Stockholders' Equity of Identive Group, Inc.

6 Months Ended

Jun. 30, 2011

Stockholders' Equity of Identive Group, Inc.

5. Stockholders’ Equity of Identive Group, Inc.

Public Offering

In May 2011 the Company issued 7,843,137 shares of common stock at a price of $2.55 per share in an underwritten public offering for a net consideration of approximately $18.3 million after recording approximately $0.3 million in underwriting discounts and commissions and issuance costs related to the offering.

Private Placement

In November 2010, the Company issued 4,097,626 shares of common stock at a price of $2.525 per share and warrants to purchase an additional 4,097,626 shares of its common stock at an exercise price of $2.65 per share in a private placement to accredited and other qualified investors (the “Investors” or “Warrant holders”), for net consideration of approximately $9.6 million after recording approximately $0.8 million in issuance costs related to the private placement. The warrants are exercisable beginning on the date of issuance and ending on the fifth anniversary of the date of issuance. Any portion of warrants not exercised prior to the expiration date will become void and of no value and such warrants shall be terminated and no longer outstanding. The Company calculated the fair value of the warrants using the Black-Scholes option pricing model and determined the fair value to be $6.3 million. The warrants are classified as equity in accordance with ASC Topic 505, Equity (“ASC 505”) as the settlement of the warrants will be in shares and are within the control of the Company.

During the three months ended June 30, 2011, the Company issued 0.4 million shares of its common stock to the warrant holders upon exercise of the warrants as disclosed in the condensed consolidated statements of equity and comprehensive loss.

Acquisition Warrants

As part of the consideration paid by the Company in connection with the acquisition of Hirsch Electronics, the Company issued approximately 4.7 million warrants to purchase shares of the Company’s common stock at an exercise price of $3.00, in exchange for the outstanding capital stock of Hirsch. Also, as part of the Hirsch transaction, the Company issued 0.2 million warrants to purchase shares of the Company’s common stock in exchange for outstanding Hirsch warrants at exercise prices in the range between $2.42 and $3.03, with a weighted average exercise price of $2.79. All warrants issued in connection with the Hirsch transaction will become exercisable for a period of two years on April 30, 2012. The Company measured the fair value of the warrants using the Black-Scholes option pricing model and determined the fair value to be $1.5 million. The warrants are classified as equity in accordance with ASC Topic 505, Equity (“ASC 505”) as the settlement of the warrants will be in shares and are within the control of the Company.

2011 Employee Stock Purchase Plan (“ESPP”)

In June 2011, Identive’s stockholders approved the 2011 Employee Stock Purchase Plan (the “ESPP”). Initially, 2,000,000 shares of common stock are reserved for issuance over the term of the ESPP, which is ten years. In addition, on the first day of each fiscal year commencing with fiscal year 2011, the aggregate number of shares reserved for issuance under the ESPP is automatically increased by a number equal to the lowest of (i) 750,000 shares, (ii) two percent of all shares outstanding at the end of the previous year, or (iii) an amount determined by the Board. If any option granted under the ESPP expires or terminates for any reason without having been exercised in full, the unpurchased shares subject to that option will again be available for issuance under the ESPP. Under the ESPP, eligible employees may purchase shares of common stock at 85% of the lesser of fair market value of our common stock at the beginning of or end of the applicable offering period. Each offering period lasts for six months. The first six-month exercise period under the ESPP commenced on July 1, 2011 and no shares have been issued as of June 30, 2011.

Stock-Based Compensation Plans

The Company has various stock-based compensation plans to attract, motivate, retain and reward employees, directors and consultants by providing its Board of Directors (the “Board”) or a committee thereof the discretion to award equity incentives to these persons. Our stock-based compensation plans, the majority of which are stockholder approved, consist of our Director Option Plan, 1997 Stock Option Plan, 2000 Stock Option Plan, 2007 Stock Option Plan (“the 2007 Plan”), the Bluehill ID AG Executive Bonus Plan and Share Option Plan (the “Bluehill Plans”), 2010 Bonus and Incentive Plan (the “2010 Plan”), and 2011 Incentive Compensation Plan (the “2011 Plan”).

Stock Option Plans

Stock options plans are generally time-based and expire seven to ten years from the date of grant. Vesting varies, with some options vesting 25% each year over four years; some vesting 1/12^th per month over one year; some vesting 100% after one year; and some vesting 1/12^th per month, commencing four years from the date of grant. The Director Option Plan and 1997 Stock Option Plan both expired in March 2007. The 2000 Stock Option Plan expired in December 2010. As noted below, the 2007 Plan was discontinued in June 2011 in connection with the approval of the 2011 Plan. As a result, options will no longer be granted under any of these plans. As of June 30, 2011, an aggregate of approximately 0.4 million granted options were outstanding under Director Option Plan and 1997 Stock Option Plan, 0.3 million granted options were outstanding under the 2000 Stock Option Plan, and 1.4 million granted options were outstanding under the 2007 Plan. These outstanding options remain exercisable in accordance with the terms of the original grant agreements under the respective plans.

The following table summarizes information about options outstanding as of June 30, 2011:

	Options Outstanding						Options Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
	Number		Contractual		Exercise		Number		Exercise
Range of Exercise Prices	Outstanding		Life (Years)		Price		Exercisable		Price
$ 1.50 - $ 2.41		557,591		4.95	$	2.32		289,917	$	2.35
$ 2.42 - $ 2.63		429,562		9.51		2.63		418,187		2.63
$ 2.64 - $ 3.12		538,460		4.61		2.99		441,608		2.99
$ 3.13 - $8.08		583,468		2.89		5.36		542,261		5.44
$ 8.09 - $10.74		7,850		1.46		9.84		7,850		9.84
$ 1.50 - $10.74		2,116,931		5.21	$	3.42		1,699,823	$	3.61

Stock-Based Compensation Expense (Stock Options)

The following table illustrates the stock-based compensation expense resulting from stock options included in the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2011 and 2010 (in thousands):

	Three Months					Six Months
	Ended June 30,					Ended June 30,
	2011			2010		2011			2010
Cost of revenue	$	5		$	5	$	8		$	10
Research and development		(5	)		16		65			33
Selling and marketing		81			58		117			119
General and administrative		(7	)		63		(42	)		127
Stock-based compensation expense before income taxes	$	74		$	142	$	148		$	289
Income tax benefit		—			—		—			—
Stock-based compensation expense after income taxes	$	74		$	142	$	148		$	289

Stock Bonus and Incentive Plans

In connection with its acquisition of Bluehill ID AG in January 2010, the Company assumed the Bluehill Plans, pursuant to which options to purchase 2.1 million shares of the Company’s common stock may be granted to executives, key employees and other service providers, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), based upon the achievement of certain performance targets or other terms and conditions as determined by the administrator of the plans. No grants have been made under these plans since the date of assumption.

In June 2010, Identive’s stockholders approved the 2010 Plan under which cash and equity-based awards may be granted to executive officers, including the CEO and CFO, and other key employees (“Participants”) of the Company and its subsidiaries and members of the Company’s Board, as designated from time to time by the Compensation Committee of the Board (the “Committee”). An aggregate of 3.0 million shares of the Company’s common stock were reserved for issuance under the 2010 Plan as equity-based awards, including shares, nonqualified stock options, restricted stock or deferred stock awards. These awards provide the executives and employees with the opportunity to earn shares of common stock depending on the extent to which certain performance goals are met. For services rendered, the executives shall be paid an incentive bonus to be received in cash and shares of the Company with certain lock-up periods. In addition, the executives and employees are entitled to receive a grant of non-qualified stock options in an amount equal to 20% of the number of U.S. dollars in the Participant’s Base Salary. The Committee may make incentive awards based on such terms, conditions and criteria as it considers appropriate, including awards that are subject to the achievement of certain performance criteria. For performance-based incentive awards, the performance criteria considered by the Committee may include any one or more of the following business measurements: (i) total stockholder return, (ii) economic value added, (iii) return on capital employed, (iv) revenues, (v) sales, (vi) net income, (vii) operating income, (viii) EBITDA, (ix) EBITDA margin, (x) profit margin, (xi) earnings per share, including in comparison to selected indexes and comparable companies, (xii) return on equity, (xiii) cash flow, (xiv) operating margin, (xv) net worth, (xvi) stock price, or (xvii) in the case of any incentive award, other than an incentive award to certain employees, any other criteria that may be determined as appropriate by the Committee from time to time. Stock awards are generally fully vested at the time of grant, but subject to a 24-month lock-up from the date of grant. While the Company will maintain its current 2010 Plan for making performance-based awards to Participant’s, all future equity awards granted under the 2010 Plan will be issued pursuant to the 2011 Incentive Compensation Plan. During the six months ended June 30, 2011, 0.5 million shares, respectively, were issued pursuant to the 2010 Plan as disclosed in the consolidated statements of equity and comprehensive loss. As of June 30, 2011, a total of 0.6 million shares have been issued pursuant to the 2010 Plan.

On June 6, 2011, Identive’s stockholders approved the 2011 Plan, which is administered by the Compensation Committee of the Company’s Board of Directors. The plan is to provide stock options, stock units, restricted shares, and stock appreciation rights to be granted to officers, directors, employees, consultants, and other persons who provide services to the Company or any related entity. The 2011 Plan serves as a successor plan to the Company’s 2007 Plan. The Company reserved 4.0 million shares of common stock plus any remaining common stock available for delivery under the 2007 Plan and the 2010 Plan as of June 6, 2011. In aggregate, as of June 6, 2011, 8.5 million shares were available for future grants under the 2011 Plan, including shares rolled over from 2007 Plan and 2010 Plan.

A summary of the activity under the Company’s stock-based compensation plans for the six months ended June 30, 2011 is as follows:

				Stock Options									Stock Awards
	Shares						Average		Aggregate		Remaining
	Available			Number			Exercise Price		Intrinsic		Contractual		Number		Fair
	for Grant			Outstanding			per share		Value		Life (in years)		Granted		Value
Balance at December 31, 2010		7,542,277			1,810,188		$	3.56	$	128,300		4.66
Authorized		4,000,000
Granted		(977,504	)		470,462		$	2.67						507,042		1,363,000
Cancelled or Expired		21,030			(142,718	)	$	3.39
Exercised					(21,001	)	$	2.36
Balance at June 30, 2011		10,585,803			2,116,931		$	3.42	$	35,613		5.21
Vested or expected to vest at June 30, 2011					2,075,500		$	3.44	$	31,097		5.19
Exercisable at June 30, 2011					1,699,823		$	3.61	$	9,573		5.16

The weighted-average grant date fair value per option for options granted during the three and six months ended June 30, 2011 was $2.92 and $2.67, respectively. The weighted-average grant date fair value per option for options granted during the three and six months ended June 30, 2010 was $1.29 and $1.36, respectively. During the three and six months ended June 30, 2011, 16,539 and 21,001 options, respectively, were exercised. Cash proceeds from the exercise of stock options were $44,543 and $56,591 during the three and six months ended June 30, 2011, respectively. During the three and six months ended June 30, 2010, no options were exercised. At June 30, 2011, there was $0.4 million of unrecognized stock-based compensation expense, net of estimated forfeitures related to non-vested options, that is expected to be recognized over a weighted-average period of two years.

During the three and six months ended June 30, 2011, the Company recognized $0.1 million and $0.2 million, respectively for the portion of the bonus payable in shares as stock-based compensation expense and $0.1 million and $0.2 million, respectively for the portion of the bonus payable in cash, pursuant to the 2010 Plan described above. In addition, the Company recognized $0.1 million and $0.2 million during the three and six months ended June 30, 2011, respectively, in stock-based compensation expense as it relates to Participants’ eligibility to receive stock options awards pursuant to the 2010 Plan as described above. During the three and six months ended June 30, 2010, the Company recognized $0.2 million for the portion of the bonus payable in shares as stock-based compensation expense and $0.2 million for the portion of the bonus payable in cash, pursuant to the 2010 Plan as described above. During the three and six months ended June 30, 2010, no bonus was payable as it relates to Participants’ eligibility to receive stock options awards pursuant to the 2010 Plan. Since the award of share-based payments described above represents an obligation to issue a variable number of Company’s shares determined on the basis of a monetary value derived solely on variations in an operating performance measure (and not on the basis of variations in the fair value of the entity’s equity shares), the award is considered a share-based liability in accordance with ASC 480 and is remeasured to fair value each reporting period.

Stock-Based Compensation Expense (Share Bonuses)

The following table illustrates the stock-based compensation expense resulting from stock bonus and incentive plans included in the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2011 and 2010 (in thousands):

	Three Months				Six Months
	Ended June 30,				Ended June 30,
	2011		2010		2011		2010
Cost of revenue	$	2	$	—	$	2	$	—
Research and development		6		—		10		—
Selling and marketing		65		—		125		—
General and administrative		239		161		296		161
Total	$	312	$	161	$	433	$	161

The above amounts were accrued for as of June 30, 2011 and 2010 and included in the accrued compensation and related benefits in the condensed consolidated balance sheets.

Common Stock Reserved for Future Issuance

As of June 30, 2011, the Company has reserved an aggregate of approximately 14.7 million shares of its common stock for future issuance under its various equity plans, of which approximately 8.5 million shares are reserved for future grants under the 2011 Plan and 2010 Plan, approximately 2.1 million shares are reserved for future issuance pursuant to outstanding options under all stock options plans, 2.0 million shares are reserved for future issuance under the ESPP and approximately 2.1 million shares are reserved for future issuance under the Bluehill Plans.

As of June 30, 2011, the Company has reserved an aggregate of approximately 3.2 million shares of common stock for future issuance in connection with its acquisition of Bluehill ID, consisting of approximately 2.0 million shares for the options converted at the closing of the Bluehill ID acquisition and approximately 1.2 million shares for the noncontrolling shareholders of Bluehill ID as discussed under Note 3 above.

As of June 30, 2011, the Company has reserved an aggregate of approximately 4.5 million shares of common stock for future issuance in connection with its acquisition of idOnDemand, consisting of approximately 4.3 million shares for the earn-out contingent consideration and approximately 0.2 million shares for the noncontrolling shareholders as discussed under Note 3 above.

As of June 30, 2011, the Company has reserved an aggregate of approximately 8.6 million shares of common stock for future issuance pursuant to outstanding warrants, consisting of approximately 3.7 million shares pursuant to outstanding warrants in connection with the November 2010 private placement as described above and approximately 4.9 million shares pursuant to outstanding warrants in connection with the Hirsch acquisition.

Comprehensive Loss Attributable to Identive Group, Inc.

Comprehensive loss consists of the following (in thousands):

	Three Months Ended June 30						Six Months Ended June 30
	2011			2010			2011			2010
Net loss	$	(1,639	)	$	(885	)	$	(3,522	)	$	(7,158	)
Other comprehensive loss
Change in foreign currency translation adjustment	$	517		$	(2,880	)	$	2,757		$	(4,940	)
Total comprehensive loss	$	(1,122	)	$	(3,765	)	$	(765	)	$	(12,098	)
Less: comprehensive loss attributable to noncontrolling interest		121			455			246			876
Comprehensive loss attributable to Identive Group, Inc.	$	(1,001	)	$	(3,310	)	$	(519	)	$	(11,222	)