Stockholders' Equity of Identive Group, Inc.

6 Months Ended

Jun. 30, 2012

Stockholders' Equity of Identive Group, Inc.

5. Stockholders’ Equity of Identive Group, Inc.

Preferred Stock

The Company is authorized to issue 10,000,000 shares of preferred stock, 40,000 of which have been designated as Series A Participating Preferred Stock, par value $0.001 per share. No shares of the Company’s preferred stock, including the Series A Participating Preferred Stock, were outstanding as of June 30, 2012. Upon the affirmative vote of Board of Directors, without stockholder approval or further action, Board of Directors may from time to time, direct the issuance of shares of preferred stock in series and may, at the time of issuance, determine the rights, preferences and limitations of each series, including voting rights, dividend rights and redemption and liquidation preferences. Such issuances of preferred stock could adversely affect the holders of shares of the Company’s common stock.

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 incurring approximately $0.4 million in underwriting discounts and commissions and issuance costs related to the offering.

2011 Employee Stock Purchase Plan

In June 2011, Identive’s stockholders approved the 2011 Employee Stock Purchase Plan (the “ESPP” or “Plan”). Initially, 2.0 million shares of common stock were 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 the fair market value of the Company’s 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. The plan contains an automatic reset feature under which if the fair market value of a share of common stock on any exercise date (except the final scheduled exercise date of any offering period) is lower than the fair market value of a share of common stock on the first trading day of the offering period in progress, then the offering period in progress shall end immediately following the close of trading on such exercise date, and a new offering period shall begin on the next subsequent January 1 or July 1, as applicable, and shall extend for a 24-month period ending on December 31 or June 30, as applicable. Subsequent offering periods shall commence on January 1 or July 1, as applicable, immediately following the end of the previous offering period and shall extend for a 24-month period ending on December 31 or June 30, as applicable. As of June 30, 2012 and December 31, 2011, the plan automatically reset and a new offering period began on July 1, 2012 and January 1, 2012, respectively. There were 93,871 shares of common stock issued under the ESPP during the six months ended June 30, 2012. The following table illustrates the stock-based compensation expense resulting from the ESPP included in the condensed consolidated statements of operations for the three and six months ended June 30, 2012 and 2011 (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Cost of revenue	$	9	$	—	$	14	$	—
Research and development		11		—		16		—
Selling and marketing		15		—		24		—
General and administrative		15		—		22		—
Total	$	50	$	—	$	76	$	—

As of June 30, 2012, 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 2.0 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. An aggregate of 3.0 million shares of the Company’s common stock was 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’s common stock 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 Compensation 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 (described below). As of June 30, 2012, a total of 0.9 million shares have been issued pursuant to the 2011 Plan, of which 0.2 million shares were issued during the six months ended June 30, 2012 as disclosed in the condensed consolidated statements of equity.

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 provides 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, 8.6 million shares were available for future grants under the 2011 Plan, including shares rolled over from 2007 Plan and 2010 Plan. From June 6, 2011 through June 30, 2012, a total of 1.6 million options have been granted pursuant to the 2011 Plan, of which 1.3 million were granted during the six months ended June 30, 2012.

Stock-Based Compensation Expense (Stock 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 six months ended June 30, 2012 and 2011 (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
Cost of revenue	$	—		$	2	$	1		$	2
Research and development		1			6		9			10
Selling and marketing		(51	)		65		42			125
General and administrative		(384	)		239		(124	)		296
Total	$	(434	)	$	312	$	(72	)	$	433

During the three months ended June 30, 2012, the Company’s outlook for the remainder of 2012 deteriorated due to macroeconomic uncertainty and associated softness in demand for the Company’s products, and the Company reduced its forecasted revenue, gross margin and operating profit. This resulted in a significant reduction in the expected amount for annual bonus payouts compared with the amounts expected to be paid as of the end of the previous quarter. In addition, one employee left the Company during the second quarter and did not accept the bonus awarded to him for 2011. As a result, the Company recorded a net credit of $0.4 million for bonus accruals in its condensed consolidated statements of operations during the three-months ended June 30, 2012. As of June 30, 2012 and 2011, $0.1 million and $0.4 million, respectively, were accrued for share and stock option bonuses and included in accrued compensation and related benefits in the condensed consolidated balance sheets.

Stock Option Plans

The Company’s 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 each 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 June 30, 2012, an aggregate of approximately 0.3 million granted options were outstanding under the Director Option Plan and the 1997 Stock Option Plan, 0.3 million granted options were outstanding under the 2000 Stock Option Plan, 1.2 million granted options were outstanding under the 2007 Plan, and 1.6 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.

A summary of the activity under the Company’s stock-based compensation plans for the six months ended June 30, 2012 and for the year ended December 31, 2011 are as follows:

				Stock Options									Stock Awards
	Shares Available for Grant			Number Outstanding			Average Exercise Price per share		Average 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		(1,447,980	)		820,716			2.53						627,264	$	1,627,969
Cancelled or Expired		20,035			(343,081	)		7.27
Exercised					(21,001	)		2.36
Balance at December 31, 2011		10,114,332			2,266,822			2.86	$	49,298		5.90
Granted		(1,467,745	)		1,286,110			1.33						181,635	$	272,655
Cancelled or Expired		59,626			(282,985	)		2.79
Balance at June 30, 2012		8,706,213			3,269,947			2.26	$	—		7.08
Vested or expected to vest at June 30, 2012					3,121,589		$	2.29	$	—		6.98

The following table summarizes information about options outstanding as of June 30, 2012:

	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
$ 0.94 - $ 1.05		104,000		9.95	$	1.05		—	$	0.00
$ 1.06 - $ 1.20		943,533		9.92		1.20		—		—
$ 1.21 - $ 2.40		746,644		5.93		2.17		527,107		2.23
$ 2.41 - $ 2.63		734,712		7.93		2.55		543,343		2.60
$ 2.64 - $ 10.74		741,058		3.42		3.59		711,552		3.61
$ 0.94 - $ 10.74		3,269,947		7.08	$	2.26		1,782,002	$	2.89

The weighted-average grant date fair value per option for options granted during the three and six months ended June 30, 2012 was $1.20 and $1.33, respectively. 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. During the three and six months ended June 30, 2012, no options were exercised. 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.

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 six months ended June 30, 2012 and 2011 (in thousands):

	Three Months Ended June 30,					Six Months  Ended June 30,
	2012		2011			2012		2011
Cost of revenue	$	2	$	5		$	5	$	8
Research and development		12		(5	)		20		65
Selling and marketing		72		81			132		117
General and administrative		86		(7	)		131		(42	)
Stock-based compensation expense before income taxes		172		74			288		148
Income tax benefit		—		—			—		—
Stock-based compensation expense after income taxes	$	172	$	74		$	288	$	148

At June 30, 2012, there was $1.1 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 1.4 years.

Common Stock Reserved for Future Issuance

As of June 30, 2012, the Company has reserved an aggregate of approximately 13.8 million shares of its common stock for future issuance under its various equity incentive plans, of which approximately 6.6 million shares are reserved for future grants under the 2011 Plan and 2010 Plan, approximately 3.3 million shares are reserved for future issuance pursuant to outstanding options under all stock options and incentive plans, 1.9 million shares are reserved for future issuance under the ESPP and approximately 2.0 million shares are reserved for future issuance under the Bluehill Plans.

As of June 30, 2012, 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 outstanding options assumed at the closing of the Bluehill ID acquisition and approximately 1.3 million shares for the noncontrolling shareholders of Bluehill ID.

As of June 30, 2012, 0.1 million shares are reserved for future issuance in connection with the acquisition of polyright for the earn-outs in consideration of meeting 2011 targets.

As of June 30, 2012, 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 its November 2010 private placement and approximately 4.9 million shares pursuant to outstanding warrants in connection with its April 2009 acquisition of Hirsch Electronics Corporation (“Hirsch”).