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INVE > SEC Filings for INVE > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for IDENTIVE GROUP, INC.

Form 10-Q for IDENTIVE GROUP, INC.


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements for purposes of the safe harbor provisions under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements, other than statements of historical facts, include statements on our ability to execute our growth strategy, expand our business, leverage our opportunities, enter new markets, capitalize on the growth in our industries, develop and improve new technology, and similar statements regarding our strategy, future operations, financial position, projected results, estimated revenues or losses, projected costs, prospects, plans, market trends, competition and objectives of management. In some cases, you can identify forward-looking statements by terms such as "will," "believe," "could," "should," "would," "may," "anticipate," "intend," "plan," "estimate," "expect," "project" or the negative of these terms or other similar expressions. Although we believe that our expectations reflected in or suggested by the forward-looking statements that we make in this Quarterly Report on Form 10-Q are reasonable, we cannot guarantee future results, performance or achievements. You should not place undue reliance on these forward-looking statements. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our expectations change, whether as a result of new information, future events or otherwise.


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We also caution you that such forward-looking statements are subject to risks, uncertainties and other factors, not all of which are known to us or within our control, and that actual events or results may differ materially from those indicated by these forward-looking statements. Such factors include our ability to successfully integrate strategic businesses that we acquire, our ability to reduce costs associated with strategic acquisitions, our ability to anticipate product demand, our ability to obtain supplies for products in a timely manner, and our ability to retain key personnel, as well as those additional factors listed in the "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2011. These cautionary statements qualify all of the forward-looking statements included in this Quarterly Report on Form 10-Q that are attributable to us or persons acting on our behalf.

The following information should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto set forth in Part I-Item 1 of this Quarterly Report on Form 10-Q and with the audited financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2011.

Overview

Identive Group, Inc. ("Identive," the "Company", "we" or "us") provides secure identification ("Secure ID") solutions that combine the convenience of radio frequency identification ("RFID") with the security of smart card technology to enable people to easily and securely interact with and manage digital devices, systems and data. Our offerings include hardware products, software, integrated systems and services to address the global markets for credential management, physical and logical/cyber access control, integrated ID solutions and a host of near field communication ("NFC") and RFID-enabled applications for customers in the government, enterprise, consumer, education, healthcare and transportation sectors. Our growth model is principally based on strong technology-driven organic growth, supported by disciplined acquisitive expansion. Our common stock is listed on the NASDAQ Global Market in the U.S. under the symbol "INVE" and the Frankfurt Stock Exchange in Germany under the symbol "INV."

We operate in two segments, "Identity Management Solutions & Services" ("Identity Management") and "Identification Products & Components" ("ID Products"):

In our Identity Management segment we design, supply and manage solutions, systems and services that enable the secure management of credentials in diverse markets. These credentials are used for the identification of people and the granting of rights and privileges based on defined security policies. Our Identity Management offerings include integrated physical and logical (i.e., PC, network or cyber) access systems, integrated ID solutions, cashless payment solutions and cloud-based credential management systems, all of which are designed to enable organizations to enhance security and better meet compliance and regulatory requirements while providing the benefits of ease of use and convenience. We sell our Identity Management solutions under the Identive, Hirsch Identive, polyright, payment solution and idOnDemand brands. Our Identity Management end customers operate in the government, education, enterprise and commercial markets and can be found in multiple vertical market segments including payment, healthcare, banking, industrial, retail and critical infrastructure.

In our ID Products segment we design and manufacture both standard and highly specialized RFID and smart card technology-based products and components, including NFC products and components, that are used in the government, enterprise and consumer markets for a number of identity-based and related applications, including logical access, physical access, e-Health, e-Government, citizen ID, mobile payments, loyalty schemes, and transportation and event ticketing. Our ID Products offerings include i) readers and terminals based on both contact and contactless smart card technology and ii) RFID transponders, which consist of RFID inlays and inlay-based RFID tags, labels, stickers and cards, including NFC inlays and tags. Our ID Products are sold primarily under the Identive brand.

Each of the business areas within Identive conducts its own sales and marketing activities in the markets in which it competes, primarily utilizing its own sales and marketing organization to solicit prospective channel partners and customers, provide technical advice and support with respect to products, systems and services, and manage relationships with customers, distributors and OEMs. Increasingly, we also leverage common resources between business areas to optimize our sales and marketing efforts across multiple regions and market opportunities. The majority of our sales are made through indirect sales channels that may include dealers, systems integrators, value added resellers, resellers or Internet sales.


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Our corporate headquarters are located in Santa Ana, California and our European and operational headquarters are located in Ismaning, Germany. We maintain facilities in Chennai, India for research and development and in Australia, Canada, Germany, Hong Kong, Japan, The Netherlands, Singapore, Switzerland and the U.S. for local operations and sales. The Company was founded in 1990 in Munich, Germany and incorporated in 1996 under the laws of the State of Delaware.

Recent Acquisitions

On January 30, 2012, through our Bluehill ID AG subsidiary, we acquired approximately 58.8% of the outstanding shares of payment solution AG, a privately-held German company that provides cashless payment solutions for stadiums, arenas and other event venues ("payment solution"). In exchange for the shares of payment solution, we issued an aggregate of 1,357,758 shares of our common stock, which had an approximate value of 2.35 million (or approximately $3.0 million), to 18 selling shareholders of payment solution. The shares have not been, and will not be, registered under the U.S. Securities Act of 1933 and were issued in reliance upon available exemptions from the registration requirements of the Securities Act. The shares are also subject to applicable restrictions on transfer. payment solution's operating results have been included in our consolidated results from the date of acquisition. On April 2, 2012 we acquired an additional 23.7% of the outstanding shares of payment solution, bringing our total ownership of the company to 82.5%. We are in the process of integrating payment solution into our existing ID Solutions operations in Germany.

On July 18, 2011, through our Multicard AG subsidiary we acquired polyright SA, a Swiss provider of identity management platforms and open-ended rights and services management solutions for higher education, healthcare and industry ("polyright"). The acquisition was made using 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 included Securitas AG, Kudelski SA and members of polyright's management team. The sellers may receive aggregate potential earn-out payments payable in shares of our 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 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 our annual results, and will be subject to a two-year lockup. polyright's operating results have been included in our consolidated results since the date of acquisition. Following the acquisition, polyright was integrated into our existing ID Solutions operations in Switzerland.

On May 2, 2011, we acquired 95.8% of the shares of idOnDemand, Inc., a privately-held provider of identity management services based in Pleasanton, California ("idOnDemand"). The acquisition was pursuant to the Stock Purchase Agreement dated April 29, 2011, under which we paid the selling shareholders of idOnDemand initial consideration at closing of approximately $2.4 million in cash and 995,675 shares of our common stock. In addition, the selling shareholders may receive aggregate potential earn-out payments payable in shares of our common stock subject to achievement of specific financial and sales performance targets over a period of three years and eight months from the closing date of the acquisition. Any shares issued in connection with the earn-out will be subject to a 12-month lock-up from date of issuance. Shares issued as consideration to the selling shareholders at closing are subject to a three-year lock-up from the closing date of the acquisition. The shares have not been, and will not be, registered under the U.S. Securities Act of 1933, and were issued in reliance upon available exemptions from the registration requirements of the Securities Act. Of the total initial share consideration paid to the selling shareholders, 407,289 shares were released from lock-up six months after the closing date. Beginning on the second anniversary of the closing date, the remaining shares will be released from the lock-up in equal amounts on a monthly basis until the expiration of the lock-up period. idOnDemand's operating results have been included in our consolidated results since the date of acquisition. On December 22, 2011, we entered into an agreement to purchase the remaining outstanding shares of idOnDemand for the sum of $500,000, pursuant to an agreement among Identive, ActivIdentity Corporation and idOnDemand. Following the completion of this share purchase on January 9, 2012, idOnDemand became a wholly-owned subsidiary of Identive. idOnDemand's software and services activities have been closely integrated with our Hirsch Identive operations and together they comprise our Identity Management & Cloud Solutions division. Certain reader products from idOnDemand have been transferred to our ID Products segment.

Recent Trends and Strategies for Growth

Identive is focused on building the world's signature company in Secure ID by providing products, systems and services that are interoperable, easy to integrate and easy to use. Our goal is to build a lasting business of scale and technology to both enable and capitalize on the growth of the security and RFID industries. Our growth strategy is based both on technology-driven organic growth and disciplined acquisitive activity. We pursue investments and acquisitions with a focus on expanding our business, reinforcing our market position in targeted areas and fully leveraging our strengths and opportunities to enter new markets, as well as driving consolidation in the rapidly growing, yet fragmented markets for identification-based technologies.


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As part of our organic growth strategy, we are focused on enhancing our ability to address emerging growth markets and extending our product and solutions offerings through ongoing research and development programs. This includes a significant update to our Hirsch Identive access control software and hardware platforms and continued enhancements to our software systems for cashless payment systems. Additionally, to meet increasing customer demand for RFID inlays and finished transponder products such as tags, labels and cards, we continue to add new manufacturing and production equipment and lines at our facilities in Germany and Singapore.

In order to position the Company to participate in emerging, potentially very high-growth market opportunities, we have invested and continue to invest in new products and solutions in a number of areas. In anticipation of the launch of new smartphones that include NFC technology, we created a new dedicated group focused on NFC and mobility applications, which is responsible for guiding and coordinating our NFC product and market strategies as well as launching new cloud-based NFC services. We are investing in NFC product and service offerings, including NFC tags, readers, development kits, and a cloud-based services platform for managing content on deployed NFC tags. We also launched an online market to sell our NFC products and services at www.identiveNFC.com. To take advantage of the growing market trend towards the convergence (or integration) of physical and cyber access systems, we created a new group focused on the market for converged access products. Additionally, to meet the growing demand for cloud-based credential issuance and management, we are investing in the development of "Identity as a Service" software solutions and capabilities.

Because acquisitions have been and continue to be a component of our strategy to expand our capabilities and the scale of our business, from time to time we reorganize our operations to enhance our ability to address our market opportunities. For example, we have consolidated our various transponder, reader and firmware product businesses into a single Identification Products organization and moved the majority of our product brands under a single market brand, Identive. We have combined our Hirsch Identive and idOnDemand operations into a single organization focused on Identity Management & Cloud Solutions, and are in the process of transitioning our Hirsch Identive and idOnDemand offerings to the Identive brand. We are also engaged in combining our most recent acquisitions, polyright and payment solutions, into the operations of our ID Solutions division.

While we expect to continue to invest in those areas of our business that we perceive to be important future growth drivers, as described below in "Results of Operations" and "Liquidity and Capital Resources," our sales for the first nine months of 2012 were negatively impacted by market factors, and we continue to incur operating losses

Goodwill and Intangibles Impairment

As described in Note 9 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, because of a significant decline in the Company's stock price and market capitalization and changes to forecasted revenue, gross margin and operating profit during the 2012 second quarter, we undertook interim goodwill impairment analyses in connection with our quarterly close as of June 30, 2012. Due to the length of time necessary to measure impairment of goodwill, our analysis was not completed as of the time of the filing of our second quarter Form 10-Q and we reported a preliminary impairment charge of $21.4 million in the second quarter ended June 30, 2012. The goodwill impairment analysis was subsequently completed during the 2012 third quarter and resulted in an additional goodwill impairment charge of approximately $5.0 million being recorded during the three months ended September 30, 2012, for a total goodwill impairment charge of $26.4 million during the nine months ended September 30, 2012.

In conjunction with our goodwill impairment test, we also tested our long-lived assets for impairment and adjusted the carrying value of each asset group to its fair value and recorded the associated impairment charge of $24.8 million in our condensed consolidated statements of operations, of which $23.9 million was recorded in the second quarter and $0.9 million was recorded in the third quarter of 2012. These charges affected our financial condition and results of operation; however, they have no impact on our day-to-day operations or liquidity and will not result in any future cash expenditures. We also expect that as a result of the impairment there will be lower non-cash charges to net earnings in future quarters, as the amount of intangible assets being amortized will be significantly reduced.

Trends in our Business

Sales Trends

Sales in the first nine months of 2012 decreased 9% to $68.0 million compared with the first nine months of 2011, reflecting a 16% decrease in organic sales, partially offset by $5.4 million of incremental revenue from idOnDemand, polyright and payment solution. In the first nine months of 2012, sales were affected by a revenue gap of approximately $6.2 million caused by the absence of new orders for secure card readers and software for the German national ID program, which had been a significant component of our revenue throughout 2011; project delays with several transponder customers in the mobile device and transportation sectors; and ongoing budget delays and constraints in the U.S. government and European government program sectors. These factors were partially offset by stronger sales of smart card readers and Hirsch Identive identity management and access control systems to the U.S. government market, related in part to limited improvement in activity associated with previously delayed security projects with some U.S. federal agencies.


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Sales in the Americas. Sales in the Americas were $35.8 million in the first nine months of 2012, accounting for 53% of total revenue and up 7% compared with $33.5 million in the first nine months of 2011. Sales of products and systems for employee ID programs within various U.S. government agencies comprise a significant proportion of our revenues in the Americas region, which also includes Canada and Latin America.

Sales of our Hirsch Identive access control systems in the Americas increased by approximately 3% in the first nine months of 2012 compared with the same period of 2011, primarily as a result of an increase in activity with certain U.S. federal agencies, including a $1.7 million order from the Department of Justice recorded in the 2012 second quarter. As a general trend, U.S. federal agencies continue to be subject to security improvement mandates under programs such as Homeland Security Presidential Directive-12 ("HSPD-12") and reiterated in memoranda from the Office of Management and Budget ("OMB M-11-11"). We believe that our Hirsch Identive access control systems remain among the most attractive offerings in the market to help agencies move towards compliance with federal directives and mandates. During 2011, our sales of security systems to the U.S. Government sector were negatively impacted by budget and funding delays. While increased project activity at some federal agencies in the first nine months of 2012 is a positive development, the outlook for our U.S. Government business remains uncertain in the near term, particularly as it is uncertain how the upcoming U.S. election may affect federal spending. To offset project and budget delays in the U.S. Government market, in recent quarters we have expanded our focus on the utility and enterprise sectors as well as on further developing our opportunities in international markets.

Smart card reader sales in the Americas increased 72% in the first nine months of 2012 compared with the same period of 2011, as a result of large orders from a few U.S. government agencies and broader, seasonally driven demand from the U.S. government sector as a whole to support cybersecurity and network access projects. This was partially offset by a 22% decrease in transponder sales in the Americas as various transportation projects slowed and expected orders were delayed.

Sales in Europe and the Middle East. Sales in Europe and the Middle East (EMEA) were $22.0 million in the first nine months of 2012, accounting for 32% of total revenue and down 28% from $30.6 million for the same period of 2011. A primary reason for this decrease was the $6.2 million revenue gap caused by the absence of new orders for readers and software to support the German national ID program, which were a significant component of our sales in 2011. This contributed to a 57% decrease in sales in our European ID Solutions business in the first nine months of 2012. European sales of smart card readers also were 46% lower in the first nine months of 2012 compared with the prior year, reflecting weakness in the market for European government programs including national ID, electronic health and other programs. Additionally, European sales of transponder products were 27% lower in the first nine months of 2012 compared with the same period of the prior year due to softness in some of our markets. These factors were partially offset by approximately $5.1 million of incremental revenue from polyright and payment solution in the first nine months of 2012.

Sales in Asia/Pacific. Sales in the Asia/Pacific region were $10.1 million in the first nine months of 2012, accounting for 15% of total revenue and down 6% from $10.7 million the first nine months of 2011. The decrease was primarily due to a 36% decline in sales from our ID Solutions business in Australia, which experiences significant variability from period to period due to the timing of large program deployments for a small number of customers. Sales of transponder products also fell 18% in the first nine months of 2012 due to project delays from customers in the NFC mobile device and transportation sectors. These trends were partially offset by stronger sales of smart card reader products, including chipsets for PC applications and smart card readers to support telecommunications applications in China and Japan.

Looking forward, we believe demand will increase across our markets for products, systems and solutions that address emerging applications such as converged access control, NFC tag deployment and management, mobile payment schemes and ID programs for citizens, consumers and employees. The trends towards the convergence of cyber and physical access and the marriage of contactless payment technology with mobile devices are beginning to be realized and to drive new activity from governments, enterprises and consumer applications around the world. We believe that our unique portfolio of technology, products, solutions, systems and experience position Identive to address these emergent trends and benefit from their growth.

Seasonality and Other Factors. In our business overall, we may experience significant variations in demand for our products quarter to quarter, and overall we typically experience a stronger demand cycle in the second half of our fiscal year. Sales of our Hirsch Identive physical access control systems are subject to U.S. government budget cycles and are generally highest in the third quarter of each year. Sales of our smart card readers and chips for government programs are impacted by testing and compliance schedules of government bodies as well as roll-out schedules for application deployments, both of which contribute to variability in demand from quarter to quarter. Further, sales of these products typically are subject to seasonality based on governmental budget cycles, with lowest sales in the first half, and in particular the second quarter of the year, and highest sales in the second half of each year. In our ID Solutions division, a variety of localized market factors including government budget cycles and retail demand cycles typically result in stronger demand in the second half of the year. This pattern is also true for our payment solutions business as sales activity in the German sports market is strongest in the second half of the year. In general, sales of our global transponder products also are typically marginally stronger in the second half of the year.


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Operating Expense Trends

We have made and continue to make significant investments in the development of products and solutions to position the Company to benefit from the expected growth of the emerging markets for NFC, payment and cloud-based identity management, as further described below. As these markets do not yet offer significant revenue opportunities, our sales in these areas currently are relatively small and not yet able to compensate for the level of investment required to participate in these markets. In recent periods this has contributed significantly to our operational losses.

Our base operating expenses (research and development, sales and marketing, and general and administrative) increased 3% in the first nine months of 2012 compared with the same period of 2011. This increase was primarily due to a $3.5 million, or 9% increase in costs from idOnDemand, polyright and payment solution, partially offset by expense reductions taken under our 2012 restructuring plan as described below, and upon the completion of various development projects. Over the past several quarters, we have increased our investment in new solutions offerings and to develop our sales and marketing capabilities to address emerging opportunities within the secure identification market that we believe hold significant long-term potential for Identive. We have also reduced our spending on general and administrative expenses as part of an ongoing initiative to lower our operating costs.

In the area of research and development, we continue to make significant investments in technology and in specific solutions to address market opportunities with both new and existing customers. We have developed next-generation software, controllers and other products to reinforce and extend the customer base for our Hirsch Identive access control offering. To address the growing opportunities for NFC-enabled systems, we have developed a cloud-based NFC tag content management platform that provides business analytics for organizations seeking to create dynamic engagement with consumers and other groups, and we continue to invest in this platform. We also continue to invest in trusted identity solutions and capabilities for cloud-based credential issuance and management, and to enhance our cashless payment and ID software systems. On an ongoing basis, we invest in the development of new contactless readers, tokens and modules, new physical access readers to enable converged physical and logical/cyber access, and in the extension of our contactless platforms. In addition, we continue to invest in enhancing and broadening our . . .

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