Kornit Digital(KRNT) - 2022 Q2 - Quarterly Report

KORNIT DIGITAL LTD. AND SUBSIDIARIES INTERIM CONSOLIDATED FINANCIAL STATEMENTS Interim Consolidated Balance Sheets Kornit Digital's balance sheet as of June 30, 2022, reflects a slight decrease in total assets and equity, primarily due to cash reduction Consolidated Balance Sheet Highlights (in thousands USD) | Balance Sheet Item | June 30, 2022 (Unaudited) | December 31, 2021 (Audited) | Change | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $196,611 | $611,551 | -67.9% | | Inventories | $89,580 | $63,017 | +42.1% | | Total current assets | $641,918 | $775,343 | -17.2% | | Total assets | $1,007,380 | $1,040,875 | -3.2% | | Total current liabilities | $75,282 | $96,676 | -22.1% | | Total liabilities | $100,964 | $121,322 | -16.8% | | Retained earnings | $18,809 | $43,482 | -56.7% | | Total shareholders' equity | $906,416 | $919,553 | -1.4% | Interim Consolidated Statements of Operations The company shifted from net income to a significant net loss for the first half of 2022, driven by a substantial increase in operating expenses despite a slight revenue decrease Statement of Operations Summary (in thousands USD, except per share data) | Metric | Six months ended June 30, 2022 | Six months ended June 30, 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Total revenues | $141,429 | $147,789 | -4.3% | | Gross profit | $53,934 | $68,992 | -21.8% | | Total operating expenses | $85,738 | $59,811 | +43.3% | | Operating income (loss) | ($31,804) | $9,181 | N/A | | Net income (loss) | ($24,673) | $10,701 | N/A | | Diluted earnings (losses) per share | ($0.50) | $0.22 | N/A | Interim Consolidated Statements of Comprehensive Income (Loss) The company reported a significant total comprehensive loss for the first half of 2022, primarily due to net loss and unrealized losses on marketable securities and hedges Comprehensive Income (Loss) Summary (in thousands USD) | Component | Six months ended June 30, 2022 | Six months ended June 30, 2021 | | :--- | :--- | :--- | | Net income (loss) | ($24,673) | $10,701 | | Other comprehensive loss, net of tax | ($12,104) | ($712) | | Comprehensive income (loss) | ($36,777) | $9,989 | Interim Statements of Changes in Shareholders' Equity Shareholders' equity declined in the first half of 2022, primarily due to net and comprehensive losses, partially offset by share-based compensation and customer warrants Changes in Shareholders' Equity (in thousands USD) | Description | Six months ended June 30, 2022 | | :--- | :--- | | Balance as of January 1, 2022 | $919,553 | | Net loss | ($24,673) | | Other comprehensive loss | ($12,104) | | Share-based compensation | $10,779 | | Warrants to customers | $12,521 | | Balance as of June 30, 2022 | $906,416 | Interim Consolidated Statements of Cash Flows The company experienced a significant net decrease in cash and equivalents in the first half of 2022, driven by substantial outflows from operating and investing activities Cash Flow Summary (in thousands USD) | Cash Flow Activity | Six months ended June 30, 2022 | Six months ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | ($54,640) | $10,330 | | Net cash used in investing activities | ($359,958) | ($44,147) | | Net cash provided by (used in) financing activities | ($342) | $608 | | Decrease in cash and cash equivalents | ($414,940) | ($33,209) | | Cash and cash equivalents at end of period | $196,611 | $92,568 | Notes to Interim Consolidated Financial Statements This section provides detailed disclosures on significant events, including a recent acquisition, changes in inventory, revenue impacts from warrants, and various financial commitments NOTE 1: GENERAL Kornit Digital specializes in digital printing solutions for the textile industry and faces operational risks due to its dependence on key suppliers - The company's core business is providing digital printing solutions for the textile industry, including systems, ink, software, and services[20] - A key operational risk is the company's dependence on four major suppliers for critical components[20] NOTE 2: SIGNIFICANT ACCOUNTING POLICIES The interim financial statements adhere to U.S. GAAP and involve significant management estimates for various valuations, including intangible assets, goodwill, and stock-based awards - The financial statements are prepared under U.S. GAAP for interim reporting and include all normal recurring adjustments[17] - Management uses significant estimates for valuations, including goodwill, inventory write-offs, and stock-based awards[19][22] NOTE 3: BUSINESS COMBINATIONS Kornit acquired Tesoma GMBH for $15.4 million in April 2022 to enhance its textile dryer offerings, resulting in $3.7 million of goodwill - Acquired Tesoma GMBH on April 5, 2022, for $15.4 million to enhance its dryer technology offerings for the textile industry[23][24] Tesoma Acquisition Purchase Price Allocation (in thousands USD) | Asset/Liability | Fair Value | | :--- | :--- | | Net tangible assets | $9,225 | | Intangible assets (Technology, Customer Relationship, Backlog) | $2,401 | | Goodwill | $3,717 | | Total purchase price | $15,443 | NOTE 4: MARKETABLE SECURITIES Marketable securities significantly increased to $247.9 million by June 30, 2022, but incurred a substantial increase in gross unrealized losses Marketable Securities Summary (in thousands USD) | Metric | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Amortized cost | $261,458 | $177,949 | | Gross unrealized gain | $16 | $625 | | Gross unrealized loss | ($13,575) | ($1,189) | | Fair value | $247,899 | $177,385 | NOTE 5: FAIR VALUE MEASUREMENTS Marketable securities and foreign currency derivatives are classified as Level 2 fair value measurements, valued using market-observable data - Marketable securities and derivative contracts are classified as Level 2 fair value measurements[32] NOTE 6: INVENTORIES Inventories significantly increased by 42.1% to $89.6 million by June 30, 2022, primarily in raw materials and finished products, with $2.5 million in write-offs Inventory Breakdown (in thousands USD) | Category | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Raw materials and components | $42,046 | $29,857 | | Work in progress | $1,490 | $0 | | Finished products | $46,044 | $33,160 | | Total | $89,580 | $63,017 | NOTE 7: DERIVATIVES AND HEDGING ACTIVITIES The company uses foreign currency derivatives as cash flow hedges for New Israeli Shekel expenses, with a notional amount of $39.8 million as of June 30, 2022 - The company uses derivative contracts to hedge foreign currency risk related to expenses in New Israeli Shekels[37] - The notional amount for cash flow hedges increased to $39.8 million at June 30, 2022, from $21.8 million at December 31, 2021[39] NOTE 8: COMMITMENTS AND CONTINGENT LIABILITIES The company has significant purchase commitments of approximately $113 million and ongoing royalty obligations on ink revenues, alongside an unused line of credit - The company has purchase commitments of approximately $113 million, mostly due within one year[43] - Royalty expenses on ink revenues were $312 thousand for the first six months of 2022, consistent with the prior year[44] NOTE 9: EARNINGS (LOSSES) PER SHARE The company reported a basic and diluted loss per share of $0.50 for the first half of 2022, a significant reversal from prior-year earnings, rendering outstanding equity awards anti-dilutive Earnings (Losses) Per Share Calculation | Metric | Six months ended June 30, 2022 | Six months ended June 30, 2021 | | :--- | :--- | :--- | | Net income (loss) (in thousands USD) | ($24,673) | $10,701 | | Denominator for basic EPS (shares) | 49,707,782 | 46,119,416 | | Denominator for diluted EPS (shares) | 49,707,782 | 47,709,429 | | Basic earnings (losses) per share | ($0.50) | $0.23 | | Diluted earnings (losses) per share | ($0.50) | $0.22 | NOTE 10: SHAREHOLDERS' EQUITY Share-based compensation totaled $10.8 million in the first half of 2022, with warrants issued to Amazon significantly reducing revenues by $12.5 million - The company has significant warrant agreements with Amazon Inc. tied to purchase volumes, which impact revenue recognition[56][57] - The accounting for Amazon's warrants reduced revenues by $12.5 million and $9.7 million in the first six months of 2022 and 2021, respectively[58] Share-Based Compensation Expense (in thousands USD) | Department | Six months ended June 30, 2022 | Six months ended June 30, 2021 | | :--- | :--- | :--- | | Cost of products & services | $1,902 | $1,118 | | Research and development | $2,457 | $1,071 | | Sales and marketing | $3,300 | $2,333 | | General and administrative | $3,120 | $2,377 | | Total | $10,779 | $6,899 | NOTE 11: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Accumulated other comprehensive income shifted to a $11.5 million loss by June 30, 2022, primarily due to unrealized losses on marketable securities and cash flow hedges Changes in Accumulated Other Comprehensive Income (Loss) (in thousands USD) | Component | Beginning Balance (Jan 1, 2022) | Net Change in H1 2022 | Ending Balance (June 30, 2022) | | :--- | :--- | :--- | :--- | | Unrealized gain (loss) on marketable securities | ($522) | ($9,918) | ($10,440) | | Unrealized gain (loss) on cash flow hedges | $293 | ($2,186) | ($1,893) | | Foreign currency translation adjustment | $800 | $0 | $800 | | Total | $571 | ($12,104) | ($11,533) | NOTE 12: REVENUE RECOGNITION Total revenue decreased to $141.4 million in the first half of 2022, driven by a decline in Systems revenue and a significant drop in U.S. sales, partially offset by EMEA growth Revenue by Source (in thousands USD) | Revenue Source | Six months ended June 30, 2022 | Six months ended June 30, 2021 | | :--- | :--- | :--- | | Systems | $78,198 | $89,298 | | Ink and consumables | $41,882 | $40,823 | | Services & Subscriptions | $21,349 | $17,668 | | Total revenue | $141,429 | $147,789 | Revenue by Geography (in thousands USD) | Geography | Six months ended June 30, 2022 | Six months ended June 30, 2021 | | :--- | :--- | :--- | | U.S | $70,992 | $98,310 | | EMEA | $48,583 | $33,526 | | Asia Pacific | $13,473 | $10,815 | | Other | $8,381 | $5,138 | | Total revenue | $141,429 | $147,789 | NOTE 13: TAXES ON INCOME The company's effective tax rate is influenced by varying foreign subsidiary tax rates and deferred tax benefits recognized in Israel - The company's effective tax rate is influenced by different tax rates across its foreign subsidiaries and deferred tax benefits in Israel[65] NOTE 14: BALANCES AND TRANSACTIONS WITH RELATED PARTIES The company conducts transactions with related parties, including logistics services from Fritz Companies Israel, with fees totaling $2.3 million in the first half of 2022 - The company has ongoing business relationships with entities affiliated with its Chairman of the Board and other board members[67][68][69][70] - Logistic service fees paid to Fritz Companies Israel, a related party, amounted to $2.3 million in the first six months of 2022[68]