3.	Acquisitions

Acquisition of payment solution AG

On January 30, 2012 (“payment solution acquisition date”), through its majority-owned subsidiary Bluehill ID AG, the Company acquired approximately 58.8% of the outstanding shares of payment solution AG, a company organized under the laws of Germany (“payment solution”). The acquisition was made pursuant to the terms and conditions contained in Share Exchange Agreements, each dated January 30, 2012, and entered into individually with 18 selling shareholders of payment solution (the “Selling Shareholders”) in Germany and Switzerland. In exchange for the shares of payment solution, the Company issued an aggregate of 1,357,758 shares, or approximately 2.4% of its outstanding Common Stock, to the Selling Shareholders, having a value of approximately $3.0 million. Mountain Partners AG, a significant stockholder of the Company, was a selling shareholder and held approximately 10.0% of payment solution. Daniel Wenzel, a director of the Company, is an affiliate of Mountain Partners AG. On April 2, 2012, the Company acquired additional noncontrolling interest and increased its ownership to approximately 82.5% of the outstanding shares of payment solution. In exchange for the additional shares of payment solution, the Company issued 548,114 shares of its Common Stock to the selling shareholder, having a value of approximately $1.2 million. The shares were issued to qualified investors outside the United States in reliance on the exemption provided by Regulation S under the U.S. Securities Act of 1933 from the registration requirements of such Act, as well as comparable exemptions under applicable foreign securities laws.

payment solution is a German-based provider of integrated cashless payment solutions for sports stadiums, arenas, theme parks and other venues for leisure and entertainment throughout Europe, and serves a number of professional football stadiums under an operator contract model. payment solution’s systems enable consumers at sporting and similar events to make quick, cashless payments for food, beverages and merchandise using contactless smart cards.

The payment solution acquisition is accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations (“ASC 805”). Under the acquisition method of accounting, the total purchase consideration, assets acquired and the liabilities assumed are measured at fair value as of the date of acquisition when control is obtained. The fair value of the consideration transferred and the assets acquired and liabilities assumed was determined by the Company and in doing so relied in part upon a third-party valuation report to measure the purchase consideration, identifiable intangible assets acquired and fair value of loss contracts. During the second fiscal quarter of 2012, the Company continued to finalize the measurement of identifiable acquired assets and assumed liabilities and as a result, the amounts of such assets and liabilities and the resulting goodwill and deferred income tax have changed as compared to the provisionally reported amounts in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2012. However, the Company is still in the process of finalizing the fair value of the liability for consumer cards. As the Company finalizes these valuation assumptions, the provisional measurements of identifiable assets and liabilities, and the resulting goodwill and deferred income taxes are subject to change, and the final purchase price accounting could be different from the amounts presented herein. The following table summarizes the fair value of total consideration transferred for payment solution controlling and noncontrolling interest, the total estimated fair value of net identifiable liabilities acquired at the payment solution acquisition date and the resulting goodwill recorded (in thousands):


Fair value of common stock	$	3,041

Fair value of total consideration transferred		3,041
Fair value of noncontrolling interest		2,131

Fair value of controlling and noncontrolling interest		5,172
Fair value of net identifiable liabilities acquired		7,786

Goodwill	$	12,958

The fair value of the shares of the Company’s common stock issued in connection with the acquisition was determined using the closing market price of the Company’s common stock as of the payment solution acquisition date of $2.24 per share. The acquisition-date fair value of the noncontrolling interest is derived by determining the fair value of the acquired business as a whole and then subtracting the consideration transferred by the Company for its controlling interest in payment solution.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the payment solution acquisition date. The estimated fair value of the identifiable assets acquired and liabilities assumed in the acquisition is based on management’s best estimates.

Assets acquired and liabilities assumed as of January 30, 2012 (in thousands):


Cash and cash equivalents	$	572
Accounts receivable		303
Inventory		34
Property and equipment		1,955
Other current assets		287
Accounts payable		(1,746	)
Liabilities to related party		(432	)
Liability for unclaimed consumer cards		(5,800	)
Financial liabilities		(5,239	)
Other accrued expenses and liabilities		(654	)
Unfavorable contracts subject to amortization		(538	)
Intangible assets subject to amortization
Customer relationships		1,323
Developed technology		2,023
Trade names		542
Contract backlog		344
Deferred tax liabilities in connection with acquired intangible assets		(760	)

Fair value of payment solution net identifable liabilities acquired	$	(7,786	)

Intangible assets of approximately $4.2 million consist primarily of customer relationships, developed technology, trade names and contract backlog. Customer relationships relate to payment solution’s ability to sell existing, in-process and future versions of its products to its existing customers. Developed technology relates to payment solution’s technology that currently generates revenue. Trade names represent future value to be derived associated with the use of existing trade names. Contract backlog represents future revenue to be derived from confirmed contracts. Customer relationships, developed technology and contract backlog were valued using the Multiperiod Excess Earnings Method (MPEEM) and the Profit Split methodology based on discounted cash flows (“DCF”). Trade names were valued using the relief from royalty method based on DCF. Unfavorable contracts of approximately $0.5 million consist of one unfavorable loan contract with a shareholder and various unfavorable equipment financing contracts with a shareholder. Unfavorable loan contract relates to a contract to purchase equipment and finance working capital requirements with an interest rate above the current market rate and unfavorable equipment financing contracts relate to equipment financing with interest rates that were above current market rates. Both unfavorable loan and equipment financing contracts are measured using a differential cash flow method. A discount rate of 14% was used to value developed technology, trade names, unfavorable loan contracts and unfavorable equipment financing contracts; a discount rate of 16% was used to value customer relationships; and a discount rate of 10% was used to value contract backlog. The discount rate used in the present value calculation was derived from a weighted average cost of capital (“WACC”) analysis, adjusted to reflect additional risks related to each asset’s characteristics. The intangible assets and unfavorable contracts are subject to amortization and the Company expects to amortize these intangible assets and unfavorable contracts over their expected useful lives of approximately four to ten years.

Of the total purchase consideration, $13.0 million was recognized as goodwill, which represents the excess of the purchase consideration of an acquired business over the fair value of the underlying net assets acquired and liabilities assumed. The goodwill arising from the payment solution acquisition is assigned to the Company’s Identity Management reportable segment in accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”). None of the goodwill recorded as part of the payment solution acquisition will be deductible for income tax purposes. As noted in Notes 8 and 9 below, the Company performed an interim goodwill and long-lived assets impairment analysis in accordance with its critical accounting policy and determined that approximately $0.9 million in property and equipment and approximately $2.1 million in intangible assets as of June 30, 2012 are impaired and recorded an impairment charge in the 2012 second quarter financial statements. Refer to Note 8, Property and Equipment and Note 9, Goodwill and Intangible Assets, for further information.

The Company recognized $0.2 million of acquisition-related costs that were expensed in the six months ended June 30, 2012. These costs are included as part of general and administration costs in the condensed consolidated statement of operations.

The amounts of revenue and earnings of payment solution included in the Company’s condensed consolidated statement of operations from the payment solution acquisition date through June 30, 2012 are as follows (in thousands):


Revenues	$	1,894
Net loss	$	1,679

Acquisition of polyright SA

Multicard AG, a subsidiary of the Company, acquired all of the outstanding shares of polyright SA (“polyright”), on July 18, 2011 (“polyright acquisition date”), for a combination of cash and payment of outstanding indebtedness in the aggregate amount of CHF 2.55 million (or approximately $3.1 million). The sellers may receive aggregate potential earn-out payments (“contingent consideration”) payable in shares of the Company’s common stock over the 30-month period following the closing of the acquisition, subject to achievement of specific financial and sales performance targets over such period. The number of such shares, if any, issued under the earn-out will be based on the average share price during the month preceding the date of announcement of the Company’s annual results, and will be subject to a two-year lockup.

The fair value of the consideration transferred, which included contingent consideration, was determined to be $3.4 million at the polyright acquisition date. The fair value of the contingent consideration was classified as liability in accordance with ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”). As of June 30, 2012, there were significant reductions in the forecast such that the $0.3 million in contingent consideration for the earn-out liability recognized as of the acquisition date was no longer a reasonable estimate based on the revised forecasts. As a result, the earn-out liability was reduced to $0.1 million in accordance with ASC 480. The re-measurement of contingent consideration is reflected as a credit in the condensed consolidated statements of operations. Refer to Note 4, Fair Value Measurements, for further information.

The company recognized identifiable intangible assets of $1.5 million and goodwill of $2.7 million related to the acquisition of polyright. The intangible assets are subject to amortization and the Company is amortizing these intangible assets over their expected useful lives of approximately one to six years. As noted in Notes 8 and 9 below, the Company performed an interim goodwill and long-lived assets impairment analysis in accordance with its critical accounting policy and determined that approximately $50,000 in property and equipment, approximately $0.6 million in intangible assets and approximately $1.0 million in goodwill as of June 30, 2012 are impaired and recorded an impairment charge in the 2012 second quarter financial statements. The goodwill impairment charge is an estimate and subject to change during the third quarter of 2012 upon completion of the impairment analysis. Refer to Note 8, Property and Equipment and Note 9, Goodwill and Intangible Assets, for further information.

Acquisition of idOnDemand, Inc.

The Company completed the acquisition of idOnDemand, Inc. (“idOnDemand”) on May 2, 2011 (the “idOnDemand acquisition date”), pursuant to a Stock Purchase Agreement dated April 29, 2011 between the Company and certain shareholders (the “Selling Shareholders”) of idOnDemand, under which the Company acquired approximately 95.8% of the shares of idOnDemand in exchange for cash and shares of the Company’s common stock. In addition, Selling Shareholders may receive potential earn-out payments (“contingent consideration”) over a period of three years and eight months from the idOnDemand acquisition date, payable in shares of the Company’s common stock and subject to achievement of specific financial and sales performance targets. Any shares issued in connection with the earn-out will be subject to a 12-month lock-up from date of issuance. In January 2012, the Company acquired the remaining noncontrolling interests and idOnDemand became a 100%-owned subsidiary.

Subsequent to the filing of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, the Company obtained additional information related to idOnDemand’s customer base and product offerings which impacted the preliminary purchase price allocation and measurement of contingent consideration. The following table summarizes the remeasured fair value of total consideration for idOnDemand controlling and noncontrolling interest, the total fair value of net identifiable assets acquired at the idOnDemand acquisition date and the resulting goodwill recorded (in thousands):


Cash consideration	$	2,396
Fair value of common stock		3,024
Fair value of contingent consideration		4,758

Fair value of total consideration transferred		10,178
Fair value of noncontrolling interest		468

Fair value of controlling and noncontrolling interest		10,646
Fair value of net identifiable assets acquired		(2,847	)

Goodwill	$	7,799

The fair value of the contingent consideration is classified as a liability in accordance with ASC 480. As of June 30, 2012, there were significant changes in the range of outcomes for the contingent consideration recognized as of the acquisition date and the contingent consideration was determined to be no longer payable due to reduced forecasts. As a result, the earn-out liability of $5.5 million was reduced to zero as there is no future expectation of an earn-out payment in accordance with ASC 480. The re-measurement of contingent consideration is reflected as a credit in the condensed consolidated statements of operations. Refer to Note 4, Fair Value Measurements, for further information.

The Company recognized identifiable intangible assets of $4.3 million and goodwill of $7.8 million related to the acquisition of idOnDemand. The Company is amortizing the intangible assets over their expected useful lives of approximately one to six years. As noted in Notes 8 and 9 below, the Company performed an interim goodwill and long-lived assets impairment analysis in accordance with its critical accounting policy and determined that approximately $0.1 million in property and equipment, approximately $3.3 in intangible assets and approximately $7.0 million in goodwill as of June 30, 2012 are impaired and recorded an impairment charge in the 2012 second quarter financial statements. The goodwill impairment charge is an estimate and subject to change during the third quarter of 2012 upon completion of the impairment analysis. Refer to Note 8, Property and Equipment and Note 9, Goodwill and Intangible Assets, for further information.

Deferred tax assets and liabilities resulting from the acquisition of idOnDemand have been netted, where applicable. Following the idOnDemand acquisition, idOnDemand became part of the U.S. tax group of the Company’s entities. Accordingly, the deferred tax liability of $1.5 million which was recognized in the purchase price accounting has been netted with the Company’s existing deferred tax assets. As a result, there was a $1.5 million reversal of the Company’s valuation allowance which was recorded as a tax benefit in the 2011 second quarter financial statements.

Pro forma financial information:

The results for the acquired payment solution, polyright and idOnDemand businesses are included in the Company’s condensed consolidated statements of operations since their respective acquisition dates. As a result of the timing of these acquisitions, the Company’s condensed consolidated results for the periods presented are not directly comparable. The unaudited pro forma financial information in the table below summarizes the results of operations of the combined entity, as though the acquisitions had occurred as of the beginning of the comparable prior annual reporting period. The pro forma financial information is presented for informational purposes only and is not intended to represent or be indicative of the results of operations that would have been achieved if the payment solution, polyright and idOnDemand acquisitions had been completed as of the date indicated, and should not be taken as representative of the Company’s future consolidated results of operations or financial condition. Preparation of the pro forma financial information for all periods presented required management to make certain judgments and estimates to determine the pro forma adjustments such as purchase accounting adjustments, which include, among others, amortization charges from acquired intangible assets, and income tax effects.

Pro forma results of operations for the three and six months ended June 30, 2012 and 2011 are as follows (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Revenues	$	23,856		$	28,194		$	45,435		$	53,233
Net loss attributable to Identive Group, Inc.		(41,875	)		(2,704	)		(48,248	)		(6,258	)
Weighted average common shares outstanding used in loss per common share attributable to Identive Group, Inc.		59,686			54,355			59,143			52,239
Net loss per common share attributable to Identive Group, Inc.	$	(0.70	)	$	(0.05	)	$	(0.82	)	$	(0.12	)