Good day, ladies and gentlemen, and welcome to the Identive Group Second Quarter Earnings Call and Webcast. My name is Ian and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Ms. Darby Dye, Director of IR. Please proceed, ma’am.

Thank you. Hello, everyone, and thank you for joining us today. The purpose of today's conference call is to supplement the information provided in our press release issued earlier today announcing the company’s financial results for the second quarter ended June 30, 2012. Speaking on today’s call are Ayman Ashour, Chairman and CEO and David Wear, CFO. Before we begin, I would like to remind you that various remarks we make on this call including those about our projected future financial results, economic and market trends, and our competitive position, constitute forward-looking statements. These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially. The forward-looking statements we make today speak as of today and we do not undertake any obligation to update any such statements to reflect events or circumstances occurring after today. Please refer to today’s press release, our Annual Report on Form 10-K for the year ended December 31, 2011, and subsequent SEC filings for a description of factors that could cause forward-looking statements to differ materially from actual results. During this conference call we will also be making reference to non-GAAP results or projections, including non-GAAP gross margin, operating expenses, adjusted EBITDA and earnings per share. Each of these non-GAAP measures exclude some or all of the following; acquisition, transition and integration costs, equity-based compensation expense, adjustment to earnout estimate, overhead allocation, impairment charges and amortization and depreciation. Identive uses these non-GAAP measures internally and believes they provide a meaningful way for investors to evaluate and compare our operating performance from period-to-period, but cautions investors to consider these measures in addition to, not as a substitute for nor superior to Identive’s consolidated financial results as presented in accordance with GAAP. A complete reconciliation between GAAP and non-GAAP financial measures is included in today’s press release, which is available in the Investor Relations section of Identive’s website. As a reminder, today’s call is also available as a webcast with slides which can be accessed from the Presentations, Reports and Webcast page within the Investor Relations section of our website at www.identive-group.com. If you are viewing the webcast you may enlarge the slides of this presentation by clicking on the magnifying lens in the bottom right hand corner of your screen. I would now like to introduce Ayman Ashour.

Thank you, Darby. And thanks to all of you for joining us this morning. Our Q2 performance came in line with our guidance on sales, adjusted EBITDA and cash. While it showed improvement on Q1, it still was not a good quarter because of weaker revenues. We have enacted cost reduction and cash preservation plan back at the end of May, which contributed some to lowering our cost base and will help us lower our EBITDA breakeven point. We have also made significant non-cash write-offs in goodwill, intangibles and fixed assets, which will reduce our breakeven point on net profit basis. We had strong sales to the U.S. government in smart card readers and continued to expand into the Chinese and Japanese telco sectors. Our reader business was particularly hit, however, by the very low level of citizen ID programs in Europe. On the transponder side, our sales were again impacted by delivery deferrals particularly from Nokia for the tag-in-the-box solutions, and also by deferrals of scheduled deliveries on various transport projects. An important success and very notable for us is the -- we are increasingly establishing ourselves more-and-more in the payment sector with innovative unique products such as tomPAY, where over 40,000 tomPAY cards were developed -- or were deployed at Olympic hospitality events for use by over 100,000 visitors. We'll talk a little bit more later about tomPAY. We had a strong Q2 for Payment Solutions despite a somewhat shortened season due to the European championships. So the season for us, as far as our Soccer cashless payment operations business is concerned, ended in May. The home stadium of the German champion, Borussia Dortmund, being one of the stadiums we operate, so strong views of our payment systems until the very last game, which actually occurred on May…

Thank you, Aymon. As Aymon stated, our Q2 results were in line with the guidance provided in our Q1's earning webcast, and reflected performance improvements over the previous quarter. I would like to take you through some of these results in a bit more detail, so we will start with Slide 8. A $23.9 million Q2 revenue was 12% higher than in Q1 and was basically in line with revenue from the second quarter of 2011 after adjusting for approximately $1.9 million of revenue associated with the German national ID program. Non-GAAP gross profit margin increased 1.3 percentage points sequentially and 0.8 percentage points year-over-year, reflecting a higher contribution of enterprise systems and software which is mainly due to the recovery we're seeing in our U.S. government business. At $11.9 million, non-GAAP operating expenses were 7% lower than in Q1 and up from 3% from the same quarter a year ago. We continue to invest in R&D, which has seen a significant increase of around 70% year-over-year. This increase has been partially funded by reductions in our G&A costs. We're working actively to bring down our expenses and initiated a cost reduction program in May that we believe will yield a run rate savings of between $4 million and $5 million compared with the first quarter's expense. On an annualized basis, these actions are expected to yield savings of close to $7 million. We recorded a restructuring charge of approximately $0.3 million in Q2 related to the actions taken to date and expect to record a further $0.4 million to $0.6 million over the remainder of the year, in line with the previous guidance. The cost reduction process has been a very collaborative one, with senior executives across the company driving reductions in payroll and discretionary expenditure in each of…

Thank you, David. I would like to start out with the strategic outlook part of our presentation today by a slide that reminds you of how we're looking at our investment in our business in 3 broad categories -- the hyper growth or megatrends area, the growth of our addressable markets and the growth of our existing markets. Just a refresher, we see NFC and cashless payment as new megatrends. We see expanding our ability in the transponder business beyond tags and tickets into identity cards and PVC type products, expanding our strength in cyber security into physical access and convert physical and cyber security, be it products or SaaS based offering, as another important pillar of extending our addressable markets. I would like now to give you within this context, give you just a quick update on where we stand. On the NFC product side, we aim to be the go-to place for NFC. So we have launched consumer direct personalization capability, added innovative products such as NFC magnets, dual NFC QR code tags, in-store stickers be it dual tag with QR and NFC or a dual-sided NFC sticker with the ability to engage on either side of a glass window. We have also launched our secure tag management platform, which we have been working on for a significant amount of time, really over the last 12 or 18 months. And the secure tag management platform aimed to personalize content for users for loyalty, advertisement or social networking purposes. Our tag management platform is aimed at the first comprehensive solution for addressing dynamic content on NFC tags and for actionable business information about the consumers who are tapping on the tags to pick up information from retailers, service providers and others or for consumer to consumer actionable information in…

[Operator Instructions] My question is from the line of Matthew Hoffman.

Clearly made some progress this quarter on the adjusted EBITDA metric and did a little bit better, trying to reconcile that with the cash. We’ve gone through the balance sheet here and looked at the payables and it looks like the payables may be tied to something on the stadium side really consumes a lot of the cash in the quarter. Can you tie that back to your commentary over the last 4 or 5 months? I assume it’s tied to the soccer stadiums and Payment Solutions inside the soccer stadiums, but can you go through kind of the puts and takes on the balance sheet and tie it back to what your actual end market opportunities are?

Sure. Well and thanks, Matt. So first let me start out by just sort of a quick overview of how the business model works. We are acting as operators in about 6th area in Germany, one of which is the largest stadium in Germany, Borussia Dortmund. And basically at the beginning of the season, the fans typically put money on their cards. And so the beginning of the season is August/September and the season concludes at sort of late May or early June, depending on what else is going on. In this particular case, when we acquired Payment Solution, which happened I think it was January 31 this year, so during Q1 we ended up with a cash out to meet some of the claims for the cash that was that where consumers have used, have charged the cards with cash. And so we ended up with approximately $2.2 million or so in assumed payables at the time of the acquisition. And if you tie that with and if you recall in the Q1 earnings call, I actually mention that Payment Solution contributed about $1.6 million cash balance. But if you add to that also the fact that we’ve been building up inventory during Q1 expecting a much stronger Q1, then ended up the combination of these 2 items were probably somewhere in the $3 million to $4 million impact of the total cash. Perhaps, David, do you want to add more color on that and I don’t know, Matt if I fully answered your question or not?

I will let David go and then I'm sure I will come back and ask a follow-up on it.

Okay, I think Ayman is right. When we acquired Payment Solution, we acquired some accounts payable at the time which was closer to $3 million and which we carried through to the end of March and in early April. We reduced a payable down to $1 million, so there is a $2 million outflow at the beginning of April related to those particular gains in the stadium caterers. In terms of the inventory build, as Ayman alluded to, the inventory build went up, I mean in Q1 we carried a higher inventory into April, which meant that working capital between March and April deteriorated by approximately $4 million.

Okay. I know when you purchased Payment Solutions, did you understand that those payables risk if you will is out there and then second, the inventory side here what is the exact nature of the inventory?

Well, let me take the second one first. The inventory is mostly readers and wafers or sort of components of these type of items, components of readers and chipsets that go some proprietary chipsets that go into, eventually into our readers, and sort of wafers from the likes of NXP and so forth. So that’s the main sort of inventory type items that we would normally have. In terms of the payable, yes, absolutely, we had a view of the payables for Payment Solution. Where we have executed poorly is on paying all of that at the same time. And that is what triggered really a very negative outflow during the months of April.

So this was one of the issues you had in March and April regarding closing the quarter and the fiscal year?

Right, I mean it was really, it was not so much closing anything, it was just sort of operationally not having the right control over the inventory build. We were late in recognizing that the sales are not holding up. So we kept on taking wafers and products and did not react fast enough to the decline in the market side. In terms of Payment Solutions, we just settled the payables too quickly. We could have phased it out in a much more sort of manageable way, which we didn’t. So as a result, when we started looking at our balance at -- sort of towards the end of April, it reflected the very low number that David mentioned earlier, which is about $5 million or thereabout. So over the last 3 months, we sort of built back up from there, while actually reducing the payables.

Okay, well, that helps us with the back story and I appreciate the color and disclosure. Let’s look forward though. You are entering soccer season. You're in some of the best stadia there in Germany, what’s the opportunity here for that business and let's tie that into the overall outlook for the back half of the year?

Sure, I mean I think it’s important to be aware of several things. Number one, we are the market leader in the German soccer payment sector. Number 2, we are the only interoperable system. So you take one of our cards from one stadia, it will be interoperable in another stadium. So these are 2 important things. There is still opportunity for growth in that market and we are pursuing that. We’re also pursuing opportunities in other markets. We have recently won our first project in Holland, and we will be releasing more details on that in the coming couple of weeks. So that’s an important one, but that is more of a system integrator rather than a complete operator. The opportunity and why I mentioned this business as cash generative is that you end up at the beginning of the season with the fans basically buying credits, and you end up holding the cash for a substantial amount of the season. Usually towards the end of the season, you have some cash drain and but invariably, you end up with a significant amount that is not claimed, and that is what we refer to as breakage. And that is part of our revenue if it remains over one year unclaimed, and that is consistent with other people in the gift card and loyalty type businesses. So the opportunity here for us is different fold. Number one, if you look at our business model right now, one of the highest expense items for us, is the actual operation of the stadia. So for example, if you take a stadium like Dortmund, we would actually deploy upwards of 150 contractors dealing with sort of the fence. As we move more and more towards NFC and towards other solutions where the consumer or the fan can access, can charge their cards or charge their account online or via a phone app, et cetera, we see that number reducing. So we see the quality of the business improving. Another important thing to be aware of is that these are long-term contracts. So while there is a significant initial cash outflow, we have these contracts for periods of -- I think 8 to 10 years typically.

Okay. Let’s move on to the third and fourth quarter specifically, using the midpoint of the next quarter’s guidance, I think it is $27.5 million, you would have to do about $32 million to have annual sales that were up year-on-year, that would also be of course, in contrast to how you finished last year when fourth quarter was kind of a dud. So I know it's a long way away. We have a lot going on especially in Europe, but talk to us about the shape of the opportunity especially with the U.S. government coming back in?

Sure. I think for Q4 it is still relatively early to project, but I think we would be looking at, if I give you a broad range, I would say probably somewhere between $27 million and $32 million is possible. But it will depend on the U.S. government business and it will depend on the transponder business picking up quite a bit. Transponder was our growth engine last year, where we had some 60% year-on-year growth, and the transponder business has been very disappointing on a year-to-date basis and we're finally beginning now in August to see it was some pickup in activity and some customers taking deliveries of things that they have ordered and deferred. So, you don’t think like, so there is a fair amount of uncertainty still, but we are generally, we remain optimistic that operationally Q3 and Q4 will be cash generative, a lot of things work in our favor in Q4 in terms of seasonality, and we continue to expect these things to be positive, but we are frankly not counting on any or very, very little European citizen ID business for the rest of the year. It's just been horrible

Understood. And last question from me and I will let somebody else pop in. It is really -- I want you to break down the transponder opportunity. You said that the transponders have been disappointing. Exactly which product line has been the most disappointing and with regard to the transponders and then come back to the NFC tags. I assume you are treating that as a discrete market, and it sounds like you are seeing some momentum on the NFC tags with the -- well, I shouldn't say momentum, but if they are pushed out, but maybe something happens by the end of the year. So just take us through those 2 end markets.

Okay. Well, I mean for us when we say transponder, transponder reader it includes the NFC products part of it. So if you will the 5 big segments or 6 big segments we look at within transponders will be transport, sort of ticketing for transport and the like, amusement parks, and the like. Then things like libraries, pharmaceuticals, payment and NFC tags, so these would be sort of the broad categories. The NFC tag business has had a lot of deferrals primarily because of Nokia, sort of as you cover Nokia, so that their own revenues have been lower than they planned and the order that we had have just been getting deferred further back. So that is one. In terms of transport, we have on hand orders in the U.S. and Singapore particularly, and those have been getting deferred. In the library sector, we have started breaking loose a little bit, but there has been -- it is one of the sectors where in Europe and elsewhere austerity plans have hit hard, so there’s been reduction in that. So you would notice that in our first page of the presentation that what we call asset ID or object ID is also down from about 10% to about 8% of revenues.

We have another question in the queue, this one is from the line of Michael Kim.

So first on the federal side, can you talk a little about the roll out the IRS contract, how do you see that progressing through the balance of the year-end and into next year?

Slowly. It is progressing. We are doing more and more of it, but slowly. But the business we have had -- so it is part of our of the revenue numbers we have disclosed in both Q1 and Q2. The bigger bids we have had have been some significant work for access systems from Department of Justice, other strong orders on readers for cyber security from another U.S. agency, and we have been continuing to get also orders in the VA sector and various sort of U.S. government agencies and departments. So it is thoroughly mixed and not sort of -- the 2 big chunks are the ones we have disclosed earlier, which is the big order for readers for an agency and the Department of Justice orders for access systems.

Okay, and then switching to identity to service, I think you have quite a number of pilots or trials underway right now. With the longer sales cycle, what do you think, can you talk about what some of the hurdles are to rolling out to a full scale deployment or enterprise-wide deployments?

Well, the -- it's your usual sort of -- the security industry, particularly in sort of employee type environments tend to move slower than we all like. And it also people tend to be, want to be double sure and triple sure that that is something they want to do, and quite often it is hard to get budgets. The very strong card that we have is that we can go into an environment, a large user that has had several acquisitions that have different legacy systems, and want to upgrade to a PKI or a sort of government grade security solution, all of these systems are part of the systems and have unified ID systems. So it is very hard to find a better solution than what we’re offering with idOnDemand. So our offering remains very, very attractive and very compelling, but it’s really sort of the budget cycles of the users, the users getting comfortable with the idea of SaaS for security and sort of pilots getting rolled out.

Okay, and then switching to transponders, I think CapEx is a little bit on the lower end of the range this quarter. How are feeling about capacity, transponder capacity? Are you expecting to invest in that significantly this year? And overall for the year, what are your expectations for capital spending?

I think we probably are looking at another sort of between $1 million and $1.3 million in CapEx spending for the year. We still need because part of our strategy on transponder is to move to more to the finish product and the higher value product. When you are selling an inlay your opportunity for differentiation is limited, whereby when you are selling a tag or a finished ticket you’ve got, you are much closer to the customer and have a much higher opportunity for differentiation. And sort of our capacity for complete tickets or tag as especially with our Singapore business now kicking in, might be at the limit. So we’ve been running close to capacity in our Munich factory, under capacity in Singapore, but really starting from August we’re beginning to be sort of stronger in both. But still the overall market is down and you can see that quite often when you see the numbers for the semiconductor companies that break their ID business out, you’ll see that sort of Q4, Q1 were poor, Q2 is showing improvement so that tends to be a little bit of a leading indicator for our business as well.

Okay. And then lastly you talked about strengthening the balance sheet in a non-dilutive fashion. Does that indicate that you’re looking more at debt capital or does it sort of convey a likelihood of some kind of divestiture?

Yes, I mean I think obviously it was critical for us to stabilize things after our [indiscernible] mission in April and I feel we have done that. So the preferred option is obviously debt. Our share price right now is what we feel is below the fair value of the company and even as we’ve done our impairment analysis, that still reflects that. So for us we’re very cognizant of the dilution issue, but we also want to strengthen the balance sheet because we want to move out of having to put the going concerns comments.

Thank you very much for your questions. There are no further questions. At this point, I’d now like to turn over to Darby for closing remarks.

Thank you. Thanks, everyone, for joining us today and we look forward to continuing to update you on our progress over the course of the next quarter. Thanks and have a good day. Bye-bye.

Thank you for your participation in today’s conference. That concludes the presentation. You may now disconnect. Good day.