligation is Typically Satisfied	When Payment is Typically Due	How Standalone Selling Price is Typically Estimated
Hardware products	When customer obtains control of the product (point-in-time)	Within 30-60 days of shipment	Observable in transactions without multiple performance obligations
Software licenses	When license is delivered to customer or made available for download, and the applicable license period has begun (point-in-time)	Within 30-60 days of the beginning of license period	Established pricing practices for software licenses bundled with software maintenance, which are separately observable in renewal transactions
Professional services	As services are performed and/or when contract is fulfilled (point-in-time)	Within 30-60 days of delivery	Observable in transactions without multiple performance obligations
Software maintenance and support services	Ratably over the course of the support contract (over time)	Within 30-60 days of the beginning of the contract period	Observable in renewal transactions
Extended hardware warranties	Ratably over the course of the support contract (over time)	Within 30-60 days of the beginning of the contract period	Observable in renewal transactions

	Amount
Deferred revenue at December 31, 2018	$	2,810
Fair value of deferred revenue acquired in acquisition, net of recognition		4
Deferral of revenue billed in current period, net of recognition		2,567
Recognition of revenue deferred in prior periods		(1,816	)
Balance as of September 30, 2019	$	3,565

Cash	$	195
Accounts receivable		2,029
Inventory		257
Prepaid expenses and other current assets		169
Property and equipment		334
Trademarks		400
Customer relationships		2,900
Developed technology		3,000
Total identifiable assets acquired		9,284
Accounts payable		(1,590	)
Accrued expenses and liabilities		(726	)
Deferred revenue		(2,928	)
Debt		(3,622	)
Total liabilities assumed		(8,866	)
Net identifiable assets acquired		418
Goodwill		5,456
Purchase price	$	5,874

Identiv, Inc. – ‘10-Q’ for 9/30/19

On: Tuesday, 11/12/19, at 4:47pm ET · For: 9/30/19 · Accession #: 1564590-19-42993 · File #: 0-29440

Previous ‘10-Q’: ‘10-Q’ on 8/14/19 for 6/30/19 · Next: ‘10-Q’ on 5/11/20 for 3/31/20 · Latest: ‘10-Q’ on 11/8/23 for 9/30/23

Quarterly Report — Form 10-Q — Sect. 13 / 15(d) – SEA’34
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‘10-Q’ — Quarterly Report
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Dates Referenced Herein and Documents Incorporated by Reference

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		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018	4
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2018	5
	Condensed Consolidated Statement of Stockholders’ Equity for the Three and Nine Months Ended September 30,2019 and 2018	6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018	8
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 4.	Controls and Procedures	43

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 6.	Exhibits	45

SIGNATURES		46

	Gross Purchased Intangible Assets		Estimated Useful Life (in Years)
Trademarks	$	400		5
Customer relationships		2,900		10
Developed technology		3,000		10
	$	6,300

Cash	$	3,485
Accounts receivable		526
Inventory		1,361
Prepaid expenses and other current assets		12
Trademarks		200
Customer relationships		1,500
Developed technology		700
Total identifiable assets acquired		7,784
Accounts payable		(31	)
Accrued expenses and liabilities		(67	)
Deferred revenue		(243	)
Other current liabilities		(4,307	)
Total liabilities assumed		(4,648	)
Net identifiable assets acquired		3,136
Goodwill		3,490
Purchase price		6,626
Less: cash acquired		(3,485	)
Net purchase price	$	3,141

	Viscount Earnout Consideration
Balance at December 31, 2018	$	—
Acquisition of Viscount		200
Increase in fair value of liability		175
Balance at September 30, 2019	$	375

	Premises			Identity		Total
Balance at December 31, 2018	$	5,796		$	3,490	$	9,286
Acquisition of business		1,173			—		1,173
Cancellation of holdback shares in connection with acquisition		(340	)		—	$	(340	)
Currency translation adjustment		9			—		9
Balance at September 30, 2019	$	6,638		$	3,490	$	10,128

				Developed			Customer
	Trademarks			Technology			Relationships			Total
Amortization period (in years)	5			10 – 12			4 – 12

Gross carrying amount at December 31, 2018	$	600		$	8,300		$	15,039		$	23,939
Accumulated amortization		(77	)		(3,978	)		(8,904	)		(12,959	)
Intangible assets, net at December 31, 2018	$	523		$	4,322		$	6,135		$	10,980

Gross carrying amount at September 30, 2019	$	758		$	9,099		$	15,752		$	25,609
Accumulated amortization		(191	)		(4,650	)		(10,046	)		(14,887	)
Intangible assets, net at September 30, 2019	$	567		$	4,449		$	5,706		$	10,722

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Cost of revenue	$	224	$	186	$	672	$	522
Selling and marketing		418		345		1,253		988
Total	$	642	$	531	$	1,925	$	1,510

2019 (remaining three months)	$	641
2020		2,568
2021		1,113
2022		1,113
2023		1,036
Thereafter		4,251
Total	$	10,722

2019 (remaining three months)	$	319
2020		1,408
2021		363
Present value discount factor		(38	)
Total		2,052
Less: Current portion - payment obligation		(1,192	)
Long-term payment obligation	$	860

	Tranche 1		Tranche 2		Total
Series B Preferred Stock
Balance at December 31, 2018	$	12,600	$	8,233	$	20,833
Cumulative dividends on Series B preferred stock		473		307		780
Balance at September 30, 2019	$	13,073	$	8,540	$	21,613

Number of Common Shares Issuable Upon Conversion
Balance at December 31, 2018		3,150		2,058		5,208
Cumulative dividends on Series B preferred stock		118		77		195
Balance at September 30, 2019		3,268		2,135		5,403

Exercise of outstanding stock options, vesting of restricted stock units ("RSU"), and issuance of RSUs vested but not released			1,977,194
ESPP			293,888
Shares of common stock available for grant under the 2011 Plan			473,319
Warrants to purchase common stock			620,000
Shares of common stock issuable upon conversion of Series B preferred stock			7,541,449
Total			10,905,850

	Number Outstanding			Average Exercise Price per Share		Weighted Average Remaining Contractual Term (Years)		Average Intrinsic Value
Balance at December 31, 2018		621,602		$	5.87		6.32	$	—
Granted		—			—
Cancelled or Expired		(46,000	)		8.52
Exercised		—			—
Balance at September 30, 2019		575,602		$	5.66		5.97	$	400,704
Vested or expected to vest at September 30, 2019		575,602		$	5.66		5.97	$	400,704
Exercisable at September 30, 2019		575,602		$	5.66		5.97	$	400,704

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$4.36 - $7.20		468,810		6.50	$	4.46		468,810	$	4.46
$7.50 - $11.30		85,198		3.91		9.74		85,198		9.74
$12.00 - $19.70		17,244		2.76		13.60		17,244		13.60
$21.70 - $24.20		4,350		1.93		23.27		4,350		23.27
$4.36 - $24.20		575,602						575,602

	Number of RSUs			Weighted Average Fair Value
Unvested at December 31, 2018		1,367,630		$	3.81
Granted		436,182			5.05
Vested		(505,771	)		3.45
Forfeited		(83,844	)		4.06
Unvested at September 30, 2019		1,214,197		$	4.38
Shares vested but not released		187,395		$	5.32

	Purchase Commitments		Other Contractual Commitments		Total
2019 (remaining three months)	$	12,096	$	153	$	12,249
2020		1,671		113		1,784
Total	$	13,767	$	266	$	14,033

Exhibit Number		Description

31.1^		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

31.2^		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

32^#		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

	IDENTIV, INC.

November 12, 2019	By:	/S/ Steven Humphreys
		Steven Humphreys
		Chief Executive Officer
		(Principal Executive Officer)

November 12, 2019	By:	/S/ Sandra Wallach
		Sandra Wallach
		Chief Financial Officer and Secretary
		(Principal Financial and Accounting Officer)

This ‘10-Q’ Filing	Date	Other Filings

	2/8/22
	2/8/21
	1/30/21
	6/16/20
	12/31/19	10-K, 4, SD
Filed on:	11/12/19
	11/4/19	4, 8-K
For Period end:	9/30/19
	8/13/19	10-Q
	8/9/19
	7/19/19
	6/30/19	10-Q
	4/15/19
	3/31/19	10-Q
	2/14/19
	2/8/19
	2/6/19	8-K
	1/30/19
	1/25/19
	1/2/19	8-K
	1/1/19
	12/31/18	10-K, SD
	11/1/18	4, 8-K
	10/23/18
	10/1/18
	9/30/18	10-Q
	7/16/18
	6/30/18	10-Q
	5/31/18	DEF 14A, SD
	5/30/18	4, 8-K
	5/9/18
	4/19/18
	4/13/18
	3/31/18	10-Q
	2/14/18	8-K
	1/16/18
	1/3/18	D
	12/31/17	10-K, 5, SD
	12/28/17	8-K
	12/20/17
	10/22/17
	5/12/17
	4/10/17
	3/21/17
	2/8/17	8-K
	11/30/16
	11/7/16
	10/14/16
	8/1/16
	6/28/16	3, 8-K
	6/17/16	4
	5/2/16
	4/28/16
	2/9/16
	1/25/16
	1/1/16
	8/13/14	8-K
	7/31/14	3, 4, 8-K
	1/30/12	4, 8-K, 8-K/A
	1/1/12	3, 4
	6/6/11	3/A, 4, 8-K, DEF 14A, PRE 14A
	4/30/09	3, 3/A, 4
	4/8/09	8-K
		List all Filings

Identiv, Inc. – ‘10-Q’ for 9/30/19

On: Tuesday, 11/12/19, at 4:47pm ET · For: 9/30/19 · Accession #: 1564590-19-42993 · File #: 0-29440

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Quarterly Report — Form 10-Q — Sect. 13 / 15(d) – SEA’34Filing Table of Contents

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Quarterly Report — Form 10-Q — Sect. 13 / 15(d) – SEA’34
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‘10-Q’ — Quarterly Report
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