Stockholders' Equity of Identive Group, Inc.

9 Months Ended

Sep. 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 $18.2 million after recording approximately $0.4 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 nine months ended September 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 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, 2.0 million 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 2012, 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 September 30, 2011. The Company recognized approximately $84,000 in stock-compensation expense related to ESPP during the three and nine months ended September 30, 2011, of which approximately $14,000 is included in cost of revenue, approximately $19,000 in research and development, approximately $27,000 in sales and marketing and approximately $24,000 in general and administrative in the condensed consolidated statements of operations. As of September 30, 2011, there was $0.6 million of total unrecognized compensation cost related to the ESPP that is expected to be recognized on a straight-line basis over the remaining vesting periods.

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. The Company’s stock-based compensation plans, the majority of which are stockholder approved, consist of the 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”), the 2010 Bonus and Incentive Plan (the “2010 Plan”), and the 2011 Incentive Compensation Plan (the “2011 Plan”).

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. Stock awards are generally fully vested at the time of grant, but subject to a 24-month lock-up from the date of grant. 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. While the Company will maintain its current 2010 Plan for making performance-based awards to Participants, all future equity awards granted under the 2010 Plan will be issued pursuant to the 2011 Plan. As of September 30, 2011, a total of 0.7 million shares have been issued pursuant to the 2010 Plan, of which 0.1 million were issued during the fiscal year ended December 31, 2010 as disclosed in the consolidated statements of equity and comprehensive loss.

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.

Stock-Based Compensation Expense (Share Bonus and Incentive Plans)

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Cost of revenue	$	1	$	—	$	3	$	—
Research and development		2		25		31		25
Selling and marketing		8		159		175		159
General and administrative		61		417		296		583
Total	$	72	$	601	$	505	$	767

Of the total amounts for the nine months ended September 30, 2011 and 2010, an amount of $0.4 million and $0.7 million was accrued for and included in the accrued compensation and related benefits in the condensed consolidated balance sheet as of September 30, 2011 and 2010, respectively.

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 and as noted above, 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 September 30, 2011, an aggregate of approximately 0.3 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, 1.4 million granted options were outstanding under the 2007 Plan, and 0.2 million granted options were outstanding under the 2011 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 September 30, 2011:

	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
$ 1.51 - $ 2.40		481,706		4.98	$	2.26		260,386	$	2.32
$ 2.41 - $ 2.61		310,862		7.68		2.43		78,378		2.44
$ 2.62 - $ 2.64		452,316		9.41		2.63		452,316		2.63
$ 2.65 - $3.12		536,960		4.37		2.99		460,219		2.99
$ 3.13- $10.74		406,648		4.14		4.11		372,670		4.11
$ 1.51- $10.74		2,188,492		5.97	$	2.88		1,623,969	$	3.01

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

				Stock Options									Stock Awards
	Shares Available for Grant			Number Outstanding			Average Exercise Price per share		Aggregate Intrinsic Value		Remaining Contractual Life (in years)		Number Granted		Fair Value
Balance at December 31, 2010		7,542,277			1,810,188		$	3.56	$	128,300		4.66
Authorized		4,000,000
Granted		(1,002,504	)		630,077		$	2.57						372,427	$	1,434,000
Cancelled or Expired		23,053			(230,772	)	$	7.31
Exercised					(21,001	)	$	2.36
Balance at September 30, 2011		10,562,826			2,188,492		$	2.88	$	25,097		5.97
Vested or expected to vest at September 30, 2011					2,021,763		$	2.92	$	19,108		5.78
Exercisable at September 30, 2011					1,623,969		$	3.01	$	5,712		5.67

The weighted-average grant date fair value per option for options granted during the three and nine months ended September 30, 2011 was $2.31 and $2.57, respectively. The weighted-average grant date fair value per option for options granted during the three and nine months ended September 30, 2010 was $0.16 and $0.95, respectively. During the three and nine months ended September 30, 2011, zero and 21,001 options, respectively, were exercised. Cash proceeds from the exercise of stock options were zero and $56,591 during the three and nine months ended September 30, 2011, respectively. During the three and nine months ended September 30, 2010, no options were exercised. At September 30, 2011, there was $0.5 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 three years.

Stock-Based Compensation Expense (Stock Options)

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011		2010			2011			2010
Cost of revenue	$	3	$	3		$	11		$	13
Research and development		8		(48	)		73			(16	)
Selling and marketing		51		59			168			179
General and administrative		32		(19	)		(10	)		108
Stock-based compensation expense before income taxes	$	94	$	(5	)	$	242		$	284
Income tax benefit		—		—			—			—
Stock-based compensation expense after income taxes	$	94	$	(5	)	$	242		$	284

Common Stock Reserved for Future Issuance

As of September 30, 2011, the Company has reserved an aggregate of approximately 14.4 million shares of its common stock for future issuance under its various equity incentive plans, of which approximately 8.1 million shares are reserved for future grants under the 2011 Plan and 2010 Plan, approximately 2.2 million shares are reserved for future issuance pursuant to outstanding options under all stock options and incentive 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 September 30, 2011, the Company has reserved an aggregate of approximately 3.3 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 1.3 million shares for the noncontrolling shareholders of Bluehill ID.

As of September 30, 2011, the Company has reserved an aggregate of approximately 2.5 million shares of common stock for future issuance in connection with its acquisition of idOnDemand, consisting of approximately 2.4 million shares for the contingent consideration and approximately 0.1 million shares for the noncontrolling shareholders.

As of September 30, 2011, the Company has reserved an aggregate of approximately 0.2 million shares of common stock for future issuance for the contingent consideration in connection with its acquisition of RockWest and polyright, consisting of approximately 136,000 shares for polyright and approximately 23,000 shares for the RockWest .

As of September 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 September 30						Nine Months Ended September 30
	2011			2010			2011			2010
Net loss	$	(3,919	)	$	(2,134	)	$	(7,441	)	$	(9,292	)
Other comprehensive (loss) income
Change in foreign currency translation adjustment		(45	)		2,744			2,712			(2,196	)
Total comprehensive (loss) income		(3,964	)		610			(4,729	)		(11,488	)
Less: comprehensive loss (income) attributable to noncontrolling interest		131			(127	)		377			749
Comprehensive loss (income) attributable to Identive Group, Inc.	$	(3,833	)	$	483		$	(4,353	)	$	(10,739	)

Net Loss per Common Share Attributable to Identive Group, Inc.

Basic and diluted net loss per share is based upon the weighted average number of common shares outstanding during the period. For the three months and nine months ended September 30, 2011 and 2010, we excluded common stock equivalents consisting of outstanding stock options and warrants from the calculation of diluted loss per share because these securities were anti-dilutive due to the net loss in the respective period. For the three and nine months ended September 30, 2011, the total number of shares excluded from diluted loss per share relating to these securities was 2,120,060 in each period and for the three and nine months ended September 30, 2010, the total number of shares excluded from diluted loss per share relating to these securities was 2,091,091 shares in each period.