PositiveID
POSITIVEID Corp (Form: 10-K, Received: 03/25/2011 16:31:12)

Table of Contents

 

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

þ

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

or

o

 

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)

DELAWARE

 

06-1637809

(State or other jurisdiction of incorporation or organization)

 

(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
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $0.01 per share

 

The NASDAQ Stock Market LLC

(Title of each class)

 

(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 o No þ

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 o No þ

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 þ No o

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 o

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 registrant’s 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. o

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):

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer o

 

Smaller reporting company þ

  

 

 

 

(Do not check if smaller reporting company)

 

 

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 registrant’s 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, 2010 was $17,810,617. 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 21, 2011, 37,265,076 shares of our common stock were outstanding.

 

 

 

 


Table of Contents

 

Item

 

Description

 

Page

 

 

 

 

 

 

 

 

Special Note Regarding Forward-Looking Statements

 

 

2

 

 

 

 

 

 

 

 

 

 

Part I

 

 

5

 

 

 

 

 

 

 

 

1.

 

Business

 

 

5

 

 

 

 

 

 

 

 

1A.

 

Risk Factors

 

 

16

 

 

 

 

 

 

 

 

1B.

 

Unresolved Staff Comments

 

 

23

 

 

 

 

 

 

 

 

2.

 

Properties

 

 

23

 

 

 

 

 

 

 

 

3.

 

Legal Proceedings

 

 

23

 

 

 

 

 

 

 

 

 

 

Part II

 

 

24

 

 

 

 

 

 

 

 

5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

 

 

24

 

 

 

 

 

 

 

 

6.

 

Selected Financial Data

 

 

25

 

 

 

 

 

 

 

 

7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

26

 

 

 

 

 

 

 

 

7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

35

 

 

 

 

 

 

 

 

8.

 

Financial Statements and Supplementary Data

 

 

35

 

 

 

 

 

 

 

 

9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

 

35

 

 

 

 

 

 

 

 

9A.

 

Controls and Procedures

 

 

35

 

 

 

 

 

 

 

 

9B.

 

Other Information

 

 

36

 

 

 

 

 

 

 

 

 

 

Part III

 

 

37

 

 

 

 

 

 

 

 

10.

 

Directors, Executive Officers and Corporate Governance

 

 

37

 

 

 

 

 

 

 

 

11.

 

Executive Compensation

 

 

39

 

 

 

 

 

 

 

 

12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

 

43

 

 

 

 

 

 

 

 

13.

 

Certain Relationships and Related Transactions, and Director Independence

 

 

45

 

 

 

 

 

 

 

 

14.

 

Principal Accountant Fees and Services

 

 

47

 

 

 

 

 

 

 

 

 

 

Part IV

 

 

48

 

 

 

 

 

 

 

 

15.

 

Exhibits, Financial Statement Schedules

 

 

48

 

 

 

 

 

 

 

 

 

 

Signatures

 

 

49

 

 

 

 

 

 

 

 

 

 

Index to Consolidated Financial Statements and Financial Schedules

 

 

F-1

 


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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:


·

that the interface between a radio frequency, or RF, powered resonant electromechanical drive and the fluids in the interstitial space of a patient for continuous detection of glucose levels in a patient represents the next evolution in the development of an implantable glucose sensor that relies on passive RF technology to continuously monitor in vivo glucose levels over an extended period of time;

·

that the development of a single-use capsule containing a proprietary chemical reagent may enable us to accelerate the development of the Easy Check breath glucose detection system and produce a prototype device during the third quarter of 2011;

·

that our partnership with Voxiva, Inc. will create an innovative, end-to-end wireless diabetes management solution, which we intend to market beginning in the second half of 2011;

·

that we plan on focusing our marketing efforts on partnering with healthcare providers and exchanges, physician group, Electronic Medical Record system vendors, and insurers to use Health Link as PHR provided to their patients;

·

that we intend to continue to explore strategic transactions with third parties in the healthcare, identification, animal health, and other sectors;

·

our ability to improve diabetics’ lives while helping them manage their healthy glucose levels, thereby decreasing the risk of diabetes-related complications and reducing medical costs;

·

that the successful development and commercialization of our glucose-sensing microchip could negate the need for diabetics to draw blood samples multiple times each day;

·

that Phase II will optimize candidate glucose-sensing systems for sensitivity and selectivity incorporating model matrices into the screen and workflow process and 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;

·

that  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 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;

·

that the wireless handheld scanner could make the VeriMed system an important identification tool for EMT and other emergency personnel outside the emergency room setting, and that the use of the VeriMed system has the potential to improve patient care, enhance productivity and lower costs;

·

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, and that we plan to continue to outsource any manufacturing requirements of our current and under development products;

·

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;

·

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;

·

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;

·

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 patient’s exhaled breath and glucose found in his or her blood and the possible elimination of a patient’s need to prick his or her finger multiple times per day to get a blood sugar reading;

·

that we expect commercial sale of our new 8 millimeter microchips in the second half of 2011;


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·

that we expect to begin sales and or revenue generation from either or both of the iglucose and flu detection system by the end of 2011, and that the revenue streams in 2011 are not expected to be material;

·

that we intend to submit our 510(k) application for iglucose during the second quarter of 2011 to the United States Food and Drug Administration;

·

that based on the Company’s review of the correspondence and evaluation of the supporting detail involving the Canada Revenue Agency audit, it does not believe that the ultimate resolution of this dispute will have a material negative impact on the Company’s historical tax liabilities, its current financial position or results of operations;

·

the expectation that operating losses will continue during the next twelve months, and that until we are able to achieve profits, we intend to continue to try to access the capital markets to fund the development of our HealthID products; and

·

that we believe that with our current working capital, our access to capital under the amended Optimus financing agreement, and through either new capital raised under our shelf registration statement, and/or reducing and delaying certain research, development and related activities, that we will have sufficient funds available to meet our working capital requirements over the next twelve months.


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.  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. Management’s Discussion and Analysis of Financial Condition and Results of Operation” and elsewhere in this Annual Report on Form 10-K and include:


·

our ability to successfully consider, review, and if appropriate, implement other strategic opportunities;

·

our expectation that we will incur losses, on a consolidated basis, for the foreseeable future;

·

our ability to fund our operations and continued development of our products, including the Rapid Flu Detection System, the GlucoChip glucose-sensing microchip, the Easy Check breath glucose detection system and the iglucose wireless communication system;

·

our ability to complete the Phase II of the Rapid Flu Detection System and Phase II of the glucose-sensing microchip development program;

·

our ability to pursue our strategy to offer identification tools and technologies for consumers and businesses;

·

our ability to maximize the amount of capital that we will have available to pursue business opportunities in the healthcare sector;

·

our ability to successfully develop and commercialize the Easy Check 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;

·

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;

·

we may become subject to costly product liability claims and claims that our products infringe the intellectual property rights of others;

·

our ability to comply with current and future regulations relating to our businesses;

·

our ability to successfully consider, review, and if appropriate, implement other strategic opportunities;

·

our ability to continue listing our common stock on the Nasdaq Stock Market;


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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 party’s 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;

·

our ability to provide uninterrupted, secure access to the Health Link, NationalCreditReport and VeriMed databases; and

·

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.




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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 businesses 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 2009 when the escrow was settled.  

Following the completion of the sale of Xmark to Stanley Canada Corporation, we retired all of our outstanding debt for a combined payment of $13.5 million and settled all contractual payments to Xmark’s 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 Corporation and Destron Fearing Corporation, a wholly-owned subsidiary of Digital Angel Corporation, which collectively are referred to as, “Digital Angel.” The terms of the APA included our purchase 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. We also received covenants from Digital Angel and Destron Fearing that will permit the use of intellectual property of Digital Angel related to our health care business without payment of ongoing royalties, as well as inventory and a limited period of technology support by Digital Angel. We 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, we, 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 our wholly-owned subsidiary (the “Merger”). Upon the consummation of the Merger, each outstanding share of Steel Vault’s common stock, warrants and options was converted into 0.5 shares of our common stock, warrants and options. 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, which included the Easy Check breath glucose detection system and the iglucose wireless communication system. These products are currently under development. 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.

In 2010 and 2011, we entered into financing transactions pursuant to which we offered shares of our Preferred Stock.  Please see “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources, ” for more information regarding these transactions.

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 PositiveID Corporation and its consolidated subsidiaries.

VeriChip, Health Link, VeriMed, VeriTrace, and NationalCreditReport.com are our registered trademarks. GlucoChip, iglucose , Wireless Body and Easy Check are our trademarks. This Annual Report on Form 10-K contains trademarks and trade names of other organizations and corporations.


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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 SEC’s 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 in the healthcare market for the identification of people. Beginning in the fourth quarter of 2009, with the acquisition of Steel Vault, we focused our strategy to provide unique health and security identification tools to protect consumers and businesses, operating in two key segments: HealthID and ID Security. Beginning in early 2011, we ceased acquiring new subscribers to our identity security and credit reporting businesses and, accordingly, we anticipate that our revenues from this segment in 2011 will decline significantly from 2010 amounts. Beginning in early 2011 we have further focused our strategy on the growth of our HealthID segment, including the continued successful development of our GlucoChip, our Easy Check breath glucose measurement device, our iglucose wireless system, and potential strategic acquisition opportunities of businesses that are complimentary to our HealthID business.

HealthID Segment

Our HealthID segment is currently focused on the development of four products: (1) the GlucoChip, a glucose-sensing microchip, based on our proprietary intellectual property, which is being developed in conjunction with Receptors LLC (“Receptors”), (2) iglucose , a stand-alone, self-contained unit that automatically queries a diabetic user’s data-capable glucometer for blood glucose data and sends that data via encrypted text messaging to the iglucose online database, (3) Easy Check, a non-invasive breath glucose detection system, based on the correlation of acetone in exhaled breath to blood glucose levels, and (4) the rapid flu detection system, also being developed in conjunction with Receptors.

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 ("FDA") cleared our VeriMed system for use in medical applications in the United States.  The Company has not actively marketed its VeriMed system since early 2008.

HealthID Segment – Recent Developments

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.

In February 2010, we successfully completed Phase I development of our rapid virus detection system, a non-invasive, point-of-care test to test patient samples and identify various forms of influenza within minutes. In Phase I development of the virus detection system, which utilizes our exclusively licensed Receptors’ CARA™ (Combinatorial Artificial Receptor Array) platform, we 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. The fluorescently labeled competitor agents compete for binding to the CARA support surface. When competitor agents are displaced from the CARA surface by virus, a fluorescent signal is produced. Model nasal wash samples that contain influenza are distinguished from samples that do not contain influenza. We are currently evaluating several strategies to pursue and monetize the development of the rapid influenza detection system during 2011.

In March 2010, we filed with the U.S. Patent and Trademark Office a non-provisional patent application for our iglucose system, currently under development, which uses wireless text messaging to automatically communicate a diabetic patient’s blood glucose levels from any data-capable glucose meter to an online database.

In April 2010, we amended our Development/Master Agreement with Receptors to document the terms of Phase II development of our rapid flu detection system. We agreed to pay Receptors $160,000 and issue it 240,000 shares of restricted common stock, of which Receptors has registration rights, in exchange for completion of Phase II.   The goal of Phase II is to develop a prototype unit that can sub-type the influenza virus at the point of care.

In May 2010, we filed a provisional patent application with the U.S. Patent and Trademark Office covering the interface between a radio frequency, or RF, powered resonant electromechanical drive and the fluids in the interstitial space of a patient for continuous detection of glucose levels in a patient. The interface employs a resonant electromechanical drive for mass sensing and RF communication of glucose levels. We believe this new interface represents the next evolution in the development of an implantable glucose sensor that relies on passive RF technology to continuously monitor in vivo glucose levels over an extended period of time.


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In June 2010, we completed the development of a single-use capsule containing a proprietary chemical reagent that we are anticipating may enable us to accelerate the development of the Easy Check breath glucose detection system and produce a prototype device during the third quarter of 2011.

In July 2010, we announced the completion of the design of our lab prototype handheld Easy Check Breath Glucose Detection Device, which development was completed during 2010. The small unit, measuring approximately 5.5 inches by 4.5 inches, utilizes a single-use capsule containing a proprietary reagent that triggers a chemical reaction that can be immediately measured and correlated to blood glucose levels.

In August 2010, we filed a provisional patent application with the U.S. Patent and Trademark Office for an insulin pen tracking and recording device. The Insulin Tracker, a microprocessor-controlled device that slides onto standard insulin pens, enables diabetes patients to automatically track and record the amount of insulin they inject, including the time and date of each injection. The data is communicated from the Insulin Tracker's memory, along with the patient's blood glucose readings from their glucometer, to the iglucose database. The combined data can provide a more complete record of blood glucose measurements, treatments and overall diabetes management and allows patients, caregivers and physicians to monitor compliance.

In September 2010, we announced that we initiated a research study with the Diabetes Research Institute ("DRI") at the University of Miami for our glucose-sensing microchip. The study, anticipated to begin in early 2011, will examine the biocompatibility and functionality of a semi-permeable membrane to be used in our GlucoChip. The study is the next step in our development, which will run in parallel to our continued laboratory testing of the glucose sensor in blood and interstitial fluid.

In November 2010 and February 2011, we amended our Amended and Restated Development/Master Agreement with Receptors to document further development of Phase II of our in vivo glucose sensor.  In connection therewith, we agreed to pay Receptors $60,000 and issued an additional 250,000 shares of common stock in connection with further Phase II development of an in vivo glucose sensor.

In November 2010, we announced a partnership with Voxiva, Inc. to integrate our wireless iglucose system with Voxiva’s care4lifeSM diabetes management program. We believe this will create an innovative, end-to-end wireless diabetes management solution, which we intend to market beginning in the second half of 2011.

In November 2010, we announced the launch of the the “Wireless Body” at the ID WORLD International Congress in Milan, Italy. The “Wireless Body” is an integrated, in vivo and external, smart healthcare communication system for diabetes management today and other disease management applications in the future.

In November 2010, we announced the expansion of our Wireless Body platform to include a new bio-sensor application for temperature through a partnership with RFID Solutions of Malaga, Spain to develop a temperature-sensing microchip to continuously measure temperature from within the body and communicate that reading to an external scanner.

On February 24, 2011, we issued 200,000 shares of our common stock to Easy Check Medical Diagnostics, LLC, or Easy Check, to amend the Asset Purchase Agreement, dated February 24, 2010, with Easy Check.  Prior to the amendment, we would issue 100,000 shares of common stock to Easy Check for each utility patent application grated by the Patent and Trademark Office.  The amendment caps the number of shares issuable for the patents to an aggregate of 200,000 shares of common stock and adds an additional patent application to the list. In addition, the royalties payable to Easy Check for the iglucose product and Easy Check product were reduced from 25% to 10%.  

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 (“PHR”) business. Our NationalCreditReport.com business was acquired in conjunction with our merger with Steel Vault in November 2009.  Our NationalCreditReport.com business 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 PHR business. We plan to focus our marketing efforts on partnering with health care providers and exchanges, physicians group, Electronic Medical Record (“EMR”) system vendors, and insurers to use Health Link as PHR provided to their patients.  

In September 2010, we agreed to sell our Health Link personal health record business for $1 million to Health Plexus, LLC. In November 2010, we made the decision to terminate those discussions.

Beginning in early 2011, in conjunction with our focus on our HealthID businesses, including the development of the GlucoChip, the Easy Check breath glucose detection system, and the iglucose wireless communication system, we have limited our activities in our ID Security segment. Beginning in early 2011, we ceased acquiring new subscribers to our identity security and credit reporting businesses and, accordingly, we anticipate that our revenues from this segment in 2011 will decline significantly from 2010 amounts. Additionally, related costs to acquire such subscribers will also decline accordingly. However, we may continue to recruit and sell such customer acquisitions to third parties.

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Our Businesses

Healthcare Products

Our Healthcare Products include the Gluco-Chip, a product that combines a glucose-sensing microtransponder based on our patent number 7,125,382 entitled “Embedded Bio-Sensor System” with an in-vivo glucose sensor. 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. The glucose sensor is intended to be coupled with our microchip to read blood glucose levels through an external scanner. According to the 2011 National Diabetes Fact Sheet, 25.8 million children and adults in the United States, or 8.3 percent of the population, have diabetes. Furthermore, about 1.9 million people aged 20 years or older were newly diagnosed with diabetes in 2010 in the United States. 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.

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 or PCR format, 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 and more than 200,000 people are hospitalized from seasonal  flu-related complications. Over a period of 30 years, between 1976 and 2006, estimates of flu-related deaths range from a low of about 3,000 to a high of about 49,000 people

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. This acquisition included two 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 patient’s 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 Check’s breath glucose detection system combines a proprietary chemical mixture of sodium nitroprusside 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 patient’s exhaled breath and glucose found in his or her blood. This could eliminate a patient’s need to prick his or her finger multiple times per day to get a blood sugar reading.

Our third diabetes management product under development, the iglucose system, uses wireless text messaging to automatically communicate a diabetic’s 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 automatically maintain glucose level logs and records for the millions of high-frequency diabetes patients. We intend to submit our 510(k) application for iglucose during the second quarter of 2011 to the United States Food and Drug Administration for clearance.


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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. The VeriChip is a passive RFID microchip, approximately the size of a grain of rice, which is implanted under the skin in a patient’s upper right arm under the supervision of a physician. The capsule is coated with a polymer, BioBond TM to form adherence to human tissue, thereby preventing migration in the body. Each microchip contains a unique 16-digit identification number. With that identification number, emergency room personnel or EMTs can securely obtain from our or a third party’s database the patient’s pre-approved information, including the patient’s name, primary care physician, emergency contact information, advance directives and, if the patient elects, other pertinent data, such as personal health records. We have not actively marketed the VeriMed system since early 2008.

Identity Security Products and Services

National Credit Report.com, LLC, or NCRC, is engaged 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.

 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 subscriber’s 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.   Beginning in early 2011, we ceased acquiring new subscribers for our identity security and credit reporting businesses.

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 individual’s 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.

According to Manhattan Research, LLC, a healthcare marketing services firm, 68% 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 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 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.

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 Medcomp’s 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.


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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.

Manufacturing; Supply Arrangements

We have historically outsourced the manufacturing of all the hardware components of our systems to third parties. As of March 21, 2011, 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.

Our products under development include Patent No.  7,125,382 for an “Embedded Bio-Sensor System,” as well as four patents pending covering the following: (i) our Easy Check breath glucose detection device, (ii) our iglucose system, (iii) our Insulin Tracker insulin pen tracking and recording device, and (iv) the interface between a radio frequency powered resonant electromechanical drive and the fluids in the interstitial space of a patient for continuous detection of glucose levels in a patient.  Furthermore, we entered into a license agreement with Siemens AG granting us rights to utilize Siemens’ Patent No. 7,650,888, entitled "Method and System for Identification of a Medical Implant" using RFID.  We also trademarked the PositiveID, Easy Check, GlucoChip, iglucose and Wireless Body names.  During 2009 and 2010, we expensed $1.4 million and $0.4 million related to research and development and expect to continue such expenditures for the foreseeable future.

Our VeriMed product is a Class II medical device.  We expect that each of our diabetes management products will also require FDA clearance.  We expect to file a 510(k) application with the FDA related to our first product to market, iglucose , during the second quarter of 2011.

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.


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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 FCC’s 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 FCC’s 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.

Manufacturers of RFID devices must submit testing results and/or other technical information demonstrating compliance with the FCC’s 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 FCC’s 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 FDA designated the VeriMed system as a Class II medical device for patient identification and health information purposes. Subject to the FDA’s regulation and 2004 guidance document referenced below, the FDA permits us to market and sell the VeriMed system in the United States for these intended uses.

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 FDA’s 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:


·

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;

·

labeling regulations and FDA prohibitions against the promotion of regulated products for uncleared, unapproved or off-label uses;

·

clearance or approval of product modifications that could significantly affect safety or effectiveness or that would constitute a major change in intended use;

·

medical device reporting, or MDR, regulations, which require that a manufacturer report to the FDA if the manufacturer’s 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

·

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

If we decide to acquire new subscribers in the future, we may decide to market our ID Security products and services through a variety of marketing channels, including through 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 Commission’s CAN-SPAM Act, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, 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 to, the provision of an opt-out link which gives the consumers the option to opt out of further email communications from a company. Violations of the CAN-SPAM Act can result in criminal and civil penalties. 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 FTC’s regulations must, among other things, provide notices to customers about the entity’s privacy policies and practices as well as information on disclosure of information, and informing consumers of their rights to opt out of certain practices.

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. 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 we may decide to engage to market our 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.

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

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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 civil or criminal  liability and adverse publicity and could harm our business and impair our ability to attract new customers.

U.S. Federal Trade Commission Oversight

An increasing focus of the United States Federal Trade Commission’s (FTC’s) consumer protection regulation is the impact of technological change on protection of consumer privacy. Under the FTC’s 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

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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.

In 2009, the FTC issued rules requiring vendors of personal health records to notify customers of any breach of unsecured, individually identifiable health information.  Also, a third party service provider of such vendors or entities that experiences a breach must notify such vendors or entities of the breach.  If we experience a breach of our systems containing personal health records, we will be required to provide these notices and may be subject to penalties.  Violations of these requirements may be prosecuted by the FTC as an unfair or deceptive act or practice.

State Legislation

The states of California, North Dakota, Wisconsin and Oklahoma have adopted laws prohibiting chip implantation without the recipient’s prior consent, and a number of states have introduced similar legislation. 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 Arkansas, California, Michigan, Minnesota, Nevada, New Hampshire, Rhode Island, Texas, Vermont, Virginia 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, 2010, 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 certain 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 affected 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.

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 EU’s 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

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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, 2010, none of these recommendations restricts our current or planned operations.

Health Insurance Portability and Accountability Act of 1996 and the Health Information Technology for Economic and Clinical Health Act of 2009

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 and our other legal obligations. 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 March 21, 2011, we had 18 employees, of whom 10 were in management, finance and administration, 7 in medical and business development, and 1 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.


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ITEM 1A. RISK FACTORS

The following risks and the risks described elsewhere in this Annual Report on Form 10-K, including the section entitled “Management’s 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.   

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.

For the year ended December 31, 2010, PositiveID has experienced operating losses of $15.9 million and its accumulated deficit at December 31, 2010 was $69.6 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.

PositiveID s 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.

PositiveID’s long-term capital needs may require additional sources of equity or credit. There can be no assurances any future Optimus tranches will close or that it will be successful in negotiating additional sources of equity or credit for its long-term capital needs. PositiveID’s 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.

PositiveID has failed to meet applicable Nasdaq Stock Market requirements and as a result 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.

On September 13, 2010, PositiveID received a letter from the Nasdaq indicating that PositiveID is not in compliance with the Nasdaq’s requirements for continued listing because, for the 30 consecutive business days prior to September 13, 2010, the bid price of its common stock closed below the minimum $1.00 per share price requirement for continued listing under Nasdaq Listing Rule 5550(a)(2) (the “Rule”).  PositiveID had 180 calendar days (or until March 14, 2011) to regain compliance with the bid price requirement.

On March 15, 2011, PositiveID received a letter from the Nasdaq staff  notifying PositiveID of a staff determination that PositiveID has not regained compliance with the $1.00 per share minimum bid price requirement set forth in the Rule and that based on PositiveID’s financial statement information as of September 30, 2010 (i.e., the date of PositiveID’s most recent periodic report filed with the SEC), it was not eligible, in accordance with Listing Rule 5810(c)(3)(A)(ii), for a second 180-calendar day cure period with respect to the bid price deficiency.  To be eligible for the additional 180-calendar day cure period, PositiveID would have had to meet the applicable standards for initial listing on The Nasdaq Capital Market (except the bid price requirement) based on its most recent public filings.  The March 15, 2011 letter notes that PositiveID’s stockholders’ equity as of September 30, 2010 of $4,697,000 does not meet the $5 million initial listing requirement for The Nasdaq Capital Market.

 Nasdaq has advised PositiveID that it may appeal the Nasdaq staff's determination to a Nasdaq Hearings Panel (the "Panel") in accordance with the procedures set forth in the Nasdaq Listing Rule 5800 Series. The filing of the appeal will automatically stay any delisting procedures until after a hearing and the determination of the Panel. PositiveID requested a hearing on March 21, 2011, in accordance with applicable Listing Rules, and the hearing is currently scheduled for April 28, 2011.  At the hearing, PositiveID will present a plan to regain compliance with the bid price requirement to the Panel and request that the Panel grant PositiveID an exception to Nasdaq’s continued listing standards for a sufficient period to implement that plan.  Under Listing Rule 5815(c)(1), the Panel has the discretion to grant such an exception for a period not to exceed 180 days from the date of the staff determination letter – that is, on or about September 15, 2011. There can be no assurance that the Panel will accept PositiveID’s compliance plan or grant PositiveID’s request for continued listing.

If PositiveID’s 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 PositiveID’s business and may hinder or delay its ability to consummate potential strategic transactions or investments. Such delisting could also adversely affect PositiveID’s 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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Future sales of capital stock may cause our stock price to fall , including sales of shares to Optimus Technology Capital Partners, LLC (“Optimus”) pursuant to the Amended and Restated Convertible Preferred Stock Purchase Agreement (the “Amended Purchase Agreement”) and the resale of such shares by Optimus.

The market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market, or the perception that these sales could occur. These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate. As of March 21, 2011 2010, we had 37,265,076 shares of common stock outstanding (which includes 4,338,000 unvested shares of restricted stock granted to our employees), and we had warrants to purchase 304,000 shares of common stock and options to purchase 3,216,492 shares of common stock outstanding. All of the shares of common stock issuable upon exercise of our outstanding warrants and any vested options will be freely tradable without restriction under the federal securities laws unless purchased by our affiliates.  

In addition, pursuant to the Amended Purchase Agreement, we may sell to Optimus up to an additional $4.0 million of our shares of Series C Preferred Stock, which are convertible into our common stock.  The shares of common stock Optimus receives under the Amended Purchase Agreement are freely tradable and Optimus may promptly sell the shares we issue to them in the public markets. Such sales, and the potential for such sales, could cause the market price of our shares to decline significantly. To the extent of any such decline, any subsequent draw downs that we request under the Amended Purchase Agreement would require the issuance of a greater number of shares to Optimus. This may result in significant dilution to our stockholders.

We do not anticipate declaring any cash dividends on our common stock .

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. In addition, our Amended Purchase Agreement with Optimus prohibits the payment of cash dividends on any of our capital stock except shares of Series C Preferred Stock while any shares of Series C Preferred Stock are outstanding.

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, PositiveID’s 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. PositiveID’s 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 PositiveID’s 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.

PositiveID’s 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 PositiveID’s 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. PositiveID’s ability to attract and retain highly skilled personnel will be a critical factor in determining whether we will be successful in the future.

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.


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Directors, executive officers, principal stockholders and affiliated entities own a significant percentage of PositiveID’s capital stock, and they may make decisions that you do not consider to be in the best interests of its stockholders.

As of March 21, 2011, PositiveID’s current directors and executive officer beneficially owned, in the aggregate, approximately 41% of PositiveID’s 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 PositiveID’s 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 PositiveID’s 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 DESIGN TM CARA TM 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 PositiveID’s business, results of operations, and financial condition.

PositiveID’s 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, PositiveID’s 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.

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 PositiveID’s 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;


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·

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 DESIGN TM CARA TM 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;

·

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, GlucoChip, which is 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.


PositiveID anticipates future losses and may require additional financing, and PositiveID’s failure to obtain additional financing when needed could force PositiveID to delay, reduce or eliminate PositiveID’s 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. PositiveID’s 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.

PositiveID’s future capital requirements will depend on many factors, including: the costs of expanding PositiveID’s 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 PositiveID’s 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 PositiveID’s general and administrative expenses.

PositiveID’s 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. PositiveID’s 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; PositiveID’s 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.

PositiveID’s industry changes rapidly as a result of technological and product developments, which may quickly render PositiveID’s 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.


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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 PositiveID’s product candidates are not accepted by the market as anticipated, if at all, PositiveID’s business, operating results, and financial condition may be materially and adversely affected.

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 competitor’s 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. PositiveID’s financial performance may be negatively impacted if a competitor’s 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 Xmark’s 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. PositiveID’s remaining business, the VeriMed business, is not deemed to compete with Xmark’s business. However, the non-compete provisions will restrict its ability to engage in any business that competes with Xmark’s business until July 2012.

Industry and Business Risks Related to Our ID Security Business

If PositiveID loses its ability to purchase data from a credit data reseller, some of which are PositiveID’s 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 PositiveID’s relationship with its credit data reseller, or one or more of the three credit reporting repositories would be disruptive to PositiveID’s business and could cause PositiveID to lose subscribers.

PositiveID’s competitors, including those who have greater resources and experience than PositiveID has, may commercialize technologies that make PositiveID’s obsolete or noncompetitive.

There are many public and private companies, actively engaged in PositiveID’s line of business and that target the same markets that it targets. Some of PositiveID’s 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 PositiveID’s competitors market products that are more effective and less expensive than its products, PositiveID may not be able to achieve commercial success.


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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 21, 2011, substantially all of PositiveID’s health care products were under development and had generated only nominal revenue. It may never achieve market acceptance or more than nominal or modest sales of these products and systems.

PositiveID is currently focused on the development of the glucose sensing microchip and the development of other sensor applications, its iglucose and Easy Check systems, 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 PositiveID’s implantable microchip may be found to cause risks to a person’s health, which could adversely affect sales of its systems that incorporate the implantable microchip.

The implantation of PositiveID’s implantable microchip may be found, or be perceived, to cause risks to a person’s 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. If more people are implanted with PositiveID’s implantable microchip, it is possible that these and other risks to health will manifest themselves. Actual or perceived risks to a person’s 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 PositiveID’s 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 PositiveID’s 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, PositiveID’s Health Link PHR or its VeriMed patient information database may damage its reputation and expose PositiveID to litigation or government penalties.

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 PositiveID’s database fails or someone is successful in hacking into the database, it could face damage to its business reputation and litigation. To the extent that inadequate firewalls or hacking results in a compromise of security of protected health information that PositiveID may hold as a “business associate” under the Health Insurance Portability and Accountability Act, or HIPAA, PositiveID could be subject to government fines and penalties.

Regulation of products and services that collect personally-identifiable information or otherwise monitor an individual’s activities may make the provision of PositiveID’s 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 PositiveID’s business. In the U.S., these laws include HIPAA, the Health Information Technology for Economic and Clinical Health Act, 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

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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. PositiveID’s failure to protect health information received from customers could subject it to liability, government penalties, 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 PositiveID’s 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. PositiveID’s 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.

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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 occupied the space pursuant to a sublease, which expired on June 30, 2010, at which point our lease for the property commenced and now expires on October 1, 2015.

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 Company’s business, financial condition and operating results.



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PART II

ITEM 5. MARKET FOR REGISTRANT’S 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 Company’s 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, 2010

 

High

 

 

Low

Quarter ended December 31, 2010

 

$

0.75

 

 

$

0.50

Quarter ended September 30, 2010

 

$

1.37

 

 

$

0.63

Quarter ended June 30, 2010

 

$

1.58

 

 

$

0.91

Quarter ended March 31, 2010

 

$

1.99

 

 

$

0.98

 

 

 

 

 

 

 

 

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


Holders

According to the records of our transfer agent, as of March 21, 2011, there were approximately 41 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.

Equity Compensation Plan Information

The following table presents information regarding options and rights outstanding under our compensation plans as of December 31, 2010:

 

 

 

 

 

 

 

 

 

 

(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

 

 

2,903,370

 

 

$

1.50

 

 

 

1,613,519

 

Equity compensation plans not approved by security holders (2)

 

 

313,122

 

 

$

6.83

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

3,216,492

 

 

$

2.02

 

 

 

1,613,519

 

 

 

 

 

 

 

 

 

 

 


(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, 2010.

(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.


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Sales of Unregistered Securities

On February 11, 2010, we purchased the assets of Easy Check Medical Diagnostics, LLC, which was comprised of the intellectual property related to the Easy Check breath analysis system and the iglucose wireless communication system.  We issued 300,000 shares of common stock in connection with the purchase.

On March 15, 2010, April 22, 2010, and December 13, 2010, we issued 50,000, 240,000 and 125,000 shares, respectively, of our common stock to Receptors as consideration for services under the terms of the Amended and Restated Development/Master Agreement, dated February 26, 2010, as amended, between us and Receptors.

On April 30, 2010, we issued 16,000 shares of our common stock to Artemis Strategies, LLC, as consideration for services under the terms of a Service Contract between us and Artemis pursuant to which Artemis would pursue certain government affairs objectives.

On July 26, 2010, we issued 25,000 shares of our common stock to Sanford Barrows Group, LLC, as consideration for recruiting services provided to us.

On September 20, 2010, we issued 12,500 shares of our common stock to Kaufman Bros., L.P., as consideration for general financial advisory services and financial analyses.

We made the foregoing stock issuances in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.

ITEM 6. SELECTED FINANCIAL DATA

As a “Smaller Reporting Company,” we are not required to provide the information required by this item.


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ITEM 7. MANAGEMENT’S 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 Corporation (“Steel Vault”), we focused our strategy to provide unique health and security identification tools to protect consumers and businesses, operating in two key segments: HealthID and ID Security.  Beginning in early 2011, we have further focused our strategy on the growth of our HealthID segment, including the continued successful development of our GlucoChip, our Easy Check breath glucose measurement device, our iglucose wireless system, and potential strategic acquisition opportunities of businesses that are complimentary to our HealthID business.  

HealthID Segment

Our HealthID segment is currently focused on the development of four products: (1) the GlucoChip, a glucose-sensing microchip, based on our proprietary intellectual property which is being developed in conjunction with Receptors LLC (“Receptors”), (2) iglucose TM , a stand-alone, self-contained unit that automatically queries a diabetic user’s date-capable glucometer for blood glucose data and sends that data via encrypted text messaging to the iglucose online database, (3) Easy Check TM , a non-invasive breath glucose detection system, based on the correlation of acetone in exhaled breath to blood glucose levels, and (4) the rapid flu detection system, also being developed in conjunction with Receptors.

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 ("FDA") cleared our VeriMed system for use in medical applications in the United States. We have not actively marketed the VeriMed system since early 2008.

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 (“PHR”) business. Our 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 PHR business. The Company planned on focusing its marketing efforts on partnering with health care providers and exchanges, physicians group, Electronic Medical Record (“EMR) system vendors, and insurers to use Health Link as PHR provided to their patients.

Beginning in early 2011, in conjunction with our focus on our HealthID businesses, including the development of the GlucoChip, the Easy Check breath glucose detection system, and iglucose wireless communication system, we have limited our activities in our ID Security segment.  In early 2011, we ceased acquiring new subscribers to our identity security and credit reporting businesses and, accordingly, we anticipate that our revenues from this segment in 2011 will decline significantly from 2010 amounts. Additionally, related costs to acquire such subscribers will also decline accordingly. However, we may continue to recruit and sell such customer acquisitions to third parties.

For recent developments in our HealthID Segment and ID Security Segment, please see, Item 1. Business - Overview .


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Beginning in the fourth quarter of 2009, with the Steel Vault merger, the Company operates in two key segments: HealthID and ID Security. The following are the segment results for the years ended December 31, 2010 and 2009.


 

For the Year Ended

 

 

 

December 31, 2010

 

 

 

HealthID

 

 

ID Security

 

Total

 

 

 

 

 

 

 

 

 

 

Revenue

$

75

 

 

$

3,018

 

 $

3,093

Cost of sales

 

45

 

 

 

918

 

 

963

Gross profit/loss

 

30

 

 

 

2,100

 

 

2,130

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

8,993

 

 

 

6,093

 

 

15,086

Research and development

 

1,394

 

 

 

 

 

1,394

Impairment of goodwill attributed to ID Security Segment

 

 

 

 

1,600

 

 

1,600

 

 

 

 

 

 

 

Total operating expenses

 

10,387

 

 

 

7,693

 

 

18,080

 

 

 

 

 

 

 

Operating loss

 

(10,357)

 

 

 

(5,593)

 

 

(15,950)

 

 

 

 

 

 

 

Interest / other income and (expense), net

 

30

 

 

 

4

 

 

34

 

 

 

 

 

 

 

Loss from continuing operations

$

(10,327)

 

 

$

(5,589)

 

(15,916)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Impairment of goodwill attributed to ID Security Segment

 

 

 

 

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.  The results of operations described below include the operation of Steel Vault’s subsidiary, National Credit Report.com, LLC, from the point of the merger.

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HealthID Segment

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Revenue

Revenue was $75,000 for the year ended December 31, 2010 compared to $162,000 for the year ended December 31, 2009. The revenue in 2010 and 2009 was attributable primarily to the sale of our new 8 millimeter microchips to a medical device company for testing purposes in support of their FDA approval process.  Based on information provided by that company related to the FDA approval process and commercial launch of the medical device that includes our microchip, we expect limited initial sales of the 8 millimeter microchips in the second half of 2011.  We currently have four products under development and expect to begin sales and or revenue generation from either or both of iglucose and the flu detection system by the end of 2011.  We do not anticipate that the revenue streams in 2011 will be material.

Gross Profit and Gross Profit Margin

Our cost of sales consists of finished goods and inventory valuation charges. We had a gross profit of $30,000 in 2010 compared to a gross profit of $108,000 in 2009.  The decrease was the result of decreased sales of microchips from 2009 to 2010 as we await FDA authorization from our medical device partner.

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 increased by $3.7 million to $9.0 million for the year ended December 31, 2010 compared to $5.3 million for the year ended December 31, 2009. This increase was primarily a result of increase of costs resulting from equity based compensation of $3.6 million from 2009 to 2010. For the years ended December 31, 2010 and 2009, we incurred stock-based compensation expense of $5.1 million and $1.5 million, respectively.

Selling, general and administrative expense included depreciation and amortization expense of approximately $30,000 and $29,000 for the years ended December 31, 2010 and 2009, respectively.

Research and Development

Our research and development expense consists primarily of costs associated with the GlucoChip, Easy Check, iglucose and rapid flu projects, including scientific research, testing, developing prototypes and demonstration units, and related expenses. Research and development expense was $1.4 million for the year ended December 31, 2010 compared to $0.4 million for the year ended December 31, 2009. Our research and development costs represent payments to our project partner and acquisition of in process research and development.

Research and development expense included share based compensation of approximately $0.6 million and $0.2 million for the years ended December 31, 2010 and 2009, respectively.

ID Security Segment

The 2009 ID Security segment reflects the results of National Credit Report.com, LLC from the merger with Steel Vault on November 10, 2009.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Revenue

Revenue for the year ended December 31, 2010 was $3.0 million as compared to revenue of $191,000 for the year ended December 31, 2009.  During 2010 the number of subscribers to our NationalCreditReport.com business increased by approximately 4,700 from 9,500 at December 31, 2009 to 14,200 at December 31, 2010.

Beginning in early 2011, in conjunction with our focus on our HealthID businesses, including the development of the GlucoChip, the Easy Check breath glucose detection system, and iglucose wireless communication system, we have limited our activities in our ID Security segment.  In early 2011, we ceased acquiring new subscribers to our identity security and credit reporting businesses.


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Gross Profit and Gross Profit Margin

ID Security cost of sales was $918,000 in 2010 compared to $40,000 in 2009. We had a gross profit of $2.1 million in 2010 compared to $151,000 in 2009 from our identity security products through our NationalCreditReport.com business. The increase was the result of a full year of operations of our NationalCreditReport.com business and the increase in number of subscribers.

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, 2010 was $6.1 million as compared to $0.5 in 2009. Selling costs in the ID Security segment are primarily variable costs driven by the cost of customer acquisition.  Depreciation and amortization expense was approximately $1.4 million and $2,000 for the year ended December 31, 2010 and 2009, respectively.

Impairment of goodwill

Based on an assessment underlying the preliminary purchase price allocation that we performed 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, we 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. Based on an assessment made as of December 31, 2010, which compared the estimate of net realizable value to the carrying value of all intangibles, we recorded a goodwill impairment charge of $1.6 million in December 2010.

Liquidity and Capital Resources

As of December 31, 2010, cash totaled $1.8 million compared to cash of approximately $6.4 million at December 31, 2009.

Cash Flows Used in Operating Activities

Net cash used in operating activities totaled $7.2 million and $5.0 million during the years ended December 31, 2010 and 2009, respectively. In 2010 and 2009, cash was used to fund operating losses resulting from the Company’s continued development of its products including GlucoChip, Easy Check, iglucose , and rapid flu detection. Operating losses are also due to salary costs, consulting fees, legal, accounting and other general and administrative costs. In 2009, cash was also used to fund the payment of accounts payable and accrued expenses.

Cash Flows from Investing Activities

Investing activities (used) provided cash of $(29,000) and $4.5 million during the years ended December 31, 2010 and 2009, respectively. In 2009 the cash provided by investing activities included proceeds from the sale of Xmark of $4.4 million.

Cash Flows from Financing Activities

Financing activities provided cash of $2.6 million and $3.7 million during the years ended December 31, 2010 and 2009, respectively. Cash provided by financing activities in 2010 was a result of the sale of preferred stock to Socius pursuant to a preferred stock purchase agreement, further discussed below, and exercised stock options of $0.4 million.  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.

Optimus Stock Offering

On September 29, 2009, the Company entered into a Convertible Preferred Stock Purchase Agreement (the “Purchase Agreement”) with Optimus Technology Capital Partners, LLC (“Optimus”) under which Optimus was 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.

To facilitate the transactions contemplated by the Purchase Agreement, R & R Consulting Partners, LLC, a company controlled by Scott R. Silverman, the Company’s 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, cannot 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


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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 as is further discussed below.

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 Series A 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 Series A 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.

On May 12, 2010, R & R demanded the return of 2.7 million shares loaned to Optimus.  Also on May 12, 2010, the Company sent Optimus a notice of its election to convert all of the outstanding shares of Series A Preferred Stock into 2,729,452 shares of Company common stock.  Optimus returned these shares to R & R in repayment of the loan. The conversion of the Series A Preferred Stock was determined by a fixed conversion price that was determined at the time of the closings of the Preferred Stock which were approximately $3.07 and $1.60, respectively. The Company was required to issue make-whole shares to Optimus equal to 35% of the Series A Liquidation Value ($10,000 per share of Series A Preferred Stock) because the Preferred Stock was redeemed prior the first anniversary of the issuance date.  On October 13, 2010, the Company filed a Certificate of Elimination with the Secretary of State of the State of Delaware effecting the elimination of the Certificate of Designation of Preferences, Rights and Limitations of Series A Preferred Stock.  No shares of the Series A Preferred Stock remain outstanding.

On March 14, 2011, the Company entered into an Amended and Restated Convertible Preferred Stock Purchase Agreement (the “Amended Purchase Agreement”) with Optimus.   The Amended Purchase Agreement amends and restates the Purchase Agreement, and, among other things, specifically (i) replaces the Series A Preferred Stock issuable under the Purchase Agreement with a Series C Preferred Stock with substantially similar terms, and (ii) reduces the maximum amount of preferred stock issuable to Optimus under the Purchase Agreement from $10,000,000 to $8,700,000, of which $4,700,000 worth was already issued (in 2009) under the Purchase Agreement as described above.  

 Under the terms of the Amended Purchase Agreement, from time to time and at the Company’s sole discretion, the Company can present Optimus with a notice to purchase shares of the Series C Preferred Stock (the “Notice”).   Optimus is obligated to purchase such Series C Preferred Stock on the twentieth 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 Amended Purchase Agreement are true and correct as if made on each tranche date, and (iii) that no such purchase would result in Optimus and its affiliates beneficially owning more than 9.99% of the Company’s common stock. In the event the closing bid price of the Company’s common stock during any one or more of the nineteen 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.  

On March 14, 2011, the Company delivered a Notice to Optimus to sell 140 shares of its Series C Preferred Stock for a tranche amount of approximately $1.4 million, which tranche is expected to close on or about April 12, 2011.   In support of this tranche, R & R loaned 2,729,452 shares, Mr. Silverman loaned 70,548 shares and Mr. Caragol loaned 700,000 shares of Company common stock to Optimus. There can be no assurance that this tranche will close.

Socius Stock Offering

On April 28, 2010, we entered into the Preferred Stock Purchase agreement (the “Preferred Purchase Agreement”) with Socius Capital Group, LLC doing business as Socius Technology Capital Group, LLC (“Socius Technology”) under which Socius Technology was committed to purchase up to $4.2 million in shares of our Series B Preferred Stock in one or more Preferred Tranches, at $10,000 per share of Preferred Stock. Under the terms of the Preferred Purchase Agreement, from time to time and at our sole discretion, we could present Socius Technology with a Preferred Notice. Socius Technology was obligated to purchase such Preferred Stock on the third trading day after the Preferred Notice date, subject to satisfaction of the Closing Conditions.

On April 28, 2010, we entered into the Stock Purchase Agreement (the “Purchase Agreement”) with Socius CG II, Ltd., a Bermuda exempted company (“Socius”), under which Socius was committed to purchase in connection with any Preferred Tranche,

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up to that number of shares of common stock equal in dollar amount to the Common Tranche, at a per share price equal to the Investment Price. Under the Purchase Agreement, we also agreed to issue in connection with any Common Tranche, two-year warrants to purchase shares of common stock equal in dollar amount to 35% of the applicable Common Tranche, at an exercise price per share equal to the Investment Price.

Socius could pay the Investment Price for the common stock, at Socius’ option, in cash or a secured promissory note. Socius could pay the warrant exercise price, at Socius’ option, in cash, a secured promissory note, or, if applicable, by cashless exercise. The promissory note bears interest at 2.0% per year calculated on a simple interest basis. The entire principal balance and interest thereon was due and payable on the fourth anniversary of the date of the promissory note, but no payments were due so long as we were in default under the Preferred Purchase Agreement or the warrants or if there were any shares of Preferred Stock issued or outstanding. The promissory note was secured by the borrower’s right, title and interest in all outstanding shares of our common stock and other securities with a fair market value equal to the principal amount of the promissory note. Our right to deliver a tranche notice to Socius pursuant to the Purchase Agreement was subject to the Closing Conditions and also that no purchase would result in Socius and its affiliates beneficially owning more than 9.99% of the common stock. Unless we obtained stockholder approval or Socius obtained an opinion of counsel that stockholder approval was not required, Socius could not exercise a warrant if, as a result of such exercise, the aggregate number of shares of common stock issued upon exercise of all warrants it held plus the aggregate number of shares of common stock issued under the Purchase Agreement would exceed 19.99% of our common stock outstanding.

Tranche Draw Down

On April 29, 2010, we presented Socius Technology with a Preferred Notice to purchase $2.3 million of Preferred Stock in a Preferred Tranche. Upon the closing of the Preferred Tranche, which occurred on May 4, 2010, we issued 230 shares of Preferred Stock. In connection with the Preferred Notice, we also presented Socius with a notice to purchase $2.3 million of common stock and warrants to purchase 600,746 shares of common stock. We issued 1,716,417 shares of common stock at an Investment Price per share of $1.34, paid in the form of a secured promissory note, and a warrant to purchase 600,746 shares of common stock to Socius, at an exercise price equal to the Investment Price of $1.34, which warrant Socius exercised on April 29, 2010 and paid in the form of a secured promissory note.

On January 13, 2011, we presented Socius Technology with a Preferred Notice to purchase $1.7 million of Preferred Stock in a Preferred Tranche. Upon the closing of the Preferred Tranche, we issued 168 shares of Preferred Stock. In connection with the Preferred Notice, we also presented Socius with a notice to purchase $1.7 million of common stock and warrants to purchase 852,174 shares of common stock. We issued 2,434,783 shares of common stock at an Investment Price per share of $0.69, paid in the form of a secured promissory note, and a warrant to purchase 852,174 shares of common stock to Socius, at an exercise price equal to the Investment Price of $0.69, which warrant Socius exercised on January 13, 2011 and paid in the form of a secured promissory note.

On January 28, 2011, we presented Socius Technology with a Preferred Notice to purchase $0.2 million of Preferred Stock in a Preferred Tranche. Upon the closing of the Preferred Tranche, we issued 22 shares of Preferred Stock. In connection with the Preferred Notice, we also presented Socius with a notice to purchase $0.2 million of common stock and warrants to purchase 100,000 shares of common stock. We issued 285,714 shares of common stock at an Investment Price per share of $0.77, paid in the form of a secured promissory note, and a warrant to purchase 100,000 shares of common stock to Socius, at an exercise price equal to the Investment Price of $0.77, which warrant Socius exercised on January 28, 2011 and paid in the form of a secured promissory note.

Financial Condition

As of December 31, 2010, we had working capital of approximately $0.2 million and an accumulated deficit of $69.6 million compared to a working capital of approximately $5.2 million and an accumulated deficit of approximately $53.7 million as of December 31, 2009. The decrease in working capital was primarily due to the operating losses described above.  The Company has incurred operating losses since and prior to the merger that created PositiveID.  The current operating losses are the result of the Company’s funding of its development products and projects:  the GlucoChip, the iglucose wireless communications system, the Easy Check breath analysis device, and the rapid flu detection system.  Operating losses are also due to salary costs, consulting fees, legal, accounting and other general administrative costs. The Company expects its operating losses to continue during the next twelve months.

Until we are able to achieve operating profits, it is our intention to continue to try to access the capital markets to fund the development of our HealthID products.  Since December 31, 2010, we have raised $1.9 million under our Socius financing facility.  We also have $4.0 million of remaining capacity available under the amended Optimus agreement and have submitted a notice to Optimus to purchase $1.4 million of our Series C Preferred Stock; however, there is no assurance that the tranche for $1.4 million will close.  Additionally, we currently have an effective “shelf” registration statement on Form S-3 which registers up to $9.6 million of securities.  Under that registration we have $5.3 million of availability remaining.  Because the aggregate market value of our common equity held by non-affiliates is less than $75 million, we will be limited from time to time in our ability to use capacity under the shelf registration statement.

The Company believes that with its current working capital, its access to capital under its equity line agreement, and through either new capital raised under its shelf registration statement, and/or reducing and delaying certain research, development and related

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activities, it will have sufficient funds available to meet its working capital requirements over the next twelve months. There can be no assurances that it will be successful in negotiating additional sources of equity or credit for its long-term capital needs.  The Company’s 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.

NASDAQ Listing

On September 13, 2010, the Company received a letter from the Nasdaq indicating that the Company is not in compliance with the Nasdaq’s requirements for continued listing because, for the 30 consecutive business days prior to September 13, 2010, the bid price of its common stock closed below the minimum $1.00 per share price requirement for continued listing under Nasdaq Listing Rule 5550(a)(2) (the “Rule”).  The Company had 180 calendar days (or until March 14, 2011) to regain compliance with the bid price requirement.

On March 15, 2011, the Company received a letter from the Nasdaq staff  notifying the Company of a staff determination that the Company has not regained compliance with the $1.00 per share minimum bid price requirement set forth in the Rule and that based on the Company’s financial statement information as of September 30, 2010 (i.e., the date of the Company’s most recent periodic report filed with the SEC), it was not eligible, in accordance with Listing Rule 5810(c)(3)(A)(ii), for a second 180-calendar day cure period with respect to the bid price deficiency.  To be eligible for the additional 180-calendar day cure period, the Company would have had to meet the applicable standards for initial listing on The Nasdaq Capital Market (except the bid price requirement) based on its most recent public filings.  The March 15, 2011 letter notes that the Company’s stockholders’ equity as of September 30, 2010 of $4,697,000 does not meet the $5 million initial listing requirement for The Nasdaq Capital Market.

 Nasdaq has advised the Company that it may appeal the Nasdaq staff's determination to a Nasdaq Hearings Panel (the "Panel") in accordance with the procedures set forth in the Nasdaq Listing Rule 5800 Series. The filing of the appeal will automatically stay any delisting procedures until after a hearing and the determination of the Panel. The Company requested a hearing on March 21, 2011, in accordance with applicable Listing Rules, and the hearing is currently scheduled for April 28, 2011.  At the hearing, the Company will present a plan to regain compliance with the bid price requirement to the Panel and request that the Panel grant the Company an exception to Nasdaq’s continued listing standards for a sufficient period to implement that plan. Under Listing Rule 5815(c)(1), the Panel has the discretion to grant such an exception for a period not to exceed 180 days from the date of the staff determination letter – that is, on or about September 15, 2011. There can be no assurance that the Panel will accept the Company’s compliance plan or grant the Company’s request for continued listing.

If the Company’s 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 the Company’s business and may hinder or delay its ability to consummate potential strategic transactions or investments. Such delisting could also adversely affect the Company’s ability to obtain financing for the continuation of its operations and could result in the loss of confidence by investors, suppliers and employees.

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, 2010, included elsewhere in this Annual Report on Form 10-K.

Revenue Recognition

The Company’s revenue recognition policy is as follows:

Product Sales

Revenue from product sales are recorded at gross amounts. As the Company is in the initial process of commercializing these systems, the level of distributor or physician returns cannot yet be reasonably estimated. Accordingly, the Company does 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;


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·

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 has a right to return the product has elapsed.


Data Subscription Services

The services for maintaining subscriber information on the Company’s 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.

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 the Company’s revenue is derived from the Company’s 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 Company’s 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 customer’s acceptance of the Company’s 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.

In October 2009, the Financial Accounting Standard Board (“FASB”) issued amended revenue recognition guidance for arrangements with multiple deliverables. The new guidance requires the use of management’s best estimate of selling price (BESP) for the deliverables in an arrangement when vendor specific objective evidence (VSOE), vendor objective evidence (VOE) or third party evidence (TPE) of the selling price is not available. In addition, excluding specific software revenue guidance, the residual method of allocating arrangement consideration is no longer permitted, and an entity is required to allocate arrangement consideration using the relative selling price method. In accordance with the guidance, the Company has elected to early adopt its provisions as of January 1, 2010 on a prospective basis for all new or materially modified arrangements entered into on or after that date. The adoption of this guidance did not have a material impact on the consolidated financial statements.

As discussed above, effective January 1, 2010 the Company adopted, on a prospective basis for all new or materially modified arrangements entered into on or after that date, the amended accounting guidance for multiple-deliverable revenue arrangements and the amended guidance related to the scope of existing software revenue recognition guidance. The amended guidance does not generally change the units of accounting for the Company’s revenue transactions. Most of the Company’s products and services qualify as separate units of accounting.

To the extent the Company sells products that may consist of multiple deliverables the revenue recognition is subject to specific guidance. A multiple-deliverable arrangement is separated into more than one unit of accounting if the following criteria are met:


·

The delivered item(s) has value to the client on a stand-alone basis; and

·

If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the Company’s control.



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If these criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered. If these criteria are met for each element and there is a relative selling price for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative selling price.

Deferred revenue consists of amounts billed in excess of revenue recognized on sales of information services, relating generally to subscription fees.

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.  We recorded a charge for impairment of goodwill of $1.6 million and $10.1 million for the years ended December 31, 2010 and 2009, respectively.

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:


·

the estimated value of our common stock;

·

the expected life of issued stock options;

·

the expected volatility of our stock price;

·

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.

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 enterprise’s 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.


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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 our beginning tax positions. We continue to fully recognize the Company’s 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 Company’s filing positions in all of the foreign, 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, 2010.

Impact of Recently Issued Accounting Standards

In January 2010, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“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.  We have evaluated the potential impact of this standard and expect it will have no significant impact on our financial position or results of operations.

In January 2010, the FASB issued ASU 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 that 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. ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009, and would be applied on a retrospective basis. The adoption of the provisions of ASU 2010-01 did not have a material effect on the financial position, results of operations or cash flows of the Company.

In April 2010, the FASB issued ASU No. 2010 - 17 – Revenue Recognition - Milestone Method (Topic 605): Milestone Method of Revenue Recognition. This standard provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for certain research and development transactions. Under this new standard, a company can recognize as revenue consideration that is contingent upon achievement of a milestone in the period in which it is achieved, only if the milestone meets all criteria to be considered substantive.  This standard will be effective for us on a prospective basis for periods beginning after January 1, 2011.  We have evaluated the potential impact of this standard and expect it will have no significant impact on our financial position or results of operations.

ITEM 7A. 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 8. 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 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. 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, 2010. 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, 2010 based on the disclosure controls evaluation.


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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 SEC’s 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, 2010, 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.

Management’s 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, 2010, 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, 2010.

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.

ITEM 9B. OTHER INFORMATION

On March 25, 2011, Ned L. Siegel was appointed to the Audit Committee of the Board of Directors and Barry M. Edelstein resigned from the Audit Committee of the Board of Directors.



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PART III

Item 10. Directors, Executive Officers and Corporate Governance

Our directors and executive officers, and their positions, as of March 21, 2011, are as follows:

 

 

 

Name

 

Positions with the Company

Scott R. Silverman

 

Chairman of the Board and Chief Executive Officer

William J. Caragol

 

President, Chief Financial Officer and Director

Jeffrey S. Cobb

 

Director

Barry M. Edelstein

 

Director

Steven R. Foland

 

Director

Michael E. Krawitz

 

Director

Ned L. Siegel

 

Director


The following is a summary of the background and business experience of our directors and executive officers as of March 21, 2011.


Scott R. Silverman, 47, has served as our chairman of our Board of Directors since November 12, 2008 and as our chief executive officer since August 27, 2009.  He previously 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. 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 Corporation, or 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 Corporation, our now wholly-owned subsidiary, or Steel Vault, from January 2006 until November 11, 2009.  He served as a member of the Board of Directors of Gulfstream International Group, Inc. from September to October, 2010.  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, 43, 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, and treasurer since December 2006.  Mr. Caragol served as Steel Vault’s 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. Mr. Caragol served as a member of the Board of Directors of Gulfstream International Group, Inc.  from September to October, 2010.  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 senior executive of other companies in the technology industry.


Jeffrey S. Cobb, 49, 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.


Barry M. Edelstein, 47, 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 2002. Mr. Edelstein has a bachelor’s 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, 51, 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 Stifel Nicolaus Weisel, 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


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Stanley and Credit Suisse in New York and Hong Kong. Mr. Foland has a bachelor’s 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, 41, has served as a member of our Board of Directors since November 2008. He currently serves as chief executive officer of PEAR, LLC, a provider of green retrofitting and renewable energy.  From January 2010 until February 2011, he served as chief executive officer of Florida Sunshine Investments I, Inc. He previously served as the chief executive officer and president of Digital Angel Corporation from December 2006 to December 2007, executive vice president from March 2003 until December 2006, and as a member of its Board of Directors from July 2007 until December 2007. 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.


Ned L. Siegel, 59, has served as a member of our Board of Directors since February 2011.  He has served as President of the Siegel Group, Inc. since September 1997, and Managing Member of the Siegel Consulting Group, LLC since November 2009, which provide real estate development and realty management services.  From October 2007 until January 2009, he served as United States Ambassador to the Commonwealth of the Bahamas.  From September 2006 until January 2007, he served as Senior Advisor to the United States Mission for the 61st Session of the United Nations General Assembly.  From January 2003 until October 2007, Mr. Siegel was a member of the Board of Directors of the Overseas Private Investment Corporation.  From 2003 until 2007, he served as a member of the Board of Directors of the Caswell-Massey Company, Ltd., a world-wide quality bath and body, home fragrance and gifts company.  Mr. Siegel was appointed Vice Chairman of Alternative Fuels Americas, Inc. in January of 2011. Mr. Siegel earned a bachelor of arts degree from the University of Connecticut in 1973 and a juris doctorate from the Dickinson School of Law in 1976.  Mr. Siegel was nominated to the Board of Directors due to his past experience with government appointments and services and his managerial experience. 


Audit Committee


Our audit committee currently consists of Steven R. Foland, Jeffrey S. Cobb and Ned L. Siegel. 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 Capital 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 Capital 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:


·

our accounting, financial reporting processes, audits and the integrity of our financial statements;

·

our independent auditor’s qualifications, independence and performance;

·

our compliance with legal and regulatory requirements;

·

our internal accounting and financial controls; and

·

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 policies and disagreements with management.


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 2010 except for a Form 4 filed jointly on May 21, 2010 by Scott R. Silverman, our chairman and chief executive officer, and R & R Consulting Partners, LLC (“R & R”), a 10% owner of our common stock of which Mr. Silverman is the managing member, to report the acquisition, indirectly by Mr. Silverman and directly by R & R, of 29,452 shares of our common stock received as interest under a share loan agreement with Optimus Technology Capital Partners, LLC.


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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.


Item 11. Executive Compensation

The following table sets forth information regarding compensation earned in or with respect to our fiscal year 2009 and 2010 by:


·

each person who served as our chief executive officer in 2010; and

·

each person who served as our chief financial officer in 2010.


We had no other executive officers during any part of 2010. We refer to these officers collectively as our named executive officers.


Summary Compensation Table

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Name and

Principal Position

 

Year

 

Salary

($)

 

Bonus

($)

 

Stock

Awards

($)

 

Option

Awards

($)

 

Non-Equity

Incentive

Plan

Compensation

($)

 

All Other

Compensation

($)

 

Total

($)

Scott R. Silverman

Chairman and Chief

Executive Officer

 

2010

 

375,000

(1)

575,000

(2)

 853,150

(3)

 

 

64,086 (4)

 

1,867,236

 

 

2009

 

222,685

(5)

140,000

 

1,650,000

(3)

 

 

16,466 (6)

 

2,029,151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

William J. Caragol

President and Chief

Financial Officer

 

2010

 

225,000

(7)

350,000

(8)

759,692

(9)

 

 

40,012 (10)

 

1,374,704

 

 

2009

 

212,593

(11)

70,000

 

1,650,000

(9)

 

 

 

1,932,593


(1)    Represents $131,151 paid in cash and 169,340 shares of restricted company common stock received in lieu of salary for an aggregate grant date fair value of $243,849, computed in accordance with FASB ASC Topic 718.

(2)    Represents $200,000 earned as a discretionary bonus and 260,417 shares of restricted company common stock received in lieu of a minimum annual bonus for an aggregate grant date fair value of $375,000, computed in accordance with FASB ASC Topic 718.

(3)    Represents the aggregate grant date fair value, computed in accordance with FASB ASC Topic 718, of 1,245,243 and 1,000,000 shares of Company common stock received in 2010 and  2009, respectively.

(4)    The amount shown includes (i) $1,238 in respect of group term life insurance provided to Mr. Silverman; (ii) $45,000 for an expense allowance and (ii) perquisites aggregating $17,848 as follows: $17,287 for an automobile allowance, maintenance and gasoline expenses and $561 for home security.

(5)    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.

(6)    The amount shown includes (i) $3,600 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.

(7)    Represents $78,691 paid in cash and 101,603 shares of restricted company common stock received in lieu of salary for an aggregate grant date fair value of $146,309, computed in accordance with FASB ASC Topic 718.

(8)    Represents $125,000 earned as a discretionary bonus and 156,250 shares of restricted company common stock received in lieu of a minimum annual bonus for an aggregate grant date fair value of $225,000, computed in accordance with FASB ASC Topic 718.

(9)    Represents the aggregate grant date fair value, computed in accordance with FASB ASC Topic 718, of 1,017,147 and 1,000,000 shares of Company common stock received in 2010 and 2009, respectively.

(10)  The amount shown includes $20,000 for an expense allowance and $20,012 for an automobile allowance, maintenance and gasoline expenses.

(11)  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.

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Narrative Disclosure to Summary Compensation Table and Additional Narrative Disclosure


Executive Employment Arrangements


Scott R. Silverman


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”), 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.


Change in Control meant 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 stockholders 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.


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 a 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. Silverman’s waiver and release of certain rights, claims and actions) of the separation agreement would survive.


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.


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. Caragol’s conviction of a felony; (ii) Mr. Caragol’s being prevented from providing services to us under the letter agreement as a result of Mr. Caragol’s violation of any law, regulation and/or rule; or (iii) Mr. Caragol’s non-performance or non-observance in any material respect of any requirement with respect to Mr. Caragol’s obligations under the letter agreement.

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The term “Change in Control” has the same meaning as provided above under the description of Mr. Silverman’s potential termination and Change in Control payments. The letter agreement also provided for the termination of all compensation-related plans in place between Mr. Caragol and us, including a letter agreement, dated May 15, 2008, between Mr. Caragol and us, provided that the waiver/release provisions of such letter would survive.


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 would receive a base salary of $375,000 and $225,000, respectively. Additionally, the Compensation Committee had the authority to approve a discretionary bonus for 2010, a portion of which was 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, LLC, strategic acquisitions, the overall financial condition/health of the business, and such other factors as the Compensation Committee deemed appropriate in light of any acquisitions or changes in the business. Mr. Silverman could earn a bonus between $200,000 and $600,000, and Mr. Caragol could 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 vest according to the following schedule: (i) 50% vested on January 1, 2011; and (ii) 50% vest on January 1, 2012. Mr. Silverman’s and Mr. Caragol’s 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 person’s 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.  


On May 4, 2010, our Compensation Committee approved a change to the above-referenced compensation arrangement and in lieu of (i) cash salary for the remainder of 2010 for Messrs. Silverman and Caragol and (ii) the minimum cash bonus obligation to Messrs. Silverman and Caragol pursuant to the bonus structure set forth above, it approved the issuance of 675,000 shares of restricted stock to Mr. Silverman and 525,000 shares of restricted stock to Mr. Caragol. These restricted shares were issued under our 2009 Stock Incentive Plan and vest according to the following schedule: (i) 50% vested on January 1, 2011; and (ii) 50% vest on January 1, 2012.  Mr. Silverman’s and Mr. Caragol’s 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 person’s violation of any law, regulation and/or rule.


2011 Executive Employment Arrangements


On November 10, 2010, our Compensation Committee approved a five year employment and non-compete agreement for Messrs. Silverman and Caragol. Beginning in 2011, Mr. Silverman and Mr. Caragol began receiving a base salary of $375,000 and $225,000, respectively.  Each executive's base salary will increase a minimum of 5% per annum during each calendar year of the term.  During the term, each executive shall receive a minimum annual bonus for each calendar year of the term in an amount equal to a minimum of one (1) times such executive’s base salary.  Additionally, the Compensation Committee has the authority to approve a discretionary bonus for each year of the term. Each of Mr. Silverman and Mr. Caragol received 1,000,000 and 750,000 shares of restricted stock, respectively, under the PositiveID Corporation 2009 Stock Incentive Plan. These restricted shares will vest according to the following schedule: (i) 50% vest on January 1, 2012; and (ii) 50% vest on January 1, 2013. Mr. Silverman’s and Mr. Caragol’s rights and interests in the unvested portion of the restricted stock are subject to forfeiture in the event they resign prior to January 1, 2013 or are terminated for cause prior to January 1, 2013, with said cause being defined as a conviction of a felony or such person being prevented from providing services to the Company as a result of such person’s violation of any law, regulation and/or rule. Mr. Silverman and Mr. Caragol are entitled to Company-paid health insurance and disability insurance, non-allocable expenses of $45,000 and $25,000, respectively, and each are entitled to use of an automobile leased by the Company and other automobile expenses, including insurance, gasoline and maintenance costs.  


If Mr. Silverman’s or Mr. Caragol’s employment is terminated prior to the expiration of the term of their respective employment agreements, certain significant payments become due to such executives. The amount of such significant payments depends on the nature of the termination. In addition, the employment agreements contain a change of control provision that provides 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 and three times the then current base salary and three times the average bonus paid to Mr. Caragol for the three full calendar years immediately prior to the change of control.  Any outstanding stock options or restricted shares held by such executive as of the date of his termination or a change of control become vested and exercisable as of such date, and remain exercisable during the remaining life of the option.  Upon a change of control, we must continue to pay all leases payments on the vehicle then used by executive. The employment agreements also contain non-compete and confidentiality provisions which are effective from the date of employment through two years from the date the employment agreements are terminated.   


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Outstanding Equity Awards as Of December 31, 2010


The following table provides information as of December 31, 2010 regarding unexercised stock options and restricted stock outstanding held by Messrs. Silverman and Caragol.


Outstanding Equity Awards as Of December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Option Awards

 

Stock Awards

Name

 

Number of

Securities

Underlying

Unexercised

Options

(#)

Exercisable

 

Number of

Securities

Underlying

Unexercised

Options(#)

Unexercisable

 

Equity

Incentive

Plan

Awards:

Number of

Securities

Underlying

Unexercised

Unearned

Options

(#)

 

Option

Exercise

Price

($)

 

Option

Expiration

Date

 

Number

of Shares

or Units

of Stock

That

Have Not

Vested

(#)(1)

 

Market

Value of

Shares or

Units of

Stock That

Have Not

Vested

($)(2)

 

Equity

Incentive

Plan

Awards:

Number

of

Unearned

Shares,

Units or

Other

Rights

That

Have Not

Vested

(#)

 

Equity

Incentive

Plan

Awards:

Market

or Payout

Value of

Unearned

Shares,

Units or

Other

Rights

That

Have Not

Vested

($)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

1,837,500

 

1,139,250

 

 

William J.

Caragol

 

50,000

(4)

 

$

10.00(5)

 

8/21/2016

 

 

 

 

 

 

 

 

 

 

 

1,512,500

 

937,750

 

 


(1)   For Mr. Silverman, 1,337,500 shares vest on January 1, 2012 and 500,000 shares vest on January 1, 2013.  For Mr. Caragol, 1,137,500 shares vest on January 1, 2012 and 375,000 shares vest on January 1, 2013.

(2)   Computed by multiplying the closing market price of a share of our common stock on December 31, 2010, or $0.62, 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.


Director Compensation


The following table provides compensation information for persons serving as members of our Board of Directors during 2010.


2010 Director Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Name

 

Stock

Awards

($) (1)

 

Fees

Earned

or Paid

in Cash

($)

 

Option

Awards

($) (1)

 

Non-Equity

Incentive Plan

Compensation

($)

 

Nonqualified

Deferred

Compensation

Earnings

 

All Other

Compensation

($)

 

Total

($)

Jeffrey S. Cobb (2)

 

164,100

 

15,000

 

 

 

 

 

179,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Barry M. Edelstein (3)

 

147,750

 

30,000

 

 

 

 

 

177,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steven R. Foland (4)

 

257,050

 

 

 

 

 

 

257,050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Michael E. Krawitz (5)

 

202,750

 

40,000

 

 

 

 

 

242,750


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(1)   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)   As of December 31, 2010, Mr. Cobb held options to purchase 218,750 shares of our common stock. Mr. Cobb was awarded 90,000 shares of restricted stock on January 20, 2010, 15,000 of which vested on the date of grant and 75,000 of which vested on January 1, 2011.  Mr. Cobb was awarded 120,000 shares of restricted stock on December 13, 2010, 100,000 shares which vest on January 1, 2012 and the remainder vest in equal installments on March 31, June 30, September 30, and December 31, 2011.

(3)   As of December 31, 2010, Mr. Edelstein held options to purchase 75,000 shares of our common stock. Mr. Edelstein was awarded 75,000 shares of restricted stock on January 20, 2010, which vested on January 1, 2011.  Mr. Edelstein was awarded 120,000 shares of restricted stock on December 13, 2010, 100,000 shares which vest on January 1, 2012 and the remainder vest in equal installments on March 31, June 30, September 30, and December 31, 2011.

(4)   As of December 31, 2010, Mr. Foland held no options to purchase shares of our common stock. Mr. Foland was awarded 145,000 shares of restricted stock on January 20, 2010, which vested on January 1, 2011.  Mr. Foland was awarded 180,000 shares of restricted stock on December 13, 2010, 100,000 which vest on January 1, 2012 and the remainder vest in equal installments on March 31, June 30, September 30, and December 31, 2011.

(5)   As of December 31, 2010, Mr. Krawitz held 150,000 options to purchase shares of our common stock. Mr. Krawitz was awarded 75,000 shares of restricted stock on January 20, 2010, which vested on January 1, 2011.  Mr. Krawitz was awarded 220,000 shares of restricted stock on December 13, 2010, 200,000 which vest on January 1, 2012 and the remainder vest in equal installments on March 31, June 30, September 30, and December 31, 2011.


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 2010 and currently, directors can elect to receive their fees in cash or restricted stock or a combination thereof.


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 vested 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 did as Audit Committee Chair.   On December 13, 2010, our Board of Directors approved a grant of 100,000 shares of restricted stock to each non-employee director, which vests on January 1, 2012, except for Mr. Krawitz who received an additional 100,000 shares of restricted stock for the significant amount of work he has done as a member of the Board.


On February 1, 2011, Ned L. Siegel was appointed to the Board of Directors. He received 220,000 shares of restricted stock in connection therewith, 200,000 shares which vest on January 1, 2012 and the remainder vest in equal installments on March 31, June 30, September 30, and December 31, 2011.


Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

See Part II, Item 5, under the heading, “Equity Compensation Plan Information” for information on compensation plans under which our equity securities are authorized for issuance.

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 21, 2011 by:


·

each of our directors;

·

each of our named executive officers;

·

all of our executive officers and directors as a group; and

·

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 21, 2011 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 person’s name. The percentage of beneficial ownership is based on 37,265,076 shares of our common stock outstanding as of March 21, 2011. 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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Table of Contents

 

Name and Address of Beneficial Owner

 

Number of

Shares

Beneficially

Owned(#)

 

Percent of

Outstanding

Shares (%)

 

Five Percent Stockholders:

 

 

 

 

 

Scott R. Silverman (1)

 

10,241,971

 

27.1

%

R & R Consulting Partners, LLC (2)

 

4,785,008

 

12.8

%

Named Executive Officers and Directors:

 

 

 

 

 

Scott R. Silverman (1)

 

10,241,971

 

27.1

%

William J. Caragol (3)

 

4,064,000

 

10.8

%

Jeffrey S. Cobb (4)

 

578,750

 

1.5

%

Barry M. Edelstein (5)

 

445,000

 

1.2

%

Steven R. Foland (6)

 

505,600

 

1.4

%

Michael E. Krawitz (7)

 

720,000

 

2.0

%

Ned L. Siegel (8)

 

320,000

 

*

%

Executive Officers and Directors as a group (7 persons) (9)

 

15,786,321

 

41.0

%


*   Less than 1%

(1)   Mr. Silverman beneficially owns 10,241,971 shares, which includes 54,000 shares upon the exercise of a warrant and 475,000 shares issuable upon the exercise of stock options that are currently exercisable or exercisable within within 60 days of March 21, 2011.  Mr. Silverman has sole voting power over 4,367,963 shares of our common stock.  Mr. Silverman has sole dispositive power over 2,459,915 shares of our common stock. Mr. Silverman lacks dispositive power over 1,908,048 shares, 70,548 shares of which were loaned to Optimus and 1,837,500 shares of which are restricted as to transfer until January 1, 2012 (1,337,500 shares) and January 1, 2013 (500,000 shares). Mr. Silverman shares voting power over 5,874,008 shares, which 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) 4,785,008 shares that Mr. Silverman, as the control person of R & R Consulting Partners, LLC, or R&R, may be deemed to share beneficial ownership with R&R.  Mr. Silverman shares dispositive power over the 1,089,000 Blue Moon shares.  Mr. Silverman shares dispositive power with R&R over 3,144,556 shares and lacks dispositive power over 2,729,452 R&R shares that were loaned to Optimus.

(2)   Consists of shares of our common stock.  Mr. Silverman, as the control person of R&R, may be deemed to share voting power with R&R over the 4,785,008 shares and dispositive power over the 3,144,556 shares.  R&R and Mr. Silverman lack dispositive power over 2,729,452 shares loaned to Optimus.

 (3)   Mr. Caragol beneficially owns 4,064,000 shares, which 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 21, 2011. Mr. Caragol has sole voting power over 2,975,000 shares of our common stock. Mr. Caragol has sole dispositive power over 762,500 shares of our common stock. Mr. Caragol lacks dispositive power over 2,212,500 shares, 700,000 shares of which were loaned to Optimus and 1,512,500 shares of which are restricted as to transfer until January 1, 2012 (1,137,500 shares) and January 1, 2013 (375,000 shares). Mr. Caragol shares dispositive and voting 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.

(4)   Includes 360,000 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 21, 2011. Mr. Cobb lacks dispositive power over 120,000 shares, which are restricted until January 1, 2012 (100,000 shares) and March 31, June 30, September 30, and December 31, 2011 (5,000 shares on each vesting day).

(5)   Includes 370,000 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 21, 2011. Mr. Edelstein lacks dispositive power over 120,000 shares, which are restricted until January 1, 2012 (100,000 shares) and March 31, June 30, September 30, and December 31, 2011 (5,000 shares on each vesting day).

(6)   Mr. Foland lacks dispositive power over 180,000 shares, which are restricted until January 1, 2012 (100,000 shares) and March 31, June 30, September 30, and December 31, 2011 (20,000 shares on each vesting day).

(7)   Includes 570,000 shares of our common stock and 150,000 shares of our common stock issuable upon the exercise of stock options that are currently exercisable or exercisable within 60 days of March 21, 2011. Mr. Krawitz lacks dispositive power over 220,000 shares, which are restricted until January 1, 2012 (200,000 shares) and March 31, June 30, September 30, and December 31, 2011 (5,000 shares on each vesting day).

(8)

Mr. Siegel lacks dispositive power over 220,000 shares, which are restricted until January 1, 2012 (200,000 shares) and March 31, June 30, September 30, and December 31, 2011 (5,000 shares on each vesting day).

(9)   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 21, 2011, 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 the sale of our then wholly-owned subsidiary, Xmark Corporation, which we refer to as the Xmark Transaction.


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Item 13. Certain Relationships and Related Transactions, and Director Independence

Since the beginning of our fiscal year 2009, 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


By virtue of the relationships described below, certain of 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.  In addition, as further described below, several of our 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.  Each of these relationships was considered in determining whether a director is independent under the standards of the Nasdaq Capital Market.


At the Board level:


·

Our chairman and chief executive officer, Scott R. 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.  In addition, Mr. Silverman is the managing member of R & R Consulting Partners, LLC, which holds 4,785,008 shares of our common stock.

·

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 and received approximately $70,000 in fees. Mr. Krawitz served on the Board of Directors of Steel Vault until November 10, 2009. Mr. Krawitz, along with Messrs. Silverman and Caragol, is a manager and member of Sah-Vul Strategic Partners I, LLC, a securities holding company.

·

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.

·

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 September 4, 2009, when we, VeriChip Acquisition Corp., a Delaware corporation and our wholly-owned subsidiary, and Steel Vault signed an Agreement and Plan of Reorganization, as amended, pursuant to which VeriChip Acquisition Corp. was merged with and into Steel Vault on November 10, 2009, with Steel Vault surviving and becoming our wholly-owned subsidiary, which we refer to as the Merger.

·

In 2010, Ned L. Siegel provided consulting services to us before becoming a director for which he received 50,000 shares of our common stock on each of January 4, 2010 and July 7, 2010, worth an aggregate of $101,500 based on the closing price of a share of our common stock on the date of grant.


Related Party Transactions


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 Vault’s 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 Vault’s 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 Vault’s 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.


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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 Vault’s assets, including the assets of National Credit Report.Com, LLC 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.


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 a Convertible Preferred Stock Purchase Agreement, or the Purchase Agreement, with Optimus Technology Capital Partners, LLC, or Optimus,  under which Optimus was committed to purchase up to $10 million shares of our convertible Series A Preferred Stock in one or more tranches.  To facilitate the transactions contemplated thereby, R & R Consulting Partners, LLC, a company controlled by Scott R. Silverman, our chairman and chief executive officer, loaned shares of common stock to Optimus.   On March 14, 2011, we entered into an Amended and Restated Convertible Preferred Stock Purchase Agreement with Optimus.  To facilitate the transactions contemplated thereby, R & R Consulting Partners, LLC, and Messrs. Silverman and Caragol loaned shares of common stock to Optimus.  Please see “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Optimus Stock Offering ” for more information regarding this transaction.


Review, Approval or Ratification of Transactions with Related Parties


Our audit committee’s 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 committee’s 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 “Certain Relationships and Related Transactions” 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, 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, entered into a voting agreement pursuant to which Mr. Silverman had 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 fell below 50.1% of our outstanding common stock, and on May 24, 2010, the voting agreement was terminated.

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Since we were no longer a “controlled company,” we phased in our compliance with the majority of independent directors requirement as permitted by the Nasdaq rules. On December 31, 2010, Michael Krawitz became independent and on February 1, 2011, Mr. Siegel joined our Board of Directors and as such we now maintain a majority of independent directors who are Messrs. Cobb, Edelstein, Foland, Krawitz and Siegel.


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 — Director and Officer Roles and Relationships” above.


Item 14. Principal Accountant Fees and Services

For the fiscal years ended December 31, 2010 and 2009, fees for services provided by EisnerAmper LLP were as follows:


 

2010

 

 

2009

 

 

 

 

 

 

 

Audit Fees

$

179,000

 

 

$

185,600

Audit Related Fees (review of registration statements and other SEC filings)

$

42,800

 

 

$

80,300

Tax Fees

 

--

 

 

 

--

All Other Fees

 

--

 

 

 

--

 

 

 

 

 

Total Fees

$

221,800

 

 

$

265,900


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 SEC’s rules on auditor independence.

All services provided by and all fees paid to EisnerAmper LLP in fiscal 2010 and 2009 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.



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Table of Contents

 

PART IV

ITEM 15. 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.




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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 25, 2011

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

 

Chief Executive Officer and Chairman
of the Board
(Principal Executive Officer)

 

March 25, 2011

Scott R. Silverman

 

 

 

 

 

/s/ William J. Caragol

 

President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)

 

March 25, 2011

William J. Caragol

 

 

 

 

 

 

 

 

/s/ Jeffrey S. Cobb

 

Director

 

March 25, 2011

Jeffrey S. Cobb

 

 

 

 

 

 

 

 

 

/s/ Barry M. Edelstein

 

Director

 

March 25, 2011

Barry M. Edelstein

 

 

 

 

 

 

 

 

 

/s/ Steven R. Foland

 

Director

 

March 25, 2011

Steven R. Foland

 

 

 

 

 

 

 

 

 

/s/ Michael E. Krawitz

 

Director

 

March 25, 2011

Michael E. Krawitz

 

 

 

 

 

 

 

 

 

/s/ Ned L. Siegel

 

Director

 

March 25, 2011

Ned L. Siegel

 

 

 

 


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Table of Contents

INDEX TO FINANCIAL STATEMENTS


 

Page

POSITIVEID CORPORATION

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

F-2

 

 

 

Consolidated Balance Sheets as of December 31, 2010 and 2009

 

F-3

 

 

 

Consolidated Statements of Operations for the years ended December 31, 2010 and 2009

 

F-4

 

 

 

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2010 and 2009

 

F-5

 

 

 

Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009

 

F-6

 

 

 

Notes to Consolidated Financial Statements

 

F-7




F-1



Table of Contents

 

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, 2010 and 2009, 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 Company’s 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 Company’s 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 Company’s 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, 2010 and 2009, and the consolidated results of its operations and its consolidated cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.

/s/ EisnerAmper LLP
New York, New York
March 25, 2011




F-2



Table of Contents

POSITIVEID CORPORATION

Consolidated Balance Sheets

(In thousands, except share data and par value)


 

 

December 31,

 

 

December 31,

 

 

2010

 

 

2009

Assets

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash

 

$

1,764 

 

 

$

6,423 

Prepaid expenses and other current assets

 

 

173 

 

 

 

193 

Total Current Assets

 

 

1,937 

 

 

 

6,616 

 

 

 

 

 

 

Equipment, net of accumulated depreciation

 

 

118 

 

 

 

122 

Goodwill

 

 

850 

 

 

 

4,200 

Intangibles

 

 

385 

 

 

 

— 

Other assets

 

 

24 

 

 

 

34 

 

 

$

3,315 

 

 

$

10,972 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

490 

 

 

$

576 

Accrued expenses and other current liabilities

 

 

1,067 

 

 

 

775 

Accrued preferred stock dividend payable

 

 

152 

 

 

 

90 

Total Current Liabilities

 

 

1,709 

 

 

 

1,441 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Preferred stock, authorized 5,000,000 shares of $.001 par value; Series A Preferred - 0 and 462 shares issued and outstanding at December 31, 2010 and 2009, respectively, Series B Preferred - 230 and 0 shares issued and outstanding at December 31, 2010 and 2009, respectively (liquidation preference of $2,300 and $4,620 December 31, 2010 and 2009, respectively)

 

 

— 

 

 

 

— 

Common stock, authorized 70,000,000 shares of $.01 par value; issued and outstanding 33,047,405 and 21,840,433 shares at December 31, 2010 and 2009, respectively

 

 

330 

 

 

 

218 

Additional paid-in capital

 

 

74,002 

 

 

 

63,018 

Accumulated deficit

 

 

(69,621)

 

 

 

(53,705)

 

 

 

4,711 

 

 

 

9,531 

Note receivable for shares issued

 

 

(3,105)

 

 

 

— 

 

 

 

 

 

 

Total Stockholders’ Equity

 

 

1,606 

 

 

 

9,531 

 

 

 

 

 

 

 

 

$

3,315 

 

 

$

10,972 

 

 

 

 

 

 




See accompanying notes to consolidated financial statements.


F-3



Table of Contents

POSITIVEID CORPORATION

Consolidated Statements of Operations

(In thousands, except per share data)


 

For the Years Ended

 

December 31,

 

2010

 

 

2009

 

 

 

 

 

 

 

Revenue

$

3,093

 

 

$

353

Cost of sales

 

1,717

 

 

 

94

 

 

 

 

 

Gross profit

 

1,376

 

 

 

259

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Selling, general and administrative

 

14,332

 

 

 

5,753

Research and development

 

1,394

 

 

 

393

Impairment of  goodwill attributed to ID Security segment

 

1,600

 

 

 

10,170

 

 

 

 

 

Total operating expenses

 

17,326

 

 

 

16,316

 

 

 

 

 

 

 

Operating loss

 

(15,950)

 

 

 

(16,057)

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of Xmark Corporation

 

 

 

 

4,385

Interest and other income

 

34

 

 

 

74

 

 

 

 

 

Total other income

 

34

 

 

 

4,459

 

 

 

 

 

Net loss

 

(15,916)

 

 

 

(11,598)

Preferred stock dividend

 

(152)

 

 

 

(90)

 

 

 

 

 

Net loss attributable to common stockholders

$

(16,068)

 

 

$

(11,688)

 

 

 

 

 

Net loss attributable to common shareholders per common share — basic and diluted

$

(0.67)

 

 

$

(0.90)

 

 

 

 

 

Weighted average number of shares outstanding — basic and diluted

 

24,053

 

 

 

13,020

 

 

 

 

 

 

 

 

 

 

 

 




See accompanying notes to consolidated financial statements.


F-4



Table of Contents

POSITIVEID CORPORATION

Consolidated Statements of Stockholders’ Equity

(In thousands)
For the Years Ended December 31, 2010 and 2009


 

 

 

 

 

 

Additional

Paid-in

Capital

 

Accumulated

Deficit

 

Note Receivable for Shares Issued

 

Total

Stockholders’

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Shares

 

Common Shares

 

 

 

 

 

 

Number

 

Par

 

Number

 

Par

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 1, 2009

 

$

 

11,730

$

117

$

44,401

$

(42,107)

$

$

2,420

Net loss

 

 

 

 

 

 

(11,598)

 

 

(11,598)

Stock based compensation

 

 

 

4,395

 

44

 

1,505

 

 

 

1,549

Issuance of shares from option exercises

 

 

 

138

 

1

 

59

 

 

 

60

Issuance of preferred shares, net of $800 financing costs

 

462

 

 

 

 

3,806

 

 

 

3,806

Issuance of shares for settlement of litigation

 

 

 

510

 

5

 

245

 

 

 

205

Issuance of shares for Steel Vault merger

 

 

 

5,067

 

51

 

13,083

 

 

 

13,134

Preferred stock dividend

 

 

 

 

 

(90)

 

 

 

(90)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2009

 

462

 

 

21,840

 

218

 

63,018

 

(53,075)

 

 

9,531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

(15,916)

 

 

(15,916)

Stock based compensation

 

 

 

5,143

 

52

 

5,067

 

 

 

5,119

Issuance of Preferred Series B shares, net of $110 for financing costs

 

230

 

 

 

 

2,190

 

 

 

2,190

Issuance of shares from option exercises

 

 

 

719

 

7

 

352

 

 

 

359

Reversal of accrued dividend for Preferred series A shares on conversion

 

 

 

 

 

89

 

 

 

89

Shares issued for Preferred Series A conversion

 

(462)

 

 

2,700

 

27

 

(27)

 

 

 

Shares issued in connection with interest expense on Preferred Series A conversion

 

 

 

29

 

 

35

 

 

 

35

Issuance of shares for note receivable

 

 

 

1,717

 

17

 

2,283

 

 

(2,300)

 

Issuance of shares for note receivable upon warrant exercise

 

 

 

600

 

6

 

799

 

 

(805)

 

Shares issued for the acquisition of Easy Check Medical Diagnostics, LLC assets

 

 

 

300

 

3

 

348

 

 

 

351

Accrual of dividend for Preferred Series B shares

 

 

 

 

 

(152)

 

 

 

(152)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2010

 

230

$

 

33,048

$

330

$

74,002

$

(69,621)

$

(3,105)

$

1,606



See accompanying notes to consolidated financial statements.


F-5



Table of Contents

POSITIVEID CORPORATION

Consolidated Statements of Cash Flows

(In thousands)


 

 

 

 

 

 

 

 

For the Years Ended

 

December 31,

 

2010

 

 

2009

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

$

(15,916)

 

 

$

(11,598)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

1,399 

 

 

 

29 

Stock based compensation

 

5,119 

 

 

 

1,549 

Write-off of acquired in-process research and development

 

351 

 

 

 

— 

Impairment of goodwill

 

1,600 

 

 

 

— 

Non cash interest income, net

 

(7)

 

 

 

(7)

Charge attributable to adjustment of goodwill

 

— 

 

 

 

10,170 

Stock issued for settlement of litigation

 

— 

 

 

 

250 

Gain on sale of Xmark Corporation

 

— 

 

 

 

(4,385)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Decrease in prepaid expenses and other current assets

 

70 

 

 

 

137 

Increase (decrease) in deferred revenue

 

 

 

 

(16)

Increase (decrease) in accounts payable and accrued expenses

 

198 

 

 

 

(1,043)

 

 

 

 

 

Net cash used in continuing operations

 

(7,179)

 

 

 

(4,914)

Net cash used in discontinued operations

 

— 

 

 

 

(60)

 

 

 

 

 

Net cash used in operating activities

 

(7,179)

 

 

 

(4,974)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Proceeds from sale of Xmark Corporation, net

 

— 

 

 

 

4,434 

Proceeds from sale of assets

 

— 

 

 

 

Payments for equipment and other assets

 

(29)

 

 

 

(11)

Payments for the merger of Steel Vault, net of cash acquired

 

— 

 

 

 

72 

Net cash (used in) provided by investing activities

 

(29)

 

 

 

4,498 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from exercise of stock options

 

359 

 

 

 

60 

Proceeds from preferred stock financing, net

 

2,190 

 

 

 

3,806 

 

 

 

 

 

 

 

Repayment of debt financing, net

 

— 

 

 

 

(196)

 

 

 

 

 

Net cash provided by financing activities

 

2,549 

 

 

 

3,670 

 

 

 

 

 

Net (decrease) increase in cash

 

(4,659)

 

 

 

3,194 

Cash, beginning of year

 

6,423 

 

 

 

3,229 

 

 

 

 

 

Cash, end of year

$

1,764 

 

 

$

6,423 

 

 

 

 

 




See accompanying notes to consolidated financial statements.


F-6



Table of Contents

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 2001. The Company commenced operations in 2002 as VeriChip Corporation. In 2007, the Company completed an initial public offering of its common stock.

In July 2008, we completed the sale of all of the outstanding capital stock of Xmark, which at the time was principally all of our operations. 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 in 2009.  

Following the completion of the sale, we retired all of our outstanding debt for a combined payment of $13.5 million and settled all contractual payments to Xmark’s and our officers and management for $9.1 million. In August 2008, we paid a special dividend to our stockholders of $15.8 million.

In November 2008, the Company entered into an Asset Purchase Agreement (“APA”) with Digital Angel Corporation and Destron Fearing Corporation, a wholly-owned subsidiary of Digital Angel Corporation, which collectively are referred to as, “Digital Angel.” The terms of the APA included our purchase 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. We also received covenants from Digital Angel and Destron Fearing that will permit the use of intellectual property of Digital Angel related to our health care business without payment of ongoing royalties, as well as inventory and a limited period of technology support by Digital Angel. We paid Digital Angel $500,000 at the closing of the APA, which was recorded in the financials as research and development and expensed.

Also, in November 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 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, all outstanding shares, options and warrants of Steel Vault’s common stock were 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 3 — Acquisitions, for more information.

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 focused its strategy to provide unique health and security identification tools to protect consumers and businesses, operating in two key segments: HealthID and ID Security.  Beginning in early 2011 the Company has further focused its strategy on the growth of its HealthID segment, including the continued successful development of its GlucoChip, its Easy Check breath glucose measurement device, its iglucose wireless system, and potential strategic acquisition opportunities of businesses that are complimentary to its HealthID business.

In February 2010 the Company acquired the assets of Easy Check Medical Diagnostics, LLC, which included 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 were expensed as in process research and development as these products are currently under development.  The purchase agreement also included certain contingent stock payments and cash royalties based on future revenues.

The Company’s ID Security segment includes its Identity Security suite of products, sold through its NationalCreditReport.com brand and its Health Link personal health record. The Company’s 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. In the first quarter of 2010, the Company re-launched its Health Link personal health record (“PHR”) business. The Company focuses 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.

F-7



Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


Beginning in early 2011, in conjunction with its focus on our HealthID businesses, including the development of the GlucoChip, the Easy Check breath glucose detection system, and iglucose wireless communication system, the Company has limited its activities in its ID Security segment.  In early 2011, the Company ceased acquiring new subscribers to its identity security and credit reporting businesses. It intends to continue to explore potential strategic transactions with third parties in the healthcare, identification, animal health, and other sectors.

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.

Concentration of Credit Risk

The Company maintained its cash in one financial institution during the years ended December 31, 2010 and 2009. Balances were insured up to Federal Deposit Insurance Corporation (“FDIC”) limits of $250,000 per institution. Cash exceeded the federally insured limits.

The Company’s 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.

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 shorter of the lease term or useful life, 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 attributable to such asset 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, 2010 and 2009.

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 Company’s 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.

In conjunction with the Company’s decision at the end of 2010 to cease acquiring new customers, it evaluated the Steel Vault business model and recoverability of its intangible assets by estimating the projected operating cash flows and estimated residual value of the NationalCreditReport.com business. As a result, the Company recorded a charge for the impairment of its goodwill of $1.6 million in the fourth quarter of 2010.  Effective December 31, 2010, the Company also stopped amortizing the remaining balance of its trademarks and domain names.


F-8



Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


Revenue Recognition

The Company’s revenue recognition policy is as follows:

Product Sales

Revenue from product sales are recorded at gross amounts. As the Company is in the initial process of commercializing these systems, the level of returns cannot yet be reasonably estimated. Accordingly, the Company does 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 has a right to return the product has elapsed.

Data Subscription Services

The services for maintaining subscriber information on the Company’s 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.

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 the Company’s revenue is derived from the Company’s 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 Company’s 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 customer’s acceptance of the Company’s 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.

In conjunction with the Company’s decision at the end of 2010 to cease acquiring new customers, it evaluated the Steel Vault business model and recoverability of its intangible assets by estimating the projected operating cash flows and estimated residual value of the NationalCreditReport.com business. As a result, the Company recorded a charge for the impairment of its goodwill of $1.6 million in the fourth quarter of 2010.  Effective December 31, 2010, the Company also stopped amortizing the remaining balance of its trademarks and domain names.

In October 2009, the Financial Accounting Standard Board (“FASB”) issued amended revenue recognition guidance for arrangements with multiple deliverables. The new guidance requires the use of management’s best estimate of selling price (BESP) for the deliverables in an arrangement when vendor specific objective evidence (VSOE), vendor objective evidence (VOE) or third party evidence (TPE) of the selling price is not available. In addition, excluding specific software revenue guidance, the residual method of allocating arrangement consideration is no longer permitted, and an entity is required to allocate arrangement consideration using the relative selling price method. In accordance with the guidance, the Company has elected to early adopt its provisions as of


F-9



Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


January 1, 2010 on a prospective basis for all new or materially modified arrangements entered into on or after that date. The adoption of this guidance did not have a material impact on the consolidated financial statements.

As discussed above, effective January 1, 2010 the Company adopted, on a prospective basis for all new or materially modified arrangements entered into on or after that date, the amended accounting guidance for multiple-deliverable revenue arrangements and the amended guidance related to the scope of existing software revenue recognition guidance. The amended guidance does not generally change the units of accounting for the Company’s revenue transactions. Most of the Company’s products and services qualify as separate units of accounting.

To the extent the Company sells products that may consist of multiple deliverables the revenue recognition is subject to specific guidance. A multiple-deliverable arrangement is separated into more than one unit of accounting if the following criteria are met:

·

The delivered item(s) has value to the client on a stand-alone basis; and

·

If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the Company’s control.

If these criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered. If these criteria are met for each element and there is a relative selling price for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative selling price.

Deferred revenue consists of amounts billed in excess of revenue recognized on sales of information services, relating generally to subscription fees.

Share-Based Compensation

Share-based compensation expenses are reflected in the Company’s consolidated statement of operations under selling, general and administrative expenses and research and development expenses.

The Company’s 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 Company’s computation of expected volatility is based on the historical volatility of comparable companies’ average historical volatility.

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 7 – 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 Company’s financial position is discussed in Note 7 — 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.


F-10



Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


Research and Development

Research and development costs are expensed as incurred and consist of development work associated with the Company’s existing and potential products. The Company’s 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 following were outstanding as of December 31, 2010 and 2009, 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,

 

2010

 

 

2009

 

 

 

 

 

 

 

Convertible preferred stock and dividends

 

 

 

 

2,038

Stock options

 

3,216

 

 

 

4,215

Warrants

 

304

 

 

 

454

Unvested restricted common stock

 

6,623

 

 

 

4,192

 

 

10,143

 

 

 

10,899

 

 

 

 

 


Impact of Recently Issued Accounting Standards

In January 2010, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“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.  We have evaluated the potential impact of this standard and expect it will have no significant impact on our financial position or results of operations.

In January 2010, the FASB issued ASU 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 that 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. ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009, and would be applied on a retrospective basis. The adoption of the provisions of ASU 2010-01 did not have a material effect on the financial position, results of operations or cash flows of the Company.

In April 2010, the FASB issued ASU No. 2010 - 17 – Revenue Recognition - Milestone Method (Topic 605): Milestone Method of Revenue Recognition . This standard provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for certain research and development transactions. Under this new standard, a company can recognize as revenue consideration that is contingent upon achievement of a milestone in the period in which it is achieved, only if the milestone meets all criteria to be considered substantive.  This standard will be effective for us on a prospective basis for periods beginning after January 1, 2011.  We have evaluated the potential impact of this standard and expect it will have no significant impact on our financial position or results of operations.


F-11



Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


Financial Condition

As of December 31, 2010, we had working capital of approximately $0.2 million and an accumulated deficit of $69.6 million compared to a working capital of approximately $5.2 million and an accumulated deficit of approximately $53.7 million as of December 31, 2009. The Company has incurred operating losses since and prior to the merger that created PositiveID.  The current operating losses are the result of the Company’s funding of its development products and projects:  the GlucoChip, the iglucose wireless communications system, the Easy Check breath analysis device, and the rapid flu detection system.  Operating losses are also due to salary costs, consulting fees, legal, accounting and other general and administrative costs. The Company expects its operating losses to continue through December 31, 2011.

Until we are able to achieve operating profits, it is our intention to continue to try to access the capital markets to fund the development of our HealthID products.  Since December 31, 2010, we have raised $1.9 million under our Socius financing facility.  We also have $4.0 million of remaining capacity available under the amended Optimus agreement and have submitted a notice to Optimus to purchase $1.4 million of the Company’s Series C Preferred Stock; however, there is no assurance that the tranche for $1.4 million will close.  Additionally, we currently have an effective “shelf” registration statement on Form S-3 which registers up to $9.6 million of securities.  Under that registration we have $5.3 million of availability remaining.  Because the aggregate market value of our common equity held by non-affiliates is less than $75 million, we will be limited from time to time in our ability to use capacity under the shelf registration statement.

The Company believes that with its current working capital, its access to capital under its equity line agreement, and through either new capital raised under its shelf registration statement, and/or reducing and delaying certain research, development and related activities, that it will have sufficient funds available to meet its working capital requirements through December 31, 2011. There can be no assurances that it will be successful in negotiating additional sources of equity or credit for its long-term capital needs.  The Company’s 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.

2.   Equipment


 

December 31,

 

December 31,

 

2010

 

2009

Equipment

$

310

 

$

303

Hardware

 

142

 

 

113

Purchased software

 

128

 

 

136

 

 

 

 

 

 

580

 

 

552

Less accumulated depreciation

 

(462)

 

 

(430)

 

 

 

 

 

$

118

 

$

122

 

 

 

 


Depreciation expense charged against income amounted to $32,000 and $29,000 for the years ended December 31, 2010 and 2009, respectively.

3.   Acquisitions

Merger with Steel Vault

On September 4, 2009, the Company, the 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 a wholly-owned subsidiary of the Company. The Merger Agreement provided for the Company’s conversion of each outstanding share of Steel Vault’s 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 $3.5 million.  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 time the transaction closed, in November 2009, the recorded value of the transaction amounted to $13.7 million as compared to approximately $3.5 million at the time the Merger Agreement was signed in September 2009. The purchase price includes Steel Vault’s approximately 6,696,000 stock options and 908,000 warrants outstanding which were converted into 3,349,000 options and 454,000 warrants to acquire shares of the Company’s common stock at the effective exchange date rate, and which were measured at the fair value using the Black-Scholes model on the date the transaction closed.


F-12



Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


Based on an assessment underlying the preliminary purchase price allocation the Company performed as of December 31, 2009, the determination was made that the estimated fair value of Steel Vault was approximately $3.5 million as of December 31, 2009. Accordingly, the Company recognized a charge attributable to the reduced carrying amount of goodwill by approximately $10.2 million. The total purchase price of the business acquired was allocated based on a final valuation as follows:

 

 

 

Cash

$

72 

Equipment and other assets

 

142 

Trademarks and domain names

 

500 

Subscriber base

 

1,250 

Goodwill

 

2,450 

Current liabilities

 

(910)

 

 

Total

 

3,504 

Charge attributable to adjustment of goodwill

 

10,170 

 

 

Total price paid

$

13,674 

 

 


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 of $2.5 million at the time the agreement was executed, 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 identified intangible assets for trademarks and domain names of $500,000 with a life of 5 years, and a subscriber base of $1,250,000 with a life of 12 months. Amortization expense of $1.4 million was recorded for the year ended December 31, 2010 associated with the finite lived intangible assets.

In conjunction with the Company’s decision at the end of 2010 to cease acquiring new customers, it evaluated the Steel Vault business model and recoverability of its intangible assets by estimating the projected operating cash flows and estimated residual value of the NationalCreditReport.com business. As a result, the Company recorded a charge for the impairment of its goodwill of $1.6 million in the fourth quarter of 2010.  Effective December 31, 2010, the Company adjusted the rate of amortization of its trademarks and domain names to reflect the estimated residual value over its estimated remaining economic life.

Easy Check Asset Purchase

On February 11, 2010, the Company purchased the assets of Easy Check Medical Diagnostics, LLC, which was comprised of the intellectual property related to the Easy Check breath analysis system and the iglucose wireless communication system. The Company issued 300,000 shares of common stock in connection with the purchase with a fair value of $351,000 based on a stock price of $1.17. The entire purchase price was expensed as in-process research and development as the development of these projects had not yet reached technological feasibility and had no alternative future uses.  We did not purchase any tangible assets from Easy Check Medical Diagnostics, LLC.  In February 2011, the Company amended this agreement to issue an additional 200,000 shares of common stock.  Also adjusted were contingent payments of up to an additional 200,000 shares of common stock and future royalties of 10%, reduced from an original royalty of 25%.

Proforma

The results of Steel Vault have been included in the condensed consolidated statements of operations since the date of acquisition, which was November 10, 2009. Unaudited pro forma results of operations for the twelve months ended December 31, 2009 are included below. Such pro forma information assumes that the Steel Vault acquisition occurred as of January 1, 2009, and revenue is presented in accordance with the Company’s accounting policies. This summary is not necessarily indicative of what the Company’s 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.

 

 

 

 

 

 

Twelve Months Ended

(In thousands, except per share amounts)

 

December 31, 2009

 

 

 

 

Revenue

 

$

1,581 

Net income (loss) attributable to common shareholders

 

$

(14,454)

Net income (loss) attributable to common shareholders
per common share — basic and diluted

 

$

(0.83)


F-13



Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


4.   Financing Agreements

Optimus Financing

On September 29, 2009, the Company entered into a Convertible Preferred Stock Purchase Agreement (the “Purchase Agreement”) with Optimus Technology Capital Partners, LLC (“Optimus”) under which Optimus was 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.

To facilitate the transactions contemplated by the Purchase Agreement, R & R Consulting Partners, LLC, a company controlled by Scott R. Silverman, the Company’s 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% as 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, cannot 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 as is further discussed below.

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 Series A 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 Series A 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.

On May 12, 2010, R & R demanded the return of 2.7 million shares loaned to Optimus.  Also on May 12, 2010, the Company sent Optimus a notice of its election to convert all of the outstanding shares of Series A Preferred Stock into 2,729,452 shares of Company common stock.  Optimus returned these shares to R & R in repayment of the loan. The conversion of the Series A Preferred Stock was determined by a fixed conversion price that was determined at the time of the closings of the Preferred Stock which were approximately $3.07 and $1.60, respectively. The Company was required to issue make-whole shares to Optimus equal to 35% of the Series A Liquidation Value because the Preferred Stock was redeemed prior the first anniversary of the issuance date.  On October 13, 2010, the Company filed a Certificate of Elimination with the Secretary of State of the State of Delaware effecting the elimination of the Certificate of Designation of Preferences, Rights and Limitations of Series A Preferred Stock.  No shares of the Series A Preferred Stock remain outstanding.

On March 14, 2011, the Company entered into an Amended and Restated Convertible Preferred Stock Purchase Agreement (the “Amended Purchase Agreement”) with Optimus.   The Amended Purchase Agreement amends and restates the Purchase Agreement, and, among other things, specifically (i) replaces the Series A Preferred Stock issuable under the Purchase Agreement with a Series C Preferred Stock with substantially similar terms, and (ii) reduces the maximum amount of preferred stock issuable to Optimus under the Purchase Agreement from $10,000,000 to $8,700,000, of which $4,700,000 worth was already issued (in 2009) under the Purchase Agreement as described above.

Under the terms of the Amended Purchase Agreement, from time to time and at the Company’s sole discretion, the Company can present Optimus with a notice to purchase shares of the Series C Preferred Stock (the “Notice”).   Optimus is obligated to purchase such Series C Preferred Stock on the twentieth 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, such as the Nasdaq or the over the counter bulletin board, (ii) the representations and warranties of the Company set forth in the Amended Purchase Agreement are true and correct as if made

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Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


on each tranche date, and (iii) that no such purchase would result in Optimus and its affiliates beneficially owning more than 9.99% of the Company’s common stock. In the event the closing bid price of the Company’s common stock during any one or more of the nineteen 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.  

On March 14, 2011, the Company delivered a Notice to Optimus to sell 140 shares of its Series C Preferred Stock for a tranche amount of approximately $1.4 million, which tranche is expected to close on or about April 12, 2011.   In support of this tranche, R & R loaned 2,729,452 shares, Mr. Silverman loaned 70,548 shares and Mr. Caragol loaned 700,000 shares of Company common stock to Optimus. The total fair value of shares loaned was approximately $1,900,000. There can be no assurance that this tranche will close.

Certificate of Designations

On March 14, 2011, pursuant to the Amended Purchase Agreement, the Company filed a Certificate of Designations of Preferences, Rights and Limitations of Series C Preferred Stock with the Secretary of State of the State of Delaware.  The Company is authorized to issue 400 shares of Series C Preferred Stock and the shares of Preferred Stock may not be converted if the shares of common stock issuable upon conversion of the Series C Preferred Stock plus any shares previously issued to Optimus or its affiliates would exceed 19.99% of the common stock outstanding as calculated and determined in accordance with Nasdaq Marketplace rules.  

Ranking and Voting. The Preferred Stock ranks, with respect to rights upon liquidation, winding-up or dissolution, senior to the Company’s Common Stock and any other classes of stock or series of preferred stock of the Company, including the Series B Preferred Stock, and junior to existing and future indebtedness of the Company. Otherwise, holders of the Preferred Stock will not be entitled to receive dividends and will have no right to vote on any matters, questions or proceedings, including, without limitation, the election of directors.

Conversion. One or more shares of the Preferred Stock may be converted into shares of Common Stock of the Company, on or after the six month anniversary of the issuance date, at a conversion price equal to the closing bid price on the trading day immediately preceding the Notice date (the “Conversion Price”) by the Company or Optimus. If the Company or Optimus exercises this conversion option with respect to any Preferred Stock, the Company will issue to Optimus the number of shares of Common Stock equal to (x) $10,000 per share of Preferred Stock multiplied by (y) the number of shares of Preferred Stock subject to the Notice divided by (z) the Conversion Price with respect to such shares. If the Company exercises the conversion prior to the fourth anniversary of the issuance of such shares, then in addition to the conversion shares, the Company must pay to the holder additional shares with respect to such converted shares: (i) 35% of the conversion shares if converted after the six-month anniversary of the issuance date but prior to the first anniversary of the issuance date, (ii) 27% of the converted shares if converted on or after the first anniversary but prior to the second anniversary of the issuance date, (iii) 18% of the converted shares if converted on or after the second anniversary but prior to the third anniversary of the issuance date, and (iv) 9% of the converted shares if converted on or after the third anniversary but prior to the fourth anniversary of the issuance date.

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 Series C 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.

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 C 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.

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 C 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 C Liquidation Value if redeemed prior to the first anniversary of the issuance date, (ii) 27% of the

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Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


Series C 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 C 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 C Liquidation Value if redeemed on or after the third anniversary but prior to the fourth anniversary of the issuance date.

The Preferred Stock and Common Stock issuable upon conversion of the Series C Preferred Stock, if any, will not be or have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

Socius Financing

On April 28, 2010, the Company entered into a Preferred Stock Purchase Agreement (the “Preferred Purchase Agreement”) with Socius Capital Group, LLC doing business as Socius Technology Capital Group, LLC (“Socius Technology”) under which Socius Technology was committed to purchase up to $4.2 million in shares of non-convertible Series B Preferred Stock of the Company (the “Preferred Stock”) in one or more tranches (each a “Preferred Tranche”), at $10,000 per share of Preferred Stock. Under the terms of the Preferred Purchase Agreement, from time to time and at the Company’s sole discretion, the Company could present Socius Technology with a notice to purchase such Preferred Stock (the “Preferred Notice”). Socius Technology was obligated to purchase such Preferred Stock on the third trading day after the Preferred Notice date, subject to satisfaction of certain closing conditions, including (i) that the Company’s common stock is listed for and trading on a trading market, (ii) the representations and warranties of the Company set forth in the Preferred Purchase Agreement are true and correct as if made on each Preferred Tranche date, and (iii) Socius Technology shall have received a commitment fee of $105,000 payable on the first tranche closing date (collectively, the “Closing Conditions”).

Commencing on the date of issuance of any such shares of Preferred Stock, holders of Preferred Stock were entitled to receive dividends on each outstanding share of Preferred Stock, which accrues in shares of Preferred Stock at a rate equal to 10% per annum from the date of issuance. Accrued dividends were be payable upon redemption of the Preferred Stock. As of December 31, 2010, the Company had accrued dividends of $152,000.

Stock Purchase Agreement

On April 28, 2010, the Company entered into a Stock Purchase Agreement (the “Agreement”) with Socius CG II, Ltd., a Bermuda exempted company (“Socius”) under which Socius was committed to purchase in connection with any Preferred Tranche, up to that number of shares of common stock equal in dollar amount to 100% of the applicable Preferred Tranche amount (the “Common Tranche”), at a per share price equal to the average of the individual daily volume weighted average price calculated over the ten trading days preceding the applicable tranche notice of the common stock on the date the Company provides notice of such tranche (the “Investment Price”). Under the Agreement, the Company also agreed to issue in connection with any Common Tranche, two-year warrants to purchase shares of common stock equal in dollar amount to 35% of the applicable Common Tranche, at an exercise price per share equal to the Investment Price.

Socius could pay the Investment Price for the common stock, at Socius’ option, in cash or a secured promissory note. Socius could pay the warrant exercise price, at Socius’ option, in cash, a secured promissory note, or, if applicable, by cashless exercise. The promissory note bears interest at 2.0% per year calculated on a simple interest basis. The entire principal balance and interest thereon was due and payable on the fourth anniversary of the date of the promissory note, but no payments were due so long as the Company was in default under the Preferred Purchase Agreement or the warrants or if there were any shares of Preferred Stock issued or outstanding. The promissory note was secured by the borrower’s right, title and interest in all outstanding shares of the Company’s common stock and other securities with a fair market value equal to the principal amount of the promissory note. The Company’s right to deliver a tranche notice to Socius pursuant to the Agreement was subject to the Closing Conditions and also that no purchase would result in Socius and its affiliates beneficially owning more than 9.99% of the common stock. Unless the Company obtained stockholder approval or Socius obtained an opinion of counsel that stockholder approval was not required, Socius could not exercise a warrant if, as a result of such exercise, the aggregate number of shares of common stock issued upon exercise of all warrants it held plus the aggregate number of shares of common stock issued under the Agreement would exceed 19.99% of the Company’s common stock outstanding.

Certificate of Designations

On April 28, 2010, the Company filed a Certificate of Designations of Preferences, Rights and Limitations of Series B Preferred Stock (the “Certificate of Designations”) with the Secretary of State of the State of Delaware. A summary of the Certificate of Designations is set forth below:


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Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


Ranking and Voting. The Preferred Stock ranks, with respect to rights upon liquidation, winding-up or dissolution, (i) senior to the Company’s Common Stock, and any other classes of stock or series of preferred stock of the Company except as set forth in clause (ii), and (ii) junior to the Company’s Series A Preferred Stock and all existing and future indebtedness of the Company. Holders of the Preferred Stock will not have rights to vote on any matters, questions or proceedings, including, without limitation, the election of directors.

Conversion. The Preferred Stock is not convertible into Common Stock.

Dividends and Other Distributions. Commencing on 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 upon redemption of the Preferred Stock. However, so long as any shares of Series A Preferred Stock are outstanding, no dividends or other distributions may be paid, declared or set apart with respect to the Preferred Stock.

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 and any liquidation preferences to the senior securities, before any distribution or payment is made to the holders of any junior securities, 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 B Liquidation Value, as defined below, 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.

Redemption . The Company may redeem, for cash or by an offset against any outstanding note payable from Socius to the Company that was issued by Socius, 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 B 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 Socius a make-whole price per share equal to the following with respect to such redeemed Preferred Stock: (i) 35% of the Series B Liquidation Value if redeemed prior to the first anniversary of the issuance date, (ii) 27% of the Series B 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 B 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 B Liquidation Value if redeemed on or after the third anniversary but prior to the fourth anniversary of the issuance date.

The Preferred Stock was not registered under the Securities Act of 1933 and could not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

Tranche Draw Down

On April 29, 2010, the Company presented Socius Technology with a Preferred Notice to purchase $2.3 million of Preferred Stock in a Preferred Tranche. Upon the closing of the Preferred Tranche, which occurred on May 4, 2010, the Company issued 230 shares of Preferred Stock. In connection with the Preferred Notice, the Company also presented Socius with a notice to purchase $2.3 million of common stock and warrants to purchase 600,746 shares of common stock. The Company issued 1,716,417 shares of common stock at an Investment Price per share of $1.34, paid in the form a secured promissory note, and a warrant to purchase 600,746 shares of common stock to Socius, at an exercise price equal to the Investment Price of $1.34, which warrant Socius exercised on April 29, 2010 and paid in the form of a secured promissory note.  There was no beneficial conversion feature as the fair value of the secured promissory notes approximated the fair value of the common stock and warrants issued on the date of issuance.  The promissory note is secured by the shares of Preferred Stock issued to Socius.

On January 13, 2011, we presented Socius Technology with a Preferred Notice to purchase $1.68 million of Preferred Stock in a Preferred Tranche.  Upon the closing of the Preferred Tranche, we issued 168 shares of Preferred Stock. In connection with the Preferred Notice we also presented Socius  with a notice to purchase $1.68 million in shares of our common stock at an Investment Price of $0.69 per share, for a total of 2,434,783 shares of our common stock pursuant to the Agreement.  On the same date, we issued Socius a two-year warrant to purchase 852,174 shares of our common stock, which is equal in dollar amount to 35% of the applicable tranche amount, at an exercise price per share equal to the Investment Price.  Socius may pay the warrant exercise price, at Socius' option, in cash, a secured promissory note, or, if applicable, by cashless exercise.  Socius elected to pay the warrant exercise price by a secured promissory note.  The promissory note is secured by the shares of Preferred Stock issued to Socius.


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Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


On January 28, 2011, we presented Socius Technology with a Preferred Notice to purchase $0.2 million of Preferred Stock in a Preferred Tranche.  Upon the closing of the Preferred Tranche, we issued 22 shares of Preferred Stock. In connection with the Preferred Notice, we also presented Socius with a notice to purchase $0.2 million in shares of our common stock at an Investment Price of $0.77 per share, for a total of 285,714 shares of our common stock pursuant to the Agreement.  On the same date, we issued Socius a two-year warrant to purchase 100,00 shares of our common stock, which is equal in dollar amount to 35% of the applicable tranche amount, at an exercise price per share equal to the Investment Price.  Socius may pay the warrant exercise price, at Socius' option, in cash, a secured promissory note, or, if applicable, by cashless exercise.  Socius elected to pay the warrant exercise price by a secured promissory note. The promissory note is secured by the shares of Preferred Stock issued to Socius.

5.   Stockholders’ Equity

Stock Option Plans

In April 2002, the Company’s 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, 2010, approximately 2.0 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, 2010. All the outstanding options are fully vested and do not expire until seven to nine years from the vesting date. As of December 31, 2010, no SARs have been granted and 441 shares may still be granted under the VeriChip 2002 Plan.

On April 27, 2005, the Company’s 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, 2010, approximately 0.3 million options and shares 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, 2010, 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, which was amended and restated on December 16, 2008 (the “VeriChip 2007 Plan”). 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, 2010, approximately 3.0 million options and shares have been granted under the VeriChip 2007 Plan. As of December 31, 2010, no SARs have been granted and 2,962 shares may be granted under the VeriChip 2007 Plan.

On November 10, 2009, the Company adopted the VeriChip 2009 Stock Incentive Plan (the “VeriChip 2009 Plan”). Under the VeriChip 2009 Plan, the number of shares for which options, SARs or performance shares may be granted is 8.0 million. As of December 31, 2010, approximately 6.4 million options and shares have been granted under the VeriChip 2009 Plan. As of December 31, 2010, no SARs have been granted and 1.6 million shares may be granted under the VeriChip 2009 Plan.

In addition, as of December 31, 2010, 0.3 million options to purchase the Company’s common stock have been granted outside of the Company’s plans, which remain outstanding as of December 31, 2010. 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 from seven to nine years.

At the effective time of the Merger, the Company assumed all of Steel Vault’s 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 Company’s 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 Company 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 vesting date.


F-18



Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


A summary of stock options for 2010 and 2009 is as follows:


 

2010

 

2009

 

 

 

 

Weighted-

 

 

 

 

Weighted-

 

Number

 

Average

 

Number

 

Average

 

of

 

Exercise

 

of

 

Exercise

 

Options

 

Price

 

Options

 

Price

Outstanding on January 1

 

4,215 

 

$

1.73

 

 

1,225 

 

$

4.52

Granted (1)

 

85 

 

 

1.08

 

 

3,349 

 

 

0.58

Exercised

 

(719)

 

 

0.50

 

 

(138)

 

 

0.44

Cancelled and forfeited

 

(365)

 

 

1.37

 

 

(221)

 

 

0.56

Outstanding on December 31 (2)

 

3,216 

 

 

2.03

 

 

4,215 

 

 

1.73

Exercisable on December 31

 

3,103 

 

$

2.07

 

 

4,102 

 

 

1.77

 

 

 

 

 

 

 

 

Shares available on December 31 for options that may be granted

 

1,614 

 

 

 

 

 

3,312 

 

 

 


(1)  Options granted in 2009 represent grants to former option holders of Steel Vault pursuant to the Merger in 2009. The total compensation expense associated with the options granted in 2010 and 2009 was $22,000 and nil, respectively. As of December 31, 2010 and 2009, the remaining amount of the compensation expense to be recorded over the remaining vesting period of the options was approximately $49,000 and nil, 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 Company’s common stock was estimated to be $0.62 and $1.10 at December 31, 2010 and 2009, respectively, based upon its closing price on the NASDAQ. As of December 31, 2010 and 2009, the intrinsic value for all options outstanding was approximately $0.4 million and $1.9 million, respectively.


The following table summarizes information about stock options at December 31, 2010 (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

 

 

829

 

 

 

8.19

 

 

$

0.36

 

 

829

 

 

$

0.36

 

$0.37 to $0.62

 

 

1,106

 

 

 

5.35

 

 

 

0.47

 

 

1,052

 

 

 

0.45

 

$0.68 to $1.99

 

 

503

 

 

 

3.07

 

 

 

0.87

 

 

444

 

 

 

0.70

 

$2.00 to $5.75

 

 

349

 

 

 

5.86

 

 

 

5.59

 

 

349

 

 

 

5.59

 

Above $5.75

 

 

429

 

 

 

3.34

 

 

 

7.78

 

 

429

 

 

 

7.78

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,216

 

 

 

5.51

 

 

$

2.03

 

 

3,103

 

 

$

2.05

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested options

 

 

3,103

 

 

 

5.37

 

 

$

2.05

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


The weighted average per share fair value of grants made in 2010 and 2009 for the Company’s incentive plans were $1.10 and $1.19, respectively.

A summary of restricted stock outstanding as of December 31, 2010 and 2009 and changes during the years then ended is presented below:


 

 

2010

 

2009

Unvested at January 1

 

 

4,191 

 

 

100 

Issued

 

 

5,142 

 

 

4,445 

Vested

 

 

(2,710)

 

 

(354)

Forfeited or Expired

 

 

— 

 

 

— 

 

 

 

 

 

 

Unvested at December 31

 

 

6,623 

 

 

4,191 

 

 

 

 

 


F-19


Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


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 Company’s 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.

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 Company’s common stock;

·

the expected life of issued stock options;

·

the expected volatility of the Company’s 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:


 

2010

 

2009

 

 

 

 

 

 

 

 

Expected dividend yield

 

 

 

 

Expected stock price volatility

 

100

%

 

100

%

Risk-free interest rate

 

2.53

%

 

0.36

%

Expected term (in years)

 

6.0

 

 

1.0

 


Warrants

On November 10, 2009, pursuant to the Steel Vault merger, all outstanding Steel Vault warrants were converted into approximately 0.3 million Company warrants. These warrants were granted at exercise prices ranging from $0.60 to $0.88 per share, are fully vested and are exercisable for a period of five years from the vest date. The warrants expire 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 2010 and 2009, compensation expense of $22,000 and nil, respectively, was recorded from 60,000 and nil options granted to employees in 2010 and 2009, respectively.

In February 2009, the Company granted approximately 518,000 shares of its restricted common stock to Mr. Caragol, its chief financial officer, in lieu of salary. The shares vested according to the following schedule: (i) 20% vested on the grant date, and (ii) 80% vested on January 1, 2010. Compensation expense of approximately nil and $213,000 was recorded for the years ended December 31, 2010 and 2009, respectively, for these shares.

In February 2009, the Company granted approximately 602,000 shares of its restricted common stock to Mr. Silverman, its then executive chairman, in lieu of salary, which vested on January 1, 2010. Compensation expense of approximately $1,000 and $300,000 was recorded for the years ended December 31, 2010 and 2009, respectively, for these shares.

In February 2009 and August 2009, the Company issued 450,000 shares of its restricted common stock to members of the Board of Directors, which vested on January 1, 2010. The Company determined the value of the stock to be approximately $173,000 based on the value of its common stock on the date 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 $1,000 and $172,000 for the years ended December 31, 2010 and 2009, respectively, associated with this restricted stock.


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Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


In January and December 2008, the Company issued options exercisable for an aggregate of approximately 195,000 shares of common stock: 155,000 to employees and 40,000 to a consultant.  Most options vest over a one or two year life.

The Company determined the fair value of the 155,000 employee options to be $37,000 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 was approximately $6,000 was recorded for the years ended December 31, 2010 and 2009.

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. Accordingly, the compensation expense recorded in connection with these options was approximately $3,000 and $11,000 was recorded for the years ended December 31, 2010 and 2009, respectively.

In September and October 2009, the Company granted an aggregate of approximately 350,000 shares of its restricted common stock to a research and development partner. Such restricted shares vested over the periods of performance in the first quarter of 2010. The Company recorded research and development 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 is vested.  Research and development expense recorded in connection with the restricted stock for the years ended December 31, 2010 and 2009 was approximately 162,000 and $241,000, respectively.

In November and December 2009, the Company granted approximately 475,000 shares of restricted common stock: 50,000 to an employee and 425,000 to consultants.  These shares vested between January 1, 2010 and 2011.

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 Company’s 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 approximately $56,000 and $8,000 in compensation expense for the years ended December 31, 2010 and 2009, respectively, in connection with this grant.

The Company recorded compensation expense associated with the 425,000 shares of restricted stock issued to 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 years ended December 31, 2010 and 2009 was approximately $97,000 and $300,000, respectively.

In November 2009, the Company granted 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 recognized as compensation expense over the vesting period. The Company recorded compensation expense of approximately $2.2 million and $0.3 million the years ended December 31, 2010 and 2009, respectively, associated with this restricted stock.

In January 2010, the Company granted 50,000 shares of its common stock to a consultant from the VeriChip 2002 Plan. The Company determined the value of the stock to be approximately $56,000 based on the value of its common stock on the dates of grant. The Company recorded compensation expense of approximately $56,000 for the year ended December 31, 2010, associated with this stock.

In January 2010, the Company granted 100,000 shares of its common stock to an employee from the VeriChip 2007 Plan, 50% of which vested immediately and the other 50% of which vested on July 1, 2010. The Company determined the value of the stock to be approximately $109,000 based on the value of its common stock on the dates of grant. The Company recorded compensation expense of approximately $109,000 for the year ended December 31, 2010, associated with this restricted stock.

In January 2010, the Company granted 385,000 shares of its common stock to members of its Board of Directors of which 370,000 shares were restricted, vesting on January 1, 2011. The Company determined the value of the stock to be approximately $420,000 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 $418,000 for the year ended December 31, 2010, associated with this stock.

In February and April 2010, the Company granted an aggregate of approximately 290,000 shares of its restricted common stock to a research and development partner, Receptors. Such restricted shares vested over the periods of performance between February and September 2010. The Company recorded research and development 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 is vested. The Company recorded compensation expense of approximately $310,000 for the year ended December 31, 2010, associated with this restricted stock.

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Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


In April 2010, the Company issued options exercisable for approximately 60,000 shares of common stock to employees, vesting between 2011 and 2012. The Company determined the fair value of the options to be $66,000 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 was approximately $22,000 for the year ended December 31, 2010.

In April 2010, the Company granted 16,000 shares of its common stock to a consultant who will provide government affairs services from the Company’s authorized/unissued reserve. The Company determined the value of the stock to be approximately $23,000 based on the value of its common stock on the dates of grant. Compensation expense recorded in connection with the restricted stock for the years ended December 31, 2010 was $23,000.

In April and May 2010, the Company granted an aggregate of approximately 1.4 million shares of its common stock to its employees, including the Company’s chairman and chief executive officer and its president and chief financial officer.  These executives agreed to receive stock based compensation in lieu of cash for salary and a portion of their incentive compensation for the remainder of 2010. The Company determined the value of the stock to be approximately $1.9 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, between January 1, 2011 and 2012. Compensation expense recorded in connection with the restricted stock for the year ended December 31, 2010 was $1.3 million.

In June 2010, the Company extended previously fully vested options set to expire on June 28, 2010 for one year for 175,000 shares for its chief executive officer. The Company recorded compensation expense of $23,000 for the year ended December 31, 2010, related to the extension.

In July 2010, the Company granted 50,000 shares of its common stock to an employee, 50% of which will vest in July 2011 and the other 50% of which will vest in July 2012. The Company determined the value of the stock to be approximately $51,000 based on the value of its common stock on the dates of grant. The Company recorded compensation expense of approximately $18,000 for the year ended December 31, 2010 associated with this restricted stock.

In July and September 2010, the Company granted 85,500 shares from the VeriChip 2009 Plan and 37,500 shares from the Company’s authorized/unissued reserve to several consultants. The Company determined the value of the stock based on the value of its common stock on the dates of grant. The Company recorded compensation expense of approximately $108,000 for the year ended December 31, 2010 associated with this stock.

In November 2010, the Company granted approximately 1.8 million shares of its common stock to its chairman and chief executive officer and its president and chief financial officer, vesting 50% on January 1, 2012 and 2013.   The Company determined the value of the stock to be approximately $1.1 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. Compensation expense recorded in connection with the restricted stock for the year ended December 31, 2010 was approximately $0.1 million.

In December 2010, the Company granted approximately 125,000 shares of its restricted common stock to Receptors, a research and development company. Such shares were fully vested at the time of grant. The Company recorded research and development 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 is vested. Compensation expense recorded in connection with the restricted stock for the year ended December 31, 2010 was approximately $69,000.

In December 2010, the Company granted approximately 0.9 million shares of its common stock to its employees and directors.  The Company determined the value of the stock to be approximately $0.5 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 through January 1, 2012. Compensation expense recorded in connection with the restricted stock for the year ended December 31, 2010 was $48,000.

NASDAQ Listing

On September 13, 2010, the Company received a letter from the Nasdaq indicating that the Company is not in compliance with the Nasdaq’s requirements for continued listing because, for the 30 consecutive business days prior to September 13, 2010, the bid price of its common stock closed below the minimum $1.00 per share price requirement for continued listing under Nasdaq Listing Rule 5550(a)(2) (the “Rule”).  The Company had 180 calendar days (or until March 14, 2011) to regain compliance with the bid price requirement.


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Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


On March 15, 2011, the Company received a letter from the Nasdaq staff  notifying the Company of a staff determination that the Company has not regained compliance with the $1.00 per share minimum bid price requirement set forth in the Rule and that based on the Company’s financial statement information as of September 30, 2010 (i.e., the date of the Company’s most recent periodic report filed with the SEC), it was not eligible, in accordance with Listing Rule 5810(c)(3)(A)(ii), for a second 180-calendar day cure period with respect to the bid price deficiency.  To be eligible for the additional 180-calendar day cure period, the Company would have had to meet the applicable standards for initial listing on The Nasdaq Capital Market (except the bid price requirement) based on its most recent public filings.  The March 15, 2011 letter notes that the Company’s stockholders’ equity as of September 30, 2010 of $4,697,000 does not meet the $5 million initial listing requirement for The Nasdaq Capital Market.

 Nasdaq has advised the Company that it may appeal the Nasdaq staff's determination to a Nasdaq Hearings Panel (the "Panel") in accordance with the procedures set forth in the Nasdaq Listing Rule 5800 Series. The filing of the appeal will automatically stay any delisting procedures until after a hearing and the determination of the Panel. The Company requested a hearing on March 21, 2011, in accordance with applicable Listing Rules, and the hearing is currently scheduled for April 28, 2011. At the hearing, the Company will present a plan to regain compliance with the bid price requirement to the Panel and request that the Panel grant the Company an exception to Nasdaq’s continued listing standards for a sufficient period to implement that plan. Under Listing Rule 5815(c)(1), the Panel has the discretion to grant such an exception for a period not to exceed 180 days from the date of the staff determination letter – that is, on or about September 15, 2011. There can be no assurance that the Panel will accept the Company’s compliance plan or grant the Company’s request for continued listing.

If the Company’s 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 the Company’s business and may hinder or delay its ability to consummate potential strategic transactions or investments. Such delisting could also adversely affect the Company’s ability to obtain financing for the continuation of its operations and could result in the loss of confidence by investors, suppliers and employees.

6.   Selling, general and administrative expense


 

Years Ended

 

December 31,

 

2010

 

 

2009

Salaries and benefits (1)

$

5,843

 

 

$

2,058

Legal and accounting

 

1,413

 

 

 

1,536

On-line customer acquisition fees – Identity Security

 

2,381

 

 

 

Sales and marketing

 

1,840

 

 

 

1,148

Insurance

 

434

 

 

 

192

Travel and entertainment

 

261

 

 

 

140

Depreciation and amortization

 

1,396

 

 

 

29

Other

 

764

 

 

 

650

 

 

 

 

 

 

$

14,332

 

 

$

5,753

 

 

 

 

 


(1)  Included in salaries and benefits is $4.5 million and $1.4 million of share-based compensation expense for the years 2010 and 2009, respectively, associated with stock compensation (includes stock options and restricted stock). See Note 5 to the Consolidated Financial Statements.


7.   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.


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Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


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,

 

2010

 

 

2009

Deferred tax assets (liabilities):

 

 

 

 

 

 

 Accrued expenses and reserves

$

343

 

 

$

290 

Stock-based compensation

 

5,942

 

 

 

4,349 

Intangibles

 

132

 

 

 

— 

Property and equipment

 

(8)

 

 

 

(11)

Net operating loss carryforwards

 

22,397

 

 

 

17,933 

Gross deferred tax assets

 

28,807

 

 

 

22,561

Valuation allowance

 

(28,807)

 

 

 

(22,561)

Net deferred taxes

$

 

 

$

 

 

 

 

 


The valuation allowance for U.S. deferred tax assets increased by approximately $6.2 million and $7.0 million in 2010 and 2009, 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, 2010 and 2009, has primarily been provided for net U.S. federal and state deferred tax assets.

The difference between the effective rate reflected in the provision for income taxes on loss before taxes and the amounts determined by applying the applicable statutory U.S. tax rate are analyzed below:

 

 

2010

 

2009

 

%

 

%

Statutory tax benefit

 

(34)

 

 

(34)

State income taxes, net of federal effects

 

(6)

 

 

(6)

Permanent tax basis difference in stock of subsidiary

 

 

 

(12)

Impairment of goodwill

 

6

 

 

28

Net operating losses of acquired subsidiary

 

 

 

(34)

Stock based compensation on exercise and vesting

 

(4)

 

 

Other

 

(1)

 

 

Change in deferred tax asset valuation allowance

 

39

 

 

58

  Provision for income taxes

 

 

 

 

 

 

 


On December 31, 2010, the Company had U.S. federal net operating loss carry forwards of approximately $56.0 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 2030. 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 in 2008.

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. Since 2008 the Company has issued additional shares which results in additional changes of ownership under IRC Section 382. As a result the Company’s future utilization of its net operating loss carryforwards has been significantly limited as to the amount of use in any particular year, and consequently may be subject to expiration.

The Company does not have any uncertain tax positions at December 31, 2010.

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, 2007.

In January 2010, Stanley Canada Corporation, or Stanley, received a notice from the Canadian Revenue Agency (CRA), that the CRA would be performing a review of Xmark’s Canadian tax returns for the periods 2005 through 2008. The Company has complied with all of Stanley’s information requests. This review covers all periods that the Company owned Xmark. 

In February 2011, Stanley received a notice from the CRA that the CRA completed its review of the Xmark returns and was questioning certain deductions on the tax returns under review.  The Company does not agree with the position taken by the CRA and intends to dispute such findings.  Based on the Company’s review of the correspondence and evaluation of the supporting detail, it does not believe that the ultimate resolution of this dispute will have a material negative impact on the Company’s historical tax liabilities, its current financial position or results of operations. The Company believes that as of December 31, 2010, it has adequately accrued for this dispute.

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Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


8.   Commitments and Contingencies

Employment Contract

On November 10, 2010, the Company’s compensation committee (the “Compensation Committee”) approved a five year employment and non-compete agreement for Scott R. Silverman, our Chairman of the Board and Chief Executive Officer, and a five year employment and non-compete agreement for William J. Caragol, our President and Chief Financial Officer. Beginning in 2011, Mr. Silverman and Mr. Caragol will receive a base salary of $375,000 and $225,000, respectively. During the term, each executive shall receive a minimum annual bonus for each calendar year of the term in an amount equal to a minimum of one (1) times such executive’s base salary.  Additionally, the Compensation Committee has the authority to approve a discretionary bonus for each year of the term. Each of Mr. Silverman and Mr. Caragol will receive 1,000,000 and 750,000 shares of restricted stock, respectively, under the PositiveID Corporation 2009 Stock Incentive Plan. These restricted shares will vest according to the following schedule: (i) 50% vest on January 1, 2012; and (ii) 50% vest on January 1, 2013.

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 Company’s 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 Company’s intellectual property rights and intellectual property licenses could have a material adverse effect on the Company’s business, financial condition and operating results.

9.   Related Party Transactions

Stock Ownership

As of  March 25, 2011, Mr. Silverman beneficially owned 27.1% of the Company’s outstanding common stock, including the 1,035,000 shares and 54,000 shares underlying a warrant that are directly owned by Blue Moon Energy Partners, LLC (“Blue Moon”) and 4,785,008 shares that are directly owned by R & R.  Mr. Silverman, the Company’s chief executive officer and chairman of the Board of Directors, is a manager and controls a member of Blue Moon (i.e., R & R). William J. Caragol, the Company’s president, chief financial officer and member of the Board of Directors, is a manager and member of Blue Moon.

Optimus Financing

On September 29, 2009, the Company entered into the Purchase Agreement with Optimus, under which Optimus was committed to purchase up to $10 million of convertible Preferred Stock in one or more tranches. To facilitate the transactions contemplated by the Purchase Agreement, R & R 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 and Optimus. On May 13, 2010, the Company converted all of the outstanding shares of Preferred Stock into shares of its common stock and Optimus repaid R&R in full. On March 14, 2011, the Company entered into an Amended and Restated Convertible Preferred Stock Purchase Agreement with Optimus.  To facilitate the transactions contemplated thereby, R & R Consulting Partners, LLC, and Messrs. Silverman and Caragol loaned shares of common stock to Optimus.  For more information regarding this transaction, see Note 4, “Financing Agreements,” to these consolidated financial statements.

10.   Segments

Since the merger with Steel Vault on November 10, 2009, we operate in two business segments: HealthID and ID Security.

HealthID Segment

Our HealthID segment is currently focused on the development of four products: (1) the GlucoChip, a glucose-sensing microchip, based on our proprietary intellectual property which is being developed in conjunction with Receptors LLC (“Receptors”), (2) iglucose TM , a stand-alone, self-contained unit that automatically queries a diabetic user’s date-capable glucometer for blood glucose data and sends that data via encrypted text messaging to the iglucose online database, (3) Easy Check TM , a non-invasive breath glucose detection system, based on the correlation of acetone in exhaled breath to blood glucose levels, and (4) the rapid flu detection system, also being developed in conjunction with Receptors.

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Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


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 ("FDA") cleared our VeriMed system for use in medical applications in the United States. We have not actively marketed the VeriMed system since early 2008.

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 (“PHR”) business. Our NationalCreditReport.com business was acquired in conjunction with the merger of National Credit Report.com, LLC with Steel Vault in November 2009. Our NationalCreditReport.com business 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 PHR business. The Company plans to focus its marketing efforts on partnering with health care providers and exchanges, physicians group, Electronic Medical Record (“EMR) system vendors, and insurers to use Health Link as PHR provided to their patients.

Beginning in early 2011, in conjunction with our focus on our HealthID businesses, including the development of the GlucoChip, the Easy Check breath glucose detection system, and iglucose wireless communication system, we have limited our activities in our ID Security segment.  In early 2011, we ceased acquiring new subscribers to our identity security and credit reporting businesses. We intend to continue to explore potential strategic transactions with third parties in the healthcare, identification, animal health, and other sectors.

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, 2010

 

 

 

 

 

 

 

 

Revenue

$

75 

 

$

3,018 

 

$

3,093 

Operating loss

 

(10,357)

 

 

(5,593)

 

 

(15,950)

Loss before income taxes

 

(10,327)

 

 

(5,589)

 

 

(15,916)

 

 

 

 

 

 

 

 

 

Total assets

$

1,515 

 

$

1,800 

 

$

3,315 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

(10,502)

 

 

(16,057)

Loss before income taxes

 

(1,096)

 

 

(10,502)

 

 

(11,598)

 

 

 

 

 

 

 

 

 

Total assets

$

6,502 

 

$

4,470 

 

$

10,972 


In conjunction with the Company’s decision at the end of 2010 to cease acquiring new customers, it evaluated the Steel Vault business model and recoverability of its intangible assets by estimating the projected operating cash flows and estimated residual value of the NationalCreditReport.com business. As a result, the Company recorded an impairment charge of $1.6 million in the fourth quarter of 2010.  Effective December 31, 2010, the Company also adjusted the rates of amortization of its trademarks and domain names to reflect the estimated residual value over its estimated remaining economic life.  The impairment charge and change in amortization affect the Company’s ID Security Segment.


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Table of Contents

POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)


11.   Supplementary Cash Flow Information

In the years ended December 31, 2010 and 2009, the Company had the following non-cash investing and financing activities:


 

Years Ended

December 31,

 

2010

 

2009

Non-cash financing and investing activities:

 

 

 

 

 

Debt financing costs

$

 

$

Accrued dividend payable

 

152

 

 

90

Issuance of common stock and options for Steel Vault Acquisition

 

 

 

13,134

 

$

152

 

$

13,224

 

 

 

 




F-27



Table of Contents

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 (5)

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

3.2

Amended and Restated By-laws of PositiveID Corporation adopted as of December 12, 2005, as amended on March 16, 2010 (5)

4.1

Form of Specimen Common Stock Certificate (5)

10.1*

VeriChip Corporation 2002 Flexible Stock Plan, as amended through December 21, 2006 (9)

10.2*

VeriChip Corporation 2005 Flexible Stock Plan, as amended through December 21, 2006 (9)

10.3*

VeriChip Corporation 2007 Stock Incentive Plan, as amended and restated (10)

10.4*

VeriChip Corporation 2009 Stock Incentive Plan (11)

10.5*

VeriGreen Energy Corporation 2009 Flexible Stock Plan (12)

10.6*

PositiveID Animal Health Corporation 2010 Flexible Stock Plan (5)

10.7*

Syscomm International Corporation 2001 Flexible Stock Plan, as amended and restated (22)

10.8*

Form of Restricted Stock Award Agreement under the 2002/2005 Flexible Stock Plan (9)

10.9*

Form of Non-Qualified Stock Option Award Agreement under the 2002/2005 Flexible Stock Plan (9)

10.10*

Form of Non-Qualified Option Award Agreement under the VeriChip Corporation 2007 Stock Incentive Plan (13)

10.11*

Form of Stock Award Agreement under the VeriChip Corporation 2007 Stock Incentive Plan (14)

10.12*

Form of Non-Qualified Option Award Agreement under the VeriChip Corporation 2009 Stock Incentive Plan (5)

10.13*

Form of Stock Award Agreement under the VeriChip Corporation 2009 Stock Incentive Plan (5)

10.14*

Form of Restricted Stock Award Agreement under the VeriGreen Energy Corporation 2009 Flexible Stock Plan (5)

10.15*

Form of Non-Qualified Stock Option Award Agreement under the VeriGreen Energy Corporation 2009 Flexible Stock Plan (5)

10.16*

Form of Restricted Stock Award Agreement under the PositiveID Animal Health Corporation 2010 Flexible Stock Plan (5)

10.17*

Form of Non-Qualified Stock Option Award Agreement under PositiveID Animal Health Corporation 2010 Flexible Stock Plan (5)

10.18*

Form of Restricted Stock Award Agreement under the Syscomm International Corporation 2001 Flexible Stock Plan, as amended and restated (5)

10.19*

Form of Non-Qualified Stock Option Award Agreement under the Syscomm International Corporation 2001 Flexible Stock Plan, as amended and restated (5)

10.20*

Letter Agreement, dated March 27, 2009, between PositiveID Corporation and William J. Caragol (17)

10.21

Letter Agreement, dated May 15, 2008, between PositiveID Corporation and Digital Angel Corporation (1)

10.22*

PositiveID Corporation Employment and Non-Compete Agreement between the Company and Scott R. Silverman dated November 11, 2010 (23)

10.23*

PositiveID Corporation Employment and Non-Compete Agreement between the Company and William J. Caragol dated November 11, 2010 (23)

10.24

Guarantee, dated May 15, 2008, between Digital Angel Corporation and The Stanley Works (1)

10.25

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 (12)


Table of Contents


10.26†

Development and Supply Agreement, dated March 17, 2009, between PositiveID Corporation and Medical Components, Inc. (12)

10.27

Secured Convertible Promissory Note, dated June 4, 2009, between Steel Vault Corporation and PositiveID

Corporation (20)

10.28

Common Stock Purchase Warrant, dated June 4, 2009, between Steel Vault Corporation and PositiveID Corporation (20)

10.29

Convertible Note and Warrant Subscription Agreement, dated June 4, 2009, between Steel Vault Corporation and PositiveID Corporation (20)

10.30

Security Agreement, dated June 4, 2009, between Steel Vault Corporation and PositiveID Corporation (20)

10.31

Security Agreement, dated June 4, 2009, between National Credit Report.com, LLC and PositiveID Corporation (20)

10.32

Subordination and Intercreditor Agreement, dated June 4, 2009, between Blue Moon Energy Partners LLC and PositiveID Corporation (20)

10.33

Common Stock Purchase Warrant, dated June 4, 2009, between Steel Vault Corporation and William J. Caragol (20)

10.34

Guaranty of Collection, dated June 4, 2009, among Steel Vault Corporation, William J. Caragol and PositiveID Corporation (20)

10.35

Secured Convertible Promissory Note, dated March 20, 2009, between Steel Vault Corporation and Blue Moon Energy Partners LLC (5)

10.36

Security Agreement, dated March 20, 2009, between Steel Vault Corporation and Blue Moon Energy Partners LLC (5)

10.37

Warrant to Purchase Common Stock of Steel Vault Corporation, dated March 20, 2009, given to Blue Moon Energy Partners LLC (5)

10.38

License Agreement, dated September 21, 2009, between PositiveID Corporation and Receptors LLC (8)

10.39

Development/Master Agreement, dated September 21, 2009, between PositiveID Corporation and Receptors LLC (8)

10.40

First Amendment to Development/Master Agreement, dated April 22, 2010, between PositiveID Corporation and Receptors LLC (6)

10.41

Convertible Preferred Stock Purchase Agreement, dated September 29, 2009, between PositiveID Corporation and Optimus Capital Partners, LLC (21)

10.42

Amended and Restated Convertible Preferred Stock Purchase Agreement, dated March 14, 2011, between PositiveID Corporation and Optimus Capital Partners, LLC (25)

10.43

Preferred Stock Purchase Agreement, dated April 28, 2010, between PositiveID Corporation and Socius Capital Group, LLC (24)

10.44

Stock Purchase Agreement, dated April 28, 2010, between PositiveID Corporation and Socius CG II, Ltd. (24)

10.45

License Agreement, dated October 6, 2009, between PositiveID Corporation and Receptors LLC (8)

10.46

Development/Master Agreement, dated October 6, 2009, between PositiveID Corporation and Receptors LLC (8)

10.47

Amended and Restated License Agreement, dated February 26, 2010, between PositiveID Corporation and Receptors LLC (5)

10.48

Amended and Restated Development/Master Agreement, dated February 26, 2010, between PositiveID Corporation and Receptors LLC (5)

10.49†

AT&T Machine to Machine Wireless Communications Agreement, dated January 24, 2011, between PositiveID Corporation and AT&T Mobility II, LLC

10.50†

Raytheon Microelectronics Proposal for the Manufacturing and Test of Transponder RFID S100, dated as of February 24, 2011, between PositiveID Corporation and Raytheon Microelectronics España S.A.

21.1

List of Subsidiaries of PositiveID Corporation

23.1

Consent of EisnerAmper 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



Table of Contents


(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-K previously filed by PositiveID Corporation on March 19, 2010

(6)    Incorporated by reference to the Form 10-Q previously filed by PositiveID Corporation on May 6, 2010

(7)    Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on October 15, 2010

(8)    Incorporated by reference to the Form 10-Q previously filed by PositiveID Corporation on November 12, 2009.

(9)    Incorporated by reference to the Form 10-K previously filed by PositiveID Corporation on April 2, 2007.

(10)  Incorporated by reference to the Form 10-K previously filed by PositiveID Corporation on February 12, 2009.

(11)  Incorporated by reference to the Registration Statement on Form S-8 previously filed by PositiveID Corporation on November 12, 2009 (Registration No. 333-163066).

(12)  Incorporated by reference to the Form 10-Q previously filed by PositiveID Corporation on May 14, 2009.

(13)  Incorporated by reference to the Form 10-Q previously filed by PositiveID Corporation on August 8, 2007.

(14)  Incorporated by reference to the Form 10-Q previously filed by PositiveID Corporation on November 8, 2007.

(15)  Incorporated by reference to the Form 10-Q previously filed by PositiveID Corporation on August 14, 2008.

(16)  Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on January 6, 2009.

(17)  Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on March 30, 2009.

(18)  Incorporated by reference to the Registration Statement on Form S-1 previously filed by PositiveID Corporation on December 29, 2005 (Registration No. 333-130754).

(19)  Incorporated by reference to the Form 10-Q previously filed by PositiveID Corporation on May 15, 2007.

(20)  Incorporated by reference to the Form 10-Q previously filed by PositiveID Corporation on August 13, 2009

(21)  Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on September 29, 2009.

(22)  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).

(23)  Incorporated by reference to the Form 10-Q previously filed by PositiveID Corporation on November 12, 2010.

(24)  Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on April 29, 2010.

(25)  Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on March 14, 2011.

*      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.


Exhibit 3.1

CERTIFICATE OF AMENDMENT
OF
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
VERICHIP CORPORATION

It is hereby certified that:

1. The name of the corporation (hereinafter called the “Corporation”) is VeriChip Corporation.

2. The Certificate of Incorporation of the Corporation is hereby amended by changing the Article numbered “I” so that, as amended, said Article shall be and read as follows:

ARTICLE I
NAME

The name of the corporation is PositiveID Corporation.

3. The Certificate of Incorporation of the Corporation is hereby amended by changing the first paragraph of the Article numbered “IV” so that, as amended, said paragraph of said Article shall be and read as follows:  

ARTICLE IV
CAPITALIZATION
 

The total number of shares of all classes of capital stock which the Corporation is authorized to issue is 75,000,000 shares, consisting of 70,000,000 shares of common stock, par value $0.01 per share (the “ Common Stock ”) and 5,000,000 shares of preferred stock, par value $0.001 per shares (the “ Preferred Stock ”).

4.  Pursuant to a resolution of its Board of Directors, a meeting of stockholders of the Corporation was duly called and held, on November 10, 2009 upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendments.

5.  The foregoing amendments were duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

NOW, THEREFORE, the Corporation has caused this Certificate to be signed this 10th day of November , 2009.

By: /s/ William J. Caragol                                    
Name: William J. Caragol
Title: President and Chief Financial Officer




SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
VERICHIP CORPORATION
     VeriChip Corporation, a corporation organized and existing under the laws of the State of Delaware (the “ Corporation ”), DOES HEREBY CERTIFY AS FOLLOWS:
     1. The name of the Corporation is “VeriChip Corporation.” The Corporation was originally incorporated under the name “Surgical Identification Services, Inc.,” and the original certificate of incorporation was filed with the Secretary of State of the State of Delaware on November 29, 2001.
     2. An Amended and Restated Certificate of Incorporation (the “ Amended and Restated Certificate of Incorporation ”) was filed with the Secretary of State of the State of Delaware on December 20, 2005.
     2. This Second Amended and Restated Certificate of Incorporation (“ Certificate ”) has been duly adopted by the Board of Directors and has been approved and adopted by the stockholders of the Corporation, in accordance with Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware.
     3. This Certificate restates, integrates and further amends the provisions of the Amended and Restated Certificate of Incorporation of the Corporation.
     4. The text of the Amended and Restated Certificate of Incorporation is hereby restated and amended to read in its entirety as follows:
ARTICLE I
NAME
     The name of the corporation is VeriChip Corporation.
ARTICLE II
PURPOSE
     The purpose of the Corporation is to engage in any lawful acts or activities for which corporations may be organized under the General Corporation Law of the State of Delaware (the DGCL ) and to possess and exercise all of the powers and privileges granted by such law and any other law of the State of Delaware.


ARTICLE III
REGISTERED AGENT
     The street address of the registered office of the Corporation in the State of Delaware is 2711 Centerville Road, Suite 400, in the City of Wilmington, County of New Castle, 19808, and the name of the Corporation’s registered agent at such address is The Company Corporation.
ARTICLE IV
CAPITALIZATION
     Section 4.1 Authorized Capital Stock .
     The total number of shares of all classes of capital stock which the Corporation is authorized to issue is 45,000,000 shares, consisting of 40,000,000 shares of common stock, par value $0.01 per share (the Common Stock ), and 5,000,000 shares of preferred stock, par value $0.001 per share (the Preferred Stock ).
     No holder of stock of any class or series of the Corporation, whether now or hereafter authorized or issued, shall be entitled, as a matter of right, to subscribe for or purchase any part of any new or additional issue of stock of any class or series whatsoever, or of any securities convertible into stock of any class or series, or to which are attached or with which are issued warrants or rights to purchase any such stock, whether now or hereafter authorized, issued or sold, whether issued for moneys, property or services, or by way of dividend or otherwise, or any right or subscription to any thereof, other than such, if any, as the Board of Directors in its discretion may from time to time fix, pursuant to authority hereby conferred upon it; and any shares of stock or convertible obligations with warrants or rights to purchase any such stock, which the Board of Directors may determine to offer for subscription, may be sold without being first offered to any of the holders of the stock of the Corporation of any class or classes or series or may, as the Board may determine, be offered to holders of any class or classes or series of stock exclusively or to the holders of all classes or series of stock, and if offered to more than one class or series of stock, in such proportions as between such classes or series of stock as the Board of Directors, in its discretion, may determine.
     Effective immediately upon the date of filing of this Certificate with the Delaware Secretary of State, every three (3) outstanding shares of Common Stock of the Corporation will be combined into and automatically become one (1) outstanding share of Common Stock of the Corporation and the authorized shares of the Corporation shall remain as set forth in this Certificate. Any fractional shares that occurs as a result of the foregoing shall be rounded up or down to the nearest whole number.

2



     Section 4.2 Preferred Stock .
     (a) The Preferred Stock may be issued from time to time in one or more classes or series. The Board of Directors (the “ Board ”) is hereby expressly authorized to provide for the issuance of shares of Preferred Stock in one or more classes or series and to establish from time to time the number of shares to be included in each such class or series and to fix the designations, powers, preferences and relative, participating, optional and other special rights, if any, of each such class or series and the qualifications, limitations and restrictions thereof, as shall be stated in the resolution(s) adopted by the Board providing for the issuance of such class or series and included in a certificate of designations (a “ Preferred Stock Designation ”) filed pursuant to the DGCL. Without limiting the generality of the foregoing, the resolution or resolutions providing for the establishment of any class or series of Preferred Stock may, to the extent permitted by law, provide that such class or series shall be superior to, rank equally with or be junior to the Preferred Stock of any other class or series. Except as otherwise expressly provided in the resolution or resolutions providing for the establishment of any class or series of Preferred Stock, no vote of the holders of shares of Preferred Stock or Common Stock shall be a prerequisite to the issuance of any shares of any class or series of the Preferred Stock authorized by and complying with the conditions of this Certificate.
     (b) The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the outstanding shares of Common Stock, without a vote of the holders of the Preferred Stock, or any class or series thereof, unless a vote of any such holders of Preferred Stock is required pursuant to another provision of this Certificate (including any Preferred Stock Designation).
     Section 4.3 Common Stock .
     (a) The holders of shares of Common Stock shall be entitled to one vote for each such share of Common Stock held on each matter properly submitted to the stockholders on which the holders of shares of Common Stock are entitled to vote. Except as otherwise required by law or this Certificate (including any Preferred Stock Designation), at any annual or special meeting of the stockholders the holders of outstanding shares of Common Stock shall have the exclusive right to vote for the election of directors and on all other matters properly submitted to a vote of the stockholders. Notwithstanding the foregoing, except as otherwise required by law or this Certificate (including a Preferred Stock Designation), holders of Common Stock shall not be entitled to vote on any amendment to this Certificate (including any amendment to any Preferred Stock Designation) that relates solely to the terms of one or more outstanding class or series of Preferred Stock if the holders of such affected class or series are entitled, either separately or together with the holders of one or more other such class or series, to vote thereon pursuant to this Certificate (including any Preferred Stock Designation).
     (b) Subject to the rights of the holders of Preferred Stock, the holders of shares of Common Stock shall be entitled to receive such dividends and other distributions (payable in cash, property or capital stock of the Corporation) when, as and if declared thereon by the Board from time to time out of any assets or funds of the Corporation legally available therefor and shall share equally on a per share basis in such dividends and distributions.

3



     (c) In the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Corporation, and after payment or provision for payment of the debts and other liabilities of the Corporation, and subject to the rights of the holders of Preferred Stock in respect thereof, the holders of shares of Common Stock shall be entitled to receive all the remaining assets of the Corporation available for distribution to its stockholders, ratably in proportion to the number of shares of Common Stock held by them.
ARTICLE V
BOARD OF DIRECTORS
     Section 5.1 Board Powers .
     The business and affairs of the Corporation shall be managed by, or under the direction of, the Board. In addition to the powers and authority expressly conferred upon the Board by statute, this Certificate or the By-Laws (“ By-Laws ”) of the Corporation, the Board is hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the DGCL, this Certificate and any By-Laws; provided, however , that no By-Laws hereafter adopted by the stockholders shall invalidate any prior act of the Board that would have been valid if such By-Laws had not been adopted.
     Section 5.2 Number, Election and Term .
     (a) The number of directors of the Corporation, other than those who may be elected by the holders of one or more series of Preferred Stock voting separately by class or series, shall be fixed from time to time exclusively by the Board pursuant to a resolution adopted by a majority of the Whole Board. For purposes of this Certificate, “ Whole Board ” shall mean the total number of directors the Corporation would have if there were no vacancies.
     (b) Subject to Section 5.5 , a director shall hold office until the annual meeting for the year in which his or her term expires and until his or her successor has been elected and qualified, subject, however, to such director’s earlier death, resignation, retirement, disqualification or removal.
     (c) Unless and except to the extent that the By-Laws shall so require, the election of directors need not be by written ballot.
     (d) There shall be no cumulative voting in the election of directors.
     Section 5.3 Newly Created Directorships and Vacancies .
     Subject to Section 5.5 , newly created directorships resulting from an increase in the number of directors and any vacancies on the Board resulting from death, resignation, retirement, disqualification, removal or other cause may be filled solely by a majority vote of the directors then in office, even if less than a quorum, or by a sole remaining director (and not by stockholders), and any director so chosen shall hold office for the remainder of the term to which the new directorship was added or in which the vacancy occurred and until his or her successor has been elected and qualified, subject, however, to such director’s earlier death, resignation, retirement, disqualification or removal. No decrease in the number of directors constituting the Board shall shorten the term of any incumbent director.

4



     Section 5.4 Removal .
     Subject to Section 5.5 , any or all of the directors may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Corporation then entitled to vote generally in the election of directors, voting together as a single class.
     Section 5.5 Preferred Stock — Directors .
     Notwithstanding any other provision of this Article V , and except as otherwise required by law, whenever the holders of one or more series of Preferred Stock shall have the right, voting separately by class or series, to elect one or more directors, the term of office, the filling of vacancies, the removal from office and other features of such directorships shall be governed by the terms of such series of Preferred Stock as set forth in this Certificate (including any Preferred Stock Designation).
ARTICLE VI
BY-LAWS
     In furtherance and not in limitation of the powers conferred upon it by law, the Board is expressly authorized and empowered to adopt, amend, alter or repeal the By-Laws. The affirmative vote of a majority of the Whole Board shall be required to adopt, amend, alter or repeal the By-Laws. The stockholders shall, to the extent such power is at the time conferred on them by applicable law, also have the power, by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Corporation then entitled to vote generally in the election of directors, voting together as a single class, to make, alter, amend or repeal any By-Law of the Corporation.
ARTICLE VII
MEETINGS OF STOCKHOLDERS
     Section 7.1 No Action by Written Consent .
     Except as otherwise required by the specific terms of any class or series of Preferred Stock as set forth in the Preferred Stock Designation with respect to such class or series, any action required or permitted to be taken at any annual or special meeting of stockholders may be taken only upon the vote of stockholders at an annual or special meeting duly noticed and called in accordance with the DGCL as amended from time to time, and may not be taken by written consent of stockholders without a meeting.

5



     Section 7.2 Meetings .
     Except as otherwise required by law or the terms of any one or more series of Preferred Stock, special meetings of stockholders of the Corporation may be called only by the Chairman of the Board, the Chief Executive Officer, the President, or the Board pursuant to a resolution adopted by a majority of the Whole Board, and the ability of the stockholders to call a special meeting is hereby specifically denied.
     Section 7.3 Advance Notice .
     Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the By-Laws.
     Section 7.4 Location .
     Meetings of stockholders may be held within or outside the State of Delaware, as the By-Laws may provide. The books of the Corporation may be kept (subject to any provision contained in the statues) outside of the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By-Laws.
ARTICLE VIII
LIMITED LIABILITY; INDEMNIFICATION
     Section 8.1 Limitation of Personal Liability .
     No person who is or was a director of the Corporation shall be personally liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted by the DGCL as the same exists or hereafter may be amended. If the DGCL is hereafter amended to authorize corporate action further limiting or eliminating the liability of directors, then the liability of a director to the Corporation or its stockholders shall be limited or eliminated to the fullest extent permitted by the DGCL, as so amended. Any repeal or amendment of this Section 8.1 by the stockholders of the Corporation or by changes in law, or the adoption of any other provision of this Certificate inconsistent with this Section 8.1 will, unless otherwise required by law, be prospective only (except to the extent such amendment or change in law permits the Corporation to further limit or eliminate the liability of directors) and shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or amendment or adoption of such inconsistent provision with respect to acts or omissions occurring prior to such repeal or amendment or adoption of such inconsistent provision.

6



     Section 8.2 Indemnification .
     (a) Each person who is or was made a party or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “ proceeding ”) by reason of the fact that he or she is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter a “ Covered Person ”), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent, or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized or permitted by applicable law, as the same exists or may hereafter be amended, against all expense, liability and loss (including, without limitation, attorneys’ fees, judgments, fines, ERISA excise taxes and penalties and amounts paid in settlement) reasonably incurred or suffered by such Covered Person in connection with such proceeding, and such right to indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided , however , that, except for proceedings to enforce rights to indemnification, the Corporation shall indemnify a Covered Person in connection with a proceeding (or part thereof) initiated by such Covered Person only if such proceeding (or part thereof) was authorized by the Board. The right to indemnification and advancement of expenses conferred by this Section 8.2 shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending or otherwise participating in any such proceeding in advance of its final disposition to the fullest extent authorized by the DGCL as the same exists or is hereafter amended.
     (b) The rights conferred on any Covered Person by this Section 8.2 shall not be exclusive of any other rights which any Covered Person may have or hereafter acquire under law, this Certificate, the By-Laws, an agreement, vote of stockholders or disinterested directors, or otherwise.
     (c) Any repeal or amendment of this Section 8.2 by the stockholders of the Corporation or by changes in law, or the adoption of any other provision of this Certificate inconsistent with this Section 8.2 , will, unless otherwise required by law, be prospective only (except to the extent such amendment or change in law permits the Corporation to provide broader indemnification rights on a retroactive basis than permitted prior thereto), and will not in any way diminish or adversely affect any right or protection existing at the time of such repeal or amendment or adoption of such inconsistent provision in respect of any act or omission occurring prior to such repeal or amendment or adoption of such inconsistent provision.
     (d) This Section 8.2 shall not limit the right of the Corporation, to the extent and in the manner authorized or permitted by law, to indemnify and to advance expenses to persons other than Covered Persons, provided, however, that if the DGCL requires or permits the payment of such expenses incurred by a Covered Person as set forth herein in advance of the final disposition of a proceeding, such payment shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director of officer is not entitled to be indemnified under this Section or otherwise.
     (e) The Corporation may, by action of its Board, provide indemnification and the advancement of expenses to such of the officers, employees and agents of the Corporation and such other persons serving at the request of the Corporation as officers, employees and agents of another corporation, partnership, joint venture, limited liability company, trust or other enterprise to such extent as is permitted by the laws of the State of Delaware as the same exists or is hereafter amended and the Board shall determine to be appropriate.

7



     (f) The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, limited liability company, trust or other enterprise against any expense, liability or loss incurred by such person in any such capacity or arising out of his status as such, whether or not the Corporation would have the power to indemnify such person against such liability under Delaware law.
     (g) The rights and authority conferred in this Article VIII shall not be exclusive of any other right which any person may otherwise have or hereafter acquire.
ARTICLE IX
AMENDMENT OF CERTIFICATE OF INCORPORATION
     The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in this Certificate (including any Preferred Stock Designation), and any other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by this Certificate, the By-Laws or the DGCL; and, except as set forth in Article VIII , all rights, preferences and privileges herein conferred upon stockholders, directors or any other persons by and pursuant to this Certificate in its present form or as hereafter amended are granted subject to the right reserved in this Article; provided , however , that, notwithstanding any other provision of this Certificate, and in addition to any other vote that may be required by law or any Preferred Stock Designation, the affirmative vote of the holders of a majority of the voting power of all then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend, alter or repeal, or adopt any provision as part of this Certificate.
ARTICLE X
SECTION 203 OF THE DGCL
     The Corporation elects not to be governed by Section 203 of the DGCL.

8



ARTICLE XII
SECTION 102(B)(2) OF THE DGCL
     Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this corporation under §291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under §279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation.
     IN WITNESS WHEREOF, VeriChip Corporation has caused this Certificate to be duly executed in its name and on its behalf by its Chief Executive Officer this 18th day of December, 2006.
         
  VERICHIP CORPORATION
 
 
  By:   /s/ Scott R. Silverman    
    Scott R. Silverman, Chief Executive Officer   
       
 

9



VERICHIP CORPORATION
CERTIFICATE OF DESIGNATIONS OF PREFERENCES,
RIGHTS AND LIMITATIONS
OF
SERIES A PREFERRED STOCK
The undersigned, Scott R. Silverman and William J. Caragol hereby certify that:
     1. They are the Chief Executive Officer and Acting Chief Financial Officer, respectively, of VeriChip Corporation, a Delaware corporation (the “ Corporation ”).
     2. The Corporation is authorized to issue 5,000,000 shares of preferred stock, none of which shares are issued and outstanding.
     3. The following resolutions were duly adopted by the Board of Directors:
     WHEREAS, the Certificate of Incorporation of the Corporation provides for a class of its authorized stock known as preferred stock, comprised of 5,000,000 shares, $0.001 par value per share (the “ Preferred Stock ”), issuable from time to time in one or more series;
     WHEREAS, the Board of Directors of the Corporation is authorized to fix the dividend rights, dividend rate, voting rights, conversion rights, rights and terms of redemption and liquidation preferences of any wholly unissued series of Preferred Stock and the number of shares constituting any Series A and the designation thereof, of any of them; and
     WHEREAS, it is the desire of the Board of Directors of the Corporation, pursuant to its authority as aforesaid, to fix the rights, preferences, restrictions and other matters relating to a series of Preferred Stock, which shall consist of up to 2,000 shares of the Preferred Stock which the Corporation has the authority to issue, as follows:
     NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby provide for the issuance of a series of Preferred Stock for cash or exchange of other securities, rights or property and does hereby fix and determine the rights, preferences, restrictions and other matters relating to such series of Preferred Stock as follows:
TERMS OF PREFERRED STOCK
     1.  Designation, Amount and Par Value . The series of Preferred Stock shall be designated as the Corporation’s Series A Preferred Stock (the “ Series A Preferred Stock ”) and the number of shares so designated shall be 2,000, which shall not be subject to increase without any consent of the holders of the Series A Preferred Stock (each a “ Holder ” and collectively, the “ Holders ”) as required by applicable law. Each share of Series A Preferred Stock shall have a par value of $0.001 per share.
     2.  Ranking and Voting . The Series A Preferred Stock shall, with respect to rights upon liquidation, winding-up or dissolution, rank:

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          a. senior to the Corporation’s common stock, par value $0.01 per share (“ Common Stock ”), and any other class or series of Preferred Stock of the Corporation (collectively, together with any warrants, rights, calls or options exercisable for or convertible into such Preferred Stock, the “ Junior Shares ”); and
          b. junior to all existing and future indebtedness of the Corporation.
     Except as required by applicable law, the holders of shares of Series A Preferred Stock will have no right to vote on any matters, questions or proceedings of this Corporation including, without limitation, the election of directors.
     3.  Dividends and Other Distributions . Commencing on the first anniversary of the date of the issuance of any such shares of Series A Preferred Stock (each respectively an “ Issuance Date ”), Holders of Series A Preferred Stock shall be entitled to receive dividends on each outstanding share of Series A Preferred Stock (“ Dividends ”), which shall accrue in shares of Series A Preferred Stock at a rate equal to 10.0% per annum from the Issuance Date. Accrued Dividends shall be payable annually on the anniversary of the Issuance Date. No dividend shall be payable with respect to shares of Series A 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.
          a. Any calculation of the amount of such Dividends payable pursuant to the provisions of this Section 3 shall be made based on a 365-day year and on the number of days actually elapsed during the applicable calendar quarter, compounded annually.
          b. So long as any shares of Series A Preferred Stock are outstanding, no dividends or other distributions will be paid, declared or set apart with respect to any Junior Shares. The Common Stock shall not be redeemed while the Series A Preferred Stock is outstanding.
     4.  Conversion .
          a. Mechanics of Conversion.
               (i) Subject to the terms and conditions hereof, one or more of the Series A Preferred Stock may be converted into shares of Common Stock, at any time or times on or after (but not before) the six-month anniversary of the issuance date of such Series A Preferred Stock, at the option of Holder or the Company, by (i) if at the option of Holder, delivery of a written notice to the Company, in the form attached hereto as Exhibit A-1 (the “ Holder Conversion Notice ”), of the Holder’s election to convert the Series A Preferred Stock, or (ii) if at the option of the Company, delivery of a written notice to Holder, in the form attached hereto as Exhibit A-2 (the “ Company Conversion Notice ” and, with the Holder Conversion Notice, each a “ Conversion Notice ”), of the Company’s election to convert the Series A Preferred Stock. On the same Trading Day on which the Company has received the Holder Conversion Notice or issued the Company Conversion Notice (as the case may be) by 10:30 a.m. Eastern time, or the following Trading Day if received after such time or on a non-Trading Day, the Company shall transmit by facsimile or electronic mail an acknowledgment of confirmation of receipt of the Holder Conversion Notice or issuance of the Company Conversion Notice to the Holder and the Company’s transfer agent (the “ Transfer Agent ”) and shall authorize the credit by the Transfer Agent of such aggregate number of Conversion Shares to which the Holder is entitled pursuant to such Conversion Notice to Holder’s or its designee’s balance account with The Depository Trust Company (DTC) Fast Automated Securities Transfer (FAST) Program, through its Deposit/Withdrawal at Custodian (DWAC) system, time being of the essence.

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               (ii) No fractional shares of Common Stock are to be issued upon conversion of Series A Preferred Stock, but rather the Company shall issue to Holder scrip or warrants in registered form (certificated or uncertificated) which shall entitle Holder to receive a full share upon the surrender of such scrip or warrants aggregating a full share.
               (iii) The Holder shall not be required to deliver the original certificates for the Series A Preferred Stock in order to effect a conversion hereunder.
               (iv) The Company shall pay any and all taxes which may be payable with respect to the issuance and delivery of Conversion Shares to Holder.
          b. Company Conversion . In the event of a conversion of any Series A Preferred Stock pursuant to a Company Conversion Notice, the Company shall issue to the Holder of such Series A Preferred Stock a number of Conversion Shares equal to (x) the Series A Liquidation Value multiplied by (y) the number of such Series A Preferred Stock subject to the Company Conversion Notice divided by (z) the Conversion Price with respect to such Series A Preferred Stock. If the Company exercises this conversion option with respect to any Series A Preferred Stock (other than Series A Preferred Stock issued as a dividend with respect to Series A Preferred Stock) prior to the fourth anniversary of the issuance of such shares, then in addition to the Conversion Shares to be issued in accordance with the preceding sentence, the Company shall pay to such Holder an additional number of Conversion Shares equal to the following with respect to such converted Series A Preferred Stock (other than Series A Preferred Stock issued as a dividend with respect to Series A Preferred Stock): (i) 35% of the Conversion Shares issuable in respect of such Series A Preferred Stock (other than Series A Preferred Stock issued as a dividend with respect to Series A Preferred Stock) if converted after the six-month anniversary of the Issuance Date but prior to the first anniversary of the Issuance Date, (ii) 27% of the Conversion Shares issuable in respect of such Series A Preferred Stock (other than Series A Preferred Stock issued as a dividend with respect to Series A Preferred Stock) if converted on or after the first anniversary but prior to the second anniversary of the Issuance Date, (iii) 18% of the Conversion Shares issuable in respect of such Series A Preferred Stock (other than Series A Preferred Stock issued as a dividend with respect to Series A Preferred Stock) if converted on or after the second anniversary but prior to the third anniversary of the Issuance Date, and (iv) 9% of the Conversion Shares issuable in respect of such Series A Preferred Stock (other than Series A Preferred Stock issued as a dividend with respect to Series A Preferred Stock) if converted on or after the third anniversary but prior to the fourth anniversary of the Issuance Date.
          c. Holder Conversion . In the event of a conversion of any Series A Preferred Stock pursuant to an Holder Conversion Notice, the Company shall issue to the Holder of such Series A Preferred Stock a number of Conversion Shares equal to (x) the Series A Liquidation Value multiplied by (y) the number of such Series A Preferred Stock subject to the Company Conversion Notice divided by (z) the Conversion Price with respect to such Series A Preferred Stock.

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          d. If the Company at any time on or after the date of issuance of any Preferred Stock subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision will be proportionately reduced and the number of Conversion Shares will be proportionately increased. If the Company at any time on or after such issuance date combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination will be proportionately increased and the number of Conversion Shares will be proportionately decreased. Any adjustment under this Section 4.c shall become effective at the close of business on the date the subdivision or combination becomes effective.
          e. In addition to any adjustments pursuant to Section 4.c if at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “ Purchase Rights ”), then Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which Holder could have acquired if Holder had held the number of shares of Common Stock acquirable upon conversion of all Preferred Stock held by Holder immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.
          f. Definitions . For purposes of this Section 4, the following terms shall have the following meanings:
               (i) The “ Conversion Price ” means a price per share equal to the Closing Bid Price of a share of Common Stock on the Trading Day immediately preceding the date of the applicable Tranche Notice Date, subject to adjustment herein.
               (ii) “ Conversion Shares ” means the shares of Common Stock issuable upon conversion of Series A Preferred Stock.
               (iii) The “ Closing Bid Price ” means, for any security as of any date, the last closing bid price for such security on the Trading Market, as reported by Bloomberg, or, if the Trading Market begins to operate on an extended hours basis and does not designate the closing bid price, then the last bid price of such security prior to 4:00 p.m., Eastern time, as reported by Bloomberg, or, if the Trading Market is not the principal securities exchange or trading market for such security, the last closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last closing bid price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price is reported for such security by Bloomberg, the average of the bid prices of any market makers for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Closing Bid Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value as mutually determined by the Company and the holder.

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               (iv) A “ Trading Day ” means any day on which the Common Stock is traded on the Trading Market; provided that it shall not include any day on which the Common Stock is (a) scheduled to trade for less than 5 hours, or (b) suspended from trading.
               (v) The “ Trading Market ” means the OTC Bulletin Board, the NASDAQ Capital Market, the NASDAQ Global Market, the NASDAQ Global Select Market, the NYSE Amex, or the New York Stock Exchange, whichever is at the time the principal trading exchange or market for the Common Stock, but does not include the Pink Sheets inter-dealer electronic quotation and trading system.
               (vi) A “ Tranche Notice Date ” with respect to a Series A Preferred Share shall mean the Tranche Notice Date established for the issuance of such Series A Preferred Stock under the stock purchase agreement pursuant to which such Series A Preferred Share was issued to the Holder thereof.
          g. Failure to Timely Deliver Conversion Shares . If the Company shall fail (through no fault of Holder) to timely authorize the credit of the Holder’s balance account with DTC for such number of Conversion Shares to which the Holder is entitled pursuant to a Conversion Notice, then, in addition to all other remedies available to Holder, the Company shall, subject to the availability of lawful funds therefor, pay in cash to Holder on each day that the issuance of such Conversion Shares is not timely effected an amount equal to 1.5% of the product of (A) the sum of the number of Conversion Shares not issued to Holder on a timely basis and to which Holder is entitled and (B) the Closing Bid Price of the shares of Common Stock on the Trading Day immediately preceding the last possible date which the Company could have issued such Conversion Shares to Holder without violating any other restrictions on the issuance of Conversion Shares to the Holder, including the foregoing clause (h) below. In addition to the foregoing, if after the Company’s receipt of the applicable conversion delivery documents the Company shall fail (through no fault of Holder) to timely authorize the credit of the Holder’s balance account with DTC for the number of Conversion Shares to which the Holder is entitled upon the Holder’s exercise hereunder, and the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of Conversion Shares issuable upon such exercise that the Holder anticipated receiving from the Company, then the Company shall, within one Trading Day after the Holder’s request and in the Holder’s discretion, either (i) pay cash, subject to the availability of lawful funds therefor, to the Holder in an amount equal to the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased (the “ Buy-In Price ”), at which point the Company’s obligation to credit such Holder’s balance account with DTC for the number of Conversion Shares to which the Holder is entitled upon the Holder’s exercise hereunder and to issue such Conversion Shares shall terminate, or (ii) promptly honor its obligation to credit such Holder’s balance account with DTC for the number of Conversion Shares to which the Holder is entitled upon the Holder’s exercise hereunder and pay cash, subject to the availability of lawful funds therefor, to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock sold by Holder in satisfaction of its obligations, times (B) the Closing Bid Price on the date of exercise.

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          h. Conversion Limitation . Notwithstanding any other provision in this Agreement, at no time may the Company or Holder deliver a Conversion Notice if the number of Conversion Shares to be received pursuant to such Conversion Notice, aggregated with all other shares of Common Stock then beneficially (or deemed beneficially) owned by Holder, would result in Holder owning, on the date of delivery of the Conversion Notice, more than 9.99% of all Common Stock outstanding as determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. In addition, as of any date, the aggregate number of shares of Common Stock into which the Preferred Stock are convertible within 61 days, together with all other shares of Common Stock then beneficially (or deemed beneficially) owned (as determined pursuant to Rule 13d-3 under the Exchange Act) by Holder and its affiliates (as such term is defined in Rule 12b-2 under the Exchange Act), shall not exceed 9.99% of the total outstanding shares of Common Stock as of such date.
          i. Disputes . In the case of a dispute as to the determination of the Conversion Price or the arithmetic calculation of the number of Conversion Shares issued or issuable hereunder, the Company shall promptly issue to Holder the number of Conversion Shares that are not disputed and resolve such dispute as follows. The Company shall submit the disputed determinations or arithmetic calculations via facsimile or electronic mail within two (2) Trading Days of delivery of the Conversion Notice giving rise to such dispute, as the case may be, to Holder. If Holder and the Company are unable to agree upon such determination or calculation of the Conversion Price or the number of Conversion Shares within three (3) Trading Days of such disputed determination or arithmetic calculation being submitted to Holder, then the Company shall, within two (2) Trading Days, submit via facsimile or electronic mail (a) the disputed determination of the Conversion Price or arithmetic calculation to an independent, reputable investment bank or independent registered public accounting firm selected by Holder subject to the Company’s approval, which may not be unreasonably withheld or delayed, or (b) the disputed arithmetic calculation to the Company’s independent registered public accounting firm. The Company shall cause at its expense the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and Holder of the results no later than three (3) Trading Days from the time it receives the disputed determinations or calculations. Such investment bank’s or accountant’s determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error.
     5.  Liquidation .
          a. Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment or provision for payment of debts and other liabilities of the Corporation, before any distribution or payment shall be made to the holders of any Junior Shares by reason of their ownership thereof, the Holders of Series A Preferred Stock shall first be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders an amount with respect to each share of Series A Preferred Stock equal to $10,000.00 (the “ Series A Liquidation Value ”). If, upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the amounts payable with respect to the shares of Series A Preferred Stock are not paid in full, the holders of shares of Series A Preferred Stock shall share equally and ratably in any distribution of assets of the Corporation in proportion to the liquidation preference to which each such holder is entitled.

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          b. After payment has been made to the Holders of the Series A Preferred Stock of the full amount of the Series A Liquidation Value, any remaining assets of the Corporation shall be distributed among the holders of the Junior Shares in accordance with the Corporation’s Certificates of Designations and Certificate of Incorporation.
          c. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation shall be insufficient to make payment in full to all Holders, then such assets shall be distributed among the Holders at the time outstanding, ratably in proportion to the full amounts to which they would otherwise be respectively entitled.
     6.  Redemption . The Company may redeem, for cash, any or all of the Series A Preferred Stock at any time at the redemption price per share equal to the Series A Liquidation Value, plus any accrued but unpaid dividends with respect to such shares of Series A Preferred Stock (the “ Redemption Price ”). If the Company exercises this redemption option with respect to any Series A Preferred Stock (other than shares of Series A Preferred Stock issued as a dividend with respect to shares of Series A Preferred Stock) prior to the fourth anniversary of the issuance of such shares, then in addition to the Redemption Price, the Company shall pay to holder a make-whole price per share equal to the following with respect to such redeemed shares (other than shares of Series A Preferred Stock issued as a dividend with respect to shares of Series A 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.
     7.  Transferability . The Series A Preferred Stock may only be sold, transferred, assigned, pledged or otherwise disposed of (“ Transfer ”) in accordance with state and federal securities laws. The Corporation shall keep at its principal office, or at the offices of the Transfer Agent, a register of the Series A Preferred Stock. Upon the surrender of any certificate representing Series A Preferred Stock at such place, the Corporation, at the request of the record Holder of such certificate, shall execute and deliver (at the Corporation’s expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of shares represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of shares as is requested by the Holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate.
     8.  Miscellaneous .
          a. Notices . Any and all notices to the Corporation shall be addressed to the Corporation’s Chief Executive Officer or Chief Financial Officer at the Corporation’s principal place of business on file with the Secretary of State of the State of Delaware. Any and all notices

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or other communications or deliveries to be provided by the Corporation to any Holder hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile telephone number or address of such Holder appearing on the books of the Corporation, or if no such facsimile telephone number or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this section prior to 5:30 p.m. Eastern time, (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this section later than 5:30 p.m. but prior to 11:59 p.m. Eastern time on such date, (iii) the second business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given.
          b. Lost or Mutilated Preferred Stock Certificate . Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered Holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing shares of Series A Preferred Stock, and in the case of any such loss, theft or destruction upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the Holder is a financial institution or other institutional investor its own agreement shall be satisfactory) or in the case of any such mutilation upon surrender of such certificate, the Corporation shall, at its expense, execute and deliver in lieu of such certificate a new certificate of like kind representing the number of shares of such series represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate.
          c. Headings . The headings contained herein are for convenience only, do not constitute a part of this Certificate of Designations and shall not be deemed to limit or affect any of the provisions hereof.
     RESOLVED, FURTHER, that the chairman, chief executive officer, president, chief financial officer, or any vice-president, and the secretary or any assistant secretary, of the Corporation be and they hereby are authorized and directed to prepare and file a Certificate of Designations of Preferences, Rights and Limitations of Series A Preferred Stock in accordance with the foregoing resolution and the provisions of Delaware law.

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     IN WITNESS WHEREOF, the undersigned have executed this Certificate this 29th day of September 2009.
         
By:
  /s/ Scott R. Silverman    
 
       
Name:
  Scott R. Silverman    
Title:
  Chief Executive Officer    
 
       
By:
  /s/ William J. Caragol    
       
Name:
  William J. Caragol    
Title:
  Acting Chief Financial Officer    

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Exhibit A-1
Form of Investor Conversion Notice
INVESTOR CONVERSION NOTICE
     The undersigned hereby exercises the right to purchase ____________ shares of Common Stock (“ Conversion Shares ”) of VeriChip Corporation, a Delaware corporation (“ Company ”), upon conversion of ____________ shares of Series A Preferred Stock. Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Convertible Preferred Stock Purchase Agreement dated September 29, 2009, by and between the Company and the Investor referred to therein.
     Unless otherwise instructed by the holder, the Company will issue said shares in electronic form to the Deposit/Withdrawal at Custodian (DWAC) account of the holder with Depository Trust Company (DTC) pursuant to account information previously provided to Company by the holder.
 
By:  
Name:  
Title:  

 



Exhibit A-2
Form of Company Conversion Notice
     VeriChip Corporation, a Delaware corporation (“ Company ”) hereby exercises the right to cause the purchase of ____________ shares of its Common Stock (“ Conversion Shares ”), upon conversion of ____________ shares of Series A Preferred Stock of the Company held by the holder thereof. Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Convertible Preferred Stock Purchase Agreement dated September 29, 2009, by and between the Company and the Investor referred to therein.
     Unless otherwise instructed by the holder, the Company will issue said shares in electronic form to the Deposit/Withdrawal at Custodian (DWAC) account of the holder with Depository Trust Company (DTC) pursuant to account information previously provided to Company by the holder.
VERICHIP CORPORATION
 
By:  
Name:  
Title:  

 



POSITIVEID CORPORATION

CERTIFICATE OF DESIGNATIONS
OF PREFERENCES, RIGHTS AND LIMITATIONS
OF
SERIES B PREFERRED STOCK
The undersigned, Scott R. Silverman and William J. Caragol hereby certify that:
1. They are the Chief Executive Officer and President and Chief Financial Officer, respectively, of PositiveID Corporation, a De