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 II, Item 1A of this Report and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 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, 2021. 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," "us" and "our" as used herein refers collectively to Identiv, Inc. and its wholly-owned subsidiaries, unless otherwise stated.

Overview

Identiv is a global provider of secure identification and physical security.

We are leveraging our Radio Frequency Identification ("RFID") based physical device-management expertise as well as our physical access, video and analytics solutions to provide leading solutions as our customers, and our customers' customers, embracing the Internet of Things ("IoT"). Customers in the technology and mobility, consumer, government, healthcare, education and other sectors rely on Identiv's identification and access solutions. Identiv's platform encompasses RFID and Near-Field Communication ("NFC"), cybersecurity, and the full spectrum of physical access, video, and audio security. We are bringing the benefits of the IoT to a wide range of physical, connected items.

Identiv's mission is to digitally enable every physical thing and every physical place on the planet. Our full continuum of security solutions is delivered through our platform of RFID enabled devices, mobile, client/server, cloud, web, dedicated hardware and software defined architectures. In doing so, we believe that we will create smart physical security and a smarter physical world.

Segments

We have organized our operations into two reportable business segments, principally by solution families: Identity and Premises. Our Identity segment includes products and solutions enabling secure access to information serving the logical access and cyber-security market, and protecting connected objects and information using RFID embedded security. Our Premises segment includes our solutions to address the premises security market for government and enterprise, including access control, video surveillance, analytics, audio, access readers and identities.



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Factors Affecting Our Performance

Market Adoption

Our financial performance depends on the pace, scope and depth of end-user adoption of our RFID products in multiple industries. Such pace, scope and depth accelerated during 2020, causing large fluctuations in our operating results. During 2021, we believe RFID deployments occurred at a much faster pace of growth than historically. We believe significant improvement in chip capabilities at lower costs, combined with the incorporation of the full NFC Data Exchange Format ("NDEF") protocol by Apple in its iPhone 12 and iOS 14, has accelerated the opportunities for product engineers to integrate RFID into their products to create new and more engaging customer experiences, product reliability and performance. As the market hit this pivot point, we expanded both our capacity and technical leadership. We track growth indicators including design wins, customer launches and technology launches. We have made investments in our technology, world class quality and automation, and we believe that our competitive advantages will continue to drive growth.

We believe the underlying, long-term trend is continued RFID adoption by multiple verticals. We also believe that expanding use cases fosters adoption across verticals and into other markets. In addition, we do not have any significant concentration of customers so we believe that our demand will continue to be resilient to the loss of any individual customer or application.

If RFID market adoption, and adoption of our products specifically, does not meet our expectations then our growth prospects and operating results will be adversely affected. If we are unable to meet end-user or customer volume or performance expectations, then our business prospects may be adversely affected. In contrast, if our RFID sales exceed expectations, then our revenue and profitability may be positively affected.

Given the uncertainties of the specific timing of our new customer deployments, we cannot assure you that we have appropriate inventory and capacity levels or that we will not experience inventory shortfalls or overages in the future or acquire inventory at costs to maintain gross margins. We attempt to mitigate those risks by being deeply embedded in our customers design cycle, working with our chip partners on long lead time components, managing our limited capital equipment needs within a short cycle and future proofing our facilities to accommodate several scenarios for growth potential.

If end users with sizable projects change or delay them, we may experience significant fluctuation in revenue on a quarterly or annual basis, and we anticipate that uncertainty to continue to characterize our business for the foreseeable future.

Seasonality and Other Factors

In our business overall, we experience 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. Sales of our Identity readers, many of which are sold to government agencies worldwide, are impacted by project schedules of government agencies, as well as roll-out schedules for application deployments. 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 the 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.

Purchasing of our Products and Services for U.S. Federal Government Security Programs

In addition to the general seasonality of demand, overall U.S. Federal Government expenditure patterns have a significant effect on demand for our products due to the significant portion of revenue that is typically sourced from U.S. Federal Government agencies. Drivers of growth included our technology strength and proven security solutions, work-from-home mandates, and continued strength in investments for security across a number of different agencies. We believe that the success and growth of our business will continue through the U.S. Federal Government focus on security and our successful procurement of government business. If there are changes in government purchasing policies or budgetary constraints, there could be implications for our growth prospects and operating results. If we are unable to meet end-user or customer volume or performance expectations, then our business prospects and operating results may be adversely affected.



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Effects of the COVID-19 Pandemic on our Business.

In March 2020, the World Health Organization characterized the coronavirus ("COVID-19") a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The rapid spread of the pandemic and the continuously evolving responses to combat it have had an increasingly negative impact on the global economy. In view of the rapidly changing business environment created by the uncertainty related to the depth and or duration of the impact resulting from COVID-19, we have experienced delays in our sales in select vertical markets and are currently unable to determine if there will be any continued disruption and the extent to which this may have future impact on our business. We continue to monitor the progression of the pandemic and its effect on our financial position, results of operations, and cash flows.

Results of Operations



The following table includes net revenue and net profit information by business
segment and reconciles gross profit to loss before income tax provision (in
thousands).

                                                   Three Months Ended March 31,
                                                2022             2021        % Change
Identity:
Net revenue                                  $    14,579       $ 13,658              7 %
Gross profit                                       3,159          3,359             (6 %)
Gross profit margin                                   22 %           25 %
Premises:
Net revenue                                       10,482          8,504             23 %
Gross profit                                       5,807          4,333             34 %
Gross profit margin                                   55 %           51 %
Total:
Net revenue                                       25,061         22,162             13 %
Gross profit                                       8,966          7,692             17 %
Gross profit margin                                   36 %           35 %
Operating expenses:
Research and development                           2,529          2,337              8 %
Selling and marketing                              5,110          4,064             26 %
General and administrative                         2,488          2,125             17 %
Restructuring and severance                         (140 )          388           (136 %)
Total operating expenses:                          9,987          8,914             12 %
Loss from operations                              (1,021 )       (1,222 )          (16 %)
Non-operating income (expense):
Interest expense, net                                (25 )         (245 )          (90 %)
Gain on investment                                    24              -            100 %
Foreign currency gains, net                           19             46            (59 %)

Loss before income tax benefit (provision) $ (1,003 ) $ (1,421 ) (29 %)




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

                                Three Months Ended March 31,
                                  2022                 2021
Americas                     $       16,891       $       15,148
Europe and the Middle East            3,794                2,460
Asia-Pacific                          4,376                4,554
Total                        $       25,061       $       22,162

Percentage of net revenue:
Americas                                 67 %                 68 %
Europe and the Middle East               15 %                 11 %
Asia-Pacific                             18 %                 21 %
Total                                   100 %                100 %


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Net Revenue

Net revenue for the three months ended March 31, 2022 was $25.1 million, an increase of 13% compared with $22.2 million for the comparable period of 2021. Net revenue in the Americas was $16.9 million for the three months ended March 31, 2022, an increase of 12% compared to $15.1 million for the comparable period of 2021. Net revenue in Europe, the Middle East, and the Asia-Pacific was approximately $8.2 million for the three months ended March 31, 2022, an increase of 16% compared with the comparable period of 2021.

Identity Segment

Net revenue in our Identity segment, which represented 58% of our net revenue, was $14.6 million for the three months ended March 31, 2022, an increase of 7% compared with $13.7 million for the comparable period of 2021. Net revenue in this segment in the Americas for the three months ended March 31, 2022 was comparable to the same period of 2021.

Net revenue in this segment in Europe, the Middle East, and the Asia-Pacific increased 15% for the three months ended March 31, 2022 compared with the comparable period of 2021 due to higher sales of RFID transponder products to mobile phone and consumer products contract manufacturers and higher sales of smart card readers.

Premises Segment

Net revenue in our Premises segment, which represented 42% of our net revenue, was $10.5 million for the three months ended March 31, 2022, an increase of 23% compared with $8.5 million for the comparable period of 2021. Net revenue in this segment in the Americas for the three months ended March 31, 2022 increased 22% compared with the comparable period of 2021 due to higher sales of Hirsch Velocity hardware and software products to consumers in select commercial verticals.

Net revenue in this segment across Europe, the Middle East, and the Asia-Pacific increased 31% compared with the comparable period of 2021. The increases in these regions are primarily project driven and can vary period to period.

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 solutions for trusted physical access is an attractive offering to help federal agency customers move towards compliance with federal directives and mandates. To address 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.

Gross Profit and Gross Margin

Gross profit for the three months ended March 31, 2022 was $9.0 million, or 36% of net revenue, compared with $7.7 million, or 35% of net revenue in the comparable period of 2021. 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.

Identity Segment

In our Identity segment, gross profit was $3.2 million in the three months ended March 31, 2022 compared with $3.4 million in the comparable period of 2021. Gross profit margins in the Identity segment decreased to 22% in the three months ended March 31, 2022 from 25% in the comparable period of 2021. The decrease in gross profit margins was primarily attributable to continued investments in technology and manufacturing processes and systems and changes in product mix, with a higher proportion of lower margin RFID transponder product sales.

Premises Segment

In our Premises segment, gross profit was $5.8 million in the three months ended March 31, 2022 compared with $4.3 million in the comparable period of 2021. Gross profit margins in the Premises segment increased to 55% in the three months ended March 31, 2022 from 51% in the comparable period of 2021 primarily due to product mix as well as the impact resulting from our focus on operational efficiencies.

We expect there will be variation in our total gross profit from period to period, as our gross profit has been and will continue to be affected primarily by varying mix among our products. Within each product category, gross margins have tended to be consistent, but over time may 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.



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Operating Expenses

Information about our operating expenses for the three months ended March 31, 2022 and 2021 is set forth below (dollars in thousands).



Research and Development

                                  Three Months Ended March 31,
                              2022              2021         % Change
Research and development   $     2,529       $     2,337             8 %
as a % of net revenue               10 %              11 %

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 months ended March 31, 2022
increased compared to the comparable prior year period primarily due to higher
headcount and related costs as well as higher stock-based compensation costs
associated with PSUs.

Selling and Marketing

                                Three Months Ended March 31,
                           2022              2021          % Change
Selling and marketing   $     5,110       $     4,064             26 %
as a % of net revenue            20 %              18 %

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 months ended March 31, 2022 increased compared to the comparable prior year period primarily due to higher salaries and benefits costs and as well as higher trade show and related costs.

General and Administrative



                                     Three Months Ended March 31,
                                2022              2021          % Change
General and administrative   $     2,488       $     2,125             17 %
as a % of net revenue                 10 %              10 %

General and administrative expenses consist primarily of compensation expenses for employees performing administrative functions, and professional fees incurred for legal, auditing and other consulting services.

General and administrative expense for the three months ended March 31, 2022 increased compared to the prior year period primarily due to higher headcount and related costs as well as higher external contractor costs.

Restructuring and Severance Charges



                                    Three Months Ended March 31,
                                 2022            2021         % Change
Restructuring and severance   $     (140 )     $    388            (136 %)

During the three months ended March 31, 2022, we entered into a settlement agreement associated with outstanding rental payments due the landlord on leased office space in San Francisco, California. As a result of the settlement, we recorded a net credit of $153,000 representing the difference between amounts accrued and the settlement amount. The settlement credit was partially offset by severance related costs of $13,000.



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Non-operating Income (Expense)

Information about our non-operating income (expense) for the three months ended March 31, 2022 and 2021 is set forth below (dollars in thousands).



                                    Three Months Ended March 31,
                                2022            2021          % Change
Interest expense, net         $    (25 )     $     (245 )           (90 %)
Gain on investment            $     24       $        -             100 %
Foreign currency gains, net   $     19       $       46             (59 %)

Interest expense, net consists of interest on financial liabilities, amortization of debt issuance costs, and interest accretion expense for a liability on a contractual payment obligation arising from our acquisition of Hirsch Electronics Corporation. The decrease in interest expense for the three months ended March 31, 2022 compared to the comparable period of 2021 was attributable to lower borrowings outstanding under our revolving loan facility with our lender (which was fully paid down in August 2021), and lower amounts outstanding under our contractual payment obligations (all amounts outstanding had been paid as of December 31, 2021).

Changes in currency valuation in the periods mainly were the result of exchange rate movements between the U.S. Dollar, the Indian Rupee, the Canadian Dollar, 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.

Income Tax Benefit (Provision)


                                       Three Months Ended March 31,
                                 2022          2021             % Change
Income tax benefit (provision)   $   4       $     (44 )             (109 %)
Effective tax rate                   0 %            (3 %)

As of March 31, 2022, 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 benefit during the three months ended March 31, 2022. The effective tax rates for the three months ended March 31, 2022 and 2021 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.



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Liquidity and Capital Resources

As of March 31, 2022, our working capital, defined as current assets less current liabilities, was $51.3 million, a decrease of $0.5 million compared to $51.9 million as of December 31, 2021. As of March 31, 2022, our cash and cash equivalents balance was $27.6 million.

On February 8, 2017, we entered into a Loan and Security Agreement with East West Bank ("EWB"). Following subsequent amendments, on February 8, 2021, we amended and restated the Loan and Security Agreement in its entirety (the "Loan and Security Agreement"). The Loan and Security Agreement provided for a $20.0 million revolving loan facility subject to a borrowing base and a $4.0 million non-formula revolving loan facility that was not subject to a borrowing base. Advances under the revolving loan facility, as amended on April 30, 2021, bear interest at a per annum rate equal to the prime rate. The maturity date of the main revolving loan facility is February 8, 2023. The non-formula revolving loan facility terminated on February 7, 2022.

On April 14, 2022, we amended the Loan and Security Agreement, replacing the $20.0 million revolving loan facility subject to a borrowing base with a non-formula revolving loan facility with no borrowing base requirement and a maturity date of February 8, 2023. In addition, the interest rate was lowered from prime to prime minus 0.25%, and certain financial covenants were amended. As of March 31, 2022, there were no amounts outstanding and we were in compliance with all financial covenants under the Loan and Security Agreement.

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 March 31, 2022, the amount of cash included at such subsidiaries was $4.5 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.

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 March 31, 2022, we had an accumulated deficit of $410.0 million. During the three months ended March 31, 2022, we had a net loss of $1.0 million.

We believe our existing cash and cash equivalents, 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 business through public or private equity offerings, debt financings or other arrangements. However, there can be no assurance that additional capital 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. Debt or 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 loans could impose significant restrictions on our operations. The incurrence of additional indebtedness or the issuance of certain debt or 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.



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The following summarizes our cash flows for the three months ended March 31, 2022 and 2021 (in thousands):



                                                                  March 31,
                                                            2022             2021
Net cash used in operating activities                   $        (34 )   $       (411 )
Net cash used in investing activities                           (486 )         (1,131 )
Net cash provided by (used in) financing activities             (399 )          1,963

Effect of exchange rates on cash, cash equivalents, and restricted cash

                                             (200 )           (312 )

Net increase (decrease) in cash, cash equivalents, and restricted cash

                                           (1,119 )            109
Cash, cash equivalents, and restricted cash at
beginning of period                                           29,807           11,409

Cash, cash equivalents, and restricted cash at end of period

$     28,688     $     11,518

Cash flows from operating activities

Cash used in operating activities for the three months ended March 31, 2022 was primarily due to net loss of $1.0 million, a decrease in cash from net changes in operating assets and liabilities of $0.4 million, offset by adjustments for certain non-cash items of $1.4 million, consisting primarily of depreciation, amortization and stock-based compensation. Cash used in operating activities for the three months ended March 31, 2021 was primarily due to net loss of $1.5 million, a decrease in cash from net changes in operating assets and liabilities of $0.5 million, and adjustments for certain non-cash items of $1.6 million, consisting primarily of depreciation, amortization, stock-based compensation, and impairment of a right-of-use operating lease asset.

Cash flows from investing activities

Cash used in investing activities for the three months ended March 31, 2022 and 2021 was $0.5 million and $1.1 million, respectively, which related to capital expenditures in our manufacturing facility in Singapore and our research and development facility in Germany.

Cash flows from financing activities

Cash used in financing activities during the three months ended March 31, 2022 was $0.4 million, which related to net share settlement of restricted stock units. Cash provided by financing activities during the three months ended March 31, 2021 was primarily due to net borrowings under our revolving loan facility of $2.2 million, partially offset by taxes paid related to net share settlement of restricted stock units of $0.3 million.



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Off-Balance Sheet Arrangements

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

Climate Change

We believe that neither climate change, nor governmental regulations related to climate change, have had a material effect on our business, financial condition or results of operations.

Critical Accounting Policies and Estimates

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 condensed consolidated 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.

During the three months ended March 31, 2022, 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, 2021.

Recent Accounting Pronouncements

See Note 2, Significant Accounting Policies and Recent Accounting Pronouncements, in the accompanying notes to our unaudited 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.

10b5-1 Trading Plans

From time to time, our executive officers and directors have, and we expect they will in the future, enter into written trading plans pursuant to Rule 10b5-1 of the Securities and Exchange Act of 1934.



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