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
Each of the terms the "Company," "
Overview
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
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
Purchasing of our Products and Services for
In addition to the general seasonality of demand, overall
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Effects of the COVID-19 Pandemic on our Business.
In
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)
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 % 25
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Net Revenue
Net revenue for the three months ended
Identity Segment
Net revenue in our Identity segment, which represented 58% of our net revenue,
was
Net revenue in this segment in
Premises Segment
Net revenue in our Premises segment, which represented 42% of our net revenue,
was
Net revenue in this segment across
As a general trend,
Gross Profit and Gross Margin
Gross profit for the three months ended
Identity Segment
In our Identity segment, gross profit was
Premises Segment
In our Premises segment, gross profit was
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
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 endedMarch 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
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
Restructuring and Severance Charges
Three Months Ended March 31, 2022 2021 % Change Restructuring and severance$ (140 ) $ 388 (136 %)
During the three months ended
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Non-operating Income (Expense)
Information about our non-operating income (expense) for the three months ended
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
Changes in currency valuation in the periods mainly were the result of exchange
rate movements between the
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
We recorded an income tax benefit during the three months ended
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Liquidity and Capital Resources
As of
On
On
As our previously unremitted earnings have been subjected to
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
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 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
Cash flows from investing activities
Cash used in investing activities for the three months ended
Cash flows from financing activities
Cash used in financing activities during the three months ended
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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
During the three months ended
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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