Note 6 - Discontinued Operations

3 Months Ended

Mar. 31, 2012

Disposal Groups, Including Discontinued Operations, Disclosure [Text Block]

6.  Discontinued Operations

On July 22, 2011, we sold Destron and on June 15, 2011, we sold certain of the assets of our SARBE business unit, excluding the PELS contract.  Destron manufactures radio frequency identification and visual tags primarily for livestock, fisheries and companion pets and SARBE manufactures search and rescue beacons primarily for military applications.  As a result of the sales of Destron and SARBE, the financial condition, results of operations and cash flows of each of these businesses through the date of sale have been reported as discontinued operations in our financial statements, and prior period information has been reclassified accordingly.  The PELs contract is also included in discontinued operations for all periods presented as more fully discussed below.

PELS Contract

We have included the PELS contract in discontinued operations because under the terms of the SARBE sale, we outsourced a portion of the project management of PELS to an affiliate of the purchaser of the SARBE business, and also entered into a profit allocation agreement with them. As of December 31, 2011, we had recorded our estimate of the loss on the PELS contract of approximately $3.7 million.

On April 10, 2012, the MOD notified Signature of its exercise of the termination provision of the contract for failure to complete certain milestones for product approvals by the established deadline. Under the terms of the termination notice, such termination became effective as of April 24, 2012. As stated in the notice, termination triggers the requirement that Signature reimburse to the MOD all monies paid by the MOD to Signature in respect of this contract for product or inventory previously delivered. No early termination or other penalties are claimed by the MOD in the termination notice. The total amount of reimbursement currently claimed by the MOD is £0.4 million (approximately $0.7 million at the March 31, 2012 exchange rate). Assuming reimbursement of this amount, and the elimination of revenue from the production phase of the contract, the result would be a reduction in expected net cash flow and an increase in the projected loss from the PELS contract of approximately $2.9 million, primarily for the writedown of inventory to estimated realizable value. Accordingly, we accrued an additional loss of approximately $2.9 million on the PELS contract during the three-months ended March 31, 2012. In the aggregate, the loss recognized on the PELS contract in 2011 and the first quarter of 2012 totaled approximately $6.6 million. Signature is in the process of analyzing its rights under the contract, including recourse or remedies that may be available to Signature as a result of the MOD's notice of termination. Until this analysis is complete and Signature determines the appropriate course of action, the ultimate effect of the termination notice on the contract, the Company, and its financial statements/status is uncertain.

The following table, in thousands, presents the results of operations of our discontinued operations, excluding any allocated or common overhead expenses, for the three-months ended March 31, 2012 and 2011:

	Three-Months Ended March 31,
	2012			2011
	(in thousands)
Revenue	$	—		$	9,009
Cost of sales		2,901			5,500
Gross profit		(2,901	)		3,509
Research and development expenses		—			229
Selling, general and administrative expenses		—			2,569
Operating (loss) income		(2,901	)		711
Gain on sale		—			224
Interest and other income (expense), net		5			44
Interest expense		—			(172	)
(Loss) income from discontinued operations before income taxes		(2,896	)		807
Provision for income taxes		—			(18	)
(Loss) income from discontinued operations		(2,896	)		789
(Loss) income attributable to the non-controlling interest		42			(10	)
(Loss) income from discontinued operations attributable to Digital Angel Corporation	$	(2,854	)	$	779
(Loss) income from discontinued operations per common share - basic and diluted	$	(0.10	)	$	0.03
Weighted average number of common shares outstanding - basic and diluted		29,875			29,651

The net assets of discontinued operations as of March 31, 2012 and December 31, 2011, were as follows (in thousands):

	March 31, 2012			December 31, 2011
	(in thousands)
Cash	$	—		$	17
Accounts receivable		—			563
Inventory		160			3,103
Other current assets		667			831
Total current assets		827			4,514
Fixed assets		—			179
Total assets	$	827		$	4,693
Accounts payable, accrued expenses and other current liabilities		2,481			4,422
Total current liabilities	$	2,481		$	4,422
Long-term debt and other long-term liabilities		—			—
Net (liabilities) assets of discontinued operations	$	(1,654	)	$	271