UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-33297
POSITIVEID CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE
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06-1637809 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
(Address of principal executive offices) (Zip code)
(561) 805-8008
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, par value $0.01 per share
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The NASDAQ Stock Market LLC |
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(Title of each class)
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(Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
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Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the registrants common stock held by non-affiliates of the
registrant computed by reference to the price at which the common stock was last sold on the Nasdaq
Stock Market on June 30, 2009 was $5,205,018. For purposes of this calculation, shares of common
stock held by each officer and director and by each person who owns 10% or more of the outstanding
common stock have been excluded in that such persons may be deemed to be affiliates. The
determination of affiliate status is not necessarily a conclusive determination for other purposes.
At March 5, 2010, 23,033,275 shares of our common stock were outstanding.
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements, within the meaning of
Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of
the Securities Exchange Act of 1934, as amended (the Exchange Act), that reflect our current
estimates, expectations and projections about our future results, performance, prospects and
opportunities. Forward-looking statements include, without limitation, statements about our market
opportunities, our business and growth strategies, our projected revenue and expense levels,
possible future consolidated results of operations, the adequacy of our available cash resources,
our financing plans, our competitive position and the effects of competition and the projected
growth of the industries in which we operate, as well as the following statements:
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the ability of the Company to improve diabetics lives while helping
them manage their healthy glucose levels, thereby decreasing the risk
of diabetes-related complications and reducing medical costs; |
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the ability of the sensing system to demonstrate a glucose
concentration response in model blood and interstitial fluid matrices; |
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that patients implanted with our glucose-sensing microchip, if
successfully developed, could get a rapid reading of their blood sugar
with a simple wave of a handheld scanner; |
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the ability of iGlucose to provide next generation, real time data to
improve diabetes management and help ensure patient compliance, data
accuracy and insurance reimbursement; |
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the iGlucose wireless communication device being the first to address
the Medicare requirement for durable medical equipment manufacturers
and pharmacies to maintain glucose level logs and records for the
millions of high-frequency diabetes patients; |
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that the use of a heavy molecule to generate a chemical reaction that
can be reliably measured may prove the close correlation between
acetone concentration found in a patients exhaled breath and glucose
found in his or her blood and the possible elimination of a patients
need to prick his or her finger multiple times per day; |
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that the rapid sub-type classification of flu strains at the point of
care will allow for improved treatment, thereby discouraging
antibiotic overuse, preventing central lab overloading and improving
overall health outcomes; and |
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that the rapid flu sub-type test will give an early warning of the
rise of new sub-types of influenza so that containment measures can be
implemented and pandemic proportions can be avoided. |
This Annual Report on Form 10-K also contains forward-looking statements attributed to third
parties relating to their estimates regarding the size of the future market for products and
systems such as our products and systems, and the assumptions underlying such estimates, including,
but not limited to, the likelihood that the number of diabetics in the U.S., which currently stands
at 23.7 million, may almost double in 25 years, and the annual cost of treating them may triple to
$336 billion. Forward-looking statements include all statements that are not historical facts and
can be identified by forward-looking statements such as may, might, should, could, will,
intends, estimates, predicts, projects, potential, continue, believes, anticipates,
plans, expects and similar expressions. Forward-looking statements are only predictions based
on our current expectations and projections, or those of third parties, about future events and
involve risks and uncertainties.
Although we believe that the expectations reflected in the forward-looking statements
contained in this Annual Report on Form 10-K are based upon reasonable assumptions, no assurance
can be given that such expectations will be attained or that any deviations will not be material.
In light of these risks, uncertainties and assumptions, the forward-looking statements, events and
circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could
differ materially and adversely from those anticipated or implied in the forward-looking
statements. Important factors that could cause our actual results, level of performance or
achievements to differ materially from those expressed or forecasted in, or implied by, the
forward-looking statements we make in this Annual Report on Form 10-K are discussed under Item 1A.
Risk Factors, Item 6. Managements Discussion and Analysis of Financial Condition and Results of Operation and
elsewhere in this Annual Report on Form 10-K and include:
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our ability to continue listing our common stock on the Nasdaq Stock Market (Nasdaq); |
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our ability to successfully consider, review, and if appropriate, implement other strategic opportunities; |
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our expectation that we will incur losses, on a consolidated basis, for the foreseeable future; |
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our ability to fund our operations and continued development of our products, including the Rapid Flu
Detection System, the glucose-sensing microchip, the Easy Check breath glucose detection system and the
iGlucose wireless communication system; |
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our ability to complete the Phase II of the Rapid Flu Detection System by the end of 2010 or at all and
Phase II of the glucose-sensing microchip development program by mid 2010 or at all; |
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our ability to pursue our strategy to offer identification tools and technologies for consumers and
businesses; |
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our ability to maximize the amount of capital that we will have available to pursue business
opportunities in the healthcare and energy sectors; |
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our ability to successfully develop and commercialize the breath glucose detection system and the
iGlucose wireless communication device and the glucose-sensing microchip, and the market acceptance of
these devices and the microchip; |
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our ability to obtain patents on our products, including the Easy Check breath glucose detection system
and the iGlucose wireless communication device, the validity, scope and enforceability of our patents,
and the protection afforded by our patents; |
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we may become subject to costly product liability claims and claims that our products infringe the
intellectual property rights of others; |
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our ability to comply with current and future regulations relating to our businesses; |
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uncertainty as to whether a market for our VeriMed system will develop and whether we will be able to
generate more than a nominal level of revenue from this business; |
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the potential for patent infringement claims to be brought against us asserting that we hold no rights
for the use of the implantable microchip technology and that we are violating another partys
intellectual property rights. If such a claim is successful, we could be enjoined from engaging in
activities to market the systems that utilize the implantable microchip and be required to pay
substantial damages; |
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our ability to provide uninterrupted, secure access to the Health Link and VeriMed databases; and |
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our ability to establish and maintain proper and effective internal accounting and financial controls. |
You should not place undue reliance on any forward-looking statements. In addition, past
financial or operating performance is not necessarily a reliable indicator of future performance,
and you should not use our historical performance to anticipate future results or future period
trends. Except as otherwise required by federal securities laws, we disclaim any obligation or
undertaking to disseminate any updates or revisions to any forward-looking statement contained in
this Annual Report on Form 10-K to reflect any change in our expectations or any change in events,
conditions or circumstances on which any such statement is based. All forward-looking statements
attributable to us, or persons acting on our behalf, are expressly qualified in their entirety
by the cautionary statements included in this Annual Report on Form 10-K.
4
PART I
ITEM 1. BUSINESS
The Company
PositiveID Corporation, formerly known as VeriChip Corporation, was formed as a Delaware
corporation by Digital Angel Corporation, or Digital Angel, in November 2001. In January 2002, we
began our efforts to create a market for radio frequency identification, or RFID, systems that
utilize our human implantable microchip. During the first half of 2005 we acquired two business
focused on providing RFID systems for healthcare applications. Those businesses (EXi Wireless and
Instantel) were merged in 2007 to form Xmark Corporation (Xmark), which was a wholly owned
subsidiary of ours. On February 14, 2007, we completed our initial public offering in which we
sold 3,100,000 shares of our common stock at $6.50 per share.
On July 18, 2008, we completed the sale of all of the outstanding capital stock of Xmark,
which at the time was principally all of our operations, to Stanley Canada Corporation, a
wholly-owned subsidiary of The Stanley Works. The sale transaction was closed for $47.9 million in
cash, which consisted of the $45 million purchase price plus a balance sheet adjustment of
approximately $2.9 million, which was adjusted to $2.8 million at settlement of the escrow. Under
the terms of the stock purchase agreement, $43.4 million of the proceeds were paid at closing and
$4.4 million was released from escrow in July 2009. As a result, we recorded a gain on the sale of
Xmark of $6.2 million, with $4.5 million of that gain deferred until the escrow was settled. The
financial position, results of operations and cash flows of Xmark have been reclassified as
discontinued operations in 2008 and 2007.
Following the completion of the sale of Xmark to Stanley Canada, we retired all of our
outstanding debt for a combined payment of $13.5 million and settled all contractual payments to
Xmarks and our officers and management for $9.1 million. On August 28, 2008, we paid a special
dividend to our stockholders of $15.8 million.
On November 12, 2008, the Company entered into an Asset Purchase Agreement (APA) with
Digital Angel and Destron Fearing Corporation, a wholly-owned subsidiary of Digital Angel, which
collectively are referred to as, Digital Angel. The terms of the APA included the purchase by the
Company of patents related to an embedded bio-sensor system for use in humans, and the assignment
of any rights of Digital Angel under a development agreement associated with the development of an
implantable glucose sensing microchip. The Company also received covenants from Digital Angel and
Destron Fearing that will permit the use of intellectual property of Digital Angel related to the
Companys VeriMed business without payment of ongoing royalties, as well as inventory and a limited
period of technology support by Digital Angel. The Company paid Digital Angel $500,000 at the
closing of the APA, which was recorded in the financials as research and development expense.
Also, on November 12, 2008, R&R Consulting Partners LLC, a company controlled by our Chairman
and Chief Executive Officer, purchased 5,355,556 shares of common stock from Digital Angel, at
which point in time Digital Angel ceased being a stockholder.
On September 4, 2009, the Company, VeriChip Acquisition Corp., a Delaware corporation and our
wholly-owned subsidiary (the Acquisition Subsidiary), and Steel Vault Corporation, a Delaware
corporation (Steel Vault), signed an Agreement and Plan of Reorganization (the Merger
Agreement), dated September 4, 2009, as amended, pursuant to which the Acquisition Subsidiary was
merged with and into Steel Vault on November 10, 2009, with Steel Vault surviving and becoming a
wholly-owned subsidiary of the Company (the Merger). Upon the consummation of the Merger, each outstanding
share of Steel Vaults common stock, warrants and options was converted into 0.5 shares of common
stock, warrants and options of the Company. At the closing of the Merger, we changed our name to
PositiveID Corporation, and changed our stock ticker symbol with Nasdaq to PSID effective
November 11, 2009.
In February 2010, we acquired the assets of Easy Check Medical Diagnostics, LLC, including the
Easy Check breath glucose detection system and the iGlucose wireless communication system. These
products are currently under development. There is a U.S. patent pending for the Easy Check breath
glucose detection system and the Company plans to file a patent application and launch the product
development for the iGlucose system in early 2010. In exchange for the assets, we issued 300,000
shares of our common stock valued at approximately $351,000. Additional
payment in the form of shares (maximum 200,000 shares) and product royalties may be paid
in the future based on successful patent grants and product or license revenues.
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Our principal executive offices are located at 1690 South Congress Avenue, Suite 200, Delray
Beach, Florida 33445. Our telephone number is (561) 805-8008. Unless the context provides
otherwise, when we refer to the Company, we, our, or us in this Annual Report on Form 10-K,
we are referring to VeriChip Corporation and its consolidated subsidiaries.
VeriChip, Health Link, VeriMed, VeriTrace, iGlucose and NationalCreditReport.com are our
registered trademarks. This Annual Report on Form 10-K contains trademarks and trade names of other
organizations and corporations.
Available Information
We file or furnish with or to the Securities and Exchange Commission, or SEC, our quarterly
reports on Form 10-Q, annual reports on Form 10-K, current reports on Form 8-K, annual reports to
stockholders and annual proxy statements and amendments to such filings. Our SEC filings are
available to the public on the SECs website at http://www.sec.gov. These reports are also
available free of charge from our website at http://www.positiveidcorp.com as soon as reasonably
practicable after we electronically file or furnish such material with or to the SEC. The
information on our website is not incorporated by reference into this Annual Report on Form 10-K or
any registration statement that incorporates this Annual Report on Form 10-K by reference.
Overview
We have historically developed, marketed and sold radio frequency identification, frequently
referred to as RFID, systems used for the identification of people in the healthcare market.
Beginning in the fourth quarter of 2009, with the acquisition of Steel Vault, the Company is
pursuing its strategy to provide unique health and security identification tools to protect
consumers and businesses, operating in two key segments: HealthID and ID Security.
Our HealthID segment is currently focused on the development of the glucose-sensing microchip,
in conjunction with Receptors LLC (Receptors). In the field of diabetes management we also
acquired, in February 2010, the assets of Easy Check Medical Diagnostics, LLC, including the Easy
Check breath glucose detection system and the iGlucose wireless communication system. All three of
these products are currently under development.
We also intend to continue the development of the Rapid Flu Detection system, and other health
related products, built on our core intellectual property. Our HealthID segment also includes the
VeriMed system, which uses an implantable passive RFID microchip (the VeriChip) that is used in
patient identification applications. Each implantable microchip contains a unique verification
number that is read when it is scanned by our scanner. In October 2004, the U.S. Food and Drug
Administration, or FDA, cleared our VeriMed Health Link system for use in medical applications in
the United States.
Our ID Security segment includes our Identity Security suite of products, sold through our
NationalCreditReport.com brand and our Health Link personal health record. Our
NationalCreditReport.com business was acquired in conjunction with our merger with Steel Vault in
November 2009. NationalCredit-Report.com offers consumers a variety of identity security products
and services primarily on a subscription basis. These services help consumers protect themselves
against identity theft or fraud and understand and monitor their credit profiles and other personal
information, which include credit reports, credit monitoring and credit scores. In the first
quarter of 2010, we re-launched our Health Link personal health record (PHR) business. We plan
to focus our marketing efforts on partnering with health care providers and exchanges, physician
groups, Electronic Medical Record (EMR) system vendors, and insurers to use Health Link as a PHR
provided to their patients. We will also seek to partner with pharmaceutical companies who wish to
communicate with our online community through various forms of value added content and advertising.
The Company continues to
focus on its HealthID and ID Security businesses, including the development of the glucose sensing
microchip, the Easy Check breath glucose detection system, the iGlucose wireless communication
system, the Rapid Flu Detection System, the Health Link PHR, and its operating business in
identity security. The Company intends to continue to explore potential strategic transactions
with third parties in the healthcare, identification, and animal health sectors.
Our Businesses
Healthcare Products
Our Healthcare Products include the development of a glucose-sensing microtransponder based on
our patent number 7,125,382 entitled Embedded Bio-Sensor System. Our patent covers a bio-sensor
system that utilizes RFID technology, combining wireless communication with an implantable
passively-powered on-chip transponder. We have partnered with Receptors, a technology company whose
AFFINITY by DESIGN chemistry platform can
be applied to the development of selective binding products, to develop an in-vivo glucose
sensor to detect glucose levels in the human body which is intended to be coupled with our
microchip to read blood glucose levels through an external scanner. According to the American
Diabetes Association, there are 23.6 million people in the United States, or 8 percent of the
population, who have diabetes. Furthermore, the total prevalence of diabetes increased 13.5 percent
from 2005 to 2007. We believe the successful development and commercialization of our
glucose-sensing microchip could negate the need for diabetics to draw blood samples multiple times
each day to read their blood glucose levels. We further believe that patients implanted with our
glucose-sensing microchip, if successfully developed, could get a rapid reading of their blood
sugar with a simple wave of a handheld scanner.
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In conjunction with Receptors, we have successfully completed Phase I development of the
glucose-sensing microchip and are currently in Phase II development. In Phase I, we successfully
demonstrated the bench-top format application of the glucose-sensing system to the detection of
glucose levels. Phase II will include expanding on the synthetic competitor agent and Combinatorial
Artificial Receptor Array (CARA) binding environment preparation and screening protocols using
optimized array and bead workflows. We expect that it will optimize candidate glucose-sensing
systems for sensitivity and selectivity incorporating model matrices into the screen and workflow
process. We also expect that Phase II will optimize the binding environment and competitor agent
synthesis, test cut-off membrane technology and demonstrate a bench-scale fluorescence system
prototype.
We have also partnered with Receptors to develop a Rapid Influenza Detection System built on
the same intellectual property platform used in the glucose sensing microtransponder. The Rapid
Influenza Detection System is intended to initially provide two levels of identification within
minutes. If developed, utilizing a simple test tube format that can be combined with an
inexpensive reader, it is expected that the first level will prep the sample and identify the agent
as a flu or non-flu virus, and that the second level of identification will classify the sub-type
of flu that is present in a sample, such as H3N2 (seasonal flu), H1N1 (swine flu), etc. In February
2010, we completed Phase I development and successfully achieved proof-of-concept. CARA support and
complementary competitor agents were developed to detect the presence of influenza in a model nasal
wash matrix. Using multiplexed specificity, the goal of Phase II is to classify the sub-type of flu
that is present in a sample. We believe rapid sub-type classification of flu strains at the point
of care will allow for improved treatment, thereby discouraging antibiotic overuse, preventing
central lab overloading and improving overall health outcomes. Furthermore, we believe the rapid
flu sub-type test will give an early warning of the rise of new sub-types of influenza so that
containment measures can be implemented and pandemic proportions can be avoided. According to the
Centers for Disease Control and Prevention, each year in the United States on average, 5 percent to
20 percent of the population gets the flu; on average, more than 200,000 people are hospitalized
from flu-related complications, and about 36,000 people die from flu-related causes.
In February 2010, we acquired certain intellectual property rights and assets of Easy Check
Medical Diagnostics, LLC, to expand our portfolio of non-invasive glucose-level testing products
and diabetes management tools under development. Easy Check has two primary products under
development: the Easy Check breath glucose detection system and the iGlucose wireless
communication device.
The Easy Check breath glucose test, currently under development, is a non-invasive glucose
detection system that measures acetone levels in a patients exhaled breath. The association
between acetone levels in the breath and glucose is well documented, but previous data on the
acetone/glucose correlation has been insufficient for reliable statistics. Easy Checks breath
glucose detection system combines a proprietary chemical mixture of natrium nitroprussid with
breath exhalate, which is intended to create a new molecular compound that can be measured with its
patent pending technology. We believe that the use of a heavy molecule to generate a chemical
reaction that can be reliably measured may prove the close correlation between acetone
concentrations found in a patients exhaled breath and glucose found in his or her blood. This
could eliminate a patients need to prick his or her finger multiple times per day to get a blood
sugar reading.
Easy Checks other product under development, the iGlucose system, uses wireless SMS messaging
to automatically communicate a diabetics glucose readings to the iGlucose online database.
iGlucose is intended to provide next generation, real-time data to improve diabetes management and
help ensure patient compliance, data accuracy and insurance reimbursement. In addition, we believe
that the iGlucose wireless communication device is the first to address the Medicare requirement
for durable medical equipment manufacturers and pharmacies to maintain glucose level logs and
records for the millions of high-frequency diabetes patients.
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Our VeriMed system, which includes our VeriChip, is designed to rapidly and accurately
identify people who are unconscious, confused or unable to communicate at the time of medical
treatment, for example, upon arrival at a hospital emergency room. Our VeriMed system provides
emergency room physicians and staff who use our scanner, linking a patient to the VeriMed Registry
to have access to patient pre-approved information, including the patients name, primary care
physician, emergency contact information, advance directives and, if the patient elects, other
pertinent data, such as personal health records. In addition, we believe that our wireless handheld
scanner could make the VeriMed system an important identification tool for EMTs and other emergency
personnel outside the hospital emergency room setting. The components of our system include:
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a glass-encapsulated microchip-equipped transponder, antenna, and capacitor; |
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a fixed location, or a wireless handheld, scanner; and |
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a secure, web-enabled database containing patient-approved information. |
The microchip used in the VeriMed system is a passive RFID microchip, approximately the size
of a grain of rice, which is implanted under the skin in a patients upper right arm under the
supervision of a physician. The capsule is coated with a polymer, BioBondTM to form
adherence to human tissue, thereby preventing migration in the body. Each microchip contains a
unique 16-digit identification number. The identification number can be read by one of our handheld
scanners. When the scanner is placed within a few inches of the microchip, a small amount of radio
frequency energy passes from the scanner, energizing the dormant microchip, which then emits a
radio frequency signal transmitting the identification number. With that identification number,
emergency room personnel or EMTs can securely obtain from our or a third partys database the
patients pre-approved information, including the patients name, primary care physician, emergency
contact information, advance directives and, if the patient elects, other pertinent data, such as
personal health records.
Identity Security Products and Services
NationalCreditReport.com is an emerging leader in the consumer provision of credit reports,
credit score and credit monitoring products. This business provides an easy to use medium for
consumers to retrieve and review their credit history, as well as monitor their credit files with
one or all three of the major credit reporting bureaus: Experian, Equifax and TransUnion. We plan
to add both credit and non-credit related products to our portfolio of services in 2010 some of
which may include, but are not limited to, payday loan reporting and monitoring, national criminal
reporting and monitoring, cyberspace reporting and monitoring, public record reporting and
monitoring as well as data breach response and notification services. We also plan to sell our
products and services directly to corporations to give to their employees as an employee benefit.
The three credit reporting repositories have agreements with a number of credit reporting
resellers, allowing them to in turn supply companies, like NationalCreditReport.com, that resell
their products and services, separately or bundled, with other services to consumers. NCRC has an
agreement with one of the resellers.
Our products and
services are offered to consumers principally on a monthly subscription
basis. Subscription fees are generally billed directly to the subscribers credit card. The
prices to subscribers of various configurations of our monitoring products and services range
generally from $14.95 to $19.95 per month. As a means of allowing customers to become familiar with
our services, we often offer free trial periods.
A substantial number of our subscribers cancel their subscriptions each year. Because there is
a marketing and search cost to acquire a new subscriber and produce initial fulfillment materials,
subscribers typically must be retained for a number of months to cover these costs. Not all
subscribers are retained for a sufficient period of time to achieve positive cash flow returns on
these costs.
Health Link Personal Health Record
Health Link is a patient-controlled, online repository to store personal health information
such as medications, allergies, family history, previous surgeries, vaccinations and lab results.
Health Link also connects the patient to a multitude of customized materials such as personalized
health education and online connectivity to caregivers. Through reminders and alerts that can be
tailored to suit an individuals unique circumstances, members are reminded of important actions
and receive suggestions to better manage their health. This includes everything from refilling
prescriptions on time, appointment reminders, drug interaction warnings, and tips for preventative
actions. Health Link can be accessed from any location at any time through an internet connection.
8
According to Manhattan Research, LLC, a healthcare marketing services firm, 68 percent of all
adults in the U.S. used the Internet in 2009 to obtain health information, compared to 64% of
adults seeking such information from a doctor and 43% of adults seeking such information from
friends or family members. According to Manhattan Research, the number of U.S. adults looking for
health information online has increased from 63.3 million in 2002 to 157.5 million in 2009.
Patients using the Health Link personal health record (PHR) are responsible for inputting
all of their information into our database, including personal health records, as physicians
offices are not yet typically involved in this process. Patients can also utilize Health Link to
connect with numerous Electronic Medical Record (EMR) systems that are currently accessible
through Microsoft HealthVault and Google Health. This interoperability will allow patients to
automatically retrieve medical information and include that information, such as prescriptions from
large pharmacy chains, laboratory diagnostic tests and many electronic devices (i.e. glucose
meters, blood pressure monitors and electronic scales), in their Health Link PHR.
VeriMed System
We believe that the use of the VeriMed System has the potential to improve patient care,
enhance productivity and lower costs. The IDTechEx report refers to a study performed by the U.S.
Institute of Medicine that estimated that preventable medical errors in the United States cause
between 44,000 and 98,000 deaths each year, due in part to mistaken patient identification and lack
of information on a patients medical history, and results in losses, other than the loss of human
life, of $17 billion to $29 billion annually. These losses include the expense of additional care
needed because of mistakes, disability, and lost productivity and income. One factor that can
contribute to the occurrence of preventable medical errors is the inability to identify a patient
and/or access his or her health records. Recognizing the problem of patient identification and
access to medical records, the United States government is currently attempting to address certain
inefficiencies in the healthcare system related to information technology. In particular, the
current administration has developed a plan to move, in the next five years, toward broad adoption
of standards-based electronic health information systems, including the computerization of the
nations health records.
In early 2007, we entered into a partnership with Alzheimers Community Care, or ACC, of West
Palm Beach, Florida, in which PositveID and ACC will conduct a study of the effectiveness of the
VeriMed System in managing the records of Alzheimers patients and their caregivers. In the
two-year, 200 patient study, participating individuals suffering from Alzheimers disease and other
forms of dementia, as well as their caregivers, would receive the VeriChip implantable microchip to
provide emergency department staff easy access to those patients identification and medical
information. Alzheimers disease is one of several medical conditions we identify as being ideally
suited for the benefits of the VeriMed system since individuals with the disease or other forms of
dementia are often unable to give necessary identifying information or critical medical history
upon being admitted to a hospital. ACC also believes it is important for caregivers to obtain the
implantable VeriMed. If a caregiver becomes ill, the VeriMed database will inform medical personnel
that he or she is the caregiver for someone unable to care for themselves. All participants in the
study will be voluntary. The legally designated responsible party of an Alzheimers patient unable
to make medical decisions must give permission for the patient to participate. As of December 31,
2009, more than 100 patients and caregivers have received the VeriChip as part of this study.
Other Applications
During 2009, in conjunction with Raytheon Microelectronics España, we developed an 8mm
microchip, which has functionality that is substantially equivalent to the VeriChip. This
development was done under a Development and Supply Agreement with Medical Components, Inc.
(Medcomp), a leading global manufacturer of vascular access catheters, to develop and manufacture
a RFID microchip for implantation into Medcomps vascular access medical devices on an exclusive
basis. Under this agreement, if the Medcomp product is cleared by the FDA, Medcomp has committed
to minimum purchase of $3,005,000 over a five year period.
We also have another system that utilizes the implantable microchip, our VeriTrace system. Our
VeriTrace system was conceived of in the wake of Hurricane Katrina, when we donated implantable
microchips to FEMAs Department of Mortuary Services in Mississippi and Louisiana to help with
FEMAs efforts to identify corpses. Our implantable microchips were used to provide an end-to-end
tagging solution for the accurate tracking and identification of human remains and associated
evidentiary items.
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Sales, Marketing and Distribution
Our sales, marketing and distribution plan for our Healthcare Products is to align with large
medical distribution companies, and either manufacture the products to their specification or
license the products and underlying technology to them.
Our Identity Security products and services are marketed to consumers primarily through online
advertising, email marketing, paid search, strategic marketing partnerships, as well as search
engine marketing (SEM) and search engine optimization (SEO) strategies.
We plan to market our Health Link PHR to patients through partnerships with healthcare
providers, insurers, Health Information Exchanges, Regional Health Information Organizations, EMR
system vendors, and other related healthcare entities and healthcare providers. As we continue to
add patient subscribers through these strategic relationships, we will seek further partnerships
with pharmaceutical companies and medical device manufacturers who wish to communicate with our
on-line community through various forms of value added content.
Manufacturing; Supply Arrangements
We have historically outsourced the manufacturing of all the hardware components of our RFID
systems to third parties. As of February 28, 2010, we have not had material difficulties obtaining
system components. We believe that if any of our manufacturers or suppliers were to cease supplying
us with system components, we would be able to procure alternative sources without material
disruption to our business. We plan to continue to outsource any manufacturing requirements of our
current and under development products.
Through 2008, Digital Angel was our sole supplier of the implantable microchips, which it
obtained from Raytheon Microelectronics España, a subsidiary of Raytheon Company, or RME, under the
terms of a separate supply agreement which was terminated on November 12, 2008. Since that time we
have been contracting with RME directly.
Environmental Regulation
We must comply with local, state, federal, and international environmental laws and
regulations in the countries in which we do business, including laws and regulations governing the
management and disposal of hazardous substances and wastes. We expect our operations and products
will be affected by future environmental laws and regulations, but we cannot predict the effects of
any such future laws and regulations at this time. Our distributors who place our products on the
market in the European Union are required to comply with EU Directive 2002/96/EC on waste
electrical and electronic equipment, known as the WEEE Directive. Noncompliance by our distributors
with EU Directive 2002/96/EC would adversely affect the success of our business in that market.
Additionally, we are investigating the applicability of EU Directive 2002/95/EC on the restriction
of the use of certain hazardous substances in electrical and electronic equipment, known as the
RoHS Directive which took effect on July 1, 2006. We do not expect the RoHS Directive will have a
significant impact on our business.
Government Regulation
Laws and Regulations Pertaining to RFID Technologies
Our RFID systems that use our implantable microchip rely on low-power, localized use of radio
frequency spectrum to operate. As a result, we must comply with U.S. Federal Communications
Commission, or FCC, and Industry Canada regulations, as well as the laws and regulations of other
jurisdictions governing the design, testing, marketing, operation and sale of RFID devices if and
when we sell our products. Accordingly, all of our products and systems have a paired FCC and
Industry Canada equipment authorization.
U.S. Federal Communications Commission Regulations
Under FCC regulations and Section 302 of the Communications Act, RFID devices, including those
we market and sell, must be authorized and comply with all applicable technical standards and
labeling requirements prior to being marketed in the United States. The FCCs rules prescribe
technical, operational and design requirements for devices that operate on the electromagnetic
spectrum at very low powers. The rules ensure that such devices do not cause interference to
licensed spectrum services, mislead consumers regarding their operational capabilities or produce
emissions that are harmful to human health. Our RFID devices are intentional radiators, as defined
in the FCCs rules. As such, our devices may not cause harmful interference to licensed services
and must accept any interference received. We must construct all equipment in accordance with good
engineering design as well as manufacturers practices.
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Manufacturers of RFID devices must submit testing results and/or other technical information
demonstrating compliance with the FCCs rules in the form of an application for equipment
authorization. The FCC processes each application when it is in a form acceptable for filing and,
upon grant, issues an equipment identification number. Each of our RFID devices must bear a label
which displays the equipment authorization number, as well as specific language set forth in the
FCCs rules. In addition, each device must include a user manual cautioning users that changes or
modifications not expressly approved by the manufacturer could void the equipment authorization. As
a condition of each FCC equipment authorization, we warrant that each of our devices marked under
the grant and bearing the grant identifier will conform to all the technical and operational
measurements submitted with the application. RFID devices used and/or sold in interstate commerce
must meet these requirements or the equipment authorization may be revoked, the devices may be
seized and a forfeiture may be assessed against the equipment authorization grantee. The FCC
requires all holders of equipment authorizations to maintain a copy of each authorization together
with all supporting documentation and make these records available for FCC inspection upon request.
The FCC may also conduct periodic sampling tests of equipment to ensure compliance. We believe we
are in substantial compliance with all FCC requirements applicable to our products and systems.
Regulation by the FDA
Our VeriChip microchip is a medical device subject to regulation by the FDA, as well as other
federal and state regulatory bodies in the United States and comparable authorities in other
countries. In October 2004, the VeriMed system received classification as a Class II medical device
by the FDA for patient identification and health information purposes. The FDA also permits us to
market and sell the VeriMed system in the United States.
FDA Premarket Clearance and Approval Requirements. Generally speaking, unless an exemption
applies, each medical device we wish to distribute commercially in the United States will require
either prior clearance under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or FFDCA,
or a premarket approval application, or PMA, from the FDA. Medical devices are classified into one
of three classes Class I, Class II or Class III depending on the degree of risk to the
patient associated with the medical device and the extent of control needed to ensure safety and
effectiveness. Devices deemed to pose lower risks are placed in either Class I or II. The
manufacturer of a Class II device is typically required to submit to the FDA a premarket
notification requesting permission to commercially distribute the device and demonstrating that the
proposed device is substantially equivalent to a previously cleared and legally marketed 510(k)
device or a device that was in commercial distribution before May 28, 1976 for which the FDA has
not yet called for the submission of a PMA. This process is known as 510(k) clearance. Devices
deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting implantable
devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are
generally placed in Class III, requiring premarket approval.
In October 2004, we received classification of our VeriMed system as a Class II device. In
granting this classification, the FDA created a new device category for implantable radiofrequency
transponder systems for patient identification and health information. The FDA also determined
that devices that meet this description will be exempt from 510(k) premarket clearance so long as
they comply with the FFDCA, its implementing regulations and the provisions of an FDA guidance
document issued by the FDA in December 2004, entitled Guidance for Industry and FDA Staff, Class
II Special Controls Guidance Document: Implantable Radiofrequency Transponder System for Patient
Identification and Health Information, that establishes special controls for this type of device.
The special controls, which are intended to ensure that the device is safe and effective for its
intended use, include the following: biocompatibility testing, information security procedures,
performance standard verification, software validation, electro-magnetic compatibility and
sterility testing. We believe that we are in compliance with FFDCA, its implementing regulations
and the December 2004 guidance document. Similarly, a company that wishes to market products that
will compete with the VeriMed system will not be required to submit a 510(k) premarket clearance
application to the FDA if they comply with the requirements of the special controls guidance
document as well as a full spectrum of FDA regulations, described more fully below.
In January, 2007, the FDA published a Draft Guidance entitled Radio-Frequency Wireless
Technology in Medical Devices. This document includes the FDAs current recommendations regarding
specific risks and limitations to be considered when developing and implementing a Quality System
for medical devices using radio frequency wireless technology, as well as additional information to
be included in the labeling for such devices. We believe our Quality System and labeling for our
VeriMed System meet the recommendations outlined in the draft guidance.
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Pervasive and Continuing Regulation. After a medical device is placed on the market, numerous
regulatory requirements continue to apply. These include:
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quality system regulations, or QSR, which require manufacturers,
including third-party manufacturers, to follow stringent design,
testing, control, documentation and other quality assurance procedures
during all aspects of the manufacturing process; |
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labeling regulations and FDA prohibitions against the promotion of
regulated products for uncleared, unapproved or off-label uses; |
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clearance or approval of product modifications that could
significantly affect safety or effectiveness or that would constitute
a major change in intended use; |
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medical device reporting, or MDR, regulations, which require that a
manufacturer report to the FDA if the manufacturers device may have
caused or contributed to a death or serious injury or malfunctioned in
a way that would likely cause or contribute to a death or serious
injury if the malfunction were to recur; and |
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post-market surveillance regulations, which apply when necessary to
protect the public health or to provide additional safety and
effectiveness data for the device. |
Regulation of Identity Security Products
We market our consumer products and services through a variety of marketing channels,
including online marketing channels, which include online advertising, email marketing, paid
search, as well as search engine marketing (SEM) and search engine optimization (SEO) strategies,
direct mail, outbound telemarketing, inbound telemarketing, inbound customer service and account
activation calls. These channels are subject to both federal and state laws and regulations.
Federal and state laws and regulations may limit our ability to market to new subscribers or offer
additional services to existing subscribers.
Email marketing of our services is subject to the Federal Trade Commissions CAN Spam act
which is a law that regulates the use of email communications as a marketing tool to potential,
current and inactive subscribers. The CAN Spam act lists certain rules and regulations that define
the information that must be contained in email marketing messages being sent from a company which
include, but are not limited the provision of an opt-out link which gives the consumers the option
to opt out of further email communications from a company. These laws may affect our use of email
to market to or communicate with subscribers or potential subscribers.
The Fair Credit Reporting Act, or FCRA, governs, among other things, the sharing of consumer
report information among affiliated and unaffiliated third parties; access to credit scores; and
requirements for data furnishers and users of consumer report information. Violation of the FCRA,
or of similar state laws, can result in an award of actual damages, as well as statutory and/or
punitive damages in the event of a willful violation. In 2003, Congress amended the FCRA with the
Fair and Accurate Credit Transactions Act of 2003 (FACTA). FACTA allows consumers to obtain a
free credit report once a year from each of the three nationwide consumer credit reporting
agencies. FACTA also contains provisions intended to reduce identity theft, such as allowing
consumers to place alerts on their credit histories and mandating secure disposal of certain
categories of information.
The Gramm-Leach Bliley Act (GLBA) requires financial institutions to comply with detailed
privacy and data security regulations. Under GLBA, the FTC was given authority to regulate certain
financial institutions that are not otherwise subject to the enforcement authority of another
regulator. Entities falling within the purview of the FTCs regulations must, among other things,
provide notices to customers about the entitys privacy policies and practices as well as
information on disclosure of information.
Telemarketing of our services is subject to federal and state telemarketing regulation.
Federal statutes and regulations adopted by the Federal Trade Commission and Federal Communications
Commission impose various restrictions on the conduct of telemarketing. The Federal Trade
Commission also has enacted the national Do Not Call Registry, which enables consumers to elect to
prohibit telemarketers from calling them. We may not be able to reach potential subscribers
because they are placed on the national Do Not Call Registry. Many states have adopted, and others
are considering adopting, statutes or regulations that specifically affect telemarketing
activities. Although we do not control the telemarketing firms that it engages to market its
programs, in some cases we are responsible
for compliance with these federal and state laws and regulations. In addition, the Federal
Trade Commission and virtually all state attorneys general have authority to prevent marketing
activities that constitute unfair or deceptive acts or practices.
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Fraud and Abuse
We are subject to various federal and state laws pertaining to healthcare fraud and abuse,
including anti-kickback laws and false claims laws. Violations of these laws are punishable by
criminal and/or civil sanctions, including, in some instances, imprisonment and exclusion from
participation in federal and state healthcare programs, including Medicare, Medicaid and Veterans
Affairs health programs. We have never been challenged by a government authority under any of these
laws and believe that our operations are in material compliance with such laws. However, because of
the far-reaching nature of these laws, there can be no assurance that we would not be required to
alter one or more of our practices to be in compliance with these laws. In addition, there can be
no assurance that the occurrence of one or more violations of these laws would not result in a
material adverse effect on our financial condition and results of operations.
Anti-Kickback Laws
We may directly or indirectly be subject to various federal and state laws pertaining to
healthcare fraud and abuse, including anti-kickback laws. In particular, the federal healthcare
program Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering,
receiving or providing remuneration, directly or indirectly, in exchange for or to induce either
the referral of an individual, or the furnishing, arranging for or recommending a good or service,
for which payment may be made in whole or part under federal healthcare programs, such as the
Medicare and Medicaid programs. Penalties for violations include criminal penalties and civil
sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other
federal healthcare programs.
Federal False Claims Act
We may become subject to the Federal False Claims Act, or FCA. The FCA imposes civil fines and
penalties against anyone who knowingly submits or causes to be submitted to a government agency a
false claim for payment. The FCA contains so-called whistle-blower provisions that permit a
private individual to bring a claim, called a qui tam action, on behalf of the government to
recover payments made as a result of a false claim. The statute provides that the whistle-blower
may be paid a portion of any funds recovered as a result of the lawsuit. Even though the VeriMed
system is not reimbursed by federal healthcare programs, it is still possible that we may be liable
for violations of the FCA, for instance, if a sales representative were to assist or instruct a
physician to bill a government program for microchip implantation by listing on the claim form some
other service that is reimbursable.
State Laws and Regulations
Many states have enacted laws similar to the federal Anti-Kickback Statute and FCA. The
Deficit Reduction Act of 2005 contains provisions that give monetary incentives to states to enact
new state false claims acts. The state Attorneys General are actively engaged in promoting the
passage and enforcement of these laws. While the Federal Anti-Kickback Statute and FCA apply only
to federal programs, many similar state laws apply both to state funded and to commercial health
care programs. In addition to these laws, all states have passed various consumer protection
statutes. These statutes generally prohibit deceptive and unfair marketing practices, including
making untrue or exaggerated claims regarding consumer products. There are potentially a wide
variety of other state laws, including state privacy laws, to which we might be subject. We have
not conducted an exhaustive examination of these state laws.
Privacy Laws and Regulations
Our VeriMed business is subject to various federal and state laws regulating the protection of
consumer privacy. We have never been challenged by a governmental authority under any of these laws
and believe that our operations are in material compliance with such laws. However, because of the
far-reaching nature of these laws, there can be no assurance that we would not be required to alter
one or more of our systems and data security procedures to be in compliance with these laws. Our
failure to protect health information received from customers
could subject us to liability and adverse publicity and could harm our business and impair our
ability to attract new customers.
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U.S. Federal Trade Commission Oversight
An increasing focus of the United States Federal Trade Commissions (FTCs) consumer
protection regulation is the impact of technological change on protection of consumer privacy.
Under the FTCs statutory authority to prosecute unfair or deceptive acts and practices, the FTC
vigorously enforces promises a business makes about how personal information is collected, used and
secured. Since 1999, the FTC has taken enforcement action against companies that do not abide by
their representations to consumers of electronic security and privacy. More recently, the FTC has
found that failure to take reasonable and appropriate security measures to protect sensitive
personal information is an unfair practice violating federal law. In the consent decree context,
offenders are routinely required to adopt very specific cyber security and internal compliance
mechanisms, as well as submit to twenty years of independent compliance audits. Businesses that do
not adopt reasonable and appropriate data security controls have been found liable for as much as
$10 million in civil penalties and $5 million in consumer redress.
The FTC has considered the potential impact of RFID on consumer protection issues although
this does not appear to be a current regulatory priority. In 2006, the FTC launched a new
initiative, Protecting Consumers in the Next Tech-ade and convened public hearings on November
6-8, 2006 that brought together experts from the business, government and technology sectors as
well as consumer advocates, academics and law enforcement officials to explore ways in which
convergence and the globalization of commerce impact consumer protection. Panelists examined
changes in marketing and technology over the past decade and challenges facing consumers, business
and government. One of the panels, entitled RFID Technology in the Next Tech-ade, focused on the
role of RFID in the healthcare and retail sectors. On September 23, 2008, the FTC convened a
Transatlantic RFID Workshop on Consumer Privacy and Data Security to consider RFID issues of
relevance to both the United States and the European Commission. The FTC has not engaged in any
formal activities relating to RFID since 2008.
State Legislation
The states of California, North Dakota, Wisconsin and Oklahoma have adopted laws prohibiting
chip implantation without the recipients prior consent. A number of states also introduced
legislation focusing on the consumer privacy implications of RFID use in government identification
documents, prescription drug tracking, retail sales, healthcare records and tracking of one
individual by another. The states of California, Michigan, Nevada, New Hampshire, Rhode Island,
Texas, Vermont and Washington enacted laws preserving consumer privacy relating to government
identification documents, RFID-enabled credit and ATM cards, and other RFID documents. As of
December 31, 2009, none of this legislative activity restricts our current or planned operations.
Many states have privacy laws relating specifically to the use and disclosure of healthcare
information. Federal healthcare privacy laws may preempt state laws that are less restrictive or
offer fewer protections for healthcare information than the federal law if it is impossible to
comply with both sets of laws. More restrictive or protective state laws still may apply to us, and
state laws will still apply to the extent that they are not contrary to federal law. Therefore, we
may be required to comply with one or more of these multiple state privacy laws. Statutory
penalties for violation of these state privacy laws varies widely. Violations also may subject us
to lawsuits for invasion of privacy claims.
Many states currently have laws in place requiring organizations to notify individuals if
there has been unauthorized access to their unencrypted personal information. Several states also
require organizations to notify the applicable state Attorney General or other governmental entity
in the event of a data breach, and may also require notification to consumer reporting agencies if
the number of individuals involved surpasses a defined threshold. We may be required to comply
with one or more of these notice of security breach laws in the event of unauthorized access to
personal information. In addition to statutory penalties for a violation of the notice of security
breach laws, we may be exposed to liability from impacted individuals.
Title 201, Section 17.00 of the Code of Massachusetts Regulations (Regulation 201)
establishes standards for the protection of personal information of Massachusetts residents. Under
Regulation 201, we may be required to develop, implement and maintain a written information
security program designed to protect such personal information. We may also be required to perform
a risk assessment of our existing safeguards, and improve those areas where there is a reasonably
foreseeable risk to the security, confidentiality and/or integrity of any electronic, paper or
other records that contain personal information about Massachusetts residents. Although Regulation
201
itself does not include a remedy provision, the Massachusetts Attorney General may be able to
levy fines against us pursuant to other laws, and we may also be exposed to liability from impacted
individuals.
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The European Union
In the European Union (EU), promotion of RFID technology is viewed as a critical economic
issue. It is established that insofar as RFID is a technology involving collection, sharing and
storage of personally identifiable information, the mandates of Directive 95/46/EC of the European
Parliament and of the Council of 24 October 1995 on the Protection of Individuals With Regard to
the Processing of Personal Data and On the Free Movement of Such Data (EU Data Directive)
applies. All 25 EU member countries have implemented the EU data directive. In addition, Directive
2002/58/EC of the European Parliament and of the Council of 12 July 2002 concerning the processing
of personal data and the protection of privacy in the electronic communications sector is also
applicable. At issue today is whether additional privacy protection laws beyond those prescribed
by the EU data directive and its country-specific laws, as well as the electronic communications
directive, are needed for privacy issues raised by RFID technology. On January 19, 2005, the EUs
Working Party 29, charged with interpretation and expansion of EU data protection law and policy,
and adopted Working Document 105, addressing data protection issues related to RFID technology.
That document reinforced the need to comply with the basic principles of the EU data directive and
related documents whenever personal data is collected via RFID technology. Guidance to RFID
manufacturers was also provided regarding responsibilities to design privacy compliant technology.
On May 5, 2009, the Commission of the European Communities adopted a Commission Recommendation
on the Implementation of Privacy and Data Protection Principles in Applications Supported by
Radio-Frequency Identification (SEC(2009)585, SEC(2009)586). This document provides
recommendations regarding the privacy, data protection and security problems related to RFID uses,
particularly in business-to-consumer environments. The objective is to stimulate innovation
through wider adoption of RFID applications, facilitate interoperable RFID uses and adopt similar
privacy and security approaches in different EU Member States. It is noted that biometric
identification data or health-related data are especially critical with regard to information
security and privacy, therefore requiring specific attention. As of December 31, 2009, none of
these recommendations restricts our current or planned operations.
Health Insurance Portability and Accountability Act of 1996
Under the federal Health Information Technology for Economic and Clinical Health Act (the
HITECH Act), we are subject to certain federal privacy and security requirements relating to
individually identifiable health information we maintain. To the extent required by the Health
Insurance Portability and Accountability Act of 1996 (HIPAA), we have entered into business
associate agreements with certain health care providers and health plans relating to the privacy
and security of protected health information. We have implemented policies and procedures to enable
us to comply with these HIPAA business associate agreements. Under the HITECH Act, we are required
by federal law to comply with those business associate agreements, as well as certain privacy and
security requirements found in HIPAA and the HITECH Act as they relate to our activities as a
business associate. As a vendor of personal health records, the HITECH Act also requires us to
notify individuals if there is a breach of security of individually identifiable health information
held in a personal health record. If we do experience such a breach, we must notify each
individual whose information was acquired by an unauthorized person, and we must also notify the
FTC. Failure to comply with these federal privacy and security laws could subject us to civil or
criminal penalties.
Employees
As of February 28, 2010, we had 20 employees, of whom 8 were in management, finance and
administration, 5 in medical and business development, and 7 in customer support. We consider our
relationship with our employees to be satisfactory and have not experienced any interruptions of
our operations as a result of labor disagreements. None of our employees are represented by labor
unions or covered by collective bargaining agreements.
ITEM 1A. RISK FACTORS
The following risks and the risks described elsewhere in this Annual Report on Form 10-K,
including the section entitled Managements Discussion and Analysis of Financial Condition and
Results of Operations, could materially affect our business, prospects, financial condition,
operating results and cash flows. If any these risks materialize, the trading price of our common
stock could decline, and you may lose all or part of your investment.
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Risks Related to the Operations and Business of PositiveID
PositiveID has a history of losses, and expects to incur additional losses in the future.
PositiveID is unable to predict the extent of future losses or when it will become profitable.
Through December 31, 2009, PositiveID has experienced operating losses and as of December 31,
2009 its accumulated deficit was $54.0 million. PositiveID expects to continue to incur operating
losses for the near future. Its ability in the future to achieve or sustain profitability is based
on a number of factors, many of which are beyond its control. Even if it achieves profitability in
the future, it may not be able to sustain profitability in subsequent periods.
PositiveIDs long-term capital needs may require additional sources of capital, and there can
be no assurances that it will be successful in negotiating additional sources of long-term capital.
PositiveIDs long-term capital needs may require additional sources of equity or credit. There
can be no assurances that it will be successful in negotiating additional sources of equity or
credit for its long-term capital needs. PositiveIDs inability to have continuous access to such
financing at reasonable costs could materially and adversely impact its financial condition,
results of operations and cash flows.
Compliance with changing regulations concerning corporate governance and public disclosure may
result in additional expenses.
There have been changing laws, regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act, new regulations promulgated by the SEC and
rules promulgated by the national securities exchanges and the NASDAQ. These new or changed laws,
regulations and standards are subject to varying interpretations in many cases due to their lack of
specificity, and, as a result, their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies, which could result in continuing uncertainty
regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and
governance practices. As a result, PositiveIDs efforts to comply with evolving laws, regulations
and standards are likely to continue to result in increased general and administrative expenses and
a diversion of management time and attention from revenue-generating activities to compliance
activities. PositiveIDs board members and executive officers could face an increased risk of
personal liability in connection with the performance of their duties. As a result, PositiveID may
have difficulty attracting and retaining qualified board members and executive officers, which
could harm its business. If PositiveIDs efforts to comply with new or changed laws, regulations
and standards differ from the activities intended by regulatory or governing bodies, it could be
subject to liability under applicable laws or its reputation may be harmed.
PositiveID depends on key personnel to manage its business effectively, and, if it is unable
to hire, retain or motivate qualified personnel, its ability to design, develop, market and sell
its systems could be harmed.
PositiveIDs future success depends, in part, on certain key employees, including Scott R.
Silverman, its chairman of the board and chief executive officer, and William J. Caragol, its
president and chief financial officer, as well as key technical and operations personnel, and on
PositiveIDs ability to attract and retain highly skilled personnel. The loss of the services of
any of its key personnel may seriously harm its business, financial condition and results of
operations. In addition, the inability to attract or retain qualified personnel, or delays in
hiring required personnel, particularly operations, finance, accounting, sales and marketing
personnel, may also seriously harm its business, financial condition and results of operations.
PositiveIDs ability to attract and retain highly skilled personnel will be a critical factor in
determining whether we will be successful in the future.
During 2009, PositiveID failed to meet applicable Nasdaq Stock Market requirements. If in the
future PositiveID were to fail to meet one of these requirements, its stock could be delisted by
the Nasdaq Stock Market. If delisting occurs, it would adversely affect the market liquidity of its
common stock and harm its businesses.
If PositiveIDs common stock is delisted from the Nasdaq Stock Market, trading of its common
stock most likely will be conducted in the over-the-counter market on an electronic bulletin board
established for unlisted
securities, such as the OTC Bulletin Board. Delisting would adversely affect the market
liquidity of its common stock and harm PositiveIDs business and may hinder or delay its ability to
consummate potential strategic transactions or investments. Such delisting could also adversely
affect PositiveIDs ability to obtain financing for the continuation of its operations and could
result in the loss of confidence by investors, suppliers and employees.
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We will continue to incur the expenses of complying with public company reporting
requirements.
We have an obligation to continue to comply with the applicable reporting requirements of the
Securities Exchange Act of 1934, or the Exchange Act, which includes the filing with the SEC of
periodic reports, proxy statements and other documents relating to our business, financial
conditions and other matters, even though compliance with such reporting requirements is
economically burdensome.
Directors, executive officers, principal stockholders and affiliated entities own a
significant percentage of PositiveIDs capital stock, and they may make decisions that you do not
consider to be in the best interests of its stockholders.
As of March 5, 2010, PositiveIDs current directors and executive officer beneficially owned,
in the aggregate, approximately 55.6% of PositiveIDs outstanding voting securities. As a result,
if some or all of them acted together, they would have the ability to exert substantial influence
over the election of the board of directors and the outcome of issues requiring approval by
PositiveIDs stockholders. This concentration of ownership may also have the effect of delaying or
preventing a change in control of PositiveID that may be favored by other stockholders. This could
prevent transactions in which stockholders might otherwise recover a premium for their shares over
current market prices.
Risks Related to PositiveIDs Product Development Efforts
PositiveID
and its development partner Receptors LLC are in the early stages of developing a
rapid influenza detection system for the H1N1 virus and an in vivo glucose-sensing RFID microchip,
the effectiveness of both of which is unproven.
PositiveID and its
development partner, Receptors, are engaged in the research and development
of applying Receptors patented AFFINITY by DESIGNTM
CARATM platform to the detection and
classification of pandemic threat viruses, such as the H1N1 virus, as well as the research and
development of an in vivo glucose-sensing RFID microchip. The effectiveness of this detection
system and the effectiveness of this sensor/microchip system are yet to be determined. As a result,
there can be no assurance that PositiveID and Receptors will be able to successfully employ these
development-stage products as diagnostic solutions for either the detection of strains of influenza
and other viruses or for the detection of glucose in vivo. Any failure to establish the efficacy or
safety of these development-stage products could have a material adverse effect on PositiveIDs
business, results of operations, and financial condition.
PositiveIDs product research and development activities may not result in a
commercially-viable rapid influenza detection system, in vivo glucose-sensing RFID microchip, Easy
Check breath glucose detection system, or iGlucose wireless communication device.
All products are in the early stages of development, and are therefore prone to the risks of
failure inherent in diagnostic product development. PositiveID or Receptors may be required to
complete and undertake significant clinical trials to demonstrate to the U.S. Food and Drug
Administration, or FDA, that these products are safe and effective to the satisfaction of the FDA
and other non-United States regulatory authorities or for their respective, intended uses, or are
substantially equivalent in terms of safety and effectiveness to existing, lawfully-marketed,
non-premarket approved devices. Clinical trials are expensive and uncertain processes that often
take years to complete. Failure can occur at any stage of the process, and successful early
positive results do not ensure that the entire clinical trial or later clinical trials will be
successful. Product candidates in clinical-stage trials may fail to show desired efficacy and
safety traits despite early promising results. If the research and development activities of
PositiveID or Receptors do not result in commercially-viable products, PositiveIDs business,
results of operations, financial condition, and stock price could be adversely affected.
Even if the FDA or similar non-United States regulatory authorities grant PositiveID
regulatory approval of a product, the approval may take longer than PositiveID anticipates and may
be subject to limitations on the indicated uses for which the product may be marketed or contain
requirements for costly post-marketing follow up studies. Moreover, if PositiveID fails to comply
with applicable regulatory requirements, PositiveID may be subject to fines,
suspension or withdrawal of regulatory approvals, product recalls, seizure of products,
operating restrictions and criminal prosecution.
17
The success and timing of development efforts, clinical trials, regulatory approvals, product
introductions, collaboration and licensing arrangements, any termination of development efforts and
other material events could cause volatility in our stock price.
Volatility in PositiveIDs stock price will depend on many factors, including:
|
|
|
success of the development partnership between PositiveID
and Receptors and related development costs; |
|
|
|
success and timing of regulatory filings and approvals for
the rapid influenza detection system and the in vivo
glucose-sensing RFID microchip, the Easy Check breath
glucose detection system, and the iGlucose wireless
communication device; |
|
|
|
success and timing of commercialization and product
introductions of the rapid influenza detection system and
the in vivo glucose-sensing RFID microchip, the Easy Check
breath glucose detection system, and the iGlucose wireless
communication device; |
|
|
|
introduction of competitive products into the market; |
|
|
|
results of clinical trials for the rapid influenza
detection system and the in vivo glucose-sensing RFID
microchip, the Easy Check breath glucose detection system,
and the iGlucose wireless communication device; |
|
|
|
a finding that Receptors patented AFFINITY by
DESIGNtm CARAtm
platform is invalid or unenforceable, the Easy Check breath
glucose detection system, and the iGlucose wireless
communication device; |
|
|
|
a finding that the rapid influenza detection system or the
in vivo glucose-sensing RFID microchip, the Easy Check
breath glucose detection system, and the iGlucose wireless
communication device infringes the patents of a third party; |
|
|
|
our ability to obtain a patent on the Easy Check breath
glucose detection system and the iGlucose wireless
communication device; |
|
|
|
our ability to obtain a patent on the Easy Check breath glucose
detection system and the iGlucose wireless communication device; |
|
|
|
payment of any royalty payments under licensing agreements; |
|
|
|
unfavorable publicity regarding PositiveID, Receptors, or
either of the companies products or competitive products; |
|
|
|
termination of development efforts for the rapid influenza
detection system, the in vivo glucose-sensing RFID microchip, the
Easy Check breath glucose detection system, or the iGlucose
wireless communication device; |
|
|
|
timing of expenses PositiveID may incur with respect to any
license or acquisition of products or technologies; and |
|
|
|
termination of development efforts of any product under
development or any development or collaboration agreement. |
18
PositiveID anticipates future losses and may require additional financing, and PositiveIDs
failure to obtain additional financing when needed could force PositiveID to delay, reduce or
eliminate PositiveIDs product development programs or commercialization efforts.
PositiveID anticipates future losses and therefore may be dependent on additional financing to
execute its business plan. Although PositiveID currently has the funding needed to pay for the
planned development of its current projects, its plans for expansion may still require additional
financing. In particular, PositiveID may require additional capital in order to continue to conduct
the research and development and obtain regulatory clearances and approvals necessary to bring any
future products to market and to establish effective marketing and sales capabilities for existing
and future products. PositiveIDs operating plan may change, and it may need additional funds
sooner than anticipated to meet its operational needs and capital requirements for product
development, clinical trials and commercialization. Additional funds may not be available when
PositiveID needs them on terms that are acceptable to PositiveID, or at all. If adequate funds are
not available on a timely basis, PositiveID may terminate or delay the development of one or more
of its products, or delay establishment of sales and marketing capabilities or other activities
necessary to commercialize its products. Therefore, PositiveID does not know whether any planned
development phases or clinical trials for the rapid influenza detection system or the in vivo
glucose-sensing RFID microchip the Easy Check breath glucose detection system, or the iGlucose
wireless communication device will be completed on schedule, or at all. Furthermore, PositiveID
cannot guarantee that any planned development phases or clinical trials will begin on time or at
all.
PositiveIDs future capital requirements will depend on many factors, including: the costs of
expanding PositiveIDs sales and marketing infrastructure and manufacturing operations; the degree
of success PositiveID experiences in developing and commercializing the rapid influenza detection
system and the in vivo glucose-sensing RFID microchip; the Easy Check breath glucose detection
system, and the iGlucose wireless communication device ; the number and types of future products
PositiveID develops and commercializes; the costs, timing and outcomes of regulatory reviews
associated with PositiveIDs current and future product candidates; the costs of preparing, filing
and prosecuting patent applications and maintaining, enforcing and defending intellectual
property-related claims; and the extent and scope of PositiveIDs general and administrative
expenses.
PositiveIDs future product development efforts may not yield marketable products due to
results of studies or trials, failure to achieve regulatory approvals or market acceptance,
proprietary rights of others or manufacturing issues.
Development of a product candidate requires substantial technical, financial and human
resources. PositiveIDs potential product candidates may appear to be promising at various stages
of development yet fail to timely reach the market for a number of reasons, including: the lack of
adequate quality or sufficient prevention benefit, or unacceptable safety during preclinical
studies or clinical trials; PositiveIDs or its collaborative development partners failure to
receive necessary regulatory approvals on a timely basis, or at all; the existence of proprietary
rights of third parties; or the inability to develop manufacturing methods that are efficient,
cost-effective and capable of meeting stringent regulatory standards.
PositiveIDs industry changes rapidly as a result of technological and product developments,
which may quickly render PositiveIDs product candidates less desirable or even obsolete. If
PositiveID is unable or unsuccessful in supplementing its product offerings, its revenue and
operating results may be materially adversely affected.
The industry in which PositiveID operates is subject to rapid technological change. The
introduction of new technologies in the market, including the delay in the adoption of these
technologies, as well as new alternatives for the delivery of products and services will continue
to have a profound effect on competitive conditions in this market. PositiveID may not be able to
develop and introduce new products, services and enhancements that respond to technological changes
on a timely basis. If PositiveIDs product candidates are not accepted by the market as
anticipated, if at all, PositiveIDs business, operating results, and financial condition may be
materially and adversely affected.
19
If PositiveID or Receptors are unable to develop and later market the products under
development in a timely manner or at all, or if competitors develop or introduce similar products
that achieve commercialization before the products enter the market, the demand for the products
may decrease or the products could become obsolete.
The products will operate in competitive markets, where competitors may already be well
established. PositiveID expects that competitors will continue to innovate and to develop and
introduce similar products that could be competitive in both price and performance. Competitors may
succeed in developing or introducing similar products earlier than PositiveID or Receptors,
obtaining regulatory approvals and clearances for such products before the products are approved
and cleared, or developing more effective products. In addition, competitors may have products that
have already been approved or are in a stage of advanced development, which may achieve
commercialization before the products enter the market.
If a competitors products reach the market before the products, they may gain a competitive
advantage, impair the ability of PositiveID or Receptors to commercialize the products, or render
the products obsolete. There can be no assurance that developments by competitors will not render
the products obsolete or noncompetitive. PositiveIDs financial performance may be negatively
impacted if a competitors successful product innovation reaches the market before the products or
gains broader market acceptance.
PositiveID believes that the products have certain technological advantages, but maintaining
these advantages will require continual investment in research and development, and later in sales
and marketing. There is no guarantee that PositiveID or Receptors will be successful in maintaining
these advantages. Nor is there any guarantee that PositiveID or Receptors will be successful in
completing development of the products in any clinical trials or in achieving sales of the
products, or that future margins on such products will be acceptable.
Risks Occasioned by the Xmark Transaction
PositiveID will be unable to compete with Xmarks business for four years from the date of
closing.
PositiveID has agreed that, for a period of four years after the closing of the Xmark
Transaction, or July 2012, it will not (i) directly or indirectly participate with, control or own
an interest in any entity that is engaged in the business of manufacturing, selling, financing,
supplying, marketing or distributing infant security systems, wander prevention systems,
asset/personnel and identification systems, and vibration monitoring instruments anywhere in the
world or (ii) solicit, induce, encourage or attempt to persuade any employee of Xmark to terminate
his or her employment relationship with Xmark, or offer to hire any Xmark employee. PositiveIDs
remaining business, the VeriMed business, is not deemed to compete with Xmarks business. However,
the non-compete provisions will restrict its ability to engage in any business that competes with
Xmarks business until July 2012.
Industry and Business Risks Related to Our ID Security Business
PositiveID is unable to control many of the factors affecting consumer spending, and declines
in consumer spending could reduce demand for PositiveIDs products.
PositiveIDs business depends on consumer demand for its products and, consequently, is
sensitive to a number of factors that influence consumer spending, including general economic
conditions, disposable consumer income, fuel prices, recession and fears of recession, war and
fears of war, inclement weather, consumer debt, conditions in the housing market, interest rates,
sales tax rates and rate increases, inflation, consumer confidence in future economic conditions
and political conditions, and consumer perceptions of personal well-being and security. In
particular, an economic downturn leads to decreased discretionary spending, which adversely impacts
PositiveIDs business. Adverse changes in factors affecting discretionary consumer spending could
reduce consumer demand for its products, thus reducing its sales and harming its business and
operating results.
20
The identity security market including PositiveID faces a significant amount of subscriber
churn. As a result, PositiveID must obtain the subscribers it loses in the ordinary course of
business and, if it fails to do so, its revenue and subscriber base will decline.
A substantial number of subscribers to PositiveIDs consumer products and services cancel
their subscriptions each year. Cancellations may occur due to numerous factors, including:
|
|
|
changing subscriber preferences; |
|
|
|
competitive price pressures; |
|
|
|
general economic conditions; |
|
|
|
cancellation of subscribers due to credit card declines; and |
|
|
|
credit or charge card holder turnover. |
If PositiveID fails to replace subscribers to its consumer products and services it loses in
the ordinary course of business, its revenue may decline, causing a material adverse impact on the
results of its operations. There can be no assurance that it can successfully replace the large
number of subscribers that cancel each year.
Marketing laws and regulations may materially limit PositiveIDs or its clients ability to
offer PositiveID products and services to consumers.
PositiveID markets its consumer products and services through a variety of marketing channels,
including direct mail, outbound telemarketing, inbound telemarketing, inbound customer service and
account activation calls, email, mass media and the internet. These channels are subject to both
federal and state laws and regulations. Federal and state laws and regulations may limit its
ability to market to new subscribers or offer additional services to existing subscribers, which
may have a material impact on PositiveIDs ability to sell its services.
If PositiveID loses its ability to purchase data from a credit data reseller, some of which
are PositiveIDs competitor, which credit data reseller purchases the data from the three major
credit reporting repositories, demand for its services would decrease.
PositiveID relies on credit data resellers, who in turn rely on the three major credit
reporting repositories, Equifax, Experian and TransUnion, to provide it with essential data for its
consumer identity theft protection and credit management services. Each of the three major credit
reporting repositories owns its consumer credit data and is a competitor of PositiveID in providing
credit information directly to consumers, and may decide that it is in their competitive interests
to stop indirectly supplying data to PositiveID. Any interruption, deterioration or termination of
PositiveIDs relationship with its credit data reseller, or one or more of the three credit
reporting repositories would be disruptive to PositiveIDs business and could cause PositiveID to
lose subscribers.
PositiveIDs competitors, including those who have greater resources and experience than
PositiveID has, may commercialize technologies that make PositiveIDs obsolete or noncompetitive.
There are many public and private companies, actively engaged in PositiveIDs line of business
and that target the same markets that it targets. Some of PositiveIDs current competitors have
significantly greater financial, marketing and product development resources than PositiveID does.
Low barriers to entry into its line of business may result in new competitors entering the markets
PositiveID serves. If PositiveIDs competitors market products that are more effective and less
expensive than its products, PositiveID may not be able to achieve commercial success.
Industry and
Business Risks Related to Our HealthID Business
PositiveID may never achieve market acceptance or significant sales of its healthcare products or
systems.
Through March 5, 2010, PositiveID had generated nominal revenue from sales of its VeriMed
system, its diabetes management products, and Rapid Influenza Detection System, which are products
under development. It may never achieve market acceptance or more than nominal or modest sales of
these products and systems.
21
PositiveID does not expect to generate revenue from its VeriMed business over the next 12 to
24 months. PositiveIDs VeriMed business generated gross sales of $43,000 in 2008 and $162,000 in
2009. PositiveID is
currently focused on its Health Link personal health records business, the development of the
glucose sensing microchip and the development of other sensor applications, its Rapid Influenza
Detection System, and is considering and will review other strategic opportunities. However, there
can be no assurance that PositiveID will be able to successfully develop or implement such options
or strategic alternatives.
Implantation of PositiveIDs implantable microchip may be found to cause risks to a persons
health, which could adversely affect sales of its systems that incorporate the implantable
microchip.
The implantation of PositiveIDs implantable microchip may be found, or be perceived, to cause
risks to a persons health. Potential or perceived risks include adverse tissue reactions,
migration of the microchip and infection from implantation. There have been articles published
asserting, despite numerous studies to the contrary, that the implanted microchip causes malignant
tumor formation in laboratory animals. As more people are implanted with PositiveIDs implantable
microchip, it is possible that these and other risks to health will manifest themselves. Actual or
perceived risks to a persons health associated with the microchip implantation process could
constrain its sales of the VeriMed system or result in costly and expensive litigation. Further,
the potential resultant negative publicity could damage its business reputation, leading to loss in
sales of PositiveIDs other systems targeted at the healthcare market which would harm its business
and negatively affect its prospects.
If PositiveID is required to effect a recall of its implantable microchip, its reputation
could be materially and adversely affected and the cost of any such recall could be substantial,
which could adversely affect its results of operations and financial condition.
From time to time, implanted devices have become subject to recall due to safety, efficacy,
product failures or other concerns. To date, PositiveID has not had to recall any of its
implantable microchips. However, if, in the future, it is required to affect such a recall, the
cost of the recall, and the likely related loss of system sales, could be substantial and could
materially and adversely affect PositiveIDs results of operations and financial condition. In
addition, any such recall could materially adversely affect its reputation and its ability to sell
its systems that make use of the implantable microchip which would harm its business and negatively
affect its prospects.
Interruptions in access to, or the hacking into, PositiveIDs Health Link PHR or its VeriMed
patient information database may have a negative impact on its revenue, damage its reputation and
expose PositiveID to litigation.
Reliable access to the Health Link PHR or the VeriMed patient information database is a key
component of the functionality of those systems. Its ability to provide uninterrupted access to the
database, whether operated by it or one or more third parties with whom PositiveID contracts, will
depend on the efficient and uninterrupted operation of the server and network systems involved.
Although certain elements of technological, power, communications, personnel and site redundancy
are maintained, the databases may not be fully redundant. Further, the database may not function
properly if certain necessary third-party systems fail, or if some other unforeseen act or natural
disaster should occur. In the past, PositiveID has experienced short periods during which the
database was inaccessible as a result of development work, system maintenance and power outages.
Any disruption of the database services, computer systems or communications networks, or those of
third parties that we rely on, could result in the inability of users to access the database for an
indeterminate period of time. This, in turn, could cause PositiveID to lose the confidence of the
healthcare community and persons who have undergone the microchip implant procedure, resulting in a
loss of revenue and possible litigation.
In addition, if the firewall software protecting the information contained in PositiveIDs
database fails or someone is successful in hacking into the database, it could face damage to its
business reputation and litigation.
22
Regulation of products and services that collect personally-identifiable information or
otherwise monitor an individuals activities may make the provision of PositiveIDs services more
difficult or expensive and could jeopardize its growth prospects.
Certain technologies that PositiveID currently, or may in the future, support are capable of
collecting personally-identifiable information. A growing body of laws designed to protect the
privacy of personally-
identifiable information, as well as to protect against its misuse, and the judicial
interpretations of such laws, may adversely affect the growth of PositiveIDs business. In the
U.S., these laws include the Health Insurance Portability and Accountability Act, or HIPAA, the
Federal Trade Commission Act, the Electronic Communications Privacy Act, the Fair Credit Reporting
Act, and the Gramm-Leach-Bliley Act, as well as various state laws and related regulations.
Although PositiveID is not a covered entity under HIPAA, it has entered into agreements with
certain covered entities in which it is considered to be a business associate under HIPAA. As a
business associate, PositiveID is required to implement policies, procedures and reasonable and
appropriate security measures to protect individually identifiable health information it receives
from covered entities. PositiveIDs failure to protect health information received from customers
could subject it to liability and adverse publicity, and could harm its business and impair its
ability to attract new customers.
In addition, certain governmental agencies, like the U.S. Department of Health and Human
Services and the Federal Trade Commission, have the authority to protect against the misuse of
consumer information by targeting companies that collect, disseminate or maintain personal
information in an unfair or deceptive manner. PositiveID is also subject to the laws of those
foreign jurisdictions in which it operates, some of which currently have more protective privacy
laws. If PositiveID fails to comply with applicable regulations in this area, its business and
prospects could be harmed.
Certain regulatory approvals generally must be obtained from the governments of the countries
in which its foreign distributors sell its systems. However, any such approval may be subject to
significant delays or may not be obtained. Any actions by regulatory agencies could materially and
adversely affect PositiveIDs growth plans and the success of its business.
If PositiveID fails to comply with anti-kickback and false claims laws, it could be subject to
costly and time-consuming litigation and possible fines or other penalties.
PositiveID is, or may become subject to, various federal and state laws designed to address
healthcare fraud and abuse, including anti-kickback laws and false claims laws. The federal
anti-kickback statute prohibits the offer, payment, solicitation or receipt of any form of
remuneration in return for referring items or services payable by Medicare, Medicaid or any other
federally-funded healthcare program. This statute also prohibits remuneration in return for
purchasing, leasing or ordering or arranging, or recommending the purchasing, leasing or ordering,
of items or services payable by Medicare, Medicaid or any other federally-funded healthcare
program. The anti-kickback laws of various states apply more broadly to prohibit remuneration in
return for referrals of business payable by payers other than federal healthcare programs.
False claims laws prohibit anyone from knowingly presenting, or causing to be presented, for
payment to third-party payers, including Medicare and Medicaid, which currently do not provide
reimbursement for its microchip implant procedure, claims for reimbursed drugs or services that are
false or fraudulent, claims for items or services not provided as claimed, or claims for medically
unnecessary items or services. PositiveIDs activities relating to the reporting of wholesale or
estimated retail prices of its VeriMed system, the reporting of Medicaid rebate information, and
other information affecting federal, state and third-party payment for the VeriMed system, if such
payment becomes available, will be subject to scrutiny under these laws.
The anti-kickback statute and other fraud and abuse laws are very broad in scope, and many of
their provisions have not been uniformly or definitively interpreted by existing case law or
regulations. Violations of the anti-kickback statute and other fraud and abuse laws may be
punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, as
well as the possibility of exclusion from federal healthcare programs, including Medicare and
Medicaid, which currently do not provide reimbursement for our microchip implant procedure.
PositiveID has not been challenged by a governmental authority under any of these laws and believes
that its operations are in compliance with such laws. However, because of the far-reaching nature
of these laws, it may be required to alter one or more of its practices to be in compliance with
these laws. Healthcare fraud and abuse regulations are complex and even minor, inadvertent
irregularities in submissions can potentially give rise to claims that the statute has been
violated. If PositiveID is found to have violated these laws, or are charged with violating them,
our business, financial condition and results of operations could suffer, and its management team
could be required to dedicate significant time and resources addressing the actual or alleged
violations.
23
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Delray Beach, Florida, where we occupy approximately
8,000 square feet of office space, which space is utilized by our two reporting segments. We occupy
the space pursuant to a sublease, which expires on June 30, 2010, at which point our lease for the
property commences and expires on October 1, 2015.In addition, our customer service department
occupies approximately 1,000 square feet of office space in Boca Raton, Florida.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to certain legal actions, as either plaintiff or defendant, arising in
the ordinary course of business, none of which is expected to have a material adverse effect on its
business, financial condition or results of operations. However, litigation is inherently
unpredictable, and the costs and other effects of pending or future litigation, governmental
investigations, legal and administrative cases and proceedings, whether civil or criminal,
settlements, judgments and investigations, claims or charges in any such matters, and developments
or assertions by or against the Company relating to it or to its intellectual property rights and
intellectual property licenses could have a material adverse effect on the Companys business,
financial condition and operating results.
PART II
ITEM 4. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the Nasdaq Stock Market under the symbol PSID. The Companys
common stock is listed on the Nasdaq Capital Market. The following table presents the high and low
sales price for our common stock for the periods indicated:
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, 2009 |
|
High |
|
|
Low |
|
Quarter ended December 31, 2009 |
|
$ |
2.94 |
|
|
$ |
0.90 |
|
Quarter ended September 30, 2009 |
|
$ |
4.10 |
|
|
$ |
0.40 |
|
Quarter ended June 30, 2009 |
|
$ |
0.70 |
|
|
$ |
0.40 |
|
Quarter ended March 31, 2009 |
|
$ |
0.64 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, 2008 |
|
High |
|
|
Low |
|
Quarter ended December 31, 2008 |
|
$ |
0.86 |
|
|
$ |
0.25 |
|
Quarter ended September 30, 2008 |
|
$ |
2.22 |
|
|
$ |
0.35 |
|
Quarter ended June 30, 2008 |
|
$ |
2.50 |
|
|
$ |
1.53 |
|
Quarter ended March 31, 2008 |
|
$ |
2.77 |
|
|
$ |
1.89 |
|
Holders
According to the records of our transfer agent, as of March 5, 2009, there were approximately
31 holders of record of our common stock, which number does not reflect beneficial stockholders who
hold their stock in nominee or street name through various brokerage firms.
Dividend Policy
In July 2008, we declared and in August 2008, we paid a special cash dividend of $15.8 million
on our capital stock. Any future determination with respect to the payment of dividends will be at
the discretion of our Board of Directors and will be dependent upon our financial condition,
results of operations, capital requirements, general business conditions, terms of financing
arrangements and other factors that our board of directors may deem relevant.
24
Equity Compensation Plan Information
The following table presents information regarding options and rights outstanding under our
compensation plans as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
securities |
|
|
|
|
|
|
|
|
|
|
|
remaining |
|
|
|
(a) |
|
|
(b) |
|
|
available for |
|
|
|
Number of |
|
|
Weighted- |
|
|
future issuance |
|
|
|
securities to be |
|
|
average |
|
|
under equity |
|
|
|
issued upon |
|
|
exercise price |
|
|
compensation |
|
|
|
exercise of |
|
|
per share of |
|
|
plans |
|
|
|
outstanding |
|
|
outstanding |
|
|
(excluding |
|
|
|
options, |
|
|
options, |
|
|
securities |
|
|
|
warrants and |
|
|
warrants and |
|
|
reflected in |
|
Plan Category(1) |
|
rights |
|
|
rights |
|
|
column (a)) |
|
Equity compensation plans
approved by security holders |
|
|
3,902,067 |
|
|
$ |
1.32 |
|
|
|
3,311,680 |
|
Equity compensation plans not
approved by security
holders(2) |
|
|
313,122 |
|
|
$ |
6.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,215,189 |
|
|
$ |
1.73 |
|
|
|
3,311,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A narrative description of the material terms of our equity compensation plans is set forth
in Note 6 to our consolidated financial statements for the year ended December 31, 2009. |
|
(2) |
|
In addition, we have made grants outside of our equity plans and have outstanding options
exercisable for 313,122 shares of our common stock. These options were granted as an
inducement for employment or for the rendering of consulting services. |
Sales of Unregistered Securities
None that were not previously disclosed in a Quarterly Report on Form 10-Q or Current Report on
Form 8-K.
ITEM 5. SELECTED FINANCIAL DATA
As a Smaller Reporting Company, we are not required to provide the information required by
this item.
ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our audited annual financial statements and the notes to those
financial statements included elsewhere in this Annual Report on Form 10-K.
Overview
We have historically developed, marketed and sold radio frequency identification, frequently
referred to as RFID, systems used for the identification of people in the healthcare market.
Beginning in the fourth quarter of 2009, with the acquisition of Steel Vault, the Company intends
to pursue its strategy to provide unique health and security identification tools to protect
consumers and businesses, operating in two key segments: HealthID and ID Security.
HealthID Segment
Our HealthID segment is currently focused on the development of the glucose-sensing microchip,
based on our proprietary intellectual property and developed in conjunction with Receptors LLC
(Receptors) of Chaska, Minnesota.
25
The Company also intends to continue the development of the Rapid Flu Detection system, and
other health related products, built on the Companys core intellectual property. Our HealthID
segment also includes the VeriMed system, which uses an implantable passive RFID microchip (the
VeriChip) that is used in patient identification applications. Each implantable microchip
contains a unique verification number that is read when it is scanned by our scanner. In October
2004, the U.S. Food and Drug Administration, or FDA, cleared our VeriMed Health Link system for use
in medical applications in the United States.
ID Security Segment
Our ID Security segment includes our Identity Security suite of products, sold through our
NationalCreditReport.com brand and our Health Link personal health record. Our
NationalCreditReport.com business was acquired in conjunction with our merger with Steel Vault in
November 2009. NationalCreditReport.com offers consumers a variety of identity security products
and services primarily on a subscription basis. These services help consumers protect themselves
against identity theft or fraud and understand and monitor their credit profiles and other personal
information, which include credit reports, credit monitoring and credit scores. In the first
quarter of 2010, we re-launched our Health Link personal health record (PHR). We plan to focus
our marketing efforts on partnering with health care providers and exchanges, physician groups,
Electronic Medical Record (EMR) system vendors, and insurers to use Health Link as a PHR provided
to their patients. We will also seek to partner with pharmaceutical companies who wish to
communicate with our online community through various forms of value added content and advertising.
The Company continues to focus on its HealthID and ID Security businesses, including the
development of the glucose sensing microchip, the Easy Check breath glucose detection system,
the iGlucose wireless communication system, the Rapid Flu Detection System, the Health Link
PHR, and its operating business in identity security. The Company intends to continue to
explore potential strategic transactions with third parties in the healthcare, identification,
and animal health sectors.
Recent Developments
On July 18, 2008, we completed the sale of all of the outstanding capital stock of Xmark to
Stanley for $47.9 million in cash, which consisted of the $45 million purchase price plus a balance
sheet adjustment of $2.9 million. Under the terms of the stock purchase agreement, $4.5 million of
the proceeds were held in escrow for a period of 12 months to provide for indemnification
obligations under the stock purchase agreement, if any. As a result, we recorded a gain on the sale
of Xmark of $10.7 million, with $4.5 million of that gain deferred until the escrow was settled.
The Xmark business included all of the operations of our previously reported healthcare security
and industrial segments. The financial position, results of operations and cash flows of Xmark for
2008 have been reclassified as a discontinued operation. Following the completion of the sale of
Xmark to Stanley, we retired all of our outstanding debt for a combined payment of $13.5 million
and settled all contractual payments to officers and management of us and Xmark for $9.1 million.
In addition, we issued a special dividend of $15.8 million on August 28, 2008.
During June 30, 2009, we finalized the process related to the indemnification obligations
supported by the $4.5 million escrow. In July 2009, we received $4.4 million of the previously
escrowed funds, which was net of a $115 thousand settlement to Stanley as the final balance sheet
adjustment. As a result, we recognized a $4.4 million previously deferred gain in our statement of
operations during the year ended December 31, 2009.
On September 4, 2009, the Company, Acquisition Subsidiary, and Steel Vault, signed the Merger
Agreement, pursuant to which the Acquisition Subsidiary was merged with and into Steel Vault on
November 10, 2009, with Steel Vault surviving and becoming our wholly-owned subsidiary. Upon the
consummation of the Merger, each outstanding share of Steel Vaults common stock was converted into
0.5 shares of common stock of the Company. At the closing of the Merger, we changed our name to
PositiveID Corporation, and changed our stock ticker symbol with Nasdaq to PSID effective
November 11, 2009. See Note 4 to our Condensed Consolidated Financial Statements Acquisitions,
for more information.
On September 29, 2009, we entered into a financing commitment of up to $10,000,000 with
Optimus Technology Capital Partners, LLC (Optimus) under which Optimus is potentially committed
to purchase up to $10 million of the Companys convertible Series A Preferred Stock in one or more
tranches. We plan to use the funds to develop a rapid influenza detection system for the H1N1
virus, to develop an in vivo glucose-sensing RFID microchip (discussed below) and to support our
working capital requirements and general corporate purposes. See Note 5 to our Condensed
Consolidated Financial Statements Financing Agreements, for more information.
During September 2009, through a development program with Receptors, the companies launched
Phase I of the development of a Rapid Flu Detection System for the H1N1 virus. On October 6, 2009,
in a separate development program, we launched the Phase II development of our in vivo
glucose-sensing RFID microchip with Receptors. In conjunction with these development programs, we
received an exclusive license to two of Receptors
platform patents for use with these two applications. Phase I of the Rapid Flu Detection
System was successfully completed in early 2010 and Phase II of the glucose-sensing microchip
development programs is expected to be completed by mid 2010. In conjunction with these two
projects, we paid Receptors $200,000 and 350,000 shares of restricted common stock which was valued
at approximately $900,000 and was recorded in research and development expense. Our exclusive
license continues in perpetuity so long as we continue to provide or arrange continued funding of
these projects.
26
In February 2010,
we acquired the assets of Easy Check Medical Diagnostics, LLC, including the
Easy Check breath glucose detection system and the iGlucose wireless communication system.
These products are currently under development. There is a U.S. patent pending for the Easy Check breath
glucose detection system and the Company plans to file a patent
application and launch the product
development for the iGlucose system in early 2010. In exchange for the assets, we issued 300,000
shares of our common stock valued at $350,000 for which we are required to file with the Securities
and Exchange Commission a registration statement by April 10, 2010 or we must issue an additional
30,000 shares. Additional compensation in the form of shares (maximum 200,000 shares) and product
royalties may be paid in the future based on successful patent grants and product or license
revenues.
Beginning in the fourth quarter of 2009, with the acquisition of Steel Vault, the Company operates
in two key segments: HealthID and ID Security. The following are the segment results for the year
ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended |
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
HealthID |
|
|
ID Security |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
162 |
|
|
$ |
191 |
|
|
|
353 |
|
Cost of sales |
|
|
54 |
|
|
|
40 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
Gross Profit/Loss |
|
|
108 |
|
|
|
151 |
|
|
|
259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
5,270 |
|
|
|
483 |
|
|
|
5,753 |
|
Research and development |
|
|
393 |
|
|
|
|
|
|
|
393 |
|
Charge attributable to adjustment of goodwill |
|
|
|
|
|
|
10,170 |
|
|
|
10,170 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
5,663 |
|
|
|
10,653 |
|
|
|
16,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(5,555 |
) |
|
|
(10,502 |
) |
|
|
(16,057 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale |
|
|
4,385 |
|
|
|
|
|
|
|
4,385 |
|
Interest / other income and (expense), net |
|
|
74 |
|
|
|
|
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
4,459 |
|
|
|
|
|
|
|
4,459 |
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(1,096 |
) |
|
$ |
(10,502 |
) |
|
|
(11,598 |
) |
|
|
|
|
|
|
|
|
|
|
Results of Operations
On November 10, 2009, we merged with Steel Vault, which became our wholly-owned subsidiary.
HealthID Segment
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenue
Revenue was $162,000 for the year ended December 31, 2009 compared to $43,000 for the year
ended December 31, 2008. The increase in revenue was attributable primarily to the sale of our new
8 millimeter microchips to a medical device partner.
27
Gross Profit and Gross Profit Margin
Our cost of sales consists of finished goods and inventory valuation charges. The implantable
microchips used in our VeriMed system were purchased as finished goods under the terms of our
former agreement with Digital Angel.
We
had a gross profit of $0.1 million in 2009 compared to a gross loss of $0.2 million in
2008. The loss in 2008 is attributable to inventory valuation reserves and impairment due to the
lower of cost or market.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of compensation for employees
in executive, sales, marketing and operational functions, including finance and accounting, and
corporate development. Other significant costs include depreciation and amortization, professional
fees for accounting and legal services, consulting fees and facilities costs.
Selling, general and administrative expense decreased by $14.5 million to $5.3 million for the
year ended December 31, 2009 compared to 19.8 million for the year ended December 31, 2008. This
decrease was primarily a result of contractual payments of $7.0 million to our management in 2008
as a result of the sale of Xmark to The Stanley Works. The remainder of the decrease was due to the
decrease of costs resulting from equity based compensation of $3.0 million from 2008 to 2009, the
decrease in the marketing of our VeriMed business of $2.4 million from 2008 to 2009 and
transactional expenses associated with our sale of Xmark of $0.7 million, in 2008.
For the years ended December 31, 2009 and 2008, we incurred stock-based compensation expense
of $1.5 million and $5.0 million, respectively. On July 18, 2008, as a result of our sale of Xmark
Corporation, all outstanding unvested options and restricted shares became fully vested. As a
result, we recorded $3.2 million as an expense, reflecting the unamortized balance at July 18,
2008.
Selling, general and administrative expense included depreciation and amortization expense of
approximately $29,000 and $52,000 for the years ended December 31, 2009 and 2008, respectively.
Research and Development
Our research and development expense consists primarily of costs associated with various
projects, including testing, developing prototypes and related expenses. Research and development
expense was $0.4 million for the year ended December 31, 2009 compared to $0.7 million for the year
ended December 31, 2008. The decrease resulted primarily from the asset purchase agreement for in
process research and development of $0.5 million from Digital Angel during the year ended December
31, 2008, offset by $0.2 million of share-based expense in 2009. Our research and development costs
represent payments to our project partner and acquisition of in
process research and development. Based on projects in process, the Company expects research and development to increase to 2008 levels.
Interest Expense
Interest expense was nil and $0.9 million for the years ended December 31, 2009 and 2008,
respectively. The interest expense in 2008 was due to interest paid in 2008 under our loan
agreement with Valens Offshore SPV II, Corp., which was repaid in July 2008.
ID Security Segment
The ID Security segment reflects the results of National Credit Report.com from the
acquisition of Steel Vault on November 10, 2009.
Year Ended December 31, 2009
Revenue
Revenue
of $0.2 million for the year ended December 31, 2009 resulted from sales at National
Credit Report.com since the merger with Steel Vault effective on November 10, 2009. Annualizing the revenue would not be
indicative of the results of the Company due to the upward trend in subscribers.
Gross Profit and Gross Profit Margin
Cost of sales consists primarily of the costs related to purchasing the data, reporting and
monitoring services from our supplier in order to provide services to our customers.
We
had a gross profit of $151,000 in 2009 from our identity security products through National
Credit Report.com.
Annualizing gross profit would
not be indicative of trend or pattern due to the Companys upward trend and growth in subscribers.
28
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of compensation for employees
in sales, marketing and operational functions, including finance and accounting. Other significant
costs include professional fees for accounting and legal services, and consulting fees.
Selling, general and administrative expense for the year ended December 31, 2009 was $0.5
million since the merger with Steel Vault on November 10, 2009. The Company expects the trend of selling, general and administrative
expenses to be similar on an annualized basis.
Charge attributable to adjustment of goodwill
Based on an assessment underlying the
preliminary purchase price allocation performed by the Company as of December 31, 2009, the
determination was made that the estimated fair value of the acquired company was approximately
$3.5 million as of December 31, 2009. Accordingly, the Company recognized a charge attributable
to reduced carrying amount of goodwill by the approximately $10.2 million. Such amount is deemed
not recoverable and is presented in the caption charge attributable to adjustment of goodwill in
the accompanying consolidated statement of operations.
Liquidity and Capital Resources
As of December 31, 2009, cash totaled $6.4 million compared to cash of approximately $3.2
million at December 31, 2008.
Cash Flows Used in Operating Activities
Net cash used in operating activities totaled $5.0 million and $18.7 million during the years
ended December 31, 2009 and 2008, respectively. In 2009, cash was used to fund operating losses and
pay down accrued expenses. In 2008, cash was used to fund operating losses, primarily resulting
from the marketing expenses of our VeriMed business. In addition, in 2008 net cash used in
operating activities was attributable to the $9.1 million for contractual payments to our and
Xmarks management that we paid in conjunction with the July 18, 2008 sale of our Xmark subsidiary
to The Stanley Works.
Cash Flows from Investing Activities
Investing
activities provided cash of $4.5 million and $43.2 million during the years ended
December 31, 2009 and 2008, respectively. Cash provided by investing activities in 2009 was a
result of the release of the funds in escrow from the sale of Xmark. Cash provided by investing
activities during 2008 primarily consisted of the $47.9 million of proceeds from the sale of Xmark,
net of the $4.5 million of the proceeds that was held in escrow for twelve months following the
close of the transaction to provide for indemnification obligations.
Cash Flows from Financing Activities
Financing activities provided (used) cash of $3.7 million and $(28.5) million during the years
ended December 31, 2009 and 2008, respectively. Cash provided by financing activities in 2009 was a
result of the sale of preferred stock to Optimus pursuant to a preferred stock purchase agreement,
further discussed below. During 2008, we borrowed $8.0 million from Valens Offshore SPV II, Corp.
(the Lender), a portion of which was used to repay Digital Angel and the Royal Bank of Canada,
which had previously provided a working capital line to our subsidiary, Xmark. In conjunction with
the sale of Xmark, we retired all of our outstanding debt to Digital Angel and to the Lender. Net
debt repayments for the year ended December 31, 2008 were approximately $10.5 million. On August
28, 2008, we paid a special dividend of $15.8 million, or $1.35 per share, to all stockholders of
record on August 18, 2008.
Preferred Stock Offering
On September 29, 2009, the Company entered into a Convertible Preferred Stock Purchase
Agreement (the Purchase Agreement) with Optimus under which Optimus is committed to purchase up
to $10 million shares of convertible Series A Preferred Stock of the Company (the Preferred
Stock) in one or more tranches. Under the terms of the Purchase Agreement, from time to time and
at the Companys sole discretion, the Company may present Optimus with a notice to purchase such
Preferred Stock (the Notice).
To facilitate the transactions contemplated by the Purchase Agreement, R & R Consulting
Partners, LLC, a company controlled by Scott R. Silverman, the Companys chairman and chief
executive officer, loaned shares of common stock to Optimus equal to 135% of the aggregate purchase
price for each tranche pursuant to Stock Loan Agreements between R & R Consulting Partners, LLC and
Optimus. R & R Consulting Partners, LLC was paid $100 thousand fee in October 2009 plus will be
paid 2% interest for the fair value of the loaned shares for entering into the stock loan
arrangement. The aggregate amount of shares loaned under any and all Stock Loan Agreements,
together with all other shares sold by or on behalf of the Company pursuant to General
Instruction I.B.6. to Form S-3, can not exceed one-third of the aggregate market value of the
voting and non-voting common equity held by non-affiliates of the Company in any 12 month period. R
& R Consulting Partners, LLC may demand return of some or all of the borrowed shares (or an equal
number of freely tradable shares of common stock) at any time on or after the six-month anniversary
date such borrowed shares were loaned to Optimus, but no such demand may be made if there are any
shares of Preferred Stock then outstanding. If a permitted return
demand is made, Optimus is required to
return the borrowed shares (or an equal number of
freely tradable shares of common stock) within three trading days after such demand. Optimus may return the borrowed shares in whole or in
part, at any time or from time to time, without penalty or premium. On September 29, 2009, October
8, 2009, and October 21, 2009, R & R Consulting Partners, LLC loaned Optimus 1.3 million, 800,000
and 600,000 shares, respectively, of Company common stock.
29
Optimus is obligated to purchase such Preferred Stock on the tenth trading day after any
Notice date, subject to satisfaction of certain closing conditions, including (i) that the Company
is listed for and trading on a trading market, (ii) the representations and warranties of the
Company set forth in the Purchase Agreement are true and correct as if made on each tranche date,
(iii) Optimus shall have received a commitment fee of $800 thousand payable only on the first
tranche closing date in the event the gross proceeds from the first tranche closing exceed $800
thousand; and (iv) that no such purchase would result in Optimus and its affiliates beneficially
owning more than 9.99% of the Companys common stock. In the event the closing bid price of the
Companys common stock during any one or more of the nine trading days following the delivery of a
Notice falls below 75% of the closing bid price on the trading day prior to the Notice date and
Optimus determines not to complete the tranche closing, then the Company may, at its option,
proceed to issue some or all of the applicable shares, provided that the conversion price for the
Preferred Stock that is issued shall reset at the lowest closing bid price for such nine trading
day period.
In addition, redemption of the Preferred Stock by the Company, to the extent such Preferred
Stock shall not have been converted into shares of Common Stock, was mandatory in the event that
the Company did not receive stockholder approval for the transactions described in the Purchase
Agreement on or before March 31, 2010, which approval was obtained on November 10, 2009.
On September 29, 2009 the Company exercised the first tranche of this financing, to issue 296
shares of Preferred Stock, for a tranche amount of approximately $3.0 million. In support of this
tranche, R & R Consulting Partners, LLC loaned Optimus 1.3 million shares of common stock. This
tranche closed on October 13, 2009, and the Company received proceeds of approximately $3.0
million, less the fees due on the entire financing commitment of $800 thousand. On November 5,
2009, the Company closed the second tranche of this financing, issuing 166 shares of Preferred
Stock, for a tranche amount of approximately $1.7 million. In support of this tranche, R & R
Consulting Partners, LLC loaned Optimus approximately 1.4 million shares of common stock.
Financial Condition
As of December 31, 2009, we had working capital of approximately $5.2 million and an
accumulated deficit of $53.8 million compared to a working
capital of approximately $2.3 million
and an accumulated deficit of approximately $42.1 million as of December 31, 2008. The increase in
working capital was primarily due to the sale of Preferred Stock to Optimus.
We believe that with the cash we have on hand and cash from operations we will have sufficient
funds available to cover our cash requirements, including capital expenditures, for the twelve
months ended December 31, 2010.
Critical Accounting Policies and Estimates
The following is a description of the accounting policies that our management believes involve
a high degree of judgment and complexity, and that, in turn, could materially affect our
consolidated financial statements if various estimates and assumptions made in connection with the
application of such policies were changed significantly. The preparation of our consolidated
financial statements requires that we make certain estimates and judgments that affect the amounts
reported and disclosed in our consolidated financial statements and related notes. We base our
estimates on historical experience and on other assumptions that we believe to be reasonable under
the circumstances. Actual results may differ from these estimates. For more detailed information on
our significant accounting policies, see Note 1 to our audited consolidated financial statements as
of and for the year ended December 31, 2009, included elsewhere in this Annual Report on Form 10-K.
Revenue Recognition
Our revenue recognition policies provide very specific and detailed guidelines in measuring
revenue; however, certain estimates and judgments affect the application of our revenue recognition
policies. The complexity of the estimation process and all issues related to the assumptions, risks
and uncertainties inherent in our revenue recognition policies affect the amounts reported in our
financial statements. A number of internal and external factors affect the timing of our revenue
recognition, including estimates of customer returns and the timing of customer acceptance.
30
Product Sales
Revenue from the sale of systems using our implantable microchip or other products are
recorded at gross amounts. As we are in the initial process of commercializing these systems, the
level of distributor or physician returns cannot yet be reasonably estimated. Accordingly, we do
not recognize revenues until the following criteria are met:
|
|
|
a purchase order has been received or a contract has been executed; |
|
|
|
|
the product is shipped; |
|
|
|
|
title has transferred; |
|
|
|
|
the price is fixed or determinable; |
|
|
|
|
there are no uncertainties regarding customer acceptance; |
|
|
|
|
collection of the sales proceeds is reasonably assured; and |
|
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|
|
the period during which the distributor or physician has a right to return the product has elapsed. |
We intend to recognize revenue from consignment sales, if any, when all of the criteria listed
above have been met and after the receipt of notification of such product sales from the
distributors customers (e.g., physicians). Once the level of returns can be reasonably estimated,
revenues (net of expected returns) will be recognized when all of the criteria above are met for
either direct or consignment sales.
Health Link and VeriMed Services
The services for
maintaining subscriber information on our Health Link and VeriMed databases
are sold on a stand-alone contract basis, and treated according to the terms of the contractual arrangements then in effect. Revenue from the
database service will be recognized over the term of the subscription period or the terms of the
contractual arrangements then in effect.
With respect to the sales of products whose functionality is dependent on services (e.g.,
database records maintenance), the revenue recognition policy will follow the ultimate
arrangements, subject to the aforementioned revenue recognition criteria and determining whether
there is VSOE.
ID Security Services
Revenue is recognized when persuasive evidence of an arrangement exists, collectability of
arrangement consideration is reasonably assured, the arrangement fees are fixed or determinable and
delivery of the product or service has been completed. A significant portion of our revenue is
derived from the Companys processing of transactions related to the provision of information
services to customers, in which case revenue is recognized, assuming all other revenue recognition
criteria are met, when the services are provided. Another portion of our revenues relate
substantially to monthly subscription fee-based credit monitoring contracts under which a customer
pays a preset fee for a predetermined or unlimited number of transactions or services provided
during the subscription period. Revenue related to subscription fee-based contracts having an
unlimited volume is recognized ratably during the contract term.
If at the outset of an arrangement, we determine that collectability is not reasonably
assured, revenue is deferred until the earlier of when collectability becomes probable or the
receipt of payment. If there is uncertainty as to the customers acceptance of our deliverables,
revenue is not recognized until the earlier of receipt of customer acceptance or expiration of the
acceptance period. If at the outset of an arrangement, we determine that the arrangement fee is not
fixed or determinable, revenue is deferred until the arrangement fee becomes estimable, assuming
all other revenue recognition criteria have been met.
31
We may provide multiple element arrangements. The multiple elements may include credit reports
and monitoring services. To account for each of these elements separately, the delivered elements
must have stand-alone value to our customer, and there must exist objective and reliable evidence
of the fair value for any undelivered elements. For certain customer contracts, the total
arrangement fee is allocated to the delivered and undelivered elements based on their relative fair
values.
Deferred revenue consists of amounts billed in excess of revenue recognized on sales of our
information services, relating generally to subscription fees.
Inventory
Inventories consist of finished goods. Inventory is valued at the lower of cost, determined
primarily by the first-in, first-out method, or market. The Company monitors and analyzes inventory
for potential obsolescence and slow-moving items based upon the aging of the inventory and the
inventory turns by product. Inventory items designated as slow moving are reduced to net realizable
value. Inventory items designated as obsolete are written off. The allowance for inventory excess
and obsolescence was approximately $0.0 and $0.2 million for the years ended December 31, 2009 and
2008.
Intangible Assets
ASC 350, Intangibles Goodwill and Other (ASC 350) requires that intangible assets with
indefinite lives, including goodwill, be evaluated on an annual basis for impairment or more
frequently if an event occurs or circumstances change that could potentially result in impairment.
The goodwill impairment test requires the allocation of goodwill and all other assets and
liabilities to reporting units. If the fair value of the reporting unit is less than the book value
(including goodwill), then goodwill is reduced to its implied fair value and the amount of the
write-down is charged to operations.
In
accordance with the pronouncement, we are required to test our goodwill and intangible assets with
indefinite lives for impairment annually. During the years ended December 31, 2009 and 2008, we did
not have any impairment goodwill or indefinite lived intangible assets.
Stock-Based Compensation
Stock-based compensation expense is recognized using the fair-value based method for all
awards granted on or after the date of adoption. Compensation expense is recognized over the
requisite service period based on the grant-date fair value of those options.
Forfeitures of stock-based grants are estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates.
Stock-based compensation expense is reflected in the consolidated statement of
operations in selling, general and administrative expense.
The Black-Scholes option pricing model, which we use to value our stock options, requires us
to make several key judgments including:
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the estimated value of our common stock; |
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|
the expected life of issued stock options; |
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|
the expected volatility of our stock price; |
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|
the expected dividend yield to be realized over the life of the stock options; and |
|
|
|
|
the risk-free interest rate over the expected life of the stock options. |
Our computation of the expected life of issued stock options was determined based on
historical experience of similar awards giving consideration to the contractual terms of the
stock-based awards, vesting schedules and expectations about employees future length of service.
The interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. Our
computation of volatility is based on the historical volatility of our common stock.
32
Accounting for Income Taxes
We use the liability method of accounting for deferred income taxes. Under this method, deferred
tax assets and liabilities are measured using enacted tax rates and laws that will be in effect
when the differences are expected to reverse. A valuation allowance is provided to reduce deferred
tax assets to the amount of estimated future tax benefit when it is more likely than not that some portion of
the deferred tax assets will not be realized. The income tax provision or credit is the tax
payable or refundable for the period plus or minus the change during the period in deferred tax
assets and liabilities.
We adopted the provisions of ASC 740-10, Income Taxes relating to uncertainty in income taxes
effective January 1, 2007. The provision clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements. Recognition thresholds and measurement
attributes were prescribed for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. Guidance was also provided on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosures and transition.
We use a two-step approach to recognizing and measuring tax benefits when the benefits
realization is uncertain. The first step is to determine whether the benefit is to be recognized,
and the second step is to determine the amount to be recognized:
|
|
|
income tax benefits are recognized when, based on the technical
merits of a tax position, the entity believes that if a dispute arose
with the taxing authority and were taken to a court of last resort, it
is more likely than not (i.e., a probability of greater than 50
percent) that the tax position would be sustained as filed; and |
|
|
|
|
if a position is determined to be more likely than not of being
sustained, the reporting enterprise recognizes the largest
amount of tax benefit that is greater than 50 percent likely of being
realized upon ultimate settlement with the taxing authority. |
The adoption of ASC 740-10 did not result in any adjustment to the our beginning tax positions. We
continue to fully recognize the Companys tax benefits, which are offset by a valuation allowance to the
extent that it is more likely than not that the deferred tax assets will not be realized. We have
analyzed the Companys filing positions in all of the federal and state jurisdictions where it is required to
file income tax returns, as well as all open tax years in these jurisdictions. As a result, the
Company has not recorded a tax liability and has no unrecognized tax benefits as of the date of
adoption or as of December 31, 2009.
Impact of Recently Issued Accounting Standards
Effective July 1, 2009, the Company adopted the FASB Accounting Standards Codification (ASC)
105-10, Generally Accepted Accounting Principles (ASC 105-10). ASC 105-10 establishes the FASB
Accounting
Standards Codification as the source of authoritative accounting principles recognized by the
FASB to be applied by non-governmental entities in the preparation of financial statements in
conformity with GAAP. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The codification
did not change GAAP but reorganizes the literature. References for FASB guidance throughout this
document have been updated for the codification.
33
Effective January 1, 2009, the Company adopted ASC 805-10, Business Combinations (ASC
805-10). Under ACS 805-10, an acquiring entity is required to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value with limited
exceptions. ACS 805-10 establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired. This statement also establishes
disclosure requirements which will enable users to evaluate the nature and financial effects of the
business combination. The Company expensed $0.2 million of due diligence costs relating to a
potential acquisition target during the period ended December 31, 2009.
The Company adopted the provisions of ASC 855-10, Subsequent Events (ASC 855-10) in the
second quarter of 2009. ASC 855-10 establishes (1) the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, (2) the circumstances under which
an entity should recognize events or transactions occurring after the balance sheet date in its
financial statements, and (3) the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. The Company adopted ASC 810-10-65-1,
Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51 on
January 1, 2009. This establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial statements. In addition, it changes the
way the consolidated income statement is presented by requiring consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and the noncontrolling
interest. ASC 810-10-65-1 also establishes a single method of accounting for changes in a parents
ownership interest in a subsidiary that do not result in deconsolidation and requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated. ASC 810-10-65-1 is
effective for fiscal years, and interim periods within those fiscal years, beginning on or after
December 15, 2008 and earlier adoption is prohibited. ASC 810-10-65-1 shall be applied
prospectively as of the beginning of the fiscal year in which this statement is initially applied,
except for the presentation and disclosure requirements which shall be applied retrospectively for
all periods presented. The adoption of ASC 810-10-65-1 had no impact on the Companys
financial position, results of operations, cash flows or financial statement disclosures.
In June 2009, the FASB finalized SFAS No. 167, Amending FASB interpretation No. 46(R), which
was later superseded by the FASB Codification and included in ASC topic 810. The provisions of ASC
810 provide guidance in determining whether an enterprise has a controlling financial interest in a
variable interest entity. This determination identifies the primary beneficiary of a variable
interest entity as the enterprise that has both the power to direct the activities of a variable
interest entity that most significantly impacts the entitys economic performance, and the
obligation to absorb losses or the right to receive benefits of the entity that could potentially
be significant to the variable interest entity. This pronouncement also requires ongoing
reassessments of whether an enterprise is the primary beneficiary and eliminates the quantitative
approach previously required for determining the primary beneficiary. New provisions of this
pronouncement are effective January 1, 2010. The Company is currently evaluating the impact of
adopting this pronouncement.
In August of 2009, the FASB issued ASC Update 2009-5, an update to ASC 820, Fair Value
Measurements and Disclosures. This update provides amendments to reduce potential ambiguity in
financial reporting when measuring the fair value of liabilities. Among other provisions, this
update provides clarification in circumstances in which a quoted price in an active market for the
identical liability is not available, that reporting entity is required to measure fair value using
one or more of the valuation techniques described in ACS Update 2009-5. The adoption of this update
in the third quarter of 2009 did not have a material effect on Companys condensed consolidated
financial statements.
Accounting Standard Update No. 2009-15, Accounting for Own-Share Lending Arrangements in
Contemplation of Convertible Debt Issuance or Other Financing. In October 2009, the FASB issued
Update No. 2009-15 as an amendment to the subtopic 470-20, Debt with Conversion and Other Options,
to address the
accounting for own-share lending arrangements entered in contemplation of a convertible debt
issuance or other financing. ASC 470-20-25-20A establishes that at the date of issuance, a
share-lending arrangement entered into on an entitys own shares in contemplation of a convertible
debt offering or other financing shall be measured at fair value (in accordance with Topic 820) and
recognized as an issuance cost, with an offset to additional paid-in capital in the financial
statements of the entity. ASC 470-20-35-11A establishes that if it becomes probable that the
counterparty to a share-lending arrangement will default, the issuer of the share-lending
arrangement shall recognize an expense equal to the then fair value of the unreturned shares, net
of the fair value of probable recoveries. The issuer of the share-lending arrangement shall
remeasure the fair value of the unreturned shares each reporting period through earnings until the
34
arrangement consideration payable by the counterparty becomes fixed.
Subsequent
changes in the
amount of the probable recoveries should also be recognized in earnings. ASC 470-20-45-2A
establishes that loaned shares are excluded from basic and diluted earnings per share unless
default of the share-lending arrangement occurs. ASC 470-20-50-2A adds new disclosures that must be
made in any period in which a share-lending arrangement is outstanding as follows: (a) description
of any outstanding share-lending arrangements, (b) number of shares, term, circumstances under
which cash settlement would be required, (c) any requirements for the counterparty to provide
collateral, (d) entitys reason for entering into the share-lending arrangement, (e) fair value of
the issuance cost associated with the arrangement, (f) treatment for the purpose of calculating
earnings per share, (g) unamortized amount of the issuance cost associated with the arrangement,
(h) classification of the issuance cost associated with the arrangement, (i) amount of interest
cost recognized relating to the amortization and (j) any amounts of dividends paid related to the
loaned shares that will not be reimbursed. This Accounting Standard Update shall be effective for
fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years
for arrangements outstanding entered into on or after the beginning of the first reporting period
that begins on or after June 15, 2009. Early adoption is not permitted. The Company is evaluating
the impact on financial statements regarding this update.
In October 2009, the FASB issued new guidance for revenue recognition with multiple
deliverables, which is effective for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, although early adoption is permitted. This
guidance eliminates the residual method under the current guidance and replaces it with the
relative selling price method when allocating revenue in a multiple deliverable arrangement. The
selling price for each deliverable shall be determined using vendor specific objective evidence of
selling price, if it exists, otherwise third-party evidence of selling price shall be used. If
neither exists for a deliverable, the vendor shall use its best estimate of the selling price for
that deliverable. After adoption, this guidance will also require expanded qualitative and
quantitative disclosures. The Company is currently assessing the impact of adoption on its
financial position and results of operations.
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value
Measurements. The ASU requires disclosing the amounts of significant transfers in and out of Level
1 and 2 fair value measurements and to describe the reasons for the transfers. The disclosures are
effective for reporting periods beginning after December 15, 2009. Additionally, disclosures of the
gross purchases, sales, issuances and settlements activity in Level 3 fair value measurements will
be required for fiscal years beginning after December 15, 2010.
In January 2010, the FASB issued
Accounting Standards Update 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components
of Stock and Cash (A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic 505 clarifies the stock
portion of a distribution to shareholders that allows them to elect to receive cash or stock with a limit on the amount
of cash that will be distributed is not a stock dividend for purposes of applying Topics 505 and 260. Effective
for interim and annual periods ending on or after December 15, 2009, and would be applied on a retrospective
basis. The Company does not expect the provisions of ASU 2010-01 to have a material effect on the financial position,
results of operations or cash flows of the Company.
ITEM 6A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a Smaller Reporting Company, we are not required to provide the information required by
this item.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, including supplementary data and the accompanying
report of independent registered public accounting firm filed as part of this Annual Report on Form
10-K, are listed in the Index to Consolidated Financial Statements and Financial Statement
Schedules on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 8A(T). CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Evaluation of Disclosure Controls. We evaluated the effectiveness of the design and operation
of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as
of December 31, 2009. This evaluation (the disclosure controls evaluation) was done under the
supervision and with the participation of management, including our chief executive officer (CEO)
and chief financial officer (CFO). Rules adopted by the SEC require that in this section of our
Annual Report on Form 10-K we present the conclusions of the CEO and CFO about the effectiveness of
our disclosure controls and procedures as of December 31, 2009 based on the disclosure controls
evaluation.
35
Objective of Controls. Our disclosure controls and procedures are designed so that information
required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report on
Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms. Our disclosure controls and procedures are also intended to ensure that such
information is accumulated and communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure. There are inherent limitations
to the effectiveness of any system of disclosure controls and procedures, including the possibility
of human error and the circumvention or overriding of the controls and procedures. Accordingly,
even effective disclosure controls and procedures can only provide reasonable assurance of
achieving their control objectives, and management necessarily is required to use its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Conclusion. Based upon the disclosure controls evaluation, our CEO and CFO have concluded
that, as of December 31, 2009, our disclosure controls and procedures were effective to provide
reasonable assurance that the foregoing objectives are achieved.
Changes in Internal Control Over Financial Reporting
As described above, we reviewed our internal controls over financial reporting and there were
no changes in our internal control over financial reporting identified in connection with the
evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act that occurred during the
fourth quarter of our last fiscal year and have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control
system is designed to provide reasonable assurance to our management and Board of Directors
regarding the preparation and fair presentation of published financial statements. All internal
control systems, no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Under the supervision and with the participation of management, including the CEO and CFO, we
conducted an evaluation of the effectiveness of our internal control over financial reporting, as
of December 31, 2009, based upon the framework in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation
under the framework in Internal Control Integrated Framework, management concluded that our
internal control over financial reporting was effective as of December 31, 2009.
This Annual Report does not include an attestation report of our registered public accounting
firm regarding internal control over financial reporting. Managements report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only managements report in this Annual Report.
ITEM 8B. OTHER INFORMATION
Annual and Special Meeting
An annual and special meeting of our stockholders was held on November 10, 2009 to:
(1) To approve the issuance of shares of our common stock to Steel Vault stockholders pursuant
to the agreement and plan of reorganization, dated as of September 4, 2009, among VeriChip,
VeriChip Acquisition Corp., our wholly-owned subsidiary, and Steel Vault, as amended on October 1,
2009. The proposal received 8,840,334 votes for, 63,179 votes against, 7,220 abstentions, and
2,994,819 broker non-votes.
(2) To approve and adopt an amendment to our certificate of incorporation to change our name
to PositiveID Corporation at the effective time of the Merger. The proposal received 11,743,161
votes for, 158,524 votes against, and 3,866 abstentions.
36
(3) To approve and adopt an amendment to our certificate of incorporation to increase the
total number of authorized shares of our capital stock from 45 million shares, of which 40 million
shares are common stock, to 75 million shares, of which 70 million shares will be common stock. The
proposal received 8,727,68 votes for, 170,714 votes against, 12,331 abstentions, and 2,994,819
broker non-votes.
(4) To elect five directors to hold office until the 2010 Annual Meeting of Stockholders and
until their successors have been duly elected and qualified. The results of the vote to elect five
directors were as follows:
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Name of Director |
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For |
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Withheld |
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Scott R. Silverman |
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11,736,807 |
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168,745 |
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Jeffrey S. Cobb |
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11,750,818 |
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154,734 |
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Barry M. Edelstein |
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11,746,107 |
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159,445 |
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Steven R. Foland |
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11,651,318 |
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254,234 |
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Michael E. Krawitz |
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11,748,471 |
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157,081 |
|
(5) To approve and adopt the PositiveID Corporation 2009 Stock Incentive Plan. The proposal
received 8,572,143 votes for, 316,206 votes against, 22,384 abstentions, and 2,994,819 broker
non-votes.
(6) To approve the potential issuance of shares of our common stock in excess of 19.99% of our
outstanding common stock upon conversion of our Series A Preferred Stock. The proposal received
8,745,591 votes for, 144,397 votes against, 20,744 abstentions, and 2,994,820 broker non-votes.
(7) To ratify the appointment of Eisner LLP as our independent registered public accounting
firm for the year ended December 31, 2009. The proposal received 11,677,546 votes for, 117,922
votes against and 110,084 abstentions.
(8) To approve an adjournment or postponement of the special and annual meeting, if necessary.
The proposal received 8,598,445 votes for, 288,099 votes against, 24,188 abstentions, and
2,994,820 broker non-votes.
Each of the proposals was approved by the Companys stockholders.
PositiveID Animal Health Corporation 2010 Flexible Stock Plan
On March 16, 2010, we, as the sole stockholder of PositiveID Animal Health Corporation, or
Animal Health, and the board of directors of Animal Health approved and adopted the PositiveID
Animal Health Corporation 2010 Flexible Stock Plan (the Animal Health Plan), under which
employees, including officers and directors, and consultants of Animal Health or an affiliate,
including the Company, may receive awards. Awards under the Animal Health Plan include incentive
stock options, nonqualified stock options, stock appreciation rights, restricted stock and cash
awards. The purposes of the Animal Health Plan are to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional incentive to employees
and consultants, to promote the success of our and Animal Healths businesses and to link
participants directly to stockholder interests through increased stock ownership in Animal Health.
The Animal Health Plan may be administered by the entire Animal Health board of directors or
by a compensation committee of the board of directors (the Administrator). Subject to the
provisions of the Animal Health Plan, the Administrator has the power to determine the terms of
each award granted, including the exercise price, the number of Animal Health shares subject to the
award and the exercisability thereof.
The aggregate number of shares of Animal Health common stock that may be subject to awards
under the Animal Health Plan, subject to adjustment upon a change in capitalization, is 5,000,000
shares. Such shares of common stock may be authorized, but unissued, or reacquired shares of common
stock. Shares of common stock that were subject to Animal Health Plan awards that expire or become
unexercisable without having been exercised in full shall become available for future awards under
the Animal Health Plan.
The foregoing description of the Animal Health Plan is qualified in its entirety by reference
to the actual terms of the Animal Health Plan, which are filed with this Annual Report as Exhibit
10.6.
Amendment to Amended and Restated Bylaws
On March 16, 2010, our board
of directors approved an amendment to our Amended and Restated Bylaws, adopted on December 12, 2005, to reflect
our name change from VenChip Corporation to Positive ID Corporation.
37
PART III
Item 9. Directors, Executive Officers and Corporate Governance
Our directors and executive officers, and their ages and positions, as of February 28, 2010,
are set forth below:
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Name |
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Positions with the Company |
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Scott R. Silverman
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Chief Executive Officer and Chairman of the Board |
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William J. Caragol
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President and Chief Financial Officer, Director |
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Jeffrey S. Cobb
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Director |
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Barry M. Edelstein
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Director |
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Steven R. Foland
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Director |
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Michael E. Krawitz
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Director |
The following is a summary of the background and business experience of our directors and
executive officers as of February 28, 2010:
Scott R. Silverman, 46, served as our acting president from March 2007 through May 4, 2007, as
our chief executive officer from December 5, 2006 through July 18, 2008, as chairman of our Board
of Directors from March 2003 through July 18, 2008 and as a member of our Board of Directors from
February 2002 through July 18, 2008. On November 12, 2008, he was again appointed to our Board of
Directors, to serve as chairman, and was again appointed as chief executive officer on August 27,
2009. He also served as our chief executive officer from April 2003 to June 2004. He served as the
chairman of the Board of Directors of Digital Angel from March 2003 through July 3, 2007, and
served as chief executive officer of Digital Angel from March 2003 to December 5, 2006, and as
acting president of Digital Angel from April 2005 to December 5, 2006. Mr. Silverman served as the
chairman of Steel Vault, our now wholly-owned subsidiary, from January 2006 until November 11,
2009. Mr. Silverman is an attorney licensed to practice in New Jersey and Pennsylvania. The Board
of Directors nominated Mr. Silverman because of his past experience as a chairman and chief
executive officer of Digital Angel, our former parent company, as well as his years of oversight
and senior management experience of companies in the technology industry.
William J. Caragol, 42, has served as our president and chief financial officer since November
11, 2009, and previously served as acting chief financial officer since January 2009, president
since May 2007, chief financial officer since August 2006, treasurer since December 2006, and
secretary since March 2007. Mr. Caragol served as Steel Vaults president and a member of its board
of directors from December 3, 2008 and as acting chief financial officer from October 24, 2008
until November 11, 2009 when Steel Vault became our wholly-owned subsidiary. Mr. Caragol served as
acting chief executive officer of Steel Vault from October 24, 2008 until December 3, 2008 when he
was appointed chief executive officer. From July 2005 to August 2006, he served as the chief
financial officer of Government Telecommunications, Inc., a company under common control with us at
the time. From December 2003 to June 2005, Mr. Caragol was the vice president of business
development and chief financial officer of Millivision Technologies, a technology company focused
on security applications. He is a member of the American Institute of Certified Public Accountants
and graduated from the Washington & Lee University with a bachelor of science in Administration and
Accounting. The Board of Directors nominated Mr. Caragol as a director and he holds the positions
of president and chief financial officer because of his past experience as a chief financial
officer and other management experience of other companies in the technology industry.
Jeffrey S. Cobb, 48, has served as a member of our Board of Directors since March 2007. Mr.
Cobb is the chief operating officer of IT Resource Solutions.net, Inc. Prior to April 2004, Mr.
Cobb was the executive vice president and chief operating officer of SCB Computer Technology Inc.
Mr. Cobb served as a member on the Board of Directors of Steel Vault from March 2004 through July
22, 2008. Mr. Cobb earned his Bachelor of Science in
Marketing and Management from Jacksonville University. Mr. Cobb was nominated to the Board of
Directors because of his management and business development experience in technology companies.
38
Barry M. Edelstein, 46, has served as a member of our Board of Directors since January 2008.
Mr. Edelstein serves as managing partner of Structured Growth Capital, Inc, a boutique investment
banking firm. Mr. Edelstein served as acting president and chief executive officer of Destron
Fearing Corporation (formerly known as Digital Angel Corporation), or Destron Fearing, from August
2007 until December 2007. Mr. Edelstein has served as the chairman of ScentSational Technologies,
LLC. since January 2002, Mr. Edelstein was vice president of sales and sales operations for Comcast
Business Communications Inc., where he managed the integration of Comcast Telecommunications Inc.
with two other subsidiaries and led a team that oversaw the sales, marketing, customer care,
billing operations and supplier management function of the company. Mr. Edelstein has a bachelors
degree in business administration from Drexel University and received his law degree from Widener
University School of Law. Mr. Edelstein was nominated to the Board of Directors because of his
past experience as a president and chief executive officer, as well as his years of oversight and
senior management experience.
Steven R. Foland, 50, has served as a member of our Board of Directors since February 2008.
Mr. Foland is currently managing director, head of Asia investment banking at Thomas Weisel
Partners, and previously served as a partner with Gold Mountain Partners a private advisory firm
from March 2008 until November 2009, as a managing director and head of investment banking for
Merriman Curhan Ford & Co. from September 2005 until February 2008, and as the senior managing
director and head of west coast investment banking for ThinkEquity Partners from September 2003
until July 2005. He was previously with Morgan Stanley and Credit Suisse in New York and Hong Kong.
Mr. Foland has a bachelors degree in political science from the University of Michigan and
received his law degree from the University of Notre Dame. Mr. Foland was nominated to the Board
of Directors because of his experience in the financial services sector and for his knowledge of
accounting matters.
Michael E. Krawitz, 40, has served as a member of our Board of Directors since November 2008.
He currently serves as the managing partner of Business Mediation Group, LLC, a mediation services
firm. He previously served as the chief executive officer and president of Digital Angel
Corporation from December 2006 to December 2007, and as a member of its Board of Directors from
July 2007 until December 2007. Prior to that, during his time at Digital Angel Corporation, he
served as assistant vice president and general counsel beginning in April 1999, and was appointed
vice president and assistant secretary in December 1999, senior vice president in December 2000,
secretary in March 2003, executive vice president in April 2003 and chief privacy officer in
November 2004. From 1994 to April 1999, Mr. Krawitz was an attorney with Fried, Frank, Harris,
Shriver & Jacobson in New York. Mr. Krawitz served as a member on the Board of Directors of Steel
Vault from July 23, 2008 until November 11, 2009. Mr. Krawitz earned a bachelor of arts degree from
Cornell University in 1991 and a juris doctorate from Harvard Law School in 1994. Mr. Krawitz was
nominated to the Board of Directors due to his past experience as a chief executive officer of
Digital Angel, our former parent company, as well as his experience as an attorney.
Audit Committee
Our audit committee currently consists of Steven R. Foland, Jeffrey S. Cobb and Barry M.
Edelstein. Mr. Foland chairs the audit committee. Our Board of Directors has determined that each
of the members of our audit committee is independent, as defined under, and required by, the
federal securities laws and the rules of the SEC, including Rule 10A-3(b)(i) under the Securities
and Exchange Act of 1934, as amended, or the Exchange Act, as well as the listing standards of the
Nasdaq Global Market. Our Board of Directors has determined that Mr. Foland qualifies as an audit
committee financial expert under applicable federal securities laws and regulations, and has the
financial sophistication required under the listing standards of the Nasdaq Global Market. A copy
of the current audit committee charter is available on our website at
www.positiveidcorp.com.
The audit committee assists our Board of Directors in its oversight of:
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our accounting, financial reporting processes, audits and the integrity of our financial statements; |
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our independent auditors qualifications, independence and performance; |
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our compliance with legal and regulatory requirements; |
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our internal accounting and financial controls; and |
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our audited financial statements and reports, and the discussion of the statements and reports with
management, including any significant adjustments, management judgments and estimates, new
accounting polices and disagreements with management. |
39
The audit committee has the sole and direct responsibility for appointing, evaluating and
retaining our independent auditors and for overseeing their work. All audit and non-audit services
to be provided to us by our independent auditors must be approved in advance by our audit
committee, other than de minimis non-audit services that may instead be approved in accordance with
applicable rules of the Securities and Exchange Commission, or SEC.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that our officers and directors and persons who own
more than 10% of our common stock file reports of ownership and changes in ownership with the SEC
and furnish us with copies of all such reports. We believe, based on our stock transfer records and
written representations from certain reporting persons, that all reports required under Section
16(a) were timely filed during 2009.
Code of Business Conduct and Ethics
Our Board of Directors has approved and we have adopted a Code of Business Conduct and Ethics,
or the Code of Conduct, which applies to all of our directors, officers and employees. Our Board of
Directors has also approved and we have adopted a Code of Ethics for Senior Financial Officers, or
the Code for SFO, which applies to our chief executive officer and chief financial officer. The
Code of Conduct and the Code for SFO are available upon written request to PositiveID Corporation,
Attention: Secretary, 1690 South Congress Avenue, Suite 200, Delray Beach, Florida 33445. The audit
committee of our Board of Directors is responsible for overseeing the Code of Conduct and the Code
for SFO. Our audit committee must approve any waivers of the Code of Conduct for directors and
executive officers and any waivers of the Code for SFO.
40
Item 10. Executive Compensation
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information regarding compensation earned in or with respect to
our fiscal year 2008 and 2009 by:
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each person who served as our chief executive officer in 2009; and |
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each person who served as our chief financial officer in 2009. |
We had no other executive officers during any part of 2009. We refer to these officers
collectively as our named executive officers.
Summary Compensation Table
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
Option |
|
|
Incentive Plan |
|
|
All Other |
|
|
|
|
Name and |
|
|
|
|
|
Salary |
|
|
Bonus |
|
|
Awards |
|
|
Awards |
|
|
Compensation |
|
|
Compensation |
|
|
Total |
|
Principal Position |
|
Year |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
Scott R. Silverman (1)
Chairman and Chief
Executive Officer |
|
|
2009 |
|
|
|
222,685 |
(2) |
|
|
140,000 |
|
|
|
1,650,000 |
(3) |
|
|
|
|
|
|
|
|
|
|
16,466 |
(4) |
|
|
2,029,151 |
|
|
|
|
2008 |
|
|
|
254,101 |
(5) |
|
|
1,200,000 |
|
|
|
104,000 |
(3) |
|
|
|
|
|
|
|
|
|
|
5,497,592 |
(6) |
|
|
7,055,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William J. Caragol(7)
President and Chief
Financial Officer |
|
|
2009 |
|
|
|
212,593 |
(8) |
|
|
70,000 |
|
|
|
1,650,000 |
(9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,932,593 |
|
|
|
|
2008 |
|
|
|
216,206 |
(10) |
|
|
|
|
|
|
104,000 |
(9) |
|
|
|
|
|
|
|
|
|
|
1,276,400 |
(11) |
|
|
1,596,606 |
|
|
|
|
(1) |
|
Mr. Silverman became our chief executive officer on December 5, 2006. The Company terminated him without cause on July 18, 2008, in connection with the Xmark Transaction. On November 12, 2008, in connection with the purchase by R & R Consulting Partners, LLC (an
entity that is owned and controlled by Mr. Silverman) of 45.7% of the then outstanding shares of our common stock from Digital Angel, Mr. Silverman again became the chairman of our Board of Directors. On December 31, 2008, we entered into a letter agreement with
Mr. Silverman effective December 1, 2008, which provided that Mr. Silverman would serve as our executive chairman from December 1, 2008 through December 31, 2009. On August 27, 2009, the Board of Directors appointed Mr. Silverman as the Companys chief executive
officer, and he also continues to serve as Chairman of our Board of Directors. |
|
(2) |
|
Represents the aggregate grant date fair value, computed in accordance with FASB ASC Topic 718, of 601,852 shares of restricted company common stock received in lieu of salary. See Narrative Disclosure to Summary Compensation Table below for more information. |
|
(3) |
|
Represents the aggregate grant date fair value, computed in accordance with FASB ASC Topic 718, of 1,000,000 shares of Company common stock received during 2009, and 50,000 shares of Company common stock received during 2008. |
|
(4) |
|
The amount shown includes (i) $3600 in respect of group term life insurance provided to Mr. Silverman; and (ii) perquisites aggregating $12,866 as follows: $12,322 for an automobile allowance, maintenance and gasoline expenses and $534 for home security. |
|
(5) |
|
Amount represents 2008 salary paid to Mr. Silverman until his termination on July 18, 2008. |
41
|
|
|
(6) |
|
The amount shown includes (i) $300 in respect of group term life insurance provided to Mr. Silverman; (ii) a dividend of $1,162,500 paid to Mr. Silverman, which amount was not factored into the grant date fair value required to be reported for the stock award;
(iii) $38,879 paid as vacation accrued in connection with Mr. Silvermans termination; and (iv) $4,242,273 paid to Mr. Silverman under a separation agreement. See Potential Payments upon Termination or Change in Control below for more information regarding the
$4,242,273 payment. The amount shown also includes perquisites and other personal benefits aggregating $53,640, which were as follows: |
|
|
|
|
|
|
|
Amount |
|
|
|
of |
|
Nature of Expense |
|
Expense |
|
Expense allowance |
|
$ |
45,000 |
|
Automobile allowance for automobile, maintenance and gasoline expenses |
|
|
8,640 |
|
|
|
|
|
Total |
|
$ |
53,640 |
|
|
|
|
|
|
|
|
(7) |
|
Mr. Caragol became our chief financial officer as of August 21, 2006 and our president as of May 4, 2007. Effective January 1, 2009, Mr. Caragol became our acting chief financial officer. On November 10, 2009, In conjunction with Steel Vault merger
Mr. Caragol became our president, chief financial officer and a director. |
|
(8) |
|
Represents the aggregate grant date fair value, computed in accordance with FASB ASC Topic 718, of 518,519 shares of restricted company common stock received in lieu of salary. See Narrative Disclosure to Summary Compensation Table below for more
information. |
|
(9) |
|
Represents the aggregate grant date fair value, computed in accordance with FASB ASC Topic 718, of 1,000,000 shares of Company common stock received during 2009, and 50,000 shares of Company common stock received during 2008. |
|
(10) |
|
On May 4, 2007, in connection with our Boards decision to appoint Mr. Caragol to serve as our president, our compensation committee approved an increase in Mr. Caragols base salary to $185,000. In 2008, our compensation committee approved a further
increase in Mr. Caragols base salary to $203,500. Included in 2008 was vacation paid in connection with the letter agreement dated December 31, 2008 which terminated the May 15, 2008 letter agreement. |
|
(11) |
|
The amount represents payments made to Mr. Caragol (i) related to a change in control payment received in connection with the Xmark Transaction in the amount of $1,141,400; and (ii) a dividend payment in the amount of $135,000, which amount was not
factored into the grant date fair value, as the Company had no plans, nor did it expect, to issue dividend distributions at that time. |
Narrative Disclosure to Summary Compensation Table
Executive Employment Arrangements
Scott R. Silverman
Scott R. Silverman was appointed as our chief executive officer effective December 5, 2006 and
entered into an employment and non-compete agreement with us dated December 5, 2006. The employment
agreement provided for an initial base salary of $420,000 per year, with the base salary being
subject to an annual increase of no less than 10% in each of the second and third years of the term
of the agreement. The term of the agreement was five years from the effective date. However, the
agreement was terminated on July 18, 2008 when we terminated Mr. Silverman without cause in
connection with the Xmark Transaction. Under his employment agreement, Mr. Silverman was entitled
to all benefits for which our salaried employees are generally eligible under either compensation
or employee benefit plans and programs, on the same basis as our similarly situated executive
employees. During his employment, Mr. Silverman participated in our then 401(k) plan and
Company-paid health insurance. He was reimbursed for reasonable business expenses and was provided
the use of automobiles leased by us. In addition, annual dues relating to Mr. Silvermans
membership at a private club were paid for by us. The membership dues at the private club were
approximately $3,198 per year. He also received a Company-paid $2,000,000 executive term life
policy, under which we were the beneficiary of $1,750,000. In addition, we were obligated to pay to
Mr. Silverman $45,000 per year during the term of the agreement, payable in two equal
installments of $22,500 on or before January 15 and July 15, representing non-allocable
expenses that were deemed to be additional compensation to Mr. Silverman.
42
The employment agreement specified that Mr. Silverman was eligible to receive incentive bonus
compensation for each calendar year during the term of the agreement in an amount to be reasonably
determined by our Board of Directors. Our Board had to consider bonuses paid by similarly situated
employers to similarly situated employees in making its determination. On April 2, 2007, our
compensation committee approved an executive management incentive compensation plan for fiscal year
2007 for Mr. Silverman. Under the plan, Mr. Silverman was able to earn up to $1,550,000 and earned
$800,000. The employment agreement contemplated similar plans for each year of its term.
Under the employment agreement, Mr. Silverman received 500,000 shares of restricted common
stock. The shares were subject to substantial risk of forfeiture in the event that Mr. Silverman
resigned or we terminated his employment for cause on or before December 31, 2008. Since we
terminated Mr. Silverman without cause in connection with the Xmark Transaction, this forfeiture
restriction lifted on July 18, 2008.
Under the separation agreement between Mr. Silverman and us, dated May 15, 2008, Mr. Silverman
was prohibited, for a period of two years from the closing of the Xmark Transaction (in other
words, through July 18, 2010), from competing with us or any of our affiliates by directly or
indirectly engaging in our business within the radio-frequency identification technology market
space or by engaging in any business comparable to ours or to that of our affiliates at any
location at which we or our affiliates conduct business or provide any services. However, if (1)
our VeriMed business was not sold or transferred to a third party, or (2) our VeriMed business was
sold or transferred to Mr. Silverman or one of his affiliates, Mr. Silverman would not be subject
to the portion of this restriction that applies to our VeriMed business; but, in either such event,
he would remain subject to all portions of the restriction that do not apply to our VeriMed
business. The separation agreement also included a provision relating to non-disclosure of
proprietary information.
On December 31, 2008, we and Mr. Silverman entered into a letter agreement pursuant to which,
effective December 1, 2008 through December 31, 2009, he served as our executive chairman, unless
the term was amended or the letter agreement was terminated. Mr. Silverman received 601,852 Shares
on the later to occur of (i) stockholder approval of our Amended and Restated 2007 Stock Incentive
Plan (the Amended Plan), which or (ii) the filing of the Form S-8, as amended, to reflect the
Amended Plan, which was the later to occur on February 17, 2009 (hereinafter, the Grant Date). If
Mr. Silverman remained involved in our day-to-day management (as determined by our Board of
Directors), the shares would vest upon the earlier to occur of (i) January 1, 2010 or (ii) a Change
in Control. The shares were subject to forfeiture in the event that Mr. Silverman failed to remain
involved in our day-to-day management (as determined by our Board of Directors) until the earlier
to occur of (i) January 1, 2010 or (ii) a Change in Control. The 601,852 Shares vested on January
1, 2010.
In the event of a Change in Control during 2009, if Mr. Silverman (i) became or remained a
director of the acquiring company, or in the case of a merger, the surviving entity, and (ii) did
not voluntarily resign as a director for 12 months from the closing of the Change in Control
transaction, Mr. Silverman would receive $25,000 per month for a period of not less than 12 months
from the closing of the Change in Control transaction.
The term Change in Control is defined below under the heading, Potential Payments upon
Termination or Change in Control Scott R. Silverman.
Mr. Silverman was entitled to the use of a car through December 31, 2009 and would no longer
be entitled to receive any form of bonus or incentive compensation for services rendered to us
during fiscal years ended December 31, 2008 and 2009. The letter agreement also provided for the
termination of the separation agreement, dated May 15, 2008, as amended, between us and Mr.
Silverman, provided that sections I.B.(regarding the transaction bonus payment for the Xmark
Transaction), I.E. (regarding discharge of our obligations to Mr. Silverman), II.B. (regarding
cooperation by Mr. Silverman in connection with business matters) and II.C. (regarding Mr.
Silvermans waiver and release of certain rights, claims and actions) of the separation agreement
will survive.
43
For a more detailed description of the termination and change in control provisions of this
letter agreement, see Potential Payments upon Termination or Change in Control Scott R.
Silverman below.
William J. Caragol
William J. Caragol was appointed as our chief financial officer effective August 21, 2006 and
entered into an offer letter with us dated August 2, 2006. The offer letter provides for an initial
base salary of $150,000 per year and other benefits generally available for similarly situated
employees, such as participation in the Companys 401(k) plan and Company-paid health insurance. In
addition, pursuant to the offer letter, certain of the moving and related expenses associated with
the relocation of Mr. Caragol and his family from Northern Virginia to Florida were paid or
reimbursed by the Company. On March 2, 2007, the compensation committee approved an increase in Mr.
Caragols base salary to $165,000. Then, on May 4, 2007, in connection with our Boards decision to
appoint Mr. Caragol to serve as our president, the compensation committee approved an increase in
Mr. Caragols base salary to $185,000. In 2008, the compensation committee approved a further
increase in Mr. Caragols base salary to $203,500.
The offer letter includes provisions relating to ownership of proprietary information,
disclosure and ownership of inventions and non-solicitation of customers. Mr. Caragol has agreed
that, while our employee and for the one-year period following the end of his employment, he will
not, directly or indirectly, attempt to solicit or in any other way disturb or service any person,
firm or corporation that has been a customer, employee or vendor of ours, or that of our current or
future affiliates, at any time within one year prior to the end of his employment. On April 2,
2007, our compensation committee approved an executive management incentive compensation plan for
fiscal year 2007 for Mr. Caragol. Under the plan, Mr. Caragol was able to earn up to $875,000 and
earned $450,000.
In connection with the Xmark Transaction, on May 15, 2008, we entered into a letter agreement
with Mr. Caragol, which affirmed that we desired to retain Mr. Caragol as our president and chief
financial officer following the closing of the Xmark Transaction, confirmed that Mr. Caragols base
salary would remain at $203,500 per year, and outlined the bonus compensation for which Mr. Caragol
would be eligible.
On December 31, 2008, we and Mr. Caragol entered into a letter agreement pursuant to which,
effective January 1, 2009, Mr. Caragol served as our acting chief financial officer. That letter
agreement was amended and restated on March 27, 2009, which provided that unless the term was
amended or the letter agreement was terminated, the letter agreement was in effect until January 1,
2010. Mr. Caragol ceased receiving salary and health benefits on January 1, 2009.
Compensation due to Mr. Caragol under the letter agreement was in the form of shares of
restricted common stock in the amount of 518,519. The grant of the shares took place on the Grant
Date. The shares vested according to the following schedule: (i) 20% vested on the Grant Date; and
(ii) 80% vested on January 1, 2010. However, in the event of a Change in Control and if Mr. Caragol
was terminated without cause (as defined below), the shares would immediately vest. The shares were
subject to forfeiture in the event Mr. Caragol failed to remain involved in the day-to-day
management of the Company (as determined by our Board of Directors) or if he was terminated for
cause, which is defined as (i) Mr. Caragols conviction of a felony; (ii) Mr. Caragols being
prevented from providing services to us under the letter agreement as a result of Mr. Caragols
violation of any law, regulation and/or rule; or (iii) Mr. Caragols non-performance or
non-observance in any material respect of any requirement with respect to Mr. Caragols obligations
under the letter agreement.
The term Change in Control is defined below under the heading, Potential Payments upon
Termination or Change in Control William J. Caragol.
The letter agreement also provided for the termination of all compensation-related plans in
place between Mr. Caragol and us, including the letter agreement, dated May 15, 2008, between Mr.
Caragol and us, provided that the waiver/release provisions of such letter will survive.
For a description of the termination and change in control provisions of Mr. Caragols letter
agreement, see Potential Payments upon Termination or Change in Control William J. Caragol
below.
2010 Executive Employment Arrangements
On November 12, 2009, our Compensation Committee approved a 2010 executive compensation
arrangement for Messrs. Silverman and Caragol. Beginning in 2010, Mr. Silverman and Mr. Caragol
will receive a base salary of $375,000 and $225,000, respectively. Additionally, the Compensation
Committee has the authority to approve a discretionary bonus for 2010, a portion of which is
guaranteed, to each of Mr. Silverman and Mr. Caragol based on the following factors: development of
the rapid virus sensor project, development of the glucose-sensing microchip project, the financial
performance of the business of our wholly-owned subsidiary, National Credit Report.com, strategic
acquisitions, the overall financial condition/health of the
44
business,
and such other factors as the Compensation Committee deems appropriate in light of any acquisitions or changes in the
business. Mr. Silverman may earn a bonus between $200,000 and $600,000, and Mr. Caragol may earn a
bonus between $200,000 and $450,000. Each of Mr. Silverman and Mr. Caragol received 1,000,000
shares of restricted stock under the PositiveID Corporation 2009 Stock Incentive Plan. These
restricted shares will vest according to the following schedule: (i) 50% vest on January 1, 2011;
and (ii) 50% vest on January 1, 2012. Mr. Silvermans and Mr. Caragols rights and interests in the
unvested portion of the restricted stock are subject to forfeiture in the event they resign prior
to January 1, 2012 or are terminated for cause prior to January 1, 2012, with said cause being
defined as a conviction of a felony or such person being prevented from providing services to us as
a result of such persons violation of any law, regulation and/or rule. Mr. Silverman and Mr.
Caragol are entitled to Company-paid health insurance, non-allocable expenses of $45,000 and
$20,000, respectively, and each are entitled to an automobile allowance and other automobile
expenses, including insurance, gasoline and maintenance costs.
Outstanding Equity Awards as Of December 31, 2009
The following table provides information as of December 31, 2009 regarding unexercised stock
options and restricted stock outstanding held by Messrs. Silverman and Caragol.
Outstanding Equity Awards as Of December 31, 2009
|
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|
|
Option Awards |
|
|
Stock Awards |
|
|
|
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|
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Equity |
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|
Equity |
|
|
Incentive |
|
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Incentive |
|
|
Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan |
|
|
Awards: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
Awards: |
|
|
Market |
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
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|
Number |
|
|
or Payout |
|
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|
|
Incentive |
|
|
|
|
|
|
|
|
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|
|
|
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|
of |
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Value of |
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|
Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned |
|
|
Unearned |
|
|
|
|
|
|
|
|
|
|
Awards: |
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Market |
|
|
Shares, |
|
|
Shares, |
|
|
|
Number of |
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
of Shares |
|
|
Value of |
|
|
Units or |
|
|
Units or |
|
|
|
Securities |
|
|
Number of |
|
|
Securities |
|
|
|
|
|
|
|
|
|
|
or Units |
|
|
Shares or |
|
|
Other |
|
|
Other |
|
|
|
Underlying |
|
|
Securities |
|
|
Underlying |
|
|
|
|
|
|
|
|
|
of Stock |
|
|
Units of |
|
|
Rights |
|
|
Rights |
|
|
|
Unexercised |
|
|
Underlying |
|
|
Unexercised |
|
|
Option |
|
|
|
|
|
|
That |
|
|
Stock That |
|
|
That |
|
|
That |
|
|
|
Options |
|
|
Unexercised |
|
|
Unearned |
|
|
Exercise |
|
|
Option |
|
|
Have Not |
|
|
Have Not |
|
|
Have Not |
|
|
Have Not |
|
|
|
(#) |
|
|
Options(#) |
|
|
Options |
|
|
Price |
|
|
Expiration |
|
|
Vested |
|
|
Vested
|
|
|
Vested |
|
|
Vested |
|
Name |
|
Exercisable |
|
|
Unexercisable |
|
|
(#) |
|
|
($) |
|
|
Date |
|
|
(#)(1) |
|
|
($)(2) |
|
|
(#) |
|
|
($) |
|
|
Scott R. Silverman |
|
|
50,000 |
(3) |
|
|
|
|
|
|
|
|
|
$ |
0.68 |
|
|
|
3/23/2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,000 |
(3) |
|
|
|
|
|
|
|
|
|
$ |
0.56 |
|
|
|
6/28/2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000 |
(3) |
|
|
|
|
|
|
|
|
|
$ |
0.42 |
|
|
|
7/25/2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000 |
|
|
|
1,100,000 |
|
|
|
|
|
|
|
|
|
William J. Caragol |
|
|
50,000 |
(4) |
|
|
|
|
|
|
|
|
|
$ |
10.00 |
(5) |
|
|
8/21/2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000 |
|
|
|
1,100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
50% vest on January 1, 2011 and 50% vest on January 1, 2012. |
|
(2) |
|
Computed by multiplying the closing market price of a share of our common stock on December 31, 2009, or $1.10, by the number of shares of common stock that have not vested. |
|
(3) |
|
This option was originally issued by Steel Vault and was converted into an option to purchase shares of our common stock pursuant to the Agreement and Plan of Reorganization, dated September 4, 2009, as amended, among the Company, Steel
Vault and VeriChip Acquisition Corp. |
|
(4) |
|
On July 18, 2008, all stock option awards and restricted stock awards that had previously been granted under our 2002 Flexible Stock Plan, our 2005 Flexible Stock Plan, and our 2007 Stock Incentive Plan vested upon the closing of Xmark
Transaction. |
|
(5) |
|
The exercise price of Company stock options reflected in the table represents the estimated fair market value of our common stock on the date of grant, as determined by our management and Board of Directors. |
Potential Payments upon Termination or Change in Control
Scott R. Silverman
Mr. Silverman was terminated without cause on July 18, 2008, the day on which the Xmark
Transaction closed. Under the separation agreement between Mr. Silverman and us, dated May 15,
2008, we paid him a separation payment in the amount of approximately $3.2 million and incentive
compensation in the amount of approximately $1.0 million, less all deductions and withholdings, in
full and final satisfaction of the amounts due to Mr. Silverman pursuant to the terms of his
employment agreement.
45
On December 31, 2008, we and Mr. Silverman entered into a letter agreement pursuant to which,
effective December 1, 2008 through December 31, 2009, he served as our executive chairman, unless
the term was amended or the letter agreement was terminated. Pursuant to the letter agreement, if a
Change in Control (as defined below) had been effective as of December 31, 2009, and if Mr.
Silverman (i) became or remained a director of the acquiring company, or in the case of a merger,
the surviving entity, and (ii) did not voluntarily resign as a director for 12 months from the
closing of the Change in Control transaction, Mr. Silverman would have received $25,000 per month
for a period of not less than 12 months from the closing of the Change in Control transaction, for
a total of $300,000. In addition, upon the Change in Control, the 601,852 restricted shares of our
common stock would have vested provided that Mr. Silverman was involved in the day-to-day
management of the Company and assuming the restricted shares were not already vested. In the event
Mr. Silvermans employment with us was terminated (with or without cause)in 2009, he would not be
entitled to any cash payment and if the 601,852 restricted shares of our common stock were not yet
vested, they would be forfeited.
Change in Control means the happening of any of the following:
(i) the consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any person as such term is used in Section 13(d) and
14(d) of the Exchange Act (other than any trustee or other fiduciary holding securities under any
employee benefit plan of ours, or any company owned, directly or indirectly, by our shareholders in
substantially the same proportions as their ownership of our stock), is or becomes the beneficial
owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of our securities
representing more than 50% of the combined voting power of our then outstanding securities entitled
generally to vote in the election of the Board (other than the occurrence of any contingency);
(ii) our stockholders approve a merger or consolidation of us with any other corporation or
entity, which is consummated, other than a merger or consolidation which would result in our voting
securities outstanding immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving entity) more than 50% of
the combined voting power of our voting securities or such surviving entity outstanding immediately
after such merger or consolidation; or
(iii) the effective date of a complete liquidation of us or the consummation of an agreement
for the sale or disposition by us of all or substantially all of our assets, which in both cases
are approved by our stockholders as may be required by law.
Currently, Mr. Silvermans employment is not governed under any agreement, and as such, in the
event of a change of control, he would not be entitled to any compensation.
William J. Caragol
On December 31, 2008, we and Mr. Caragol entered into a letter agreement pursuant to which,
effective January 1, 2009, Mr. Caragol served as our acting chief financial officer. That letter
agreement was amended and restated on March 27, 2009, which provided that unless the term was
amended or the letter agreement was terminated, the letter agreement was in effect until January 1,
2010. Mr. Caragol ceased receiving salary and health benefits on January 1, 2009.
Pursuant to the letter agreement, if a Change in Control had become effective on December 31,
2009 and if Mr. Caragol had been terminated without cause on December 31, 2009, the 518,519
restricted shares of our common stock would have vested immediately, assuming the restricted stock
was not yet vested. If Mr. Caragol had been terminated for cause on December 31, 2009, the shares
would have been forfeited. No other payments would be due under the letter agreement to Mr. Caragol
in the event of a Change in Control or termination (with or without cause).
The term Change in Control has the same meaning as provided above under the description of
Mr. Silvermans potential termination and Change in Control payments. The term cause is defined
above under the heading, Narrative Disclosure to Summary Compensation Table Executive Employment
Arrangements William J. Caragol.
Currently, Mr. Silvermans employment is not governed under any agreement, and as such, in the
event of a change of control, he would not be entitled to any compensation.
46
Director Compensation
The following table provides compensation information for persons serving as members of our
Board of Directors during 2009.
2009 Director Compensation
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Fees |
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Earned |
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Non-Equity |
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Nonqualified |
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|
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or Paid |
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Stock |
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Option |
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Incentive Plan |
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Deferred |
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All Other |
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in Cash |
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Awards |
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Awards |
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|
Compensation |
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|
Compensation |
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|
Compensation |
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Total |
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Name |
|
($) |
|
|
($)(1) |
|
|
($) (1) |
|
|
($) |
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|
Earnings |
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|
($) |
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|
($) |
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Jeffrey S. Cobb (2) |
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30,000 |
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37,000 |
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|
|
|
|
|
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|
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|
|
|
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|
|
|
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67,000 |
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|
|
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Barry M. Edelstein (3) |
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50,000 |
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49,250 |
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|
|
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|
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|
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|
|
|
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|
|
|
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99,250 |
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|
|
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Steven R. Foland (4) |
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55,000 |
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|
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49,250 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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104,250 |
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|
|
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Michael E. Krawitz (5) |
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22,500 |
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37,000 |
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|
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|
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|
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|
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59,500 |
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(1) |
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The dollar amount of this award reflected in the table represents the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. |
|
(2) |
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As of December 31, 2009, Mr. Cobb held options to purchase 218,750 shares of our common stock. Mr. Cobb was awarded 100,000 shares of restricted stock on February 20,
2009, which vested on January 1, 2010. |
|
(3) |
|
As of December 31, 2009, Mr. Edelstein held options to purchase 75,000 shares of our common stock. Mr. Edelstein was awarded 100,000 shares of restricted stock on
February 20, 2009, which vested on January 1, 2010 and 25,000 shares of restricted stock on August 17, 2009, which vested on January 1, 2010. |
|
(4) |
|
As of December 31, 2009, Mr. Foland held no options to purchase shares of our common stock. Mr. Foland was awarded 100,000 shares of restricted stock on February 20,
2009, which vested on January 1, 2010 and 25,000 shares of restricted stock on August 17, 2009 which vested on January 1, 2010. |
|
(5) |
|
As of December 31, 2009, Mr. Krawitz held 325,000 options to purchase shares of our common stock. Mr. Krawitz was awarded 100,000 shares of restricted stock on February
20, 2009, which vested on January 1, 2010. |
On February 21, 2008, our Board of Directors increased non-employee director compensation from
$5,000 to $7,500 per quarter. A non-employee director serving as chairman of a committee will
receive an additional $2,500 per quarter. Our non-employee directors are also reimbursed for
out-of-pocket expenses incurred in attending Board and Board committee meetings. In 2009 and
currently, directors can elect to receive their fees in cash or restricted stock or a combination
thereof.
In addition, on January 20, 2010, our Board of Directors also approved a grant of 75,000
shares of restricted stock to each non-employee director, which vests on January 1, 2011, except
for Mr. Foland who received an additional 30,000 shares of restricted stock for the significant
amount of work he does and has done as Audit Committee Chair.
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
See Part II, Item 4, under the heading, Equity Compensation Plan Information for information
on compensation plans under which our equity securities are authorized for issuance.
47
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known to us regarding beneficial ownership
of shares of our common stock as of March 5, 2010, by:
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each of our directors; |
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each of our named executive officers; |
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all of our executive officers and directors as a group; and |
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each person, or group of affiliated persons, known to us to be the
beneficial owner of more than 5% of our outstanding shares of common
stock. |
Beneficial ownership is determined in accordance with the rules and regulations of the SEC and
includes voting and investment power with respect to the securities. In computing the number of
shares beneficially owned by a person and the percentage ownership of that person, shares of common
stock subject to options or warrants held by that person that are currently exercisable or
exercisable within 60 days of March 5, 2010 are deemed outstanding. Such shares, however, are not
deemed outstanding for purposes of computing the percentage ownership of any other person. To our
knowledge, except as indicated in the footnotes to this table and subject to community property
laws where applicable, the persons named in the table have sole voting and investment power with
respect to all shares of our common stock shown opposite such persons name. The percentage of
beneficial ownership is based on 23,033,275 shares of our common stock outstanding as of March 5,
2010. Unless otherwise noted below, the address of the persons and entities listed in the table is
c/o PositiveID Corporation, 1690 South Congress Avenue, Suite 200, Delray Beach, Florida 33445.
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Number of |
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Shares |
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Percent of |
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Beneficially |
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Outstanding |
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Name and Address of Beneficial Owner |
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Owned(#) |
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Shares(%) |
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Five percent stockholders: |
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Scott R. Silverman (1) |
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11,267,013 |
|
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46.9 |
% |
R & R Consulting Partners, LLC (3) |
|
|
2,055,556 |
|
|
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8.9 |
% |
Named Executive Officers and Directors: |
|
|
|
|
|
|
|
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Scott R. Silverman (1) |
|
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11,267,013 |
|
|
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46.9 |
% |
William J. Caragol (2) |
|
|
1,907,519 |
|
|
|
8.2 |
% |
Jeffrey S. Cobb (4) |
|
|
458,750 |
|
|
|
2.0 |
% |
Barry M. Edelstein (5) |
|
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325,000 |
|
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1.4 |
% |
Steven R. Foland (6) |
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325,600 |
|
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1.4 |
% |
Michael E. Krawitz (7) |
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500,000 |
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2.1 |
% |
Executive Officers and Directors as a group (6 persons) (8) |
|
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13,694,882 |
|
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55.6 |
% |
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* |
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Less than 1% |
|
(1) |
|
Mr. Silverman has sole voting power over 11,267,013 shares of our common stock. These shares consist of (i) 2,742,963 shares held directly by Mr.
Silverman and (ii) 8,524,050 shares over which Mr. Silverman has sole voting power pursuant to a Voting Agreement, dated November 10, 2009, among Mr.
Silverman, Blue Moon Energy Partners LLC (Blue Moon), R & R Consulting Partners, LLC (R&R), Jared Shaw and William Caragol (the Voting
Agreement), consisting of the 1,089,000 shares held by Blue Moon, the 4,755,556 shares held by R&R, the 860,975 shares held by Jared Shaw, and the
1,818,519 shares held directly by Mr. Caragol. Mr. Silverman has sole dispositive power over 1,742,963 shares which are held directly by Mr. Silverman.
Mr. Silverman lacks dispositive power over 1,000,000 Shares held directly by Mr. Silverman which are restricted as to transfer until January 1, 2011
(500,000 Shares) and January 1, 2012 (500,000 Shares). Mr. Silverman shares dispositive power over 3,144,556 shares. These shares consist of (i)
1,089,000 shares that Mr. Silverman, as a manager of Blue Moon, may be deemed to share beneficial ownership with Blue Moon and Mr. Caragol and (ii)
2,055,556 shares that Mr. Silverman, as the control person of R&R, may be deemed to share beneficial ownership with R&R. |
|
(2) |
|
Includes 304,000 shares issuable upon the exercise of warrants and 50,000 shares issuable upon the exercise of stock options that are currently
exercisable or exercisable within 60 days of March 5, 2010. Mr. Caragol lacks voting power over the 1,907,519 Shares that he beneficially owns,
pursuant to the Voting Agreement. Mr. Caragol has sole dispositive power over 818,519 shares that he beneficially owns and shares dispositive power
over 1,089,000 shares that Mr. Caragol, as a manager of Blue Moon, may be deemed to share beneficial ownership with Blue Moon and Mr. Silverman. Mr.
Caragol lacks dispositive power over 1,000,000 shares, which are restricted as to transfer until January 1, 2011 (500,000 Shares) and January 1, 2012
(500,000 Shares), and lacks voting power over the 1,000,000 shares pursuant to the Voting Agreement. |
48
|
|
|
(3) |
|
R&R lacks voting power over the 2,055,556 shares pursuant to the Voting Agreement. Mr. Silverman, as the control person of R&R, may be deemed to share
dispositive power with R&R over the 2,055,556 shares. R&R also holds of record 2,700,000 shares, which have been borrowed by Optimus pursuant to the
terms of the Stock Loan Agreements described above in Item 6. Managements Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources Preferred Stock Offering. However, R&R lacks both dispositive power and voting power over the 2,700,000 shares,
and therefore does not beneficially own such shares. Pursuant to the Stock Loan Agreements, Optimus has dispositive power over the 2,700,000 shares
and pursuant to the Voting Agreement, Mr. Silverman has the voting power over the 2,700,000 shares. |
|
(4) |
|
Includes 240,000 shares of our common stock and 218,750 shares of our common stock issuable upon the exercise of stock options that are currently
exercisable or exercisable within 60 days of March 5, 2010. Mr. Cobb lacks dispositive power over 90,000 shares, which are restricted until January 1,
2011. |
|
(5) |
|
Includes 250,000 shares of our common stock and 75,000 shares of our common stock issuable upon the exercise of stock options that are currently
exercisable or exercisable within 60 days of March 5, 2010. Mr. Edelstein lacks dispositive power over 75,000 shares, which are restricted until
January 1, 2011. |
|
(6) |
|
Mr. Foland lacks dispositive power over 145,000 shares, which are restricted until January 1, 2011. |
|
(7) |
|
Includes 175,000 shares of our common stock and 325,000 shares of our common stock issuable upon the exercise of stock options that are currently
exercisable or exercisable within 60 days of March 5, 2010. Mr. Krawitz lacks dispositive power over 75,000 shares, which are restricted until January
1, 2011. |
|
(8) |
|
Includes shares of our common stock beneficially owned by current executive officers and directors and shares issuable upon the exercise of stock
options that are currently exercisable or exercisable within 60 days of March 5, 2010, in each case as set forth in the footnotes to this table. |
All stock option awards and restricted stock awards that were granted before July 18, 2008
under our 2002 Flexible Stock Plan, our 2005 Flexible Stock Plan, and our 2007 Stock Incentive Plan
vested upon the closing of Xmark Transaction.
Item 12. Certain Relationships and Related Transactions, and Director Independence.
Since the beginning of our fiscal year 2008, there has not been, and there is not currently
proposed any transaction or series of similar transactions in which the amount involved exceeded or
will exceed the lesser of $120,000 or one percent of the average of our total assets at year end
for the last two completed fiscal years and in which any related person, including any director,
executive officer, holder of more than 5% of our capital stock during such period, or entities
affiliated with them, had a material interest, other than as described in the transactions set
forth below.
Director and Officer Roles and Relationships with Digital Angel and Other Affiliates
Several of our current and former directors and executive officers have served as directors
and officers of Digital Angel, which held 45.7% of our stock at the time it sold such stock to R &
R Consulting Partners, LLC (an entity owned and controlled by Mr. Silverman) on November 12, 2008,
and its other affiliates. By virtue of the relationships described below, certain of our current
and former directors and executive officers may face situations
in which there are actual or apparent conflicts of interest that could interfere, or appear to
interfere, with their ability to act in a manner that is in our best business interests.
49
At the Board level:
|
|
|
Our chairman and chief executive officer, Scott R. Silverman, served
on the Board of Directors of Digital Angel from March 2002 until July
2007, and, from March 2003 until the end of his term of service, in
the capacity of chairman. |
|
|
|
|
Mr. Silverman served on the Board of Directors of Destron Fearing from
July 2003 until December 2007 and, from February 2004 until the end of
his term of service, in the capacity of chairman. |
|
|
|
|
Mr. Silverman served as chairman of the Board of Directors of Steel
Vault until November 10, 2009, in which Digital Angel held a 49.9%
ownership interest until August 1, 2008 and is a manager of Blue Moon,
which holds 1,035,000 shares of our common stock. |
|
|
|
|
Mr. Silverman is the managing member of R & R Consulting Partners,
LLC, which holds 5,355,556 shares of our common stock. |
|
|
|
|
Barry M. Edelstein served as interim chief executive officer and
president of Destron Fearing from August 2007 through December 2007,
as well as a member of the Board of Directors of Destron Fearing from
June 2005 until January 2008. |
|
|
|
|
Jeffrey S. Cobb serves as a member of our compensation, audit, and
nominating and governance committees and served as a member of the
compensation, audit, and nominating committees of Steel Vault until
his resignation on July 22, 2008. |
|
|
|
|
In 2008 Michael E. Krawitz provided legal services to us on a
consulting basis in 2008 and received approximately $70,000 in fees.
Mr. Krawitz served on the Board of Directors of Steel Vault until
November 10, 2009. Mr. Krawitz served as the chief executive officer
and president of Digital Angel from September 2006 to December 2007.
Prior to that, during his time at Digital Angel, he served as
assistant vice president and general counsel beginning in April 1999,
and was appointed vice president and assistant secretary in December
1999, senior vice president in December 2000, secretary in March 2003,
executive vice president in April 2003 and chief privacy officer in
November 2004. |
|
|
|
|
Blue Moon owns 1,035,000 shares of our common stock and a warrant to
purchase 54,000 shares of our common stock. Mr. Silverman is a
manager and controls a member of Blue Moon (i.e., R & R Consulting
Partners, LLC). William J. Caragol is also a manager and member of
Blue Moon. In addition, Jeffrey S. Cobb and Barry M. Edelstein, both
of whom are members of our board of directors, each own a 16.67%
interest in Blue Moon. |
|
|
|
|
Mr. Silverman served as president of Digital Angel from March 2002 to
March 2003, acting president of Digital Angel from April 2005 to
December 2006, and as the chief executive officer of Digital Angel
from March 2003 to December 2006, until he assumed the position of our
chief executive officer on December 5, 2006. |
|
|
|
|
William J. Caragol, our president and chief financial officer, served
as chief executive officer, president, acting chief financial officer
and director of Steel Vault before the Merger and is a manager of Blue
Moon, which holds 1,035,000 shares of our common stock. |
In their various capacities with Digital Angel and its other affiliates, Messrs. Silverman,
Edelstein, Cobb and Krawitz have been granted stock option awards by Digital Angel and, in certain
cases, one or more of such other affiliates. Messrs. Silverman, Caragol, Cobb, Edelstein and
Krawitz have been granted equity awards by Steel Vault, which were converted into equity awards of
the Company as a result of the Merger.
Transactions with Digital Angel Our Former Majority Stockholder
Transition Services Agreement
During the years ended December 31, 2005, 2004 and 2003, Digital Angel provided certain
general and administrative services to us, including accounting, finance, payroll and legal
services, telephone, rent and other miscellaneous items. The costs of these services were
determined based on our use of such services. On December 27, 2005, we entered into a transition
services agreement with Digital Angel, under which Digital Angel agreed to continue to provide us
with certain administrative transition services, including payroll, legal, finance, accounting,
information technology, tax services, and services related to our initial public offering. As
compensation for these services, we agreed to pay Digital Angel approximately $62,000 per month for
fixed costs allocable to these services, among other reimbursable expenses. On December 21, 2006,
we and Digital Angel entered into an amended and restated transition services agreement, which
became effective on February 14, 2007, the date of completion of our initial public offering.
50
The services provided by Digital Angel under the amended and restated transition services
agreement were the same as those provided under the initial agreement. In connection with the
December 21, 2006 amendment, the estimated monthly charge for the fixed costs allocable to these
services was increased to approximately $72,000 per month, primarily as a result of an increased
allocation for office space. Effective April 1, 2007, the estimated monthly charge for the fixed
costs allocable to these services was reduced to $40,000 per month, primarily as a result of a
reduction in allocable accounting fees and accounting and legal services. Effective January 1,
2008, the monthly cost was further reduced to $10,000 per month.
The terms of the transition services agreement and the amendment and restatement of the
agreement were negotiated between certain of Digital Angels executive officers and certain of our
executive officers. These executive officers were independent of one another, and the terms of the
agreement were based upon historical amounts incurred by Digital Angel for payment of such services
to third parties. However, these costs may not necessarily be indicative of the costs which would
be incurred by us as an independent stand alone entity.
The cost of these services to us was $0.5 million, $0.8 million and $0.5 million in the years
ended December 31, 2007, 2006 and 2005, respectively. The cost of these services to us during 2008
was $0.1 million.
On August 20, 2008, Digital Angel and the Company agreed to terminate the amended and restated
transition services agreement, with such termination being effective as of September 30, 2008.
Loan Agreement with Digital Angel
Until our initial public offering, we financed a significant portion of our operations and
investing activities primarily through funds that Digital Angel provided. On December 27, 2005, we
and Digital Angel entered into a loan agreement to memorialize the terms of existing advances to us
and provide the terms under which Digital Angel would lend additional funds to us. We refer to this
loan as the Digital Angel Loan. Through October 5, 2006, Digital Angels loan to us bore interest
at the prevailing prime rate of interest as published by The Wall Street Journal. On October 6,
2006, we entered into an amendment to the loan agreement, which increased the principal amount
available thereunder to $13.0 million, and we borrowed an additional $2.0 million under the
agreement to make the second purchase price payment with respect to our acquisition of a
wholly-owned subsidiary. In connection with that amendment, the interest rate was also changed to a
fixed rate of 12% per annum. That amendment further provided that the loan matured on July 1, 2008,
but could be extended at Digital Angels sole option through December 27, 2010.
On January 19, 2007, February 8, 2007, February 13, 2007 and February 29, 2008, we entered
into further amendments to the Digital Angel Loan documents, which increased the maximum principal
amount of indebtedness that we may incur to $14.5 million. On February 9, 2007, the effective date
of our initial public offering, the loan ceased to be a revolving line of credit, and we have no
ability to incur additional indebtedness under the Digital Angel Loan documents. The interest
continues to accrue on the outstanding indebtedness at a rate of 12% per annum. Under the terms of
the loan agreement, as amended, we were required to repay Digital Angel $3.5 million of principal
and accrued interest upon the consummation of our initial offering. Accordingly, we paid Digital
Angel $3.5 million on February 14, 2007. We were not obligated to repay an additional amount of the
indebtedness until January 1, 2008. Effective with the payment of the $3.5 million, all interest
which has accrued on the loan as of the last day of each month, commencing with the month in which
such payment is made, will be added to the principal
amount. A final balloon payment equal to the outstanding principal amount then due under the
loan, plus all accrued and unpaid interest, is due on February 1, 2010.
On December 20, 2007, we entered into a letter agreement with Digital Angel, or the December
2007 Letter Agreement, which was amended on February 29, 2008, whereby we were required to pay $0.5
million to Digital Angel by December 21, 2007. In addition, we could prepay the outstanding
principal amount before October 30, 2008 by providing Digital Angel with $10 million, plus (i) any
accrued and unpaid interest between October 1, 2007 and the date of such prepayment, less (ii) the
$0.5 million payment and any other principal payments made to reduce the outstanding principal
amount between the date of the December 2007 Letter Agreement and the date of such prepayment. We
were also required to register for resale all shares of our common stock that Digital Angel owned
with the SEC and all applicable states within 120 days following the prepayment of outstanding
principal amount. If prepayment of the outstanding principal amount was not made by 5:00 p.m. on
October 30, 2008, the December 2007 Letter Agreement would expire.
51
On July 18, 2008, we used a portion of the proceeds of the Xmark Transaction to satisfy all of
our outstanding obligations under the Digital Angel Loan.
Valens Financing
On February 29, 2008, we obtained financing in the form of a $8.0 million secured term note,
or the Valens Note, with Valens Offshore SPV II, Corp., or the Lender. The Lender is an affiliate
of Kallina Corporation and Laurus Master Fund, Ltd., which are Digital Angels lenders. The Note
accrued interest at a rate of 12% per annum and had a maturity date of March 31, 2009. The terms of
the Valens Note allowed for optional redemption by paying 100% of the principal amount, plus any
amounts then owing under the Valens Note, plus $120,000, if such amounts were paid prior to the
six-month anniversary of February 29, 2008, or $240,000, if such amounts were paid on or after the
six-month anniversary of February 29, 2008. Pursuant to the corresponding securities purchase
agreement among, we issued to the Lender 120,000 shares of our common stock.
On July 18, 2008, we used a portion of the proceeds of the Xmark Transaction to repay all of
our outstanding obligations under the Valens Note.
February 2008 Letter Agreement with Digital Angel
We used part of the proceeds of the financing with the Lender to prepay $5.3 million of debt
owed to Digital Angel pursuant to the Digital Angel Loan. In connection with the financing
transaction with the Lender, we entered into a letter agreement with Digital Angel, dated February
29, 2008, under which we agreed, among other things, (i) to prepay the $5.3 million to Digital
Angel, (ii) to amend the Digital Angel Loan documents to reduce the grace period from thirty days
to five business days, (iii) to include a cross-default provision, under which an event of default
under the Valens Note, if not cured within the greater of the applicable cure period or ten days
after the occurrence thereof, is an event of default under the Digital Angel Loan, and (iv) to
amend the December 2007 Letter Agreement. As a result of the $5.3 million payment, we are not
required to make any further debt service payments to Digital Angel until September 1, 2009.
As consideration for providing financing to us, which in turn enabled us to make the $5.3
million prepayment to Digital Angel, Digital Angel issued to the Lender 230,000 shares of Digital
Angel common stock. On July 18, 2008, we used a portion of the proceeds of the Xmark Transaction to
repay all of our outstanding obligations under the Digital Angel Loan.
Supply and Development Agreement
Digital Angel was our sole supplier of the VeriChip under the supply and development
agreement. It was terminated on November 12, 2008, in connection with our purchase of certain
intellectual property from Digital Angel, except that product warranties continue to apply to
products sold to the Company under that agreement subject to certain limitations, and the
indemnification provisions survive through March 4, 2013 for claims associated with the products
purchased under that agreement. For additional information regarding this purchase, see Asset
Purchase Agreement with Digital Angel below.
May 2008 Letter Agreement with Digital Angel
In connection with the Xmark Transaction, on May 15, 2008, we and Digital Angel entered into a
letter agreement. Under this letter agreement, the stock purchase agreement underlying the Xmark
Transaction and the transactions contemplated thereby do not constitute an event of default under
the Digital Angel Loan.
This letter agreement allowed Digital Angel to designate, from and after the date of the
closing of the Xmark Transaction or upon a breach of the letter agreement, up to three (3) members
of the Companys Board of Directors, all of which shall be independent with the exception of Joseph
J. Grillo, Digital Angels president and chief executive officer. Accordingly, upon the closing of
the Xmark Transaction, Digital Angel designated Mr. Grillo to join our Board of Directors as the
chairman. The letter agreement also provided that the Company pay to Digital Angel, upon the
closing of the Xmark Transaction, (i) $250,000 as consideration for the execution of the guarantee
between Digital Angel and The Stanley Works, and (ii) up to $250,000 for Digital Angels actual
expenses, incurred or reasonably expected to be incurred by Digital Angel in connection with the
Xmark Transaction. These amounts were expensed and included in determining the gain on sale of
Xmark for the year ended December 31, 2008.
52
In addition, the letter agreement provided, among other things, that (i) the Company would
limit all bonus and other special payments to those scheduled as of May 15, 2008, with any changes
or new payments to be pre-approved by Digital Angel, (ii) Mr. Silverman would enter into a
separation agreement with the Company, and (iii) Digital Angel would have access to the Companys
financial information.
On July 18, 2008, we a used a portion of the proceeds of the Xmark Transaction to pay $5.3
million in order to satisfy all outstanding monetary obligations under this letter agreement. On
November 12, 2008, this letter agreement was terminated in connection with our purchase of certain
intellectual property from Digital Angel, except for certain provisions relating to indemnification
in connection with the stock purchase agreement with The Stanley Works. For additional information
regarding this purchase, see Asset Purchase Agreement with Digital Angel below.
Asset Purchase Agreement with Digital Angel
On November 12, 2008, we entered into an asset purchase agreement with Digital Angel and
Destron Fearing, a wholly-owned subsidiary of Digital Angel. The terms of the asset purchase
agreement included the sale to us of patents related to an embedded bio-sensor system for use in
humans, and the assignment of any rights of Digital Angel and Destron Fearing under a development
agreement associated with the development of an implantable glucose sensing microchip. We also
received covenants from Digital Angel and Destron Fearing that will permit the use of intellectual
property of Digital Angel and Destron Fearing related to our VeriMed Health Link business without
payment of ongoing royalties, as well as inventory and a limited period of technology support by
Digital Angel and Destron Fearing. We paid Digital Angel and Destron Fearing $500,000 at the
closing of the asset purchase agreement.
Also, pursuant to the asset purchase agreement, on November 12, 2008, Mr. Grillo resigned as
our director.
Purchase Order with Digital Angel
On November 14, 2008, we purchased from Digital Angel the remaining inventory owned by Digital
Angel related to our VeriMed Health Link business for approximately $162,000.
Other Agreements
Transaction between Blue Moon and Steel Vault
On March 20, 2009, Steel Vault closed a debt financing transaction with Blue Moon for $190,000
pursuant to a secured convertible promissory note. The note was payable on demand after March 20,
2011, accrued interest at five percent per year compounded monthly and was secured by substantially
all of Steel Vaults assets pursuant to a security agreement between Steel Vault and Blue Moon. The
note could be prepaid at any time without penalty.
Under the note, Blue Moon had the right, at any time, in its sole discretion to convert the
entire unpaid principal amount and accrued and unpaid interest on the note into that number of
shares of Steel Vaults common stock at a price of $0.44 per share. Steel Vault could convert the
note into its common stock anytime after a change in control of Steel Vault or if the average of
the high and low trading prices of Steel Vaults common stock as quoted on the OTC Bulletin Board
was greater than 120% of the conversion price ($0.44 per share) over 20 consecutive trading days.
However, as a condition of our obligation to consummate the transactions contemplated by the merger
agreement, Steel Vault caused the note to be amended on terms reasonably acceptable to us to
eliminate the convertible feature of such note. In addition, Blue Moon received a common stock
purchase warrant from Steel Vault, which carries piggy-back registration rights, to purchase
108,000 shares of our common stock at a price of $0.44 per share. Following the Merger, the warrant is now exercisable for 54,000 shares
of our common stock at a price of $0.88 per share. Steel Vault repaid both the principal
and interest accrued thereon on the Blue Moon obligation in full on November 10, 2009
in the amounts of $190 and $6, respectively, and the warrant to purchase our common stock
remains outstanding.
Related Party Financing
On June 4, 2009, we closed a debt financing transaction with Steel Vault for $500,000 pursuant
to a secured convertible promissory note. The two year note was collectible on demand on or after
June 4, 2010, accrued interest at a rate of twelve percent and was secured by substantially all of
Steel Vaults assets, including the assets of NCRC and the security interest held by us on the
assets was senior to any other security interest on the assets pursuant to a Subordination and
Intercreditor Agreement between us and Blue Moon. The note could be prepaid at any time without
penalty and matured on June 4, 2011. The unpaid principal and accrued and unpaid interest under the
note could be converted at any time into common stock of Steel Vault at a price of $0.30 per share.
The principal was convertible into 1,666,667 shares of Steel Vault common stock.
53
The financing transaction included a common stock purchase warrant sold to us to purchase
333,334 common shares of Steel Vault at a price of $0.30 per share, which we refer to as the Steel
Vault Warrant. The Steel Vault Warrant was void after June 4, 2014. The note and Steel Vault
Warrant were issued to us pursuant to a Convertible Note and Warrant Subscription Agreement, dated
June 4, 2009, between us and Steel Vault, which provided that Steel Vault would file a registration
statement for the public resale of the shares underlying the note and Steel Vault Warrant upon
notice that we elected to convert all or part of the note into common stock of Steel Vault.
The financing transaction also included a guaranty of collection given by Mr. Caragol for the
benefit of Steel Vault, for which Mr. Caragol received a common stock purchase warrant from Steel
Vault to purchase 500,000 common shares of Steel Vault at a price of $0.30 per share.
Upon consummation of the Merger, we forgave the principal and interest due under the note and
the Steel Vault Warrant was cancelled. Mr. Caragol received a common stock purchase warrant from
us to purchase 250,000 common shares of our stock at a price of $0.60 per share in exchange for his
Steel Vault warrant.
Financing Transaction with Optimus
On September 29, 2009, we entered into the Purchase Agreement with Optimus under which Optimus
committed to purchase up to $10 million shares of Preferred Stock in one or more tranches. To
facilitate the transactions contemplated by the Purchase Agreement, R & R Consulting Partners, LLC,
a company controlled by Scott R. Silverman, the Companys chairman and chief executive officer,
loaned shares of common stock to Optimus equal to 135% of the aggregate purchase price for each
tranche pursuant to Stock Loan Agreements between R & R Consulting Partners, LLC and Optimus. R &
R Consulting Partners, LLC was paid $100 thousand fee in October 2009 plus will be paid 2% interest
for the fair value of the loaned shares for entering into the stock loan arrangement. On September
29, 2009, October 8, 2009, and October 21, 2009, R & R Consulting Partners, LLC loaned Optimus 1.3
million, 800,000 and 600,000 shares, respectively, of our common stock. For more information on
this transaction, see Item 6. Managements Discussion and Analysis of Financial Condition and
Results of Operations Liquidity and Capital Resources Credit Facilities.
Review, Approval or Ratification of Transactions with Related Parties
Our audit committees charter requires review and discussion of any transactions or courses of
dealing with parties related to us that are significant in size or involve terms or other aspects
that differ from those that would be negotiated with independent parties. Our nominating and
governance committees charter requires review of any proposed related party transactions,
conflicts of interest and any other transactions for which independent review is necessary or
desirable to achieve the highest standards of corporate governance. It is also our unwritten
policy, which policy is not otherwise evidenced, for any related party transaction that involves
more than a de minimis obligation, expense or payment, to obtain approval by our Board of Directors
prior to our entering into any such transaction. In conformity with our various policies on related
party transactions, each of the above transactions discussed in this Item 12, Certain
Relationships and Related Transactions, and Director Independence, section has been reviewed and
approved by our Board of Directors.
Director Independence
Effective November 10, 2009, Scott R. Silverman, our chief executive officer and executive
chairman, William J. Caragol, our president, chief financial officer and director, Jared Shaw, R &
R Consulting Partners, LLC, a Florida limited liability company owned by Mr. Silverman (R&R), and
Blue Moon Energy Partners, LLC, a Florida limited liability company of which Mr. Silverman is a
manager and controls a member and Mr. Caragol is a manager and member (Blue Moon), entered into a
voting agreement pursuant to which Mr. Silverman has voting control over all shares owned by
Messrs. Caragol and Shaw and R&R and Blue Moon, in addition to the shares owned by Mr. Silverman,
for a total of 9,630,038 shares of our common stock, or 50.1% of our outstanding common stock as of
November 10, 2009. As a result, we were eligible for the controlled company exemption under the
Nasdaq rules because we had more than 50% of the voting power for the election of directors held by
an individual, and therefore, we were not required to maintain a majority of independent directors.
However, in February, 2010, we ceased to be a controlled company because the percentage of stock
Mr. Silverman had voting control over
54
fell below 50.1% of our outstanding common stock.
Currently, our Board of Directors determined that three of our six directors are independent under
the standards of the Nasdaq Capital Market, Messrs. Cobb, Edelstein and Foland, and we therefore do
not currently maintain a majority of independent directors. Since we are no longer a controlled
company, we plan to phase in our compliance with the independent committee requirements and the
majority of independent directors requirement as permitted by the Nasdaq rules. For transactions,
relationships or arrangements that were considered by the Board of Directors in determining whether
each director was independent, please see Certain Relationships and Related Transactions, and
Director Independence Director and Officer Roles and Relationships with Digital Angel and Its
Other Affiliates above.
Item 13. Principal Accountant Fees and Services
For the fiscal years ended December 31, 2009 and 2008, fees for services provided by Eisner
LLP were as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Audit Fees |
|
$ |
185,600 |
|
|
$ |
451,143 |
|
|
|
|
|
|
|
|
|
|
Audit Related Fees (review of registration statements and other SEC filings) |
|
$ |
80,300 |
|
|
$ |
44,320 |
|
|
|
|
|
|
|
|
|
|
Tax Fees (tax-related services, including income tax advice regarding
income taxes within the United States) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other fees (acquisition due diligence services) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fees |
|
$ |
265,900 |
|
|
$ |
495,463 |
|
|
|
|
|
|
|
|
Pre-Approval Policies and Procedures
The audit committee has a policy for the pre-approval of all auditing services and any
provision by the independent auditors of any non-audit services the provision of which is not
prohibited by the Exchange Act or the rules of the SEC under the Exchange Act. Unless a type of
service to be provided by the independent auditor has received general pre-approval, it will
require specific pre-approval by the audit committee, if it is to be provided by the independent
auditor. All fees for independent auditor services will require specific pre-approval by the audit
committee. Any fees for pre-approved services exceeding the pre-approved amount will require
specific pre-approval by the audit committee. The audit committee will consider whether such
services are consistent with the SECs rules on auditor independence.
All services provided by and all fees paid to Eisner LLP in fiscal 2009 and 2008 were
pre-approved by our audit committee, in accordance with its policy. None of the services described
above were approved pursuant to the exception provided in Rule 2-01(c)(7)(i)(C) of Regulations S-X
promulgated by the SEC.
55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this Annual Report on Form 10-K:
|
|
|
|
|
|
(a)(1)
|
|
List of Financial Statements Filed as Part of this Annual Report on Form 10-K: |
|
|
|
|
|
A list of the consolidated financial statements, notes to consolidated
financial statements, and accompanying report of independent registered
public accounting firm appears on page F-1 of the Index to Consolidated
Financial Statements and Financial Statement Schedules, which is filed as
part of this Annual Report on Form 10-K. |
|
|
|
(a)(2)
|
|
Financial Statement Schedules: |
|
|
|
|
|
All other schedules are omitted because they are not applicable, the amounts
are not significant, or the required information is shown in our consolidated
financial statements or the notes thereto. |
|
|
|
(a)(3)
|
|
Exhibits: |
|
|
|
|
|
See the Exhibit Index filed as part of this Annual Report on Form 10-K. |
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
POSITIVEID CORPORATION
|
|
Date: March 17, 2010 |
By: |
/s/ William J. Caragol
|
|
|
|
William J. Caragol |
|
|
|
President and Chief Financial Officer |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Scott R. Silverman
Scott R. Silverman
|
|
Chief Executive Officer and Chairman
of the Board
(Principal Executive Officer)
|
|
March 17, 2010 |
|
|
|
|
|
/s/ William J. Caragol
William J. Caragol
|
|
President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
|
|
March 17, 2010 |
|
|
|
|
|
/s/ Jeffrey S. Cobb
Jeffrey S. Cobb
|
|
Director
|
|
March 17, 2010 |
|
|
|
|
|
/s/ Barry M. Edelstein
Barry M. Edelstein
|
|
Director
|
|
March 17, 2010 |
|
|
|
|
|
/s/ Steven R. Foland
Steven R. Foland
|
|
Director
|
|
March 17, 2010 |
|
|
|
|
|
/s/ Michael E. Krawitz
Michael E. Krawitz
|
|
Director
|
|
March 17, 2010 |
57
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page |
|
POSITIVEID CORPORATION |
|
|
|
|
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
|
|
|
|
|
F-3 |
|
|
|
|
|
|
|
|
|
F-4 |
|
|
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
|
|
F-6 |
|
|
|
|
|
|
|
|
|
F-7 |
|
|
|
|
|
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Board of Directors and Stockholders
PositiveID Corporation
We
have audited the accompanying consolidated balance sheets of
PositiveID Corporation (the Company),
formerly known as VeriChip Corporation, as of December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform audits of the Companys internal control
over financial reporting. Our audits include consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements
enumerated above present fairly, in all material
respects, the consolidated financial position of PositiveID
Corporation, as of
December 31, 2009 and 2008, and the consolidated results of their operations and their consolidated
cash flows for the years then ended, in conformity with accounting principles generally accepted in
the United States.
/s/ Eisner LLP
New York, New York
March 17, 2010
F-2
POSITIVEID CORPORATION
Consolidated Balance Sheets
(In thousands, except share data and par value)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
6,423 |
|
|
$ |
3,229 |
|
Prepaid expenses and other current assets |
|
|
193 |
|
|
|
275 |
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
6,616 |
|
|
|
3,504 |
|
|
|
|
|
|
|
|
|
|
Equipment, net of accumulated depreciation |
|
|
122 |
|
|
|
39 |
|
Restricted cash |
|
|
|
|
|
|
4,543 |
|
Other assets |
|
|
34 |
|
|
|
|
|
Goodwill |
|
|
4,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,972 |
|
|
$ |
8,086 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
576 |
|
|
$ |
72 |
|
Accrued expenses and other current liabilities |
|
|
775 |
|
|
|
1,094 |
|
Accrued preferred stock dividend payable |
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
1,441 |
|
|
|
1,166 |
|
Deferred gain |
|
|
|
|
|
|
4,500 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
1,441 |
|
|
|
5,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
Preferred stock, Authorized 5,000,000 shares
of $.001 par value; 462 and nil shares issued
and outstanding at December 31, 2009 and
2008, respectively (liquidation preference of $4,620 and nil December 31, 2009 and 2008, respectively) |
|
|
|
|
|
|
|
|
Common
stock, authorized 70,000,000 shares
of $.01 par value; issued and outstanding
21,840,433 and 11,730,209 shares at
December 31, 2009 and 2008, respectively |
|
|
218 |
|
|
|
117 |
|
Additional paid-in capital |
|
|
63,018 |
|
|
|
44,410 |
|
Accumulated deficit |
|
|
(53,705 |
) |
|
|
(42,107 |
) |
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
9,531 |
|
|
|
2,420 |
|
|
|
|
|
|
|
|
|
|
$ |
10,972 |
|
|
$ |
8,086 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
POSITIVEID CORPORATION
Consolidated Statements of Operations
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
353 |
|
|
$ |
43 |
|
Cost of sales |
|
|
94 |
|
|
|
275 |
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
259 |
|
|
|
(232 |
) |
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
5,753 |
|
|
|
19,775 |
|
Research and development |
|
|
393 |
|
|
|
712 |
|
Charge attributable to adjustment of goodwill |
|
|
10,170 |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
16,316 |
|
|
|
20,487 |
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(16,057 |
) |
|
|
(20,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of Xmark Corporation |
|
|
4,385 |
|
|
|
6,174 |
|
Gain on settlement of debt |
|
|
|
|
|
|
1,823 |
|
Other income (expense), net |
|
|
74 |
|
|
|
(334 |
) |
Interest expense |
|
|
|
|
|
|
(879 |
) |
|
|
|
|
|
|
|
Total other (expense) income |
|
|
4,459 |
|
|
|
6,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(11,598 |
) |
|
|
(13,935 |
) |
|
|
|
|
|
|
|
Income from
discontinued operations (net of tax expense of $233 in 2008) |
|
|
|
|
|
|
787 |
|
|
|
|
|
|
|
|
Net loss |
|
|
(11,598 |
) |
|
|
(13,148 |
) |
Preferred stock dividend |
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders |
|
$ |
(11,688 |
) |
|
$ |
(13,148 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
attributable to common shareholders per common share from continuing operations basic and
diluted |
|
$ |
(0.90 |
) |
|
$ |
(1.31 |
) |
Net income
per common share from discontinued operations basic and diluted |
|
|
|
|
|
|
0.07 |
|
|
|
|
|
|
|
|
Net loss
attributable to common shareholders per common share basic and diluted |
|
$ |
(0.90 |
) |
|
$ |
(1.24 |
) |
|
|
|
|
|
|
|
Weighted average number of shares outstanding basic and diluted |
|
|
13,020 |
|
|
|
10,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
POSITIVEID CORPORATION
Consolidated Statement of Stockholders Equity
(In thousands)
For the Years Ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Preferred Shares |
|
|
Common Shares |
|
|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Number |
|
|
Amount |
|
|
Number |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Loss |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2008 |
|
|
|
|
|
|
|
|
|
|
10,144 |
|
|
$ |
101 |
|
|
$ |
54,486 |
|
|
$ |
(28,959 |
) |
|
$ |
(37 |
) |
|
$ |
25,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,148 |
) |
|
|
|
|
|
|
(13,148 |
) |
Stock based compensation |
|
|
|
|
|
|
|
|
|
|
622 |
|
|
|
6 |
|
|
|
5,026 |
|
|
|
|
|
|
|
|
|
|
|
5,032 |
|
Issuance of shares to lender |
|
|
|
|
|
|
|
|
|
|
120 |
|
|
|
2 |
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
302 |
|
Issuance of shares from
option exercises |
|
|
|
|
|
|
|
|
|
|
844 |
|
|
|
8 |
|
|
|
434 |
|
|
|
|
|
|
|
|
|
|
|
442 |
|
Dividend to stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,836 |
) |
|
|
|
|
|
|
|
|
|
|
(15,836 |
) |
Sale of Xmark Corporation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
11,730 |
|
|
|
117 |
|
|
|
44,410 |
|
|
$ |
(42,107 |
) |
|
$ |
|
|
|
|
2,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,598 |
) |
|
|
|
|
|
|
(11,598 |
) |
Stock based compensation |
|
|
|
|
|
|
|
|
|
|
4,395 |
|
|
|
44 |
|
|
|
1,505 |
|
|
|
|
|
|
|
|
|
|
|
1,549 |
|
Issuance of preferred
shares, net of $800 financing costs |
|
|
462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,806 |
|
|
|
|
|
|
|
|
|
|
|
3,806 |
|
Issuance of shares from
option exercises |
|
|
|
|
|
|
|
|
|
|
138 |
|
|
|
1 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
60 |
|
Issuance of shares for
settlement of litigation |
|
|
|
|
|
|
|
|
|
|
510 |
|
|
|
5 |
|
|
|
245 |
|
|
|
|
|
|
|
|
|
|
|
250 |
|
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
(90 |
) |
Issuance of shares for
Steel Vault merger |
|
|
|
|
|
|
|
|
|
|
5,067 |
|
|
|
51 |
|
|
|
13,083 |
|
|
|
|
|
|
|
|
|
|
|
13,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2009 |
|
|
462 |
|
|
|
|
|
|
|
21,840 |
|
|
$ |
218 |
|
|
$ |
63,018 |
|
|
$ |
(53,705 |
) |
|
$ |
|
|
|
$ |
9,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
POSITIVEID CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(11,598 |
) |
|
$ |
(13,148 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
29 |
|
|
|
52 |
|
Stock based compensation |
|
|
1,549 |
|
|
|
5,032 |
|
Bad debt expense |
|
|
|
|
|
|
14 |
|
Impairment of assets |
|
|
|
|
|
|
44 |
|
Non cash interest income |
|
|
(7 |
) |
|
|
(43 |
) |
Charge attributable to adjustment of goodwill |
|
|
10,170 |
|
|
|
|
|
Gain on settlement of debt |
|
|
|
|
|
|
(1,823 |
) |
Stock issued for settlement of litigation |
|
|
250 |
|
|
|
|
|
Gain on sale of Xmark Corporation |
|
|
(4,385 |
) |
|
|
(6,174 |
) |
Allowance for inventory excess |
|
|
|
|
|
|
213 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Decrease in accounts receivable |
|
|
|
|
|
|
32 |
|
Increase in inventories |
|
|
|
|
|
|
(117 |
) |
Decrease in prepaid expenses and other current assets |
|
|
137 |
|
|
|
344 |
|
Decrease in deferred revenue |
|
|
(16 |
) |
|
|
|
|
Decrease in accounts payable and accrued expenses |
|
|
(1,043 |
) |
|
|
(225 |
) |
|
|
|
|
|
|
|
Net cash used in continuing operations |
|
|
(4,914 |
) |
|
|
(15,799 |
) |
Net cash used in discontinued operations |
|
|
(60 |
) |
|
|
(2,887 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(4,974 |
) |
|
|
(18,686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sale of Xmark Corporation, net |
|
|
4,434 |
|
|
|
43,363 |
|
Proceeds from sale of assets |
|
|
3 |
|
|
|
|
|
Payments for equipment and other assets |
|
|
(11 |
) |
|
|
(22 |
) |
Payments for the merger of SteelVault, net of cash acquired |
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
(used in) discontinued operations |
|
|
|
|
|
|
(114 |
) |
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
4,498 |
|
|
|
43,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds
from short-term borrowing |
|
|
|
|
|
|
8,000 |
|
Repayment of short-term borrowing |
|
|
|
|
|
|
(8,000 |
) |
Financing costs |
|
|
|
|
|
|
(701 |
) |
Principal payments to former stockholder |
|
|
|
|
|
|
(10,423 |
) |
Guarantee fee paid to former stockholder |
|
|
|
|
|
|
(500 |
) |
Proceeds from exercise of stock options |
|
|
60 |
|
|
|
442 |
|
Proceeds from preferred stock financing, net |
|
|
3,806 |
|
|
|
|
|
|
|
|
|
Repayment of debt financing, net |
|
|
(196 |
) |
|
|
|
|
Payment of dividend |
|
|
|
|
|
|
(15,836 |
) |
Net cash provided by discontinued operations |
|
|
|
|
|
|
(1,515 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
3,670 |
|
|
|
(28,533 |
) |
|
|
|
|
|
|
|
Net (decrease) increase in cash |
|
|
3,194 |
|
|
|
(3,992 |
) |
Cash, beginning of year |
|
|
3,229 |
|
|
|
7,221 |
|
|
|
|
|
|
|
|
Cash, end of year |
|
$ |
6,423 |
|
|
$ |
3,229 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
1
Organization, Basis of Presentation and Accounting Policies
PositiveID Corporation is a Delaware corporation formed in November 2001. The Company
commenced operations in January 2002 as VeriChip Corporation. On February 14, 2007, the Company
completed an initial public offering of its common stock, selling 3,100,000 shares of its common
stock at a price of $6.50 per share.
On July 18, 2008, the Company completed the sale of all of the outstanding capital stock of
Xmark Corporation, its wholly-owned Canadian subsidiary (Xmark), to Stanley Canada Corporation
(Stanley) for $47.9 million in cash, which consisted of the $45 million purchase price plus a
balance sheet adjustment of $2.9 million. Under the terms of the stock purchase agreement,
$4.5 million of the proceeds were held in escrow for a period of 12 months to provide for
indemnification obligations, if any, under the stock purchase agreement. As a result, the Company
recorded a gain on the sale of Xmark of $10.7 million, with $4.5 million of that gain deferred
until the escrow was settled. The Xmark business included all of the operations of our previously
reported healthcare security and industrial segments. The financial position, results of operations
and cash flows of Xmark for 2008 have been reclassified as a discontinued operation.
Following the completion of the sale of Xmark to Stanley, the Company retired all of its
outstanding debt for a combined payment of $13.5 million and settled all contractual payments to
officers and management of the Company and Xmark for $9.1 million. In addition, the Company issued
a special dividend of approximately $15.8 million on August 28, 2008.
During June 2009, the Company finalized the process related to the indemnification obligations
supported by the $4.5 million escrow. On July 20, 2009, the
Company received approximately $4.4 million of the
previously escrowed funds, which was net of a $115,000 settlement to Stanley as the final
balance sheet adjustment. As a result, the Company recognized a $4.4 million previously deferred
gain in its statement of operations during the year ended December 31, 2009.
On November 12, 2008, the Company entered into an Asset Purchase Agreement (APA) with
Digital Angel and Destron Fearing Corporation, a wholly-owned subsidiary of Digital Angel, which
collectively are referred to as, Digital Angel. The terms of the APA included the purchase by the
Company of patents related to an embedded bio-sensor system, and the assignment of any rights of
Digital Angel under a development agreement associated with the development of an implantable
glucose sensing microchip. The Company also received covenants from Digital Angel and Destron
Fearing that will permit the use of intellectual property of Digital Angel in the human RFID field
without payment of ongoing royalties, as well as inventory and a limited period of technology
support by Digital Angel. The Company paid Digital Angel $500,000 at the closing of the APA, which
was recorded in the financials as research and development expense during the year ended December
31, 2008.
Also, on November 12, 2008, R&R Consulting Partners LLC, a company controlled by our Chairman
and Chief Executive Officer, purchased 5,355,556 shares of common stock from Digital Angel, at
which point Digital Angel ceased being a stockholder.
On September 4, 2009, the Company, VeriChip Acquisition Corp., a Delaware corporation and
wholly-owned subsidiary of the Company (the Acquisition Subsidiary), and Steel Vault Corporation,
a Delaware corporation (Steel Vault), signed an Agreement and Plan of Reorganization (the Merger
Agreement), dated September 4, 2009, as amended, pursuant to which the Acquisition Subsidiary was
merged with and into Steel Vault on November 10, 2009, with Steel Vault surviving and becoming a
wholly-owned subsidiary of the Company (the Merger). Upon the consummation of the Merger, each
outstanding share, options and warrants of Steel Vaults common stock was converted into
approximately 5.1 million shares of common stock, 3.3 million options, and 0.5 million warrants of
the Company. At the closing of the Merger, the Company changed its
name to PositiveID Corporation and
changed its stock ticker symbol with Nasdaq to PSID. See Note 4 Acquisitions, for more information.
On September 29, 2009, the Company entered into a financing commitment of up to $10,000,000
with Optimus Technology Capital Partners, LLC (Optimus) under which Optimus is potentially
committed to purchase up to $10 million of the Companys convertible Series A Preferred Stock in
one or more tranches. See Note 5 Financing Agreements, for more information.
F-7
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
During September 2009, through a development program with Receptors LLC (Receptors), the
companies launched Phase I of the development of a Rapid Flu Detection System for the H1N1 virus.
On October 6, 2009, in a separate development program, the Company launched Phase II
development of its in vivo glucose-sensing
RFID microchip with Receptors. In conjunction with these development programs, the Company
received an exclusive license for two of Receptors platform patents for use with these two
applications. Phase I of the Rapid Flu Detection System was completed in early 2010 and Phase II of
the glucose-sensing microchip development programs is expected to be completed by mid 2010. In
conjunction with these two projects, the Company paid Receptors
$200,000 in cash and 350,000 restricted
shares of common stock which will become fully vested upon the phase
completion dates. These shares were valued at $330,000 as
of December 31, 2009 of which $176,000 was included in research and
development expense in the consolidated statement of operations at
December 31, 2009. Our exclusive license continues in perpetuity so long as we
continue to provide or arrange continued funding of these projects.
The Company has historically developed, marketed and sold radio frequency identification,
frequently referred to as RFID, systems used for the identification of people in the healthcare
market. Beginning in the fourth quarter of 2009, with the acquisition of Steel Vault, the Company
is pursuing its strategy to provide unique health and security identification tools to protect
consumers and businesses, operating in two key segments: HealthID and ID Security.
The Companys HealthID segment is focused on the development of the glucose-sensing microchip,
with Receptors. In the field of diabetes management the Company also acquired, in February 2010,
the assets of Easy Check Medical Diagnostics, LLC, including the Easy Check breath analysis system
and the iGlucose wireless communication system. The Company
issued 300,000 shares of common stock in February 2010 with a fair
value of $351,000 which will be expensed
as in process research and development as these products are currently under
development.
The Company also intends to continue the development of the Rapid Flu Detection system, and
other health related products, built on the Companys core intellectual property. The HealthID
segment also includes the VeriMed system, which uses an implantable passive RFID microchip (the
VeriChip) that is used in patient identification applications. Each implantable microchip
contains a unique verification number that is read when it is scanned by the Companys scanner. In
October 2004, the U.S. Food and Drug Administration, or FDA, cleared its VeriMed Health Link system
for use in medical applications in the United States.
The Companys ID Security segment includes its Identity Security suite of products, sold
through its NationalCreditReport.com brand and its Health Link personal health record. The
Companys NationalCreditReport.com business was acquired in conjunction with its merger with Steel
Vault in November 2009. NationalCreditReport.com offers consumers a variety of identity security
products and services primarily on a subscription basis. These services help consumers protect
themselves against identity theft or fraud and understand and monitor their credit profiles and
other personal information, which include credit reports, credit monitoring and credit scores. In
the first quarter of 2010, the Company re-launched its Health Link personal health record (PHR)
business. The Company plans to focus its marketing efforts on partnering with health care
providers and exchanges, physician groups, Electronic Medical Record (EMR) system vendors, and
insurers to use Health Link as a PHR provided to their patients. The Company will also seek to
partner with pharmaceutical companies who wish to communicate with its online community through
various forms of value added content and advertising.
Accounting Policies
Principles of Consolidation
The financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant inter-company transactions and balances have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America, requires management to make certain estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes.
Although these estimates are based on the knowledge of current events and actions the Company may
undertake in the future, they may ultimately differ from actual results. Included in these
estimates are assumptions about allowances for excess inventory and obsolescence, lives of long-
lived assets, lives of intangible assets, assumptions used in Black-Scholes valuation models,
estimates of the fair value of acquired assets and assumed liabilities and the determination of
whether any impairment is to be recognized on intangibles, among others.
F-8
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Concentration of Credit Risk
The Company maintained its cash in one financial institution during the years ended
December 31, 2009 and 2008. Balances were insured up to Federal Deposit Insurance Corporation
(FDIC) limits of $250,000 per institution. Cash exceeded the federally insured limits.
The Companys trade receivables are potentially subject to credit risk. The Company extends
credit to its customers based upon an evaluation of the customers financial condition and credit
history. The Company generally does not require collateral.
Inventories
Inventories consist of finished goods. Inventory is valued at the lower of cost, determined
primarily by the first-in, first-out method, or market. The Company monitors and analyzes inventory
for potential obsolescence and slow-moving items based upon the aging of the inventory and the
inventory turns by product. Inventory items designated as slow moving are reduced to net realizable
value. Inventory items designated as obsolete are written off. The allowance for inventory excess
and obsolescence was approximately nil and $0.2 million as of December 31, 2009 and 2008,
respectively.
Equipment
Equipment is carried at cost less accumulated depreciation, computed using the straight-line
method over the estimated useful lives. Leasehold improvements are depreciated over the life of the
lease, software is depreciated over 2 years, and equipment is depreciated over periods ranging from
3 to 5 years. Repairs and maintenance, which do not extend the useful life of the asset, are
charged to expense as incurred. Gains and losses on sales and retirements are reflected in the
consolidated statements of operations.
Intangible Assets
The Company continually evaluates whether events or circumstances have occurred that indicate
the remaining estimated useful lives of its definite-lived intangible assets may warrant revision
or that the remaining balance of such assets may not be recoverable. The Company uses an estimate
of the related undiscounted cash flows over the remaining life of the asset in measuring whether
the asset is recoverable. There was no impairment recorded on definite-lived intangible assets and
other long-lived assets during the years ended December 31, 2009 and 2008.
The Company records goodwill as the excess of purchase price over the fair values assigned to
the net assets acquired in business combinations. Goodwill is allocated to reporting units as of
the acquisition date for the purpose of goodwill impairment testing. The Companys reporting units
are those businesses for which discrete financial information is available and upon which segment
management makes operating decisions. Goodwill of a reporting unit is tested for impairment at
least once a year, or between testing dates if an impairment condition or event is determined to
have occurred.
Revenue Recognition
The Companys revenue recognition policy is as follows:
Product Sales
Revenue from the sale of systems using the Companys implantable microchip or other products
are recorded at gross amounts. As we are in the initial process of commercializing these systems,
the level of distributor or physician returns cannot yet be reasonably estimated. Accordingly, we
do not recognize revenues until the following criteria are met:
|
|
|
a purchase order has been received or a contract has been executed; |
|
|
|
|
the product is shipped; |
|
|
|
|
title has transferred; |
|
|
|
|
the price is fixed or determinable; |
|
|
|
|
there are no uncertainties regarding customer acceptance; |
|
|
|
|
collection of the sales proceeds is reasonably assured; and |
|
|
|
|
the period during which the distributor or physician has a right to return the product has elapsed. |
F-9
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
We intend to recognize revenue from consignment sales, if any, when all of the criteria listed
above have been met and after the receipt of notification of such product sales from the
distributors customers (e.g., physicians). Once the level of returns can be reasonably estimated,
revenues (net of expected returns) will be recognized when all of the criteria above are met for
either direct or consignment sales.
Health Link and VeriMed Services
The services for maintaining subscriber information on the Companys Health Link and VeriMed
databases are sold on a stand-alone contract basis, and treated according to the terms of the
contractual arrangements then in effect. Revenue from the database service will be recognized over
the term of the subscription period or the terms of the contractual arrangements then in effect.
With respect to the sales of products whose functionality is dependent on services (e.g.,
database records maintenance), the revenue recognition policy will follow the ultimate
arrangements, subject to the aforementioned revenue recognition criteria and determining whether
there is vendor specific objective evidence.
ID Security Services
Revenue is recognized when persuasive evidence of an arrangement exists, collectibility of
arrangement consideration is reasonably assured, the arrangement fees are fixed or determinable and
delivery of the product or service has been completed. A significant portion of our revenue is
derived from the Companys processing of transactions related to the provision of information
services to customers, in which case revenue is recognized, assuming all other revenue recognition
criteria are met, when the services are provided. Another portion of the Companys revenues relate
substantially to monthly subscription fee-based credit monitoring contracts under which a customer
pays a preset fee for a predetermined or unlimited number of transactions or services provided
during the subscription period. Revenue related to subscription fee-based contracts having an
unlimited volume is recognized ratably during the contract term.
If at the outset of an arrangement, the Company determines that collectability is not
reasonably assured, revenue is deferred until the earlier of when collectability becomes probable
or the receipt of payment. If there is uncertainty as to the customers acceptance of our
deliverables, revenue is not recognized until the earlier of receipt of customer acceptance or
expiration of the acceptance period. If at the outset of an arrangement, the Company determines
that the arrangement fee is not fixed or determinable, revenue is deferred until the arrangement
fee becomes estimable, assuming all other revenue recognition criteria have been met.
The Company may provide multiple element arrangements. The multiple elements may include
credit reports and monitoring services. To account for each of these elements separately, the
delivered elements must have stand-alone value to our customer, and there must exist objective and
reliable evidence of the fair value for any undelivered elements. For certain customer contracts,
the total arrangement fee is allocated to the delivered and undelivered elements based on their
relative fair values.
Deferred revenue consists of amounts billed in excess of revenue recognized on sales of our
information services, relating generally to subscription fees.
Share-Based Compensation
Share-based
compensation expenses are reflected in the Companys
consolidated statement of
operations under selling, general and administrative expenses and research and development
expenses.
The Companys computation of expected life is determined based on the simplified method as the
Company does not have sufficient historical exercise data to provide a reasonable basis upon which
to estimate the expected term due to the limited period of time its equity shares have been
publicly traded. The interest rate is based on the U.S. Treasury Yield curve in effect at the time
of grant. The Companys computation of expected volatility is based on the historical volatility of
comparable companies average historical volatility.
F-10
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Income Taxes
The Company accounts for income taxes under the asset and liability approach for the financial
accounting and reporting of income taxes. Deferred taxes are recorded based upon the tax impact of
items affecting financial
reporting and tax filings in different periods. A valuation allowance is provided against net
deferred tax assets when the Company determines realization is not currently judged to be more
likely than not. Income taxes are more fully discussed in Note 8 Income Taxes.
The
Company follows the provisions of the Financial Accounting
Standards Board Accounting Standards Codification (ASC) No. 740, Income Taxes (ASC 740). ASC
740 contains a two-step approach to recognizing and measuring uncertain tax positions. The first
step is to evaluate the tax position for recognition purposes by determining if the weight of
available evidence indicates it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if any. The second step is
to measure the tax benefit as the largest amount which is more than 50% likely of being realized
upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax
positions and tax benefits, which may require periodic adjustments and which may not accurately
anticipate actual outcomes. The impact of ASC 740 on the Companys financial position is discussed
in Note 8 Income Taxes. Accordingly, the Company reports a liability for unrecognized tax
benefits resulting from the uncertain tax positions taken or expected to be taken on a tax return
and recognizes interest and penalties, if any, related to uncertain tax positions as an as interest expense.
Research and Development
Research and development costs are expensed as incurred and consist of development work
associated with the Companys existing and potential products. The Companys research and
development expenses relate primarily to share based compensation to
our project partner, payroll costs for engineering personnel and costs associated
with various projects, including testing, developing prototypes and related expenses.
Loss Per Common Share and Common Share Equivalent
The
Company presents basic: income (loss) per common share and, if applicable diluted
income (loss) per share, pursuant to the provisions of ASC 260
Earnings Per Share. Basic income (loss) per common share is based on the weighted average number of common shares
outstanding in each year and after preferred stock dividend requirements. The calculation of
diluted income (loss) per common share assumes that any dilutive convertible preferred shares
outstanding at the beginning of each year or the date issued were convertible at those dates,
with preferred stock dividend requirements and outstanding common shares adjusted accordingly.
It also assumes that outstanding common shares were increased by shares issuable upon exercise
of those stock options and warrants for which average period market price exceeds exercise price,
less shares that could have been purchased by the Company with related proceeds.
The Company issued two tranches of Series A Preferred Stock of 296 and 166 shares at a per share
price of $10,000 per share in September and October 2009, respectively. The preferred shares are
non-voting, non-participating and may be converted into common shares or cash at the option of the
Company. The conversion of the preferred shares is determined by a fixed conversion price which
was determined upon the closing of the preferred shares, $3.07 and $1.60, respectively. Therefore
the two tranches of preferred shares are convertible into approximately 964,000 and 1,037,000
common shares, respectively.
The Company is required to issue an annual dividend on the Series A Preferred Stock payable in
Series A Preferred Stock on the anniversary date of the tranche
closing. As of December 31, 2009, a
preferred dividend with a fair value of $90,000 has been accrued and would be convertible into
approximately 37,000 shares of common stock.
If
at the Companys option, it elects to convert the Series A
Preferred into common shares the Company will be required to provide
the holders with a specified return as discussed in Note 5
Financing Agreements. The two tranches would be convertible into a maximum of approximately
2,931,000 common shares after the fourth anniversary of the issuances of each tranche.
Had the Company
elected to convert the 462 shares of Series A Preferred Stock on
December 31, 2009, the preferred holder would have been entitled to 2,702,000 of common shares
with a fair value of approximately $2,972,000 based upon the closing
price of the Companys common stock on December 31, 2009.
The following were outstanding as of December 31, 2009 and 2008,
and were not included in the computation of dilutive loss per share because the net effect would
have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Convertible
preferred stock and dividends |
|
|
2,038 |
|
|
|
|
|
Stock options |
|
|
4,215 |
|
|
|
1,225 |
|
Warrants |
|
|
454 |
|
|
|
0 |
|
Unvested restricted common stock |
|
|
4,192 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
10,899 |
|
|
|
1,225 |
|
|
|
|
|
|
|
|
Impact of Recently Issued Accounting Standards
Effective July 1, 2009, the Company adopted the FASB Accounting Standards Codification (ASC)
105-10, Generally Accepted Accounting Principles (ASC 105-10). ASC 105-10 establishes the FASB
Accounting Standards Codification as the source of authoritative accounting principles recognized
by the FASB to be applied by non-governmental entities in the preparation of financial statements
in conformity with GAAP. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The codification
did not change GAAP but reorganizes the literature. References for FASB guidance throughout this
document have been updated for the codification.
Effective January 1, 2009, the Company adopted ASC 805-10, Business Combinations (ASC
805-10). Under ACS 805-10, an acquiring entity is required to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value with limited
exceptions. ACS 805-10 establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired. This statement also establishes
disclosure requirements which will enable users to evaluate the nature and financial effects of the
business combination. The Company expensed $0.2 million of due diligence costs relating to a
potential acquisition target during the period ended December 31, 2009.
F-11
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
The Company adopted the provisions of ASC 855-10, Subsequent Events (ASC 855-10) in the
second quarter of 2009. ASC 855-10 establishes (1) the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, (2) the circumstances under which
an entity should recognize events or transactions occurring after the balance sheet date in its
financial statements, and (3) the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date.
The Company adopted ASC 810-10-65-1, Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51 on January 1, 2009. This establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity that should be reported as equity in the consolidated financial
statements. In addition, it changes the way the consolidated income statement is presented by
requiring consolidated net income to be reported at amounts that include the amounts attributable
to both the parent and the noncontrolling interest. ASC 810-10-65-1 also establishes a single
method of accounting for changes in a parents ownership interest in a subsidiary that do not
result in deconsolidation and requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. ASC 810-10-65-1 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008 and earlier adoption is
prohibited. ASC 810-10-65-1 shall be applied prospectively as of the beginning of the fiscal year
in which this statement is initially applied, except for the presentation and disclosure
requirement which shall be applied retrospectively for all periods presented. The adoption of ASC
810-10-65-1 had no impact on the Companys financial position, results of operations,
cash flows or financial statement disclosures.
In June 2009, the FASB finalized SFAS No. 167, Amending FASB interpretation No. 46(R), which
was later superseded by the FASB Codification and included in ASC topic 810. The provisions of ASC
810 provide guidance in determining whether an enterprise has a controlling financial interest in a
variable interest entity. This determination identifies the primary beneficiary of a variable
interest entity as the enterprise that has both the power to direct the activities of a variable
interest entity that most significantly impacts the entitys economic performance, and the
obligation to absorb losses or the right to receive benefits of the entity that could potentially
be significant to the variable interest entity. This pronouncement also requires ongoing
reassessments of whether an enterprise is the primary beneficiary and eliminates the quantitative
approach previously required for determining the primary beneficiary. New provisions of this
pronouncement are effective January 1, 2010. The Company is currently evaluating the impact of
adopting this pronouncement.
In August of 2009, the FASB issued ASC Update 2009-5, an update to ASC 820, Fair Value
Measurements and Disclosures. This update provides amendments to reduce potential ambiguity in
financial reporting when measuring the fair value of liabilities. Among other provisions, this
update provides clarification in circumstances in which a quoted price in an active market for the
identical liability is not available, that a reporting entity is required to measure fair value using
one or more of the valuation techniques described in ACS Update 2009-5. The adoption of this update
in the third quarter of 2009 did not have a material affect on Companys consolidated
financial statements.
F-12
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Accounting Standard Update No. 2009-15, Accounting for Own-Share Lending Arrangements in
Contemplation of Convertible Debt Issuance or Other Financing. In October 2009, the FASB issued
Update No. 2009-15 as an amendment to the subtopic 470-20, Debt with Conversion and Other Options,
to address the accounting for own-share lending arrangements entered in contemplation of a
convertible debt issuance or other financing. ASC 470-20-25-20A establishes that at the date of
issuance, a share-lending arrangement entered into on an entitys own shares in contemplation of a
convertible debt offering or other financing shall be measured at fair value (in accordance with
Topic 820) and recognized as an issuance cost, with an offset to additional paid-in capital in the
financial statements of the entity. ASC 470-20-35-11A establishes that if it becomes probable that
the counterparty to a share-lending arrangement will default, the issuer of the share-lending
arrangement shall recognize an expense equal to the then fair value of the unreturned shares, net
of the fair value of probable recoveries. The issuer of the share-lending arrangement shall
remeasure the fair value of the unreturned shares each reporting period through earnings until the
arrangement consideration payable by the counterparty becomes fixed. Subsequent changes in the
amount of the probable recoveries should also be recognized in earnings. ASC 470-20-45-2A
establishes that loaned shares are excluded from basic and diluted earnings per share unless
default of the share-lending arrangement occurs. ASC 470-20-50-2A adds new disclosures that must be
made in any period in which a share-lending arrangement is outstanding as follows: (a) description
of any outstanding share-lending arrangements, (b) number of shares, term, circumstances under
which cash settlement would be required, (c) any requirements for
the counterparty to provide collateral, (d) entitys reason for entering into the
share-lending arrangement, (e) fair value of the issuance cost associated with the arrangement,
(f) treatment for the purpose of calculating earnings per share, (g) unamortized amount of the
issuance cost associated with the arrangement, (h) classification of the issuance cost associated
with the arrangement, (i) amount of interest cost recognized relating to the amortization, and
(j) any amounts of dividends paid related to the loaned shares that will not be reimbursed. This
Accounting Standard Update No. 2009-15 shall be effective for fiscal years beginning on or after
December 15, 2009 and interim periods within those fiscal years for arrangements outstanding
entered into on or after the beginning of the first reporting period that begins on or after
June 15, 2009. Early adoption is not permitted. The Company is evaluating the impact this update
will have on the financial statements.
In October 2009, the FASB issued new guidance for revenue recognition with multiple
deliverables, which is effective for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, although early adoption is permitted. This
guidance eliminates the residual method under the current guidance and replaces it with the
relative selling price method when allocating revenue in a multiple deliverable arrangement. The
selling price for each deliverable shall be determined using vendor specific objective evidence of
selling price, if it exists, otherwise third-party evidence of selling price shall be used. If
neither exists for a deliverable, the vendor shall use its best estimate of the selling price for
that deliverable. After adoption, this guidance will also require expanded qualitative and
quantitative disclosures. The Company is currently assessing the impact of adoption on its
financial position and results of operations.
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value
Measurements. The ASU requires disclosing the amounts of significant transfers in and out of Level
1 and 2 fair value measurements and to describe the reasons for the transfers. The disclosures are
effective for reporting periods beginning after December 15, 2009. Additionally, disclosures of the
gross purchases, sales, issuances and settlements activity in Level 3 fair value measurements will
be required for fiscal years beginning after December 15, 2010.
In January 2010, the FASB issued
Accounting Standards Update 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components
of Stock and Cash (A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic 505 clarifies the stock
portion of a distribution to shareholders that allows them to elect to receive cash or stock with a limit on the amount
of cash that will be distributed is not a stock dividend for purposes of applying Topics 505 and 260. Effective
for interim and annual periods ending on or after December 15, 2009, and would be applied on a retrospective
basis. The Company does not expect the provisions of ASU 2010-01 to have a material effect on the financial position,
results of operations or cash flows of the Company.
F-13
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
2 Inventories
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Finished goods |
|
$ |
213 |
|
|
$ |
213 |
|
Allowance for excess and obsolescence |
|
|
(213 |
) |
|
|
(213 |
) |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
3 Equipment
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Equipment |
|
$ |
303 |
|
|
$ |
292 |
|
Hardware |
|
|
113 |
|
|
|
76 |
|
Purchased software |
|
|
136 |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
552 |
|
|
|
425 |
|
Less accumulated depreciation |
|
|
(430 |
) |
|
|
(386 |
) |
|
|
|
|
|
|
|
|
|
$ |
122 |
|
|
$ |
39 |
|
|
|
|
|
|
|
|
Depreciation expense charged against income amounted to approximately $29,000 and $52,000
for the years ended December 31, 2009 and 2008, respectively.
4 Acquisitions
On November 10, 2009, the Company completed the Merger with Steel Vault. The Merger Agreement
provided for the Companys conversion of each outstanding share of Steel Vaults common stock into
0.5 shares of common stock of the Company. At the time the Merger Agreement was signed, in
September 2009, the value of the transaction was measured to be $3.5 million. Such value was
validated through independent valuations. At the time the Merger was consummated, the stock price
of the Company was $1.71 per share as compared to $0.65 during September 2009 when the merger
agreement was executed. As a result, at the effective time of the Merger, in November 2009, the
value of the transaction amounted to be $13.7 million as
compared to approximately $3.5 million at the time the merger
agreement was signed in September 2009. In
addition, the purchase price includes Steel Vaults approximately 6,696,000 stock options
and 908,000 warrants outstanding were
converted into 3,349,000 options and 454,000 warrants to acquire shares of the Companys common stock at
the effective exchange date rate which were measured at the fair value
using the Block-Schoels model on the Merger completion date.
Based on an assessment underlying the
preliminary purchase price allocation performed by the Company as of December 31, 2009, the
determination was made that the estimated fair value of the acquired company was approximately
$3.5 million as of December 31, 2009. Accordingly, the Company recognized a charge attributable
to reduced carrying amount of goodwill by the approximately $10.2 million. Such amount is deemed
not recoverable and is presented in the caption charge attributable to adjustment of goodwill in
the accompanying consolidated statement of operations.
The total purchase price of the business acquired was allocated as follows:
|
|
|
|
|
Cash |
|
$ |
72 |
|
Equipment
and other assets |
|
|
142 |
|
Goodwill |
|
|
4,200 |
|
Current liabilities |
|
|
(910 |
) |
|
|
|
|
Total |
|
|
3,504 |
|
Charge attributable to adjustment of goodwill |
|
|
10,170 |
|
|
|
|
|
Total price paid |
|
$ |
13,674 |
|
|
|
|
|
The excess purchase price over net tangible assets has been allocated to goodwill until such
time when a final valuation is completed. The Company is undertaking an analysis to allocate such
amounts among domain names, trademarks, customer list, and other intangible assets.
F-14
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
The Steel Vault acquisition was
accounted for under the purchase method of accounting. Any changes to the preliminary estimates during the allocation period will be
reflected as an adjustment to goodwill.
The primary reasons the purchase price
of the acquisition exceeded the fair value of the net assets acquired, which
resulted in the recognition of goodwill, were to provide entry into the
industry and growth opportunities from new or enhanced product offerings and
the acquisition of the existing workforce that are not recognized as assets
apart from goodwill. In addition, the Company expects to have identifiable
intangible assets for domain names, customer base and trademarks for which it
will allocate from goodwill once it finalizes the purchase price allocation.
The results of Steel Vault have been included in the condensed consolidated statements of
operations since the date of acquisition. Unaudited pro forma results
of operations for the years
ended December 31, 2009 and 2008 are included below. Such pro forma information assumes that the Steel Vault
acquisition occurred as of January 1, 2009 and 2008,
respectively, and revenue is presented in accordance with the
Companys accounting policies. This summary is not necessarily indicative of what the Companys
results of operations would have been had the Company and Steel Vault been combined entities
during such period, nor does it purport to represent results of operations for any future periods.
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31, |
|
(In thousands, except per share amounts) |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
1,581 |
|
|
$ |
59 |
|
Net loss from continuing operations attributable to common shareholder |
|
$ |
(14,454 |
) |
|
$ |
(15,451 |
) |
Net loss
attributable to common shareholders from continuing operations per common share basic and diluted |
|
$ |
(0.83 |
) |
|
$ |
(0.99 |
) |
5 Financing Agreements
On September 29, 2009, the Company entered into a Convertible Preferred Stock Purchase
Agreement (the Purchase Agreement) with Optimus under which Optimus is committed to purchase up
to $10 million shares of convertible Series A Preferred Stock of the Company (the Preferred
Stock) in one or more tranches. Under the terms of the Purchase Agreement, from time to time and
at the Companys sole discretion, the Company may present Optimus with a notice to purchase such
Preferred Stock (the Notice).
To facilitate the transactions contemplated by the Purchase Agreement, R & R Consulting
Partners, LLC, a company controlled by Scott R. Silverman, the Companys chairman and chief
executive officer, loaned shares of common stock to Optimus equal to 135% of the aggregate purchase
price for each tranche pursuant to Stock Loan Agreements between R & R Consulting Partners, LLC and
Optimus. R & R Consulting Partners, LLC was paid $100,000 fee in October 2009 plus will be
paid 2% interest for the fair value of the loaned shares for entering into the stock loan
arrangement. The aggregate amount of shares loaned under any and all Stock Loan Agreements,
together with all other shares sold by or on behalf of the Company, can not exceed one-third of the
aggregate market value of the voting and non-voting common equity held by non-affiliates of the
Company in any 12 month period. R & R Consulting Partners, LLC may demand return of some or all of
the borrowed shares (or an equal number of freely tradable shares of common stock) at any time on
or after the six-month anniversary date such borrowed shares were loaned to Optimus, but no such
demand may be made if there are any shares of Preferred Stock then outstanding. If a permitted
return demand is made, Optimus will return the borrowed shares within three trading days after such
demand (or an equal number of freely tradable shares of common stock). Optimus may return the
borrowed shares in whole or in part, at any time or from time to time, without penalty or premium.
On September 29, 2009, October 8, 2009, and October 21, 2009, R & R Consulting Partners, LLC loaned
Optimus 1.3 million, 800,000 and 600,000 shares, respectively, of Company common stock.
Optimus is obligated to purchase such Preferred Stock on the tenth trading day after any
Notice date, subject to satisfaction of certain closing conditions, including (i) that the Company
is listed for and trading on a trading market, (ii) the representations and warranties of the
Company set forth in the Purchase Agreement are true and correct as if made on each tranche date,
(iii) Optimus shall have received a commitment fee of $800,000 payable only on the first
tranche closing date in the event the gross proceeds from the first
tranche closing exceed $800,000; and (iv) that no such purchase would result in Optimus and its affiliates beneficially
owning more than 9.99% of the Companys common stock. In the event the closing bid price of the
Companys common stock during any one or more of the nine trading days following the delivery of a
Notice falls below 75% of the closing bid price on the trading day prior to the Notice date and
Optimus determines not to complete the tranche closing, then the Company may, at its option,
proceed to issue some or all of the applicable shares, provided that the conversion price for the
Preferred Stock that is issued shall reset at the lowest closing bid price for such nine trading
day period.
Dividends and Other Distributions.
Commencing on the first anniversary of the date of issuance of any such
shares of Preferred Stock, holders of Preferred Stock shall be entitled to
receive dividends on each outstanding share of Preferred Stock, which shall
accrue in shares of Preferred Stock at a rate equal to 10% per annum from the
date of issuance. Accrued dividends shall be payable annually on the
anniversary of the issuance date. No dividend shall be payable with respect to
shares of Preferred Stock that are redeemed for cash or converted
into shares of Common Stock prior to the first anniversary of the issuance date
with respect to such shares. For the year ended December 31, 2009 the
Company had accrued dividends of $90,000 (approximately $64,000 and $26,000 for
the first and second tranche, respectively.).
Liquidation. Upon any
liquidation, dissolution or winding up of the Company after payment or
provision for payment of debts and other liabilities of the Company, before any
distribution or payment is made to the holders of any other class or series of
stock, the holders of Preferred Stock shall first be entitled to be paid out of
the assets of the Company available for distribution to its stockholders an
amount with respect to the Series A liquidation value, after which any
remaining assets of the Company shall be distributed among the holders of the
other class or series of stock in accordance with the Company’s
Certificates of Designations and Certificate of Incorporation. At
December 31, 2009, the liquidation value was $4.6 million.
Redemption. The Company may
redeem, for cash, any or all of the Preferred Stock at any time at the
redemption price per share equal to $10,000 per share of Preferred Stock (the
“Series A Liquidation Value”), plus any accrued but unpaid
dividends with respect to such shares of Preferred Stock (the “Redemption
Price”). If the Company exercises this redemption option with respect to
any Preferred Stock prior to the fourth anniversary of the issuance of such
Preferred Stock, then in addition to the Redemption Price, the Company must pay
to Optimus a make-whole price per share equal to the following with respect to
such redeemed Preferred Stock: (i) 35% of the Series A Liquidation
Value if redeemed prior to the first anniversary of the issuance date,
(ii) 27% of the Series A Liquidation Value if redeemed on or after
the first anniversary but prior to the second anniversary of the issuance date,
(iii) 18% of the Series A Liquidation Value if redeemed on or after
the second anniversary but prior to the third anniversary of the issuance date,
and (iv) 9% of the Series A Liquidation Value if redeemed on or after
the third anniversary but prior to the fourth anniversary of the
issuance date.
F-15
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
In addition, redemption of the Preferred Stock by the Company, to the extent such Preferred
Stock shall not have been converted into shares of Common Stock, was mandatory in the event that
the Company did not receive stockholder approval for the transactions described in the Purchase
Agreement on or before March 31, 2010, which approval was obtained on November 10, 2009.
On September 29, 2009 the Company exercised the first tranche of this financing, to issue 296
shares of Preferred Stock, for a tranche amount of approximately
$3.0 million at a conversion price of $3.07 per share of common
stock. In support of this
tranche, R & R Consulting Partners, LLC loaned Optimus 1.3 million shares of common stock. This
tranche closed on October 13, 2009, and the Company received proceeds of approximately $3.0
million, less the fees due on the entire financing commitment of
$800,000. On November 5,
2009, the Company closed the second tranche of this financing, issuing 166 shares of Preferred
Stock, for a tranche amount of approximately $1.7 million at a
conversion price of $1.60 per share of common stock. In support of this tranche, R & R
Consulting Partners, LLC loaned Optimus approximately
1.4 million shares of common stock. There was no beneficial
conversion feature on the Preferred Stock as the stock prices were
greater than the conversion prices on the dates of issuance.
As of December 31, 2009, the
Preferred Stock and related accrued dividends are convertible into
approximately 2.0 million shares of common stock. As of December 31, 2009
the total amount of common stock the Preferred Stock and dividends are
convertible into over the life of the Preferred Stock is 2.9 million
shares.
6 Stockholders Equity
Stock Option Plans
In April 2002, the Companys Board of Directors approved the VeriChip Corporation 2002
Flexible Stock Plan (the VeriChip 2002 Plan). Under the VeriChip 2002 Plan, the number of shares
for which options, SARs or performance shares may be granted is approximately 2.0 million. As of
December 31, 2009, approximately 1.9 million options and restricted shares, net of forfeitures,
have been granted to directors, officers and employees under the VeriChip 2002 Plan, and 0.3
million of the options or shares granted were outstanding as of December 31, 2009. All the
outstanding options are fully vested and do not expire until seven to nine years from the vesting
date. As of December 31, 2009, no SARs have been granted and 58,000 shares may still be granted
under the VeriChip 2002 Plan.
On April 27, 2005, the Companys board of directors approved the VeriChip Corporation 2005
Flexible Stock Plan (the VeriChip 2005 Plan). Under the VeriChip 2005 Plan, the number of shares
for which options, SARs or performance shares may be granted is approximately 0.3 million. As of
December 31, 2009, approximately 0.3 million options have been granted under the VeriChip 2005
Plan. All of the options are fully vested and do not expire until nine years from the vesting date.
As of December 31, 2009, no SARs have been granted and 832 shares may still be granted under the
VeriChip 2005 Plan.
On June 17, 2007, the Company adopted the VeriChip 2007 Stock Incentive Plan, or the VeriChip
2007 Plan, which was amended and restated on December 16, 2008. Under the VeriChip 2007 Plan, the
number of shares for which options, restricted shares, SARs or performance shares may be granted is
3.0 million. As of December 31, 2009, approximately 2.7 million options and shares have been
granted under the VeriChip 2007 Plan. As of December 31, 2009, no SARs have been granted and 0.3
million shares may be granted under the VeriChip 2007 Plan.
On November 10, 2009, the Company adopted the VeriChip 2009 Stock Incentive Plan, or the
VeriChip 2009 Plan. Under the VeriChip 2009 Plan, the number of shares for which options, SARs or
performance shares may be granted is 5.0 million. As of December 31, 2009, approximately 2.0
million options and shares have been granted under the VeriChip 2009 Plan. As of December 31, 2009,
no SARs have been granted and 3.0 million shares may be granted under the VeriChip 2009 Plan.
In addition, as of December 31, 2009, options exercisable for approximately 0.4 million shares
of the Companys common stock have been granted outside of the Companys plans, and 0.3 million of
the options or shares granted were outstanding as of December 31, 2009. These options were granted
at exercise prices ranging from $0.23 to $8.55 per share, are fully vested and are exercisable for
a period of up to seven years.
At the effective time of the Merger, the Company assumed all of Steel
Vaults obligations under the SysComm International Corporation
2001 Flexible Stock Plan, as amended and restated, and each option
outstanding thereunder, provided that the obligation to issue shares
of the Companys stock, as adjusted to reflect the exchange
ratio set forth in the merger agreement, was substituted for the
obligation to issue shares of Steel Vault common stock.
On November 10, 2009, pursuant to the Steel Vault Merger, approximately 6.7 million
outstanding Steel Vault options were converted into 3.3 million PositiveID options. These options
were granted at exercise prices ranging from $0.36 to $2.00 per share, are fully vested and are
exercisable for a period up to ten years from the vest date.
F-16
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
A summary of stock options for 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
Number |
|
|
Average |
|
|
Number |
|
|
Average |
|
|
|
of |
|
|
Exercise |
|
|
of |
|
|
Exercise |
|
|
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
Outstanding on January 1 |
|
|
1,225 |
|
|
$ |
4.52 |
|
|
|
1,963 |
|
|
$ |
3.26 |
|
Granted(1) |
|
|
3,349 |
|
|
|
0.58 |
|
|
|
195 |
|
|
|
0.58 |
|
Exercised |
|
|
(138 |
) |
|
|
0.44 |
|
|
|
(844 |
) |
|
|
0.54 |
|
Cancelled and forfeited |
|
|
(221 |
) |
|
|
0.56 |
|
|
|
(89 |
) |
|
|
5.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on December 31(2) |
|
|
4,215 |
|
|
|
1.73 |
|
|
|
1,225 |
|
|
|
4.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable on December 31 |
|
|
4,102 |
|
|
$ |
1.77 |
|
|
|
1,055 |
|
|
|
5.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares available on December 31 for options that may be granted |
|
|
3,312 |
|
|
|
|
|
|
|
2,023 |
|
|
|
|
|
|
|
|
(1) |
|
Options granted to former option holders
of Steel Vault pursuant to the Merger. The
total compensation expense associated with
the options granted in 2009 and 2008 was
nil and approximately $21,000,
respectively. As of December 31, 2009 and
2008, the remaining amount of the
compensation expense to be recorded over
the remaining vesting period of the
options was approximately nil and $31,000,
respectively. |
|
(2) |
|
The intrinsic value of a stock option is
the amount by which the fair value of the
underlying stock exceeds the exercise
price of the option. The fair value of the
Companys common stock was estimated to be
$1.10 and $0.37 at December 31, 2009 and
2008, respectively, based upon its closing
price on the NASDAQ. As of December 31,
2009 and 2008, the intrinsic value for all
options outstanding was approximately $1.9
million and $34,000, respectively. |
The following table summarizes information about stock options at December 31, 2009 (in
thousands, except weighted-average amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Stock Options |
|
|
Exercisable Stock Options |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
|
|
Average |
|
Range of |
|
|
|
|
|
Contractual |
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
Exercise Prices |
|
Shares |
|
|
Life |
|
|
Price |
|
|
Shares |
|
|
Price |
|
$0.00 to $0.36 |
|
|
1,075 |
|
|
|
8.72 |
|
|
$ |
0.36 |
|
|
|
1,075 |
|
|
$ |
0.36 |
|
$0.37 to $0.62 |
|
|
1,557 |
|
|
|
4.66 |
|
|
|
0.49 |
|
|
|
1,444 |
|
|
|
5.59 |
|
$0.68 to $1.99 |
|
|
631 |
|
|
|
2.53 |
|
|
|
0.83 |
|
|
|
631 |
|
|
|
0.83 |
|
$2.00 to $5.75 |
|
|
523 |
|
|
|
4.74 |
|
|
|
4.39 |
|
|
|
523 |
|
|
|
4.39 |
|
Above $5.75 |
|
|
429 |
|
|
|
4.09 |
|
|
|
7.78 |
|
|
|
429 |
|
|
|
7.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,215 |
|
|
|
5.90 |
|
|
$ |
1.73 |
|
|
|
4,102 |
|
|
$ |
1.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested options |
|
|
4,102 |
|
|
|
5.23 |
|
|
$ |
1.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average per share fair value of grants made in 2009 and 2008 for the
Companys incentive plans were $1.19 and $0.22, respectively.
A
summary of restricted stock outstanding as of December 31, 2009
and 2008 and changes during the years then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Unvested at
January 1 |
|
|
|
|
|
|
600 |
|
Issued |
|
|
4,395 |
|
|
|
700 |
|
Vested |
|
|
(203 |
) |
|
|
(1,250 |
) |
Forfeited or
Expired |
|
|
|
|
|
|
(50 |
) |
|
|
|
|
|
|
|
Unvested at
December 31 |
|
|
4,192 |
|
|
|
|
|
|
|
|
|
|
|
|
There are inherent uncertainties in making estimates about forecasts of future operating
results and identifying comparable companies and transactions that may be indicative of the fair
value of the Companys securities. The Company believes that the estimates of the fair value of its
common stock at each option grant date were reasonable under the circumstances.
F-17
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
The Black-Scholes model, which the Company used to determine compensation expense, required
the Company to make several key judgments including:
|
|
|
the estimated value of the Companys common stock; |
|
|
|
|
the expected life of issued stock options; |
|
|
|
|
the expected volatility of the Companys stock price; |
|
|
|
|
the expected dividend yield to be realized over the life of the stock option; and |
|
|
|
|
the risk-free interest rate over the expected life of the stock options. |
The Company prepared these estimates based upon its historical experience, the stock price
volatility of comparable publicly-traded companies and its best estimation of future conditions.
The fair values of the options granted were estimated on the grant date using the
Black-Scholes valuation model based on the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
|
|
|
|
|
|
|
Expected stock price volatility |
|
|
100 |
% |
|
|
35 |
% |
Risk-free interest rate |
|
|
0.36 |
% |
|
|
1.79-3.44 |
% |
Expected term (in years) |
|
|
1.0 |
|
|
|
6.0 |
|
Warrants
On November 10, 2009, pursuant to the Steel Vault merger, all outstanding Steel Vault warrants
were converted into approximately 0.5 million Company warrants. These warrants were granted at
exercise prices ranging from $0.60 to $1.16 per share, are fully vested and are exercisable for a
period from five to ten years from the vest date. The expiration of
0.2 million warrants is in December 2010 and the expiration of
0.3 million warrants is in 2014.
Share-Based Compensation
Share-based compensation expense is recognized using the fair-value based method for all
awards granted. Compensation expense for awards granted is
recognized over the requisite service period based on the grant-date fair value of those options.
Forfeitures are estimated at the time of grant and require the estimates to be revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates.
During 2009 and 2008, compensation expense of nil and $21,000, respectively, was recorded from
nil and 0.2 million options granted to employees in 2009 and 2008, respectively.
In December 2006, the Company issued 0.5 million shares of its restricted common stock to Mr.
Silverman, its then chairman and chief executive officer, who has since been reappointed as
chairman and chief executive officer, which shares were subject to forfeiture in the event that Mr.
Silverman terminated his employment or the Company terminated his employment for cause on or before
December 31, 2008. As a result of a separation agreement entered into between the Company and Mr.
Silverman, dated May 15, 2008 (the Silverman Separation Agreement), Mr. Silvermans restricted
stock vested on the closing of the sale of Xmark. The Company determined the value of the stock to
be $4.5 million based on the estimated value of its common stock on the date of grant. The value of
the restricted stock was being amortized as compensation expense over the vesting period. As a
result of the sale of Xmark on July 18, 2008, a charge of $2.2 million was recorded for the
remaining unvested cost of these restricted shares. The Company recorded compensation expense of
approximately $2.3 million in 2008 associated with the restricted
stock.
F-18
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
In March 2007, the Company issued 0.1 million shares of its restricted common stock to two
officers, which shares were to vest on March 2, 2009, but instead vested upon the closing of the
Xmark transaction. The Company determined the value of the stock to be $0.6 million based on the
value of its common stock of $5.75 per share on the date of grant. The value of the restricted
stock is being amortized as compensation expense over the vesting period. The Company recorded
compensation expense of approximately $0.2 million in 2008
associated with this restricted stock.
In January, February, and May 2008, the Company issued 0.7 million shares of its restricted
common stock to certain employees and members of the board of directors. One grant of 50,000 shares
of restricted stock was forfeited in April 2008 and the remaining balance of the restricted stock
fully vested upon the closing of the Xmark transaction. The Company determined the value of the
stock to be $1.4 million based on the value of its common stock on the dates of grant. The value of
the outstanding restricted stock was amortized as compensation expense over the vesting period. As
a result of the sale of Xmark on July 18, 2008, the remaining unvested cost of these restricted
shares was recorded in July 2008. The Company recorded compensation expense of approximately $1.4
million in 2008 associated with this restricted stock.
As a result of the sale of Xmark on July 18, 2008, the vesting of the options and restricted
shares was accelerated. Therefore, compensation expense related to
the acceleration of the vesting for the total remaining unvested balance of $3.2
million was recorded in July 2008.
In December 2008, the Company authorized the grant of 1.1 million shares of its restricted
common stock to its chairman and acting chief financial officer under letter agreements. These
shares fully vested on January 1, 2010. The Company recorded compensation expense of approximately
$0.5 million and nil in 2009 and 2008, respectively, associated with this restricted stock.
In December 2008, the Company authorized the grant of 0.4 million shares of its restricted
common stock to members of the board of directors. The Company determined the value of the stock to
be $0.1 million based on the value of its common stock on the dates of grant. The value of the
outstanding restricted stock was amortized as compensation expense over the vesting period. The
Company recorded compensation expense of approximately $0.1 million and nil in 2009 and 2008,
respectively, associated with this restricted stock.
In
December 2008, the Company issued options exercisable for
approximately 140,000 shares
of common stock; 100,000 to employees and 40,000 to a consultant.
The
Company determined the fair value of the 100,000 employee options to
be $18,000
on the date of grant based on an estimate of the fair value using the Black-Scholes valuation model
as described above. The fair value of the grant is being recognized as compensation expense over the
vesting period. Accordingly, the compensation expense recorded in connection
with these options for the years ended December 31, 2009 and
2008 was $6,000 and nil,
respectively.
The
Company recorded compensation expense associated with the 40,000 options to the
consultant using the variable accounting method which requires the Company to re-measure the
compensation expense associated with these options at the end of each reporting period until the
options are vested. Compensation expense recorded in connection with these options for the years
ended December 31, 2009 and 2008 was $10 thousand and nil, respectively.
In
August 2009, the Company authorized the grant of 50,000 shares of its restricted
common stock to members of the Board of Directors. The Company determined the value of the stock to
be $25,000 based on the value of its common stock on the dates of grant. The value of the
outstanding restricted stock was amortized as compensation expense over the vesting period. The
Company recorded compensation expense of approximately $24,000 in 2009 associated with this
restricted stock.
In September and October 2009, the Company authorized the grant of approximately 0.4 million
shares of its restricted common stock to a research and development consultant. The Company
recorded compensation expense associated with the restricted stock using the variable accounting method that
requires the Company to re-measure the compensation expense associated with the restricted stock at the
end of each reporting period until the restricted stock are vested. Compensation expense recorded in
connection with the restricted stock for the year ended December 31, 2009 was $0.2 million.
F-19
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
In November and December 2009, the Company authorized the grant of restricted stock for
approximately 475,000 shares of common stock: 50,000 to an employee
and 425,000 to
various consultants.
The
Company determined the fair value of the 50,000 shares issued to the employee to be
approximately $83,000 based on the closing price of the Companys common stock on the date of
grant. The fair value of the grant will be recognized as compensation expense over the vesting
period. Accordingly, the Company recognized $13,000 in compensation expense for the year
ended December 31, 2009 in connection with this grant.
The
Company recorded compensation expense associated with the 425,000 shares issued to
the various consultants using the variable accounting method that requires the Company to
re-measure the compensation expense associated with these shares at the end of each reporting
period until the shares are vested. Compensation expense recorded in connection with the shares
for the year ended December 31, 2009 was $300,000.
In November 2009, the Company authorized the grant of 2.0 million shares of its restricted
common stock to its executive officers which vest on a pro-rata basis through 2012. The Company
determined the value of the stock to be $3.3 million based on the value of its common stock on the
dates of grant. The value of the outstanding restricted stock is being amortized as compensation expense
over the vesting period. The Company recorded compensation expense of approximately $0.3 million in
2009 associated with this restricted stock.
7 Selling, general and administrative expense
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Salaries and benefits (1) |
|
$ |
2,058 |
|
|
$ |
14,567 |
|
Legal and accounting |
|
|
1,536 |
|
|
|
2,226 |
|
Sales and marketing |
|
|
716 |
|
|
|
1,424 |
|
Consulting |
|
|
432 |
|
|
|
255 |
|
Insurance |
|
|
192 |
|
|
|
217 |
|
Travel and entertainment |
|
|
140 |
|
|
|
280 |
|
Depreciation and amortization |
|
|
29 |
|
|
|
52 |
|
Other |
|
|
650 |
|
|
|
754 |
|
|
|
|
|
|
|
|
|
|
$ |
5,753 |
|
|
$ |
19,775 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in salaries and benefits is $1.4 million and $5.0
million of share-based compensation expense for the years 2009 and
2008, respectively, associated with stock compensation (includes
stock options and restricted stock). See Note 6 to the
Consolidated Financial Statements. |
8 Income Taxes
The Company accounts for income taxes under the asset and liability approach. Deferred taxes
are recorded based upon the tax impact of items affecting financial reporting and tax filings in
different periods. A valuation allowance is provided against net deferred tax assets where the
Company determines realization is not currently judged to be more likely than not.
The tax effects of temporary differences and carryforwards that give rise to significant
portions of deferred tax assets and liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Deferred tax
assets (liabilities): |
|
|
|
|
|
|
|
|
Accrued expenses and reserves |
|
$ |
290 |
|
|
$ |
228 |
|
Stock-based compensation |
|
|
4,349 |
|
|
|
4,162 |
|
Property and equipment |
|
|
(11 |
) |
|
|
12 |
|
Net operating loss carryforwards |
|
|
17,933 |
|
|
|
11,362 |
|
|
|
|
|
|
|
|
Gross deferred tax assets |
|
|
22,561 |
|
|
|
15,764 |
|
Valuation allowance |
|
|
(22,561 |
) |
|
|
(15,764 |
) |
|
|
|
|
|
|
|
Net deferred taxes |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
F-20
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
The valuation allowance for U.S. deferred tax assets increased by approximately $7.0
million and $3.4 million in 2009 and 2008, respectively, due mainly to the generation of U.S. net
operating losses and the acquisition of Steel Vault net operating losses. The valuation allowance
at December 31, 2009 and 2008, has primarily been provided for net U.S. deferred tax assets.
The amortization or impairment of intangible assets related to the Steel Vault acquisition is not
deductible for income tax purposes.
Loss before provision for income taxes consists of domestic operations.
The provision or (benefit) for income taxes consists of:
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Current: |
|
|
|
|
|
|
|
|
United States |
|
$ |
|
|
|
$ |
|
|
Canada |
|
|
|
|
|
|
233 |
|
|
|
|
|
|
|
|
Current income tax provision |
|
|
|
|
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Deferred: |
|
|
|
|
|
|
|
|
United States |
|
$ |
|
|
|
$ |
|
|
Canada |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
233 |
|
|
|
|
|
|
|
|
Income tax provision or (benefit) is included in the financial statements as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Continuing operations |
|
$ |
|
|
|
$ |
|
|
Discontinued operations |
|
|
|
|
|
|
233 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
233 |
|
|
|
|
|
|
|
|
The difference between the effective rate reflected in the provision for income taxes on
loss before taxes from continuing operations and the amounts determined by applying the applicable
statutory U.S. tax rate are analyzed below:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
% |
|
|
% |
|
Statutory tax benefit |
|
|
(34 |
) |
|
|
(34 |
) |
State income
taxes, net of federal effects |
|
|
(6 |
) |
|
|
(6 |
) |
Permanent
tax basis difference in stock of subsidiary (permanent difference) |
|
|
(12 |
) |
|
|
(12 |
) |
Write-down
in Investment in Steel Vault (permanent difference) |
|
|
28 |
|
|
|
|
|
Net
operating losses of acquired subsidiary |
|
|
(34 |
) |
|
|
|
|
Change in deferred tax asset valuation allowance |
|
|
58 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based upon the change of
ownership rules under IRC Section 382, the
Company experienced a change of ownership in December 2007 exceeding the 50% limitation threshold imposed by IRC
Section 382. The Company experienced a subsequent change in ownership during November 2008. The
acquired net operating losses of Steel Vault are subject to a similar limitation under IRC Section
382. As a result the Companys future utilization of its net operating loss carryforwards may be
significantly limited as to the amount of use in any particular year,
and consequently may be subject to expiration.
On December 31, 2009, the Company had U.S. federal net operating loss carry forwards of
approximately $44.8 million (including approximately $9.8 million from Steel Vault through the date
of the Merger) for income tax purposes that expire in various amounts through 2029. The net
operating losses were allocated in accordance with Treasury Regulation § 1.1502-21T(b)(2)(iv), at
the point that the Company ceased to be a part of the consolidated tax return of Digital Angel.
F-21
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
The Company files consolidated tax returns in the United States federal jurisdiction and in
the various states in which it does business. In general, the Company is no longer subject to U.S.
federal or state income tax examinations for years before December 31, 2006.
In January 2010 the Company received a notice from the Canadian Revenue Agency (CRA), that the
CRA would be performing a review of Xmarks Canadian tax returns for the periods
2005 through 2008. The Company plans to comply with all CRA information
requests. This review will cover all periods that Xmark was owned by PositiveID.
9 Commitments and Contingencies
Employment Contract
Effective December 5, 2006, the Company and Mr. Silverman entered into the PositiveID
Corporation Employment and Non-Compete Agreement (the PositiveID Employment Agreement). The
PositiveID Employment Agreement was to terminates five years from the effective date. The PositiveID
Employment agreement provided for an annual base salary of $420,000 with minimum annual increases
for the first two years of 10% of the base salary and a discretionary annual increase thereafter.
Mr. Silverman was also entitled to a discretionary annual bonus and other fringe benefits. In
addition, the PositiveID Employment Agreement provided for the grant of 500,000 shares of
restricted stock of the Company. The Company was required to register the shares as soon as
practicable. The stock was restricted and was accordingly subject to substantial risk of forfeiture
in the event that Mr. Silverman terminated his employment or the Company terminated his employment
for cause on or before December 31, 2008. If Mr. Silvermans employment was terminated prior to the
expiration of the term of the PositiveID Employment Agreement, certain significant payments became
due to Mr. Silverman. The amount of such significant payments depended on the nature of the
termination. In addition, the PositiveID Employment Agreement contained a change of control
provision that provided for the payment of five times the then current base salary and five times
the average bonus paid to Mr. Silverman for the three full calendar years immediately prior to the
change of control, or the number of years that were completed commencing on the effective date of
the agreement and ending on the date of the change of control if less than three calendar years.
Any outstanding stock options held by Mr. Silverman as of the date of his termination or a change
of control became vested and exercisable as of such date, and remained exercisable during the
remaining life of the option. All severance and change of control payments made in connection with
the PositiveID Employment Agreement were to be paid in cash, except for termination due to Mr.
Silvermans total disability, death, a constructive termination, or termination without cause,
which could be paid in shares of the Companys common stock, subject to necessary approvals, or in
cash, at Mr. Silvermans option.
F-22
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
In connection with the Xmark transaction, on May 15, 2008, the Company and Mr. Silverman
entered into a separation agreement (the Silverman Separation Agreement), which provided that
upon the closing of the Xmark transaction, Mr. Silvermans employment would be terminated, as would
the PositiveID Employment Agreement.
In connection with the Silverman Separation Agreement, in July 2008, Mr. Silverman received a
payment in the amount of approximately $4.3 million from the Company in full and final satisfaction
of the amounts due to him pursuant to the terms of the PositiveID Employment Agreement. Mr.
Silverman also received a bonus payment for the completion of the Xmark transaction in the amount
of $1.2 million.
On December 31, 2008, the Company and Mr. Silverman entered into a letter agreement, pursuant
to which Mr. Silverman would serve as the Companys chairman from December 1, 2008 through December
31, 2009, unless the term was amended or the letter agreement was terminated. The terms and
conditions were agreed on December 26, 2008, which is the accounting grant date. The letter
agreement also provided for the termination of certain provisions of the Silverman Separation
Agreement. Under the letter agreement, Mr. Silverman received 601,852 shares of the Companys
common stock, which would not be issued until the later to occur of (i) stockholder approval of the
amendment and restatement of the PositiveID 2007 Plan (the Amended Plan), or (ii) the filing of
the Form S-8, as amended, to reflect the Amended Plan, which was the later to occur on February 17,
2009 (hereinafter, the Grant Date). The shares would vest upon the earlier to occur of (i)
January 1, 2010 or (ii) a Change in Control (as defined in the Amended Plan). The shares were
subject to forfeiture in the event that Mr. Silverman failed to remain involved in the day-to-day
management of the Company (as determined by its board of directors) until the earlier to occur of
(i) January 1, 2010 or (ii) a Change in Control (as defined in the Amended Plan). The 601,852
shares vested on January 1, 2010.
In connection with the Xmark Transaction, on May 15, 2008, the Company entered into a letter
agreement with Mr. Caragol, which affirmed that the Company desired to retain Mr. Caragol as its
president and chief financial officer following the closing of the Xmark Transaction, confirmed
that Mr. Caragols base salary would remain at $203,500 per year, and outlined the bonus
compensation for which Mr. Caragol would be eligible.
On December 31, 2008, the Company and Mr. Caragol entered into a letter agreement pursuant to
which, effective January 1, 2009, Mr. Caragol served as its acting chief financial officer. That
letter agreement was amended and restated on March 27, 2009, which provided that unless the term
was amended or the letter agreement was terminated, the letter agreement was in effect until
January 1, 2010. Mr. Caragol ceased receiving salary and health benefits on January 1, 2009.
Compensation due to Mr. Caragol under the letter agreement was in the form of 518,519 shares of restricted
common stock. The grant of the shares took place on the Grant Date. The
shares vested according to the following schedule: (i) 20% vested on the Grant Date; and (ii) 80%
vested on January 1, 2010. However, in the event of a Change in Control and if Mr. Caragol was
terminated without cause (as defined below), the shares would immediately vest. The shares were
subject to forfeiture in the event Mr. Caragol failed to remain involved in the day-to-day
management of the Company (as determined by the Board of Directors) or if he was terminated for
cause, which is defined as (i) Mr. Caragols conviction of a felony; (ii) Mr. Caragols being
prevented from providing services to us under the letter agreement as a result of Mr. Caragols
violation of any law, regulation and/or rule; or (iii) Mr. Caragols non-performance or
non-observance in any material respect of any requirement with respect to Mr. Caragols obligations
under the letter agreement.
Legal proceedings
The Company is a party to certain legal actions, as either plaintiff or defendant, arising in
the ordinary course of business, none of which is expected to have a material adverse effect on the
Companys business, financial condition or results of operations. However, litigation is
inherently unpredictable, and the costs and other effects of pending or future litigation,
governmental investigations, legal and administrative cases and proceedings, whether civil or
criminal, settlements, judgments and investigations, claims or charges in any such matters, and
developments or assertions by or against us relating to the Company or to the Companys
intellectual property rights and intellectual property licenses could have a material adverse
effect on the Companys business, financial condition and operating results.
F-23
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Artigliere
On July 8, 2008, a lawsuit was filed against the Company and Digital Angel by Jerome C.
Artigliere, a former executive of the Company and Digital Angel. The lawsuit was filed in the
Circuit Court of the 15th Judicial Circuit in Palm Beach County, Florida, and alleged that Mr.
Artigliere held options to acquire 950,000 shares of the Companys common stock at an exercise
price of $0.05 per share and that he was denied the right to exercise those options. The complaint
alleged causes of action for breach of contract against the Company and Digital Angel, sought
declaratory judgments clarifying Mr. Artiglieres alleged contractual rights, and sought an
injunction enjoining the vote of the stockholders at special meeting of our shareholders that took
place on July 17, 2008, on the sale of Xmark. On September 12, 2008, Mr. Artigliere amended his
complaint to add a claim for unpaid wages against the Company and Digital Angel and to add related
claims against several former officers and directors of the Company and Digital Angel.
On March 3, 2009, the Company entered into a settlement agreement and general release related
to the Artigliere lawsuit. Under the settlement agreement, the Company agreed, among other things,
to issue approximately 510,000 shares of its common stock to Mr. Artigliere or his designees valued at $250,000.
Additionally, the Companys obligation under the settlement
agreement includes a cash payment to Mr.
Artigliere of $275,000. The Company previously accrued $0.2 million in conjunction with this matter
at December 31, 2008. The settlement agreement also contains a confidentiality clause, which if
breached could give the Company the ability to reclaim amounts from Plaintiff.
10 Related Party Transactions
Blue
Moon
As of March 5, 2010, Mr. Silverman beneficially owned 46.9% of PositiveIDs outstanding common
stock, including the 1,035,000 shares that are directly owned by Blue Moon Energy Partners, LLC
(Blue Moon) and 4,755,556 directly owned by R & R Consulting Partners, LLC. Mr. Silverman, the
Companys chief executive officer and chairman of the board, is a manager and controls a member of
Blue Moon (i.e., R & R Consulting Partners, LLC). William J. Caragol, the Companys president,
chief financial officer and member of the board, is a manager and member of Blue Moon.
Sublease
with Digital Angel
On October 8, 2008, Steel Vault entered into a sublease with Digital Angel, the Companys
former parent, for its corporate headquarters located in Delray Beach, Florida, consisting
approximately 7,911 feet of office space, which space the Company shares with Steel Vault. The rent
for the entire twenty-one-month term of the sublease is $158,000, which was paid in one lump sum
upon execution of the sublease. The Company reimbursed Steel Vault for one-half of the sublease
payment, representing the Companys share of the total cost of the sublease. In addition, in order
to account for certain shared services and resources, the Company and Steel Vault operated under a
shared services agreement, through the time of the merger, in connection with which Steel Vault
paid us $8,000 a month. The expense recorded related to the shared services agreement was
approximately $0.1 million in 2009.
Asset Purchase Agreement with Digital Angel
On November 12, 2008, the Company entered into the APA with Digital Angel. The terms of the
APA included the sale to the Company of patents related to an embedded bio-sensor system for use in
humans, and the assignment of any rights of Digital Angel under a development agreement associated
with the development of an implantable glucose sensing microchip. The Company also received
covenants from Digital Angel and Destron Fearing that will permit the use of intellectual property
of Digital Angel related to the Companys VeriMed Health Link business without payment of ongoing
royalties, as well as inventory and a limited period of technology support by Digital Angel. The
Company paid Digital Angel $500,000 at the closing of the APA, which was recorded to research and
development expense for the year ended December 31, 2008. Pursuant to the APA, the supply agreement
discussed above was terminated.
Letter Agreement with Digital Angel
On May 15, 2008, the Company entered into a Letter Agreement (the May 2008 Agreement) with
Digital Angel under which the Company agreed, in exchange for Digital Angels consent to a voting
agreement and guarantee agreement with The Stanley Works, to pay $250,000 as a fee for Digital
Angels guarantee of certain obligations under the Stock Purchase Agreement and $250,000 for
reimbursement of transactional costs incurred by Digital Angel in connection with the Xmark
transaction. These costs were accounted for as transactional costs which were netted against the
gain on the sale of Xmark in the year ended December 31, 2008. The May 2008 Agreement with Digital
Angel was terminated on November 12, 2008.
F-24
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Pledge Agreement of Digital Angel
On August 24, 2006, Digital Angel pledged 65% of its ownership in the Companys common stock
to its lender under the terms of a note and pledge agreement. The note is due in February 2010.
This note replaced a previous note issued by Digital Angel, which was due in June 2007. On August
31, 2007 and October 2, 2008, Digital Angel pledged 80% and 100%, respectively, of its ownership in
the Companys common stock to its lender under the terms two separate notes entered into with its
lender. Each note was due in February 2010.
As a result of Digital Angels sale of all of its shares of the Company to R & R Consulting
Partners, LLC, on November 12, 2008, Digital Angels lender released the shares of the Company
owned by Digital Angel from the pledge agreements between Digital Angel and its lender.
11 Discontinued Operations
On July 18, 2008, pursuant to the terms of the stock purchase agreement between the Company
and The Stanley Works, the Company completed the sale of all of the outstanding capital stock of
Xmark to Stanley Canada.
As a result of the sale of Xmark, the financial condition, results of operations and cash
flows of Xmark have been reported as discontinued operations in the Companys financial statements
and prior period information has been reclassified accordingly.
The condensed results of operations of the Companys discontinued operations for the year
ended December 31, 2008 (which include the operations of Xmark through July 18, 2008), were
comprised of the following:
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2008 |
|
|
|
|
|
|
Revenue |
|
$ |
20,002 |
|
Cost of sales |
|
|
8,289 |
|
|
|
|
|
Gross profit |
|
|
11,713 |
|
|
|
|
|
|
Selling, general and administrative
expenses |
|
|
9,093 |
|
Research and development expenses |
|
|
2,277 |
|
Other (income) expense |
|
|
(650 |
) |
Interest (income) expense |
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
1,020 |
|
|
|
|
|
|
Provision for income taxes |
|
|
233 |
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
787 |
|
|
|
|
|
F-25
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
12 Segments
Since the merger with Steel Vault on November 10, 2009, we operate in two business segments:
HealthID and ID Security.
HealthID Segment
The Company HealthID segment is currently focused on the development of the glucose-sensing
microchip, in conjunction with Receptors. In the field of diabetes management we also acquired, in
February 2010, the assets of Easy Check Medical Diagnostics, LLC, including the Easy Check breath
analysis system and the iGlucose wireless communication system. All three of these products are
currently under development.
The Company also intends to continue the development of the Rapid Flu Detection system, and
other health related products, built on the Companys core intellectual property. The Companys
HealthID segment also includes the VeriMed system, which uses the RFID microchip VeriChip that is
used in patient identification applications. Each implantable microchip contains a unique
verification number that is read when it is scanned by the Companys scanner. In October 2004, the
U.S. Food and Drug Administration, or FDA, cleared the Companys VeriMed Health Link system for use
in medical applications in the United States.
ID Security Segment
The Companys ID Security segment focuses on selling a variety of identity security products
and services primarily on a subscription basis through its subsidiary, NationalCreditReport.com.
These services help consumers protect themselves against
identity theft or fraud and understand and monitor their credit profiles and other personal
information, which include credit reports, credit monitoring and credit scores.
In the first quarter of 2010, the Company re-launched its Health Link personal health
record (PHR) business. The Company plans to focus its marketing efforts on
partnering with health care providers and exchanges, physician groups, Electronic Medical
Record (EMR) system vendors, and insurers to use
Health Link as a PHR provided to their patients. The Company will
also seek to partner with pharmaceutical companies who wish to communicate with
its online community through various forms of value added content and advertising.
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies. The Company evaluates performance based on segment income as
presented below.
The following is selected segment data as of and for the period ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total From |
|
|
|
Health |
|
|
ID |
|
|
Continuing |
|
|
|
ID |
|
|
Security |
|
|
Operations |
|
As of and For the Year Ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
162 |
|
|
$ |
191 |
|
|
$ |
353 |
|
Operating
loss |
|
|
(5,555 |
) |
|
|
(332 |
) |
|
|
(5,887 |
) |
Loss from continuing operations before income taxes |
|
|
(1,096 |
) |
|
|
(10,502 |
) |
|
|
(11,598 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets of continuing operations |
|
$ |
6,502 |
|
|
$ |
4,470 |
|
|
$ |
10,972 |
|
13 Supplementary Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Income taxes paid |
|
$ |
|
|
|
$ |
|
|
Interest paid |
|
|
|
|
|
|
285 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
285 |
|
|
|
|
|
|
|
|
In the years ended December 31, 2009 and 2008, the Company had the following non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Non-cash financing and investing activities: |
|
|
|
|
|
|
|
|
Debt financing costs |
|
$ |
|
|
|
$ |
331 |
|
Accrued dividend payable |
|
|
90 |
|
|
|
|
|
Issuance of common stock and options for Steel Vault Acquisition |
|
|
13,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,224 |
|
|
$ |
331 |
|
|
|
|
|
|
|
|
F-26
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
|
|
2.1 |
|
|
Stock Purchase Agreement, dated May 15, 2008, between PositiveID Corporation and The Stanley Works
(1) |
|
|
|
|
|
|
2.2 |
|
|
Voting Agreement, dated May 15, 2008, between Applied Digital Solutions, Inc. and The Stanley
Works (1) |
|
|
|
|
|
|
2.3 |
|
|
Voting Agreement, dated May 15, 2008, between Scott R. Silverman and The Stanley Works
(1) |
|
|
|
|
|
|
2.4 |
|
|
Agreement and Plan of Reorganization dated September 4, 2009, among PositiveID Corporation, Steel
Vault Corporation, and VeriChip Acquisition Corp. (2) |
|
|
|
|
|
|
2.5 |
|
|
Amendment No. 1 to Agreement and Plan of Reorganization, dated October 1, 2009, among PositiveID
Corporation, Steel Vault Corporation, and VeriChip Acquisition Corp. (3) |
|
|
|
|
|
|
2.6 |
|
|
Asset Purchase Agreement, dated November 12, 2008, among PositiveID Corporation, Digital Angel
Corporation and Destron Fearing Corporation (4) |
|
|
|
|
|
|
2.7 |
|
|
Voting Agreement, dated November 10, 2009, among Scott R. Silverman, William J. Caragol, Jared
Shaw, R & R Consulting Partners LLC and Blue Moon Energy Partners, LLC |
|
|
|
|
|
|
3.1 |
|
|
Second Amended and Restated Certificate of Incorporation of PositiveID Corporation filed with the
Secretary of State of Delaware on December 18, 2006, as amended on November 10, 2009
(5) |
|
|
|
|
|
|
3.2 |
|
|
Amended and Restated By-laws
of PositiveID Corporation adopted as of December 12, 2005, as
amended on March 16, 2010 |
|
|
|
|
|
|
4.1 |
|
|
Form of Specimen Common Stock Certificate |
|
|
|
|
|
|
10.1 |
* |
|
VeriChip Corporation 2002 Flexible Stock Plan, as amended through December 21, 2006 (6) |
|
|
|
|
|
|
10.2 |
* |
|
VeriChip Corporation 2005 Flexible Stock Plan, as amended through December 21, 2006 (6) |
|
|
|
|
|
|
10.3 |
* |
|
VeriChip Corporation 2007 Stock Incentive Plan, as amended and restated (7) |
|
|
|
|
|
|
10.4 |
* |
|
VeriChip Corporation 2009 Stock Incentive Plan (8) |
|
|
|
|
|
|
10.5 |
* |
|
VeriGreen Energy Corporation 2009 Flexible Stock Plan (9) |
|
|
|
|
|
|
10.6 |
* |
|
PositiveID Animal Health Corporation 2010 Flexible Stock Plan |
|
|
|
|
|
|
10.7 |
|
|
Syscomm International Corporation 2001 Flexible Stock Plan, as amended and restated (19) |
|
|
|
|
|
|
10.8 |
* |
|
Form of Restricted Stock Award Agreement under the 2002/2005 Flexible Stock Plan(6) |
|
|
|
|
|
|
10.9 |
* |
|
Form of Non-Qualified Stock Option Award Agreement under the 2002/2005 Flexible Stock Plan
(6) |
|
|
|
|
|
|
10.10 |
* |
|
Form of Non-Qualified Option Award Agreement under the VeriChip Corporation 2007 Stock Incentive
Plan
(10) |
|
|
|
|
|
F-27
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
|
|
10.11 |
* |
|
Form of Stock Award Agreement under the VeriChip Corporation 2007 Stock Incentive Plan
(11) |
|
|
|
|
|
|
10.12 |
* |
|
Form of Non-Qualified Option Award Agreement under the VeriChip Corporation 2009 Stock Incentive
Plan |
|
|
|
|
|
|
10.13 |
* |
|
Form of Stock Award Agreement under the VeriChip Corporation 2009 Stock Incentive Plan |
|
|
|
|
|
|
10.14 |
* |
|
Form of Restricted Stock Award Agreement under the VeriGreen Energy Corporation 2009 Flexible
Stock Plan |
|
|
|
|
|
|
10.15 |
* |
|
Form of Non-Qualified Stock Option Award Agreement under the VeriGreen Energy Corporation 2009
Flexible Stock Plan |
|
|
|
|
|
|
10.16 |
* |
|
Form of Restricted Stock Award Agreement under the PositiveID Animal Health Corporation 2010
Flexible Stock Plan |
|
|
|
|
|
|
10.17 |
* |
|
Form of Non-Qualified Stock Option Award Agreement under PositiveID Animal Health Corporation 2010
Flexible Stock Plan |
|
|
|
|
|
|
10.18 |
* |
|
Form of Restricted Stock Award Agreement under the Syscomm International Corporation 2001 Flexible
Stock Plan, as amended and restated |
|
|
|
|
|
|
10.19 |
* |
|
Form of Non-Qualified Stock Option Award Agreement under the Syscomm International Corporation
2001 Flexible Stock Plan, as amended and restated |
|
|
|
|
|
|
10.20 |
|
|
Consulting Agreement dated as of August 8, 2007 between PositiveID Corporation and Randolph K.
Geissler
(10) |
|
|
|
|
|
|
10.21 |
* |
|
Separation Agreement, dated May 15, 2008, between PositiveID Corporation and Scott R. Silverman
(1) |
|
|
|
|
|
|
10.22 |
* |
|
Amendment to Separation Agreement, dated July 9, 2008, between PositiveID Corporation and Scott R.
Silverman (12) |
|
|
|
|
|
|
10.23 |
* |
|
Letter Agreement, dated December 31, 2008, between PositiveID Corporation and Scott R. Silverman
(13) |
|
|
|
|
|
|
10.24 |
* |
|
Letter Agreement, dated May 15, 2008, between PositiveID Corporation and William J. Caragol
(1) |
|
|
|
|
|
|
10.25 |
* |
|
Letter Agreement, dated December 31, 2008, between PositiveID Corporation and William J. Caragol
(13) |
|
|
|
|
|
|
10.26 |
* |
|
Letter Agreement, dated March 27, 2009, between PositiveID Corporation and William J. Caragol
(14) |
|
|
|
|
|
|
10.27 |
|
|
Letter Agreement, dated May 15, 2008, between PositiveID Corporation and Digital Angel Corporation
(1) |
|
|
|
|
|
|
10.28 |
|
|
Amended and Restated Supply, License and Development Agreement dated as of December 27, 2005
between PositiveID Corporation and Digital Angel Corporation (15) |
|
|
|
|
|
F-28
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
|
|
10.29 |
|
|
First Amendment to Amended and Restated Supply, License and Development Agreement dated as of May
9, 2007 between the Registrant and Digital Angel Corporation. (16) |
|
|
|
|
|
|
10.30 |
|
|
Guarantee, dated May 15, 2008, between Digital Angel Corporation and The Stanley Works
(1) |
|
|
|
|
|
|
10.31 |
|
|
Settlement Agreement and General Release, dated March 3, 2009, among PositiveID Corporation,
Jerome C. Artigliere, Clark & Martino, P.A., Baker & Hostetler, LLP, Digital Angel Corporation,
Scott Silverman, Michael Krawitz and Kevin McLaughlin (9) |
|
|
|
|
|
|
10.32 |
|
|
Development and Supply Agreement, dated March 17, 2009, between PositiveID Corporation and Medical
Components, Inc. (9) |
|
|
|
|
|
|
10.33 |
|
|
Secured Convertible Promissory Note, dated June 4, 2009, between Steel Vault Corporation and
PositiveID Corporation (17) |
|
|
|
|
|
|
10.34 |
|
|
Common Stock Purchase Warrant, dated June 4, 2009, between Steel Vault Corporation and PositiveID
Corporation (17) |
|
|
|
|
|
|
10.35 |
|
|
Convertible Note and Warrant Subscription Agreement, dated June 4, 2009, between Steel Vault
Corporation and PositiveID Corporation (17) |
|
|
|
|
|
|
10.36 |
|
|
Security Agreement, dated June 4, 2009, between Steel Vault Corporation and PositiveID Corporation
(17) |
|
|
|
|
|
|
10.37 |
|
|
Security Agreement, dated June 4, 2009, between National Credit Report.com, LLC and PositiveID
Corporation (17) |
|
|
|
|
|
|
10.38 |
|
|
Subordination and Intercreditor Agreement, dated June 4, 2009, between Blue Moon Energy Partners
LLC and PositiveID Corporation (17) |
|
|
|
|
|
|
10.39 |
|
|
Common Stock Purchase Warrant, dated June 4, 2009, between Steel Vault Corporation and William J.
Caragol (17) |
|
|
|
|
|
|
10.40 |
|
|
Guaranty of Collection, dated June 4, 2009, among Steel Vault Corporation, William J. Caragol and
PositiveID Corporation (17) |
|
|
|
|
|
|
10.41 |
|
|
Secured Convertible Promissory Note, dated March 20, 2009, between Steel Vault Corporation and
Blue Moon Energy Partners LLC |
|
|
|
|
|
|
10.42 |
|
|
Security Agreement, dated March 20, 2009, between Steel Vault Corporation and Blue Moon Energy
Partners LLC |
|
|
|
|
|
|
10.43 |
|
|
Warrant to Purchase Common Stock of Steel Vault Corporation, dated March 20, 2009, given to Blue
Moon Energy Partners LLC |
|
|
|
|
|
|
10.44 |
|
|
License Agreement, dated September 21, 2009, between PositiveID Corporation and Receptors LLC
(5) |
|
|
|
|
|
|
10.45 |
|
|
Development/Master Agreement, dated September 21, 2009, between PositiveID Corporation and
Receptors LLC (5) |
|
|
|
|
|
|
10.46 |
|
|
Convertible Preferred Stock Purchase Agreement, dated September 29, 2009, between PositiveID
Corporation and Optimus Capital Partners, LLC (18) |
|
|
|
|
|
F-29
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
|
|
10.47 |
|
|
License Agreement, dated October 6, 2009, between PositiveID Corporation and Receptors LLC
(5) |
|
|
|
|
|
|
10.48 |
|
|
Development/Master Agreement, dated October 6, 2009, between PositiveID Corporation and Receptors
LLC
(5) |
|
|
|
|
|
|
10.49 |
|
|
Amended and Restated License Agreement, dated February 26, 2010, between PositiveID Corporation
and Receptors LLC |
|
|
|
|
|
|
10.50 |
|
|
Amended and Restated Development/Master Agreement, dated February 26, 2010, between PositiveID
Corporation and Receptors LLC |
|
|
|
|
|
|
21.1 |
|
|
List of Subsidiaries of PositiveID Corporation |
|
|
|
|
|
|
23.1 |
|
|
Consent of Eisner LLP |
|
|
|
|
|
|
31.1 |
|
|
Certification by Scott R. Silverman, Chief Executive Officer, pursuant to Exchange Act Rules
13A-14(a) and 15d-14(a) |
|
|
|
|
|
|
31.2 |
|
|
Certification by William J. Caragol, Chief Financial Officer, pursuant to Exchange Act Rules
13A-14(a) and 15d-14(a) |
|
|
|
|
|
|
32.1 |
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
|
|
(1) |
|
Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on May
16, 2008. |
|
(2) |
|
Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on
September 8, 2009. |
|
(3) |
|
Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on
October 1, 2009. |
|
(4) |
|
Incorporated by reference to the Form 10-Q previously filed by PositiveID Corporation on
November 14, 2008. |
|
(5) |
|
Incorporated by reference to the Form 10-Q previously filed by PositiveID Corporation on
November 12, 2009. |
|
(6) |
|
Incorporated by reference to the Form 10-K previously filed by PositiveID Corporation on
April 2, 2007. |
|
(7) |
|
Incorporated by reference to the Form 10-K previously filed by PositiveID Corporation on
February 12, 2009. |
|
(8) |
|
Incorporated by reference to the Registration Statement on Form S-8 previously filed by
PositiveID Corporation on November 12, 2009 (Registration No. 333-163066). |
|
(9) |
|
Incorporated by reference to the Form 10-Q previously filed by PositiveID Corporation on May
14, 2009. |
|
(10) |
|
Incorporated by reference to the Form 10-Q previously filed by PositiveID Corporation on
August 8, 2007. |
|
(11) |
|
Incorporated by reference to the Form 10-Q previously filed by PositiveID Corporation on
November 8, 2007. |
|
(12) |
|
Incorporated by reference to the Form 10-Q previously filed by PositiveID Corporation on
August 14, 2008. |
|
(13) |
|
Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on
January 6, 2009. |
|
(14) |
|
Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on March
30, 2009. |
|
(15) |
|
Incorporated by reference to the Registration Statement on Form S-1 previously filed by
PositiveID Corporation on December 29, 2005 (Registration No. 333-130754). |
|
(16) |
|
Incorporated by reference to the Form 10-Q previously filed by PositiveID Corporation on May
15, 2007. |
|
(17) |
|
Incorporated by reference to the Form 10-Q previously filed by PositiveID Corporation on
August 13, 2009 |
|
(18) |
|
Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on
September 29, 2009. |
|
(19) |
|
Incorporated by reference to the Post Effective Amendment No. 1 on Form S-8 to Form S-4
previously filed by PositiveID Corporation on November 12, 2009 (Registration No. 333-161991). |
|
* |
|
Management contract or compensatory plan. |
|
|
|
Confidential treatment has been obtained with respect to certain portions of this exhibit.
Omitted portions have been filed separately with the Securities and Exchange Commission. |
F-30