Attached files
file | filename |
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EX-3.1 - EXHIBIT 3.1 - POSITIVEID Corp | c92053exv3w1.htm |
EX-10.5 - EXHIBIT 10.5 - POSITIVEID Corp | c92053exv10w5.htm |
EX-10.4 - EXHIBIT 10.4 - POSITIVEID Corp | c92053exv10w4.htm |
EX-10.1 - EXHIBIT 10.1 - POSITIVEID Corp | c92053exv10w1.htm |
EX-10.2 - EXHIBIT 10.2 - POSITIVEID Corp | c92053exv10w2.htm |
EX-31.1 - EXHIBIT 31.1 - POSITIVEID Corp | c92053exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - POSITIVEID Corp | c92053exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - POSITIVEID Corp | c92053exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
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 | (561) 805-8008 | |
(Address of principal executive offices, | (Registrants telephone number, including area code) | |
including zip code) |
VERICHIP CORPORATION
(Former name, former address and former fiscal year, if changed since last report)
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 whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares outstanding of each of the issuers classes of common stock as of the
close of business on November 10, 2009 is as follows:
Class | Number of Shares | |
Common Stock: $0.01 Par Value | 19,227,918 |
POSITIVEID CORPORATION
TABLE OF CONTENTS
TABLE OF CONTENTS
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30 | ||||||||
30 | ||||||||
30 | ||||||||
31 | ||||||||
Exhibit 3.1 | ||||||||
Exhibit 10.1 | ||||||||
Exhibit 10.2 | ||||||||
Exhibit 10.4 | ||||||||
Exhibit 10.5 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements. |
POSITIVEID CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except par value)
(In thousands, except par value)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(unaudited) | ||||||||
Assets |
||||||||
Current Assets: |
||||||||
Cash |
$ | 4,498 | $ | 3,229 | ||||
Prepaid expenses and other current assets |
316 | 275 | ||||||
Total Current Assets |
4,814 | 3,504 | ||||||
Equipment, net of accumulated depreciation |
24 | 39 | ||||||
Restricted cash |
| 4,543 | ||||||
Investment in Steel Vault Warrant |
273 | | ||||||
Note Receivable from Steel Vault |
495 | | ||||||
Total Assets |
$ | 5,606 | $ | 8,086 | ||||
Liabilities and Stockholders Equity |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 119 | $ | 72 | ||||
Accrued expenses and other current liabilities |
683 | 1,094 | ||||||
Total Current Liabilities |
802 | 1,166 | ||||||
Deferred gain |
| 4,500 | ||||||
Total Liabilities |
$ | 802 | $ | 5,666 | ||||
Commitments and contingencies |
||||||||
Stockholders Equity: |
||||||||
Capital stock: |
||||||||
Preferred stock, Authorized 5,000 shares of
$.001 par value; no shares issued or
outstanding |
| | ||||||
Common stock, Authorized 40,000 shares of $.01
par value; issued and outstanding 14,011 and
11,730 shares at September 30, 2009 and
December 31, 2008, respectively |
140 | 117 | ||||||
Additional paid-in capital |
45,148 | 44,410 | ||||||
Accumulated deficit |
(40,722 | ) | (42,107 | ) | ||||
Other Comprehensive Income |
238 | | ||||||
Total Stockholders Equity |
4,804 | 2,420 | ||||||
Total Liabilities and Stockholders Equity |
$ | 5,606 | $ | 8,086 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
1
Table of Contents
POSITIVEID CORPORATION
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
(In thousands, except per share data)
(unaudited)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenue |
$ | 104 | $ | 6 | $ | 161 | $ | 41 | ||||||||
Cost of goods sold |
35 | | 54 | 61 | ||||||||||||
Gross profit (loss) |
69 | 6 | 107 | (20 | ) | |||||||||||
Operating expenses: |
||||||||||||||||
Selling, general and administrative |
858 | 11,924 | 3,162 | 18,668 | ||||||||||||
Research and development |
| | | 212 | ||||||||||||
Total operating expenses |
858 | 11,924 | 3,162 | 18,880 | ||||||||||||
Operating loss |
(789 | ) | (11,918 | ) | (3,055 | ) | (18,900 | ) | ||||||||
Interest and other income (expense), net |
31 | 610 | 55 | (372 | ) | |||||||||||
Interest expense |
| (40 | ) | | (879 | ) | ||||||||||
Gain on sale/release of escrow |
| 6,174 | 4,385 | 6,174 | ||||||||||||
Gain on Settlement of Debt |
| 1,823 | | 1,823 | ||||||||||||
Total other income |
31 | 8,567 | 4,440 | 6,746 | ||||||||||||
(Loss) income from continuing operations |
(758 | ) | (3,351 | ) | 1,385 | (12,154 | ) | |||||||||
Net(loss) income from discontinued
operations (net of tax (benefit) expense
of $(58) and $233) |
| (1,966 | ) | | 787 | |||||||||||
Net(loss) income |
$ | (758 | ) | |||||||||||||
Earnings (loss) per common share Basic: |
||||||||||||||||
Net (loss) income per common share from continuing
operations basic |
$ | (0.06 | ) | $ | (0.30 | ) | $ | 0.11 | $ | (1.19 | ) | |||||
Net (loss) income per common share from
discontinued operations basic |
| (0.18 | ) | | 0.08 | |||||||||||
Net (loss) income per common share basic |
$ | (0.06 | ) | $ | (0.48 | ) | $ | 0.11 | $ | (1.11 | ) | |||||
Weighted average number of shares outstanding
basic |
12,344 | 11,233 | 12,275 | 10,217 | ||||||||||||
Earnings per common share Diluted: |
||||||||||||||||
Net (loss) income per common share from continuing
operations diluted |
$ | (0.06 | ) | $ | (0.30 | ) | $ | 0.11 | $ | (1.19 | ) | |||||
Net (loss) income per common share from
discontinued operations diluted |
$ | | $ | (0.18 | ) | $ | | $ | 0.08 | |||||||
Net (loss) income per common share diluted |
$ | (0.06 | ) | $ | (0.48 | ) | $ | 0.11 | $ | (1.11 | ) | |||||
Weighted average number of shares outstanding
diluted |
12,344 | 11,233 | 12,911 | 10,217 | ||||||||||||
Net (loss) income |
$ | (758 | ) | $ | (5,317 | ) | $ | 1,385 | $ | (11,367 | ) | |||||
Other comprehensive income |
$ | 215 | $ | | $ | 238 | $ | | ||||||||
Comprehensive(loss) income |
$ | (543 | ) | $ | (5,317 | ) | $ | 1,623 | $ | (11,367 | ) | |||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
Table of Contents
POSITIVEID CORPORATION
Condensed Consolidated Statement of Stockholders Equity
For the Nine Months Ended September 30, 2009
For the Nine Months Ended September 30, 2009
(In thousands)
(Unaudited)
(Unaudited)
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||
Common Shares | Paid-in | Accumulated | Comprehensive | Stockholders | ||||||||||||||||||||
Number | Amount | Capital | Deficit | Income | Equity | |||||||||||||||||||
Balance December 31, 2008 |
11,730 | $ | 117 | $ | 44,410 | $ | (42,107 | ) | $ | | $ | 2,420 | ||||||||||||
Net income |
| | | 1,385 | | 1,385 | ||||||||||||||||||
Unrealized gain on available
for sale securities |
| | | | 238 | 238 | ||||||||||||||||||
Stock based compensation |
1,771 | 18 | 493 | | | 511 | ||||||||||||||||||
Issuance of shares for
settlement of litigation |
510 | 5 | 245 | | | 250 | ||||||||||||||||||
Balance September 30, 2009 |
14,011 | $ | 140 | $ | 45,148 | $ | (40,722 | ) | $ | 238 | $ | 4,804 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
Table of Contents
POSITIVEID CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
(In thousands)
(unaudited)
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 1,385 | $ | (11,367 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities |
||||||||
Depreciation and amortization |
21 | 43 | ||||||
Stock based compensation |
511 | 5,011 | ||||||
Gain on sale/release of escrow of Xmark Corporation |
(4,385 | ) | (6,174 | ) | ||||
Asset impairment |
| 110 | ||||||
Issuance of shares for settlement of litigation |
250 | | ||||||
Gain on settlement of debt |
| (1,823 | ) | |||||
Non cash interest income |
(37 | ) | (20 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Decrease in accounts receivable |
| 32 | ||||||
Increase in inventories |
| (9 | ) | |||||
(Increase) decrease in prepaid expenses and other current assets |
(41 | ) | 349 | |||||
Decrease in accounts payable and accrued expenses |
(302 | ) | (356 | ) | ||||
Net cash used in discontinued operations |
(60 | ) | (2,872 | ) | ||||
Net cash used in operating activities |
(2,658 | ) | (17,076 | ) | ||||
Cash flows from investing activities: |
||||||||
Sale of Xmark Corporation |
4,434 | 47,863 | ||||||
Purchase of equipment |
(7 | ) | (14 | ) | ||||
Restricted cash |
| (4,500 | ) | |||||
Investment in note receivable |
(500 | ) | | |||||
Net cash used in discontinued operations |
| (114 | ) | |||||
Net cash provided by investing activities |
3,927 | 43,235 | ||||||
Cash flows from financing activities: |
||||||||
Debt financing |
| 8,000 | ||||||
Repayment of debt financing |
| (8,000 | ) | |||||
Financing costs |
| (701 | ) | |||||
Guarantee fee paid to stockholder |
| (500 | ) | |||||
Dividend payment |
| (15,836 | ) | |||||
Principal payments to stockholder on long term debt |
| (10,423 | ) | |||||
Issuance of common shares |
| 442 | ||||||
Net cash used in discontinued operations |
| (1,515 | ) | |||||
Net cash used in financing activities |
| (28,533 | ) | |||||
Net increase (decrease) in cash |
1,269 | (2,374 | ) | |||||
Cash, beginning of period |
3,229 | 7,221 | ||||||
Cash, end of period |
$ | 4,498 | $ | 4,847 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
Table of Contents
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
1. Business and Basis of Presentation
PositiveID Corporation, formerly known as VeriChip Corporation (the Company, us, we, or
our), is a Delaware corporation formed in November 2001. The Company commenced operations in
January 2002. On February 14, 2007, the Company completed an initial public offering of its common
stock, selling 3,100,000 shares of its common stock at a price of $6.50 per share.
On July 18, 2008, the Company completed the sale of all of the outstanding capital stock of
Xmark Corporation, its wholly-owned Canadian subsidiary (Xmark), to Stanley Canada Corporation
(Stanley) for $47.9 million in cash, which consisted of the $45 million purchase price plus a
balance sheet adjustment of $2.9 million. Under the terms of the stock purchase agreement,
$4.5 million of the proceeds were held in escrow for a period of 12 months to provide for
indemnification obligations under the stock purchase agreement, if any. As a result, the Company
recorded a gain on the sale of Xmark of $10.7 million, with $4.5 million of that gain deferred
until the escrow was settled. The Xmark business included all of the operations of our previously
reported healthcare security and industrial segments. The financial position, results of operations
and cash flows of Xmark for 2008 have been reclassified as a discontinued operation.
Following the completion of the sale of Xmark to Stanley, the Company retired all of its
outstanding debt for a combined payment of $13.5 million and settled all contractual payments to
officers and management of the Company and Xmark for $9.1 million. In addition, the Company issued
a special dividend of $15.8 million on August 28, 2008.
On November 12, 2008, the Company entered into an Asset Purchase Agreement (APA) with
Digital Angel and Destron Fearing Corporation, a wholly-owned subsidiary of Digital Angel, which
collectively are referred to as, Digital Angel. The terms of the APA included the purchase by
the Company of patents related to an embedded bio-sensor system for use in humans, and the
assignment of any rights of Digital Angel under a development agreement associated with the
development of an implantable glucose sensing microchip. The Company also received covenants from
Digital Angel and Destron Fearing that will permit the use of intellectual property of Digital
Angel related to the Companys VeriMed business without payment of ongoing royalties, as well as
inventory and a limited period of technology support by Digital Angel. The Company paid Digital
Angel $500,000 at the closing of the APA, which was recorded in the financials as research and
development expense.
During the quarter ended June 30, 2009, the Company finalized the process related to the
indemnification obligations supported by the $4.5 million escrow. On July 20, 2009, the Company
received $4.4 million of the previously escrowed funds, which was net of a $115 thousand settlement
to Stanley as the final balance sheet adjustment. As a result, the Company recognized a
$4.4 million previously deferred gain in its statement of operations during the nine months ended
September 30, 2009.
On September 4, 2009, the Company, VeriChip Acquisition Corp., a Delaware corporation and
wholly-owned subsidiary of the Company (the Acquisition Subsidiary), and Steel Vault Corporation,
a Delaware corporation (Steel Vault) signed an Agreement and Plan of Reorganization (the Merger
Agreement), dated September 4, 2009, as amended, pursuant to which the Acquisition Subsidiary was
merged with and into Steel Vault on November 10, 2009, with Steel Vault surviving and becoming a
wholly-owned subsidiary of the Company (the Merger). Upon the consummation of the Merger, each
outstanding share of Steel Vaults common stock was converted into 0.5 shares of common stock of
the Company. At the closing of the Merger, the Company changed its name to PositiveID Corporation,
changed its stock ticker symbol with Nasdaq to PSID effective November 11, 2009, and continues to
be listed on the Nasdaq Capital Market.
On September 29, 2009, the Company entered into a financing commitment of up to $10,000,000
with Optimus Technology Capital Partners, LLC (Optimus) under which Optimus is potentially
committed to purchase up to $10 million of the Companys convertible Series A Preferred Stock in
one or more tranches. The Company plans to use the funds to develop a virus triage detection
system for the H1N1 virus, to develop an in vivo glucose-sensing RFID microchip (discussed below)
and to support its working capital requirements and general corporate purposes. See Note 5
Financing Agreements, for more information.
During the three months ended September 30, 2009, through a development program with Receptors
LLC (Receptors), the companies launched Phase I of the development of a triage detection system
for the H1N1 virus was launched. On October 6, 2009, in a separate development program, the
Company launched the Phase II development of its in vivo glucose-sensing RFID microchip with
Receptors. In conjunction with this development program, the Company received an exclusive license
to two of Receptors platform patents for use with these two
applications. Phase I of the H1N1 triage detection system and Phase II of the glucose-sensing
microchip development programs are expected to be completed during the first half of 2010. In
conjunction with these two projects, the Company paid Receptors $200,000 and 350,000 shares of
restricted common stock.
5
Table of Contents
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
The Company has historically developed, marketed, and sold radio frequency identification
(frequently referred to as RFID) systems used for the identification and protection of people in
the healthcare market. The Companys VeriMed system uses the human-implantable passive RFID
microchip that is used in patient identification applications, securely linking a patient to their
personal health record as maintained in the Companys proprietary database. Each implantable
VeriChip microchip contains a unique verification number that is read when it is scanned by the
Companys scanner. In October 2004, the U.S. Food and Drug Administration, or FDA, cleared the
Companys VeriMed system for use in medical applications in the United States.
On March 5, 2009, the Company established a new division to evaluate clean and alternative
energy companies for potential strategic transactions or investment and as a result established a
new subsidiary, VeriGreen Energy Corporation. The Company incurred costs of $0.3 million, primarily
consisting of transaction costs related to the evaluation of several strategic opportunities and
organization costs.
Beginning in the fourth quarter of 2009, with the acquisition of Steel Vault, the Company
intends to pursue its strategy to offer identification tools and technologies for consumers and
businesses, including healthcare identification products, initially focused on the Health Link
personal health record and the identification security products currently offered by
NationalCreditReport.com.
The Company also intends to continue the development of the H1N1 triage detection system, the
glucose sensing RFID microchip and other health related products, built on the Companys core
intellectual property.
The accompanying unaudited condensed consolidated financial statements of the Company and its
subsidiaries as of September 30, 2009 and December 31, 2008 (the December 31, 2008, financial
information included in this report has been extracted from the Companys audited financial
statements included in its Annual Report on Form 10-K, as amended, for the year ended December 31,
2008), and for the three and nine months ended September 30, 2009 and 2008 have been prepared in
accordance with United States (U.S.) generally accepted accounting principles (GAAP) for
interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X under the Securities Exchange Act of 1934. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial statements. In the opinion of
the Companys management, all adjustments (including normal recurring adjustments) considered
necessary to present fairly the unaudited condensed consolidated financial statements have been
made.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of sales and expenses during the reporting period. Actual results could differ from those
estimates. Included in these estimates are assumptions about allowances for excess inventory, bad
debt reserves, 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, the determination of whether any impairment is to be recognized on goodwill or
intangibles, among others.
The unaudited condensed consolidated statements of operations for the three and nine months
ended September 30, 2009 and 2008 are not necessarily indicative of the results that may be
expected for the entire year. These statements should be read in conjunction with the consolidated
financial statements and related notes thereto included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2008.
6
Table of Contents
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
Fair Value of Financial Instruments
The carrying values of financial instruments including cash and accounts payable approximate
fair value due to the relatively short term nature of these instruments.
The Company adopted the provisions of Financial Accounting Standards Board (FASB) ASC
820-10, Fair Value Measurements and Disclosures (ASC 820-10) for financial assets and
liabilities effective January 1, 2008, and adopted ASC 820-10 for non-financial assets and
non-financial liabilities effective January 1, 2009. ASC 820-10 clarifies the principle that fair
value should be based on the assumptions market participants would use when pricing an asset or
liability and establishes a fair value hierarchy that prioritizes the information used to develop
those assumptions. The statement utilizes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels. A brief description of
those three levels is as follows:
The three levels of the fair value hierarchy under ASC 820-10 are described below:
| Level 1Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. | ||
| Level 2Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means. | ||
| Level 3Inputs that are both significant to the fair value measurement and unobservable. |
The Companys investment in the common stock purchase warrant to purchase 333 thousand common
shares of Steel Vault, as further discussed in Note 4 Note Receivable, are classified as Level 2
under ASC 820-10 hierarchy. The warrant investment in the Company is valued monthly using a
Black-Scholes model with observable market inputs.
Investments are classified within Level 3 of the fair value hierarchy because they trade
infrequently (or not at all) and therefore have little or no readily available pricing.
Unobservable inputs are used to measure fair value to the extent that observable inputs are not
available. The note receivable is classified within Level 3 of the fair value hierarchy.
Valuations for Level 3 investments are adjusted when changes to inputs and assumptions are
corroborated by evidence such as transactions in similar instruments, convertible offerings in the
equity or debt, and changes in financial ratios or cash flows of the borrower and the guarantors
financial ability to repay the obligation in the event of a default. The note receivable is
guaranteed by the Companys president and chief financial officer who is the chief executive
officer of Steel Vault, the borrower.
For positions that are not traded in active markets or are subject to transfer restrictions,
valuations are adjusted to reflect illiquidity and/or non-transferability and such adjustments are
generally based on available market information. In the absence of such evidence, managements best
estimate is used.
The values assigned to investments and any unrealized gains or losses reported are based on
available information and do not necessarily represent amounts that might be realized if a ready
market existed and such difference could be material. Furthermore the ultimate realization of such
amounts depends on future events and circumstances and therefore valuation estimates may differ
from the value realized upon disposition of individual positions.
The following table sets forth information about the level within the fair value hierarchy at
which the Companys investments are measured at September 30, 2009 (expressed in thousands):
Fair Value | ||||||||
Fair Value | Hierarchy | |||||||
Assets |
||||||||
Warrant |
$ | 273 | 2 | |||||
Note receivable (includes $19 interest receivable) |
$ | 495 | 3 | |||||
Total |
$ | 768 | ||||||
7
Table of Contents
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
The following summarizes changes in fair value of the Companys Level 3 assets for the
nine months ended September 30, 2009. The information reflects gains and losses for the period for
assets categorized as Level 3 as of September 30, 2009 (expressed in thousands):
Level 3 | ||||
Note Receivable | ||||
Balance December 31, 2008 |
$ | | ||
Unrealized gains (representing accretion of debt discount) |
10 | |||
Purchases |
466 | |||
Balance September 30, 2009 |
$ | 476 | ||
The Company adopted the provisions of FASB ASC 825-10, Financial Instruments (ASC 825-10) on
January 1, 2008. ASC 825-10 permits entities to choose to measure many financial instruments and
certain other items at fair value that are not currently required to be measured at fair value.
ASC 825-10 also establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that chose different measurement attributes for similar assets and
liabilities. The Company has elected not to measure any eligible items at fair value.
Recent Accounting Pronouncements
Effective July 1, 2009, the Company adopted the FASB Accounting Standards Codification (ASC)
105-10, Generally Accepted Accounting Principles (ASC 105-10). ASC 105-10 establishes the FASB
Accounting Standards Codification as the source of authoritative accounting principles recognized
by the FASB to be applied by non-governmental entities in the preparation of financial statements
in conformity with GAAP. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The codification
did not change GAAP but reorganizes the literature. References for FASB guidance throughout this
document have been updated for the codification.
Effective January 1, 2009, the Company adopted ASC 805-10, Business Combinations (ASC
805-10). Under ACS 805-10, an acquiring entity is required to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value with limited
exceptions. ACS 805-10 establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired. This statement also
establishes disclosure requirements which will enable users to evaluate the nature and financial
effects of the business combination. The Company expensed $0.2 million of due diligence costs
relating to a potential acquisition target during the period ended September 30, 2009.
The Company adopted the provisions of ASC 855-10, Subsequent Events (ASC 855-10) in the
second quarter of 2009. ASC 855-10 establishes (1) the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, (2) the circumstances under which
an entity should recognize events or transactions occurring after the balance sheet date in its
financial statements, and (3) the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. The Company has evaluated any subsequent
events through November 10, 2009.
The Company adopted ASC 810-10-65-1, Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51 on January 1, 2009. This establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity that should be reported as equity in the consolidated financial
statements. In addition, it changes the way the consolidated income statement is presented by
requiring consolidated net income to be reported at amounts that include the amounts attributable
to both the parent and the noncontrolling interest. ASC 810-10-65-1 also establishes a single
method of accounting for changes in a parents ownership interest in a subsidiary that do not
result in deconsolidation and requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. ASC 810-10-65-1 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008 and earlier adoption is
prohibited. ASC 810-10-65-1 shall be applied prospectively as of the beginning of the fiscal year
in which this statement is initially applied, except for the presentation and disclosure
requirement which shall be applied retrospectively for all periods presented. The adoption of ASC
810-10-65-1 had no impact on the Companys condensed financial position, results of operations, cash
flows or financial statement disclosures.
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
In June 2009, the FASB finalized SFAS No. 167, Amending FASB interpretation No. 46(R), which
was later superseded by the FASB Codification and included in ASC topic 810. The provisions of ASC
810 provide guidance in determining whether an enterprise has a controlling financial interest in a
variable interest entity. This determination identifies the primary beneficiary of a variable
interest entity as the enterprise that has both the power to direct the activities of a variable
interest entity that most significantly impacts the entitys economic performance, and the
obligation to absorb losses or the right to receive benefits of the entity that could potentially
be significant to the variable interest entity. This pronouncement also requires ongoing
reassessments of whether an enterprise is the primary beneficiary and eliminates the quantitative
approach previously required for determining the primary beneficiary. New provisions of this
pronouncement are effective January 1, 2010. The Company is currently evaluating the impact of
adopting this pronouncement.
In August of 2009, the FASB issued ASC Update 2009-5, an update to ASC 820, Fair Value
Measurements and Disclosures. This update provides amendments to reduce potential ambiguity in
financial reporting when measuring the fair value of liabilities. Among other provisions, this
update provides clarification in circumstances in which a quoted price in an active market for the
identical liability is not available, a reporting entity is required to measure fair value using
one or more of the valuation techniques described in ACS Update 2009-5. The adoption of this
update in the third quarter of 2009 did not have a material affect on Companys condensed
consolidated financial statements.
Accounting Standard Update No. 2009-15, Accounting for Own-Share Lending Arrangements in
Contemplation of Convertible Debt Issuance or Other Financing. In October 2009, the Financial
Accounting Standards Board (FASB) issued Update No. 2009-15 as an amendment to the subtopic
470-20, Debt with Conversion and Other Options, to address the accounting for own-share lending
arrangements entered in contemplation of a convertible debt issuance or other financing. ASC
470-20-25-20A establishes that at the date of issuance, a share-lending arrangement entered into on
an entitys own shares in contemplation of a convertible debt offering or other financing shall be
measured at fair value (in accordance with Topic 820) and recognized as an issuance cost, with an
offset to additional paid-in capital in the financial statements of the entity. ASC 470-20-35-11A
establishes that if it becomes probable that the counterparty to a share-lending arrangement will
default, the issuer of the share-lending arrangement shall recognize an expense equal to the then
fair value of the unreturned shares, net of the fair value of probable recoveries. The issuer of
the share-lending arrangement shall remeasure the fair value of the unreturned shares each
reporting period through earnings until the arrangement consideration payable by the counterparty
becomes fixed. Subsequent changes in the amount of the probable recoveries should also be
recognized in earnings. ASC 470-20-45-2A establishes that loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement occurs. ASC 470-20-50-2A
adds new disclosures that must be made in any period in which a share-lending arrangement is
outstanding as follows: (a) description of any outstanding share-lending arrangements, (b) number
of shares, term, circumstances under which cash settlement would be required, (c) any requirements
for the counterparty to provide collateral, (d) entitys reason for entering into the share-lending
arrangement, (e) fair value of the issuance cost associated with the arrangement, (f) treatment for
the purpose of calculating earnings per share, (g) unamortized amount of the issuance cost
associated with the arrangement, (h) classification of the issuance cost associated with the
arrangement, (i) amount of interest cost recognized relating to the amortization and (j) any
amounts of dividends paid related to the loaned shares that will not be reimbursed. This Accounting
Standard Update shall be effective for fiscal years beginning on or after December 15, 2009 and
interim periods within those fiscal years for arrangements outstanding entered into on or after the
beginning of the first reporting period that begins on or after June 15, 2009. Early adoption is
not permitted. The Company is evaluating the impact on financial statements regarding this update.
Stock-Based Compensation
The Company recorded compensation expense, related to stock options, of approximately
$0.2 million and $0.5 million for the three and nine months ended September 30, 2009, respectively,
and approximately $0.9 million and $1.1 million for the three and nine months ended September 30,
2008, respectively.
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
In December 2008, the Company issued approximately 518 thousand shares of its restricted
common stock to William J. Caragol, its president and chief financial officer in lieu of salary.
The shares vest according to the following schedule: (i) 20% vested on the grant date, and (ii) 80%
vest on January 1, 2010. In the event of a change
in control and if Mr. Caragol is terminated without cause, the shares will immediately vest.
The shares are subject to forfeiture in the event Mr. Caragol is terminated for cause. Compensation
expense of approximately $22 thousand and $190 thousand was recorded in the three and nine months
ended September 30, 2009, respectively, for these shares.
In December 2008, the Company issued approximately 602 thousand shares of its restricted
common stock to Scott R. Silverman, its chairman and chief executive officer in lieu of salary. If
Mr. Silverman remains involved in the day-to-day management of the Company, the shares will vest
upon the earlier to occur of: (i) January 1, 2010, or (ii) a change in control of the Company. The
shares are subject to forfeiture in the event that Mr. Silverman fails to remain involved in the
day-to-day management of the Company. Compensation expense of approximately $56 thousand and $166
thousand was recorded in the three and nine months ended September 30, 2009, respectively, for
these shares.
In December 2008, the Company issued 400 thousand shares of its restricted common stock to
members of the board of directors, which vest on January 1, 2010. The Company determined the value
of the stock to be approximately $148 thousand based on the value of its common stock on the dates
of grant. The value of the outstanding restricted stock is being amortized as compensation expense
over the vesting period. Compensation expense of approximately $37 thousand and $110 thousand was
recorded in the three and nine months ended September 30, 2009, respectively, for these shares.
In January and December 2008, the Company issued 25 thousand and 170 thousand options,
respectively, to a director, employees and consultants, which vest on January 18, 2011 and
December 31, 2011, respectively. The Company determined the value of the options to be
approximately $43 thousand based on the value of its common stock on the dates of grant. The value
of the outstanding options is being amortized as compensation expense over the vesting period.
Compensation expense of approximately $23 thousand and $27 thousand was recorded in the three and
nine months ended September 30, 2009, respectively, for these options.
In August 2009, the Company issued 50 thousand shares of its restricted common stock to the
members of the special committee of the board of directors as partial compensation for their
service on the special committee, which vest on January 1, 2010. The Company determined the value
of the stock to be approximately $25 thousand based on the value of its common stock on the dates
of grant. The value of the outstanding restricted stock is being amortized as compensation expense
over the vesting period. Compensation expense of approximately $8 thousand was recorded in the
three and nine months ended September 30, 2009 for these shares.
In September 2009, the Company issued 200 thousand shares of its restricted common stock to
Receptors as partial payment for the development of a sensing system for the detection and
identification of the influenza virus, which vest on January 31, 2010. The Company determined the
value of the stock to be approximately $614 thousand based on the value of its common stock on the
dates of grant. The value of the outstanding restricted stock is being amortized as an expense over
the vesting period. Research and development expense of approximately $10 thousand was recorded in
the three and nine months ended September 30, 2009 for these shares.
Stock-based compensation expense is reflected in the condensed consolidated statement of
operations in selling, general and administrative expense.
The Companys computation of expected life was determined based on the simplified method. The
interest rate was based on the U.S. Treasury Yield curve in effect at the time of grant. The
Companys computation of expected volatility is based on the historical volatility of the Companys
comparable companies average historical volatility.
2. Principles of Consolidation
The financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant inter-company transactions and balances had been eliminated in
consolidation.
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
3. Inventories
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Raw materials |
$ | 161 | $ | 161 | ||||
Work in process |
| | ||||||
Finished goods |
52 | 52 | ||||||
213 | 213 | |||||||
Allowance for excess and obsolescence |
(213 | ) | (213 | ) | ||||
$ | | $ | | |||||
4. Note Receivable
On June 4, 2009, the Company invested $500 thousand in Steel Vault pursuant to a secured
convertible promissory note (the Note). The two year Note was collectible on demand on or after
June 4, 2010, accrued interest at a rate of twelve percent and was secured by substantially all of
Steel Vaults assets, including the assets of National Credit Report.com, LLC, a wholly-owned
subsidiary of Steel Vault. The security interest held by the Company on the assets was senior to
any other security interest on the assets pursuant to a Subordination and Intercreditor Agreement
between the Company and Blue Moon Energy Partners LLC, a Florida limited liability company (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 investment included a common stock purchase warrant given to the Company to purchase 333
thousand common shares of Steel Vault at a price of $0.30 per share. The fair market value at
issuance and September 30, 2009, was $34 thousand and $273 thousand, respectively. Interest
receivable as of September 30, 2009 was $10 thousand.
The Company valued each component of the investment as of the investment period and allocated
the $500 thousand investment proportionately to the Note and common stock purchase warrant based on
their respective fair values on June 4, 2009.
The financing transaction also included a guaranty of collection given by Mr. Caragol, the
Companys president and chief financial officer and the chief executive officer of Steel Vault for
the benefit of the Company. See Note 10 Related Party Transactions, for more information.
5. Financing Agreements
On September 29, 2009, the Company entered into a Convertible Preferred Stock Purchase
Agreement (the Purchase Agreement) with Optimus Capital Partners, LLC doing business as Optimus
Technology Capital Partners, LLC (Optimus) under which Optimus is committed to purchase up to
$10 million shares of convertible Series A Preferred Stock of the Company (the Preferred Stock)
in one or more tranches. Under the terms of the Purchase Agreement, from time to time and at the
Companys sole discretion, the Company may present Optimus with a notice to purchase such Preferred
Stock (the Notice).
To facilitate the transactions contemplated by the Purchase Agreement, R & R Consulting
Partners, LLC, a company controlled by Scott R. Silverman, the Companys chairman and chief
executive officer, will loan shares of common stock to Optimus equal to 135% of the aggregate
purchase price for each tranche pursuant to Stock Loan Agreements between R & R Consulting
Partners, LLC and Optimus. R & R Consulting Partners, LLC was paid $100 thousand fee in October
2009 plus will be paid 2% interest for the fair value of the loaned shares for entering into the
stock loan arrangement. The aggregate amount of shares loaned under any and all Stock Loan
Agreements, together with all other shares sold by or on behalf of the Company pursuant to General
Instruction I.B.6. to Form S-3, can not exceed one-third of the aggregate market value of the
voting and non-voting common equity held by non-affiliates of the Company in any 12 month period. R
& R Consulting Partners, LLC may demand return of some or all of the borrowed shares (or an equal
number of freely tradable shares of common stock) at any time on or after the six-month anniversary
date such borrowed shares were loaned to Optimus, but no such demand may be made if there are any
shares of Preferred Stock then outstanding. If a permitted return demand is made, Optimus will
return the borrowed shares within three trading days after such demand (or an equal number of
freely tradable shares of common stock). Optimus may return the borrowed shares in whole or in
part, at any time or from time to time,
without penalty or premium. On September 29, 2009, October 8, 2009, and October 21, 2009, R &
R Consulting Partners, LLC loaned Optimus 1.3 million, 800,000 and 600,000 shares, respectively, of
Company common stock.
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
Optimus is obligated to purchase such Preferred Stock on the tenth trading day after any
Notice date, subject to satisfaction of certain closing conditions, including (i) that the Company
is listed for and trading on a trading market, (ii) the representations and warranties of the
Company set forth in the Purchase Agreement are true and correct as if made on each tranche date,
(iii) Optimus shall have received a commitment fee of $800 thousand payable only on the first
tranche closing date in the event the gross proceeds from the first tranche closing exceed $800
thousand; and (iv) that no such purchase would result in Optimus and its affiliates beneficially
owning more than 9.99% of the Companys common stock. In the event the closing bid price of the
Companys common stock during any one or more of the nine trading days following the delivery of a
Notice falls below 75% of the closing bid price on the trading day prior to the Notice date and
Optimus determines not to complete the tranche closing, then the Company may, at its option,
proceed to issue some or all of the applicable shares, provided that the conversion price for the
Preferred Stock that is issued shall reset at the lowest closing bid price for such nine trading
day period.
In addition, redemption of the Preferred Stock by the Company, to the extent such Preferred
Stock shall not have been converted into shares of Common Stock, shall be mandatory in the event
that the Company does not receive stockholder approval for the transactions described in the
Purchase Agreement on or before March 31, 2010.
On September 29, 2009 the Company exercised the first tranche of this financing, to issue 296
shares of Preferred Stock, for a tranche amount of approximately $3.0 million. In support of this
tranche, R & R Consulting Partners, LLC loaned Optimus 1.3 million shares of common stock. This
tranche closed on October 13, 2009, and the Company received proceeds of approximately $3.0
million, less the fees due on the entire financing commitment of $800 thousand. On November 5,
2009, the Company closed the second tranche of this financing, issuing 166 shares of Preferred
Stock, for a tranche amount of approximately $1.7 million. In support of this tranche, R & R
Consulting Partners, LLC loaned Optimus approximately 1.4 million shares of common stock.
6. Stockholders Equity
Stock Option Plans
In April 2002, the Companys board of directors approved the VeriChip Corporation 2002
Flexible Stock Plan, or 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
September 30, 2009, approximately 1.7 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 September 30, 2009, all of which are fully
vested. As of September 30, 2009, no SARs have been granted and 0.2 million shares may still be
granted under the VeriChip 2002 Plan.
On April 27, 2005, the board of directors of Digital Angel Corporation (Digital Angel), the
Companys former majority stockholder, approved the VeriChip Corporation 2005 Flexible Stock Plan,
or 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 September 30, 2009,
approximately 0.3 million options have been granted under the VeriChip 2005 Plan and 0.2 million of
the options were outstanding. Approximately 0.2 million of the options are fully vested and expire
up to nine years from the vesting date. As of September 30, 2009, no SARs have been granted and 832
shares may still be granted under the VeriChip 2005 Plan.
On June 17, 2007, the Company adopted the VeriChip 2007 Stock Incentive Plan, or the VeriChip
2007 Plan. Under the VeriChip 2007 Plan, the number of shares for which options, SARs or
performance shares could be initially be granted was 1.0 million. On December 16, 2008, the
Companys stockholders approved an amendment to the VeriChip 2007 Plan to include an additional
2.0 million shares that may be granted. As of September 30, 2009, approximately 2.4 million options
and shares have been granted. As of September 30, 2009, no SARs have been granted and 0.6 million
shares may still be granted under the VeriChip 2007 Plan.
12
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
On November 10, 2009, at the special and annual meeting of the Company, the Companys
stockholders approved and adopted the VeriChip Corporation 2009 Stock Incentive Plan. Under the
VeriChip Corporation 2009
Stock Incentive Plan, the number of shares for which options, SARs or performance shares may
be granted is 5.0 million.
In addition, as of September 30, 2009, options exercisable for approximately 0.3 million
shares of the Companys common stock have been granted outside of the Companys plans. These
options were granted at exercise prices ranging from $0.23 to $8.55 per share, are fully vested and
are exercisable for a period of up to seven years.
In the three months ended September 30, 2009, no options and 0.1 million restricted shares
were granted. In the three months ended September 30, 2008, no options or restricted shares were
granted. In the nine months ended September 30, 2009, no options and 1.4 million restricted shares
were granted. In the nine months ended September 30, 2008, 25 thousand options and 0.7 million
restricted shares were granted.
A summary of option activity under the Companys option plans as of September 30, 2009, and
changes during the nine months then ended is presented below (in thousands, except per share
amounts):
Weighted Average |
||||||||
Number of Options |
Exercise Price Per Share |
|||||||
Outstanding on January 1, 2009 |
1,225 | $ | 4.52 | |||||
Granted |
| | ||||||
Exercised |
| | ||||||
Forfeited |
221 | 0.57 | ||||||
Outstanding on September 30, 2009 |
1,004 | 5.39 | ||||||
Exercisable on September 30, 2009 (1) |
834 | 6.41 | ||||||
Shares available on September 30, 2009 for options and common
shares that may be granted |
786 | |||||||
(1) | 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. Based upon the Companys closing price on the NASDAQ, the fair value of the underlying stock was $2.58 at September 30, 2009. As of September 30, 2009, the aggregate intrinsic value of all options outstanding was $476 thousand. |
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
The following table summarizes information about stock options at September 30, 2009 (in
thousands, except weighted-average amounts):
Outstanding Stock Options | Exercisable Stock Options | |||||||||||||||||||
Weighted- | Weighted- | Weighted- | ||||||||||||||||||
Average | Average | Average | ||||||||||||||||||
Remaining | Exercise | Exercise | ||||||||||||||||||
Range of | Contractual | Price Per | Price Per | |||||||||||||||||
Exercise Prices | Shares | Life (years) | Share | Shares | Share | |||||||||||||||
$0.0000 to $2.0250 | 226 | 8.0 | $ | 0.55 | 56 | $ | 1.10 | |||||||||||||
$4.0501 to $6.0750 | 348 | 6.9 | 5.59 | 348 | 5.59 | |||||||||||||||
$6.0751 to $8.1000 | 318 | 4.1 | 7.08 | 318 | 7.08 | |||||||||||||||
$8.1001 to $10.1250 | 106 | 5.3 | 9.24 | 106 | 9.24 | |||||||||||||||
$18.2251 to $20.2500 | 6 | 3.3 | 20.25 | 6 | 20.25 | |||||||||||||||
1,004 | 6.0 | $ | 5.39 | 834 | $ | 6.41 | ||||||||||||||
The Black-Scholes model, which the Company used to determine compensation expense,
required the Company to make several key judgments including:
| the value of the Companys common stock; | ||
| the expected life of issued stock options; | ||
| the expected volatility of the Companys stock price; | ||
| the expected dividend yield to be realized over the life of the stock option; and | ||
| the risk-free interest rate over the expected life of the stock options. |
The Company prepared these estimates based upon its historical experience, the stock price
volatility of comparable publicly-traded companies and its best estimation of future conditions.
The fair values of the options granted were estimated on the grant date using the
Black-Scholes valuation model based on the following weighted-average assumptions:
2009 | 2008 | |||||||
Expected dividend yield |
N/A | | ||||||
Expected stock price volatility |
N/A | 50 | % | |||||
Risk-free interest rate |
N/A | 4.51 | % | |||||
Expected term (in years) |
N/A | 6.0 |
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
7. Income (Loss) per Common Share
A reconciliation of the numerator and denominator of basic and diluted income (loss) per
common share is provided as follows (in thousands, except per share amounts):
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Numerator: |
||||||||||||||||
Numerator for basic and diluted loss per share: |
||||||||||||||||
Income (loss) from continuing operations |
(758 | ) | (3,551 | ) | 1,385 | (12,154 | ) | |||||||||
Net income from discontinued operations |
| (1,966 | ) | | 787 | |||||||||||
Net income (loss) |
$ | (758 | ) | $ | (5,317 | ) | $ | 1,385 | $ | (11,367 | ) | |||||
Denominator: |
||||||||||||||||
Denominator for basic income (loss) per share: |
||||||||||||||||
Weighted average shares outstanding basic |
12,344 | 11,233 | 12,275 | 10,217 | ||||||||||||
Net income (loss) per common share from
continuing operations basic |
$ | (0.06 | ) | $ | (0.30 | ) | $ | 0.11 | $ | (1.19 | ) | |||||
Net income per common share from discontinued
operations basic |
| (0.18 | ) | | 0.08 | |||||||||||
Basic income (loss) per share |
$ | (0.06 | ) | $ | (0.48 | ) | $ | 0.11 | $ | (1.11 | ) | |||||
Denominator for diluted income (loss) per
share: |
||||||||||||||||
Weighted average shares outstanding diluted |
12,344 | 11,233 | 12,911 | 10,217 | ||||||||||||
Net income (loss) per common share from
continuing operations diluted |
$ | (0.06 | ) | $ | (0.30 | ) | $ | 0.11 | $ | (1.19 | ) | |||||
Net income (loss) per common share from
discontinued operations diluted |
| (0.18 | ) | | 0.08 | |||||||||||
Diluted income (loss) per share |
$ | (0.06 | ) | $ | (0.48 | ) | $ | 0.11 | $ | (1.11 | ) | |||||
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
The following stock options and restricted stock outstanding as of September 30, 2009 and
2008 were not included in the computation of dilutive income (loss) per share because the net
effect would have been anti-dilutive:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Stock options |
1,004 | 1,144 | | 1,144 | ||||||||||||
Restricted common stock |
1,667 | | | | ||||||||||||
2,671 | 1,144 | | 1,144 | |||||||||||||
Securities excluded from
the diluted earnings
(loss) per share calculation
because the exercise prices
were greater than the average
market price |
||||||||||||||||
Stock Options (1) |
| | 809 | |
(1) | These stock options represent the number of stock options outstanding at the end of the respective period. At the point that the exercise price is less than the average market price, these options have the potential to be dilutive and application of the treasury method would reduce this amount. |
8. Income Taxes
The Company had an effective tax rate of nil for the three and nine months ended September 30,
2009 and 2008. However, it has not recorded a tax benefit for the resulting U.S. net operating loss
carryforwards, as the Company has determined that a valuation allowance against its net U.S.
deferred tax assets was appropriate based primarily on its historical operating results.
During the three and nine months ended September 30, 2009, the Company recognized a gain of
$4.4 million from the sale of Xmark in 2008. This gain resulted in taxable income in 2008, which
resulted in the Company utilizing a portion of its net operating loss carryforward through the
release of the valuation allowance against those tax attributes.
The Company adopted the provisions of ASC 740-10, Income Taxes relating to uncertainty in
income taxes effective January 1, 2008. The Company used 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 should be 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 should recognize the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority. |
The implementation
of ASC 740-10 did not result in any adjustment to the Companys beginning tax
positions. The Company continues to fully recognize its 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.
The Company recognizes any interest accrued related to unrecognized tax benefits or exposures
in interest expense and penalties in operating expenses. During the three and nine months ended
September 30, 2009 and 2008, there was no such interest or penalty.
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
9. Legal Proceedings
The Company is a party to various legal actions, as either plaintiff or defendant, including
the matters identified above, arising in the ordinary course of business, none of which is expected
to have a material adverse effect on its business, financial condition or results of operations.
However, litigation is inherently unpredictable, and the costs and other effects of pending or
future litigation, governmental investigations, legal and administrative cases and proceedings,
whether civil or criminal, settlements, judgments and investigations, claims or charges in any such
matters, and developments or assertions by or against the Company relating to it or to its
intellectual property rights and intellectual property licenses could have a material adverse
effect on the Companys business, financial condition and operating results.
10. Related Party Transactions
Agreements with Steel Vault
The Company shares a
common ownership, or control group, with Steel Vault. R & R Consulting
Partners, LLC, a holding company owned and controlled by Scott R. Silverman, and
Mr. Silverman beneficially own, as of November 10, 2009, on a combined basis, approximately 36% of the Companys
outstanding common stock. As of November 10, 2009, Mr. Silverman beneficially owned, directly or
indirectly, approximately 51% of Steel Vaults outstanding common stock, including 1,285,000 shares
that are directly owned by Blue Moon Energy Partners, LLC (Blue Moon). Mr. Silverman, the
Companys chairman of the board and chief executive officer, is a manager and controls a member of
Blue Moon (i.e., R & R Consulting Partners, LLC). William J. Caragol, the Companys president and
chief financial officer, is also a manager and member of Blue Moon and is the chief executive
officer of Steel Vault.
On October 8, 2008, Steel Vault entered into a sublease with Digital Angel for its corporate
headquarters located in Delray Beach, Florida, consisting of approximately 7,911 feet of office space,
which space the Company shares with Steel Vault. The rent for the entire twenty-one-month term of
the sublease is $158,000, which Steel Vault paid in one lump sum upon execution of the sublease.
The Company reimbursed Steel Vault for one-half of the sublease payment, representing the Companys
share of the total cost of the sublease. In addition, in order to account for certain shared
services and resources, the Company and Steel Vault operate under a shared services agreement, in
connection with which Steel Vault currently pays the Company $6,500 a month. During the three and
nine months ended September 30, 2009, the Company recorded $21,500 and $66,500, respectively, for
shared services fees from Steel Vault. The Company did not record any payments for shared services
fees from Steel Vault for the three and nine months ended September 30, 2008.
On June 4, 2009, the Company closed a debt financing transaction with Steel Vault for $500
thousand pursuant to Note. The financing transaction included a common stock purchase warrant sold
to the Company to purchase 333 thousand common shares of Steel Vault. The financing transaction
also included a guaranty of collection given by Mr. Caragol for the benefit of the Company, for
which Mr. Caragol received a common stock purchase warrant from Steel Vault. See Note 4 Note
Receivable, for more information.
Financing Transaction
To facilitate the transactions contemplated by the Purchase Agreement, R & R Consulting
Partners, LLC, a company controlled by Mr. Silverman, will loan 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. 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. See Note 5 Financing Agreements, for more
information.
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
11. Supplementary Cash Flow Information
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Income taxes paid |
$ | | $ | | ||||
Interest paid |
| 285 | ||||||
$ | | $ | 285 |
12. Subsequent Events
On September 29, 2009, the Company exercised the first tranche of the financing with Optimus
pursuant to the Purchase Agreement, pursuant to which it sold 296 shares of Preferred Stock, for a
tranche amount of approximately$3.0 million. This tranche closed on October 12, 2009, and the
Company received proceeds of approximately $3.0 million, less the fees due on the entire financing
commitment of $800 thousand. On November 5, 2009, the Company closed the second tranche of this
financing, issuing 166 shares of Preferred Stock, for a tranche amount of approximately $1.7
million. In support of this tranche, R & R Consulting Partners, LLC loaned Optimus 1.4 million
shares of common stock. See Note 5 Financing Agreements, for more information.
On October 6, 2009, the Company entered into a License Agreement with Receptors to obtain an
exclusive license to use certain intellectual property of Receptors for internal research, internal
development and quality control purposes and to make, sell, offer to sell, import and export
tangible products covered by patents and patent applications (the Licensed Products) owned by
Receptors, in their application to the development of an implantable glucose sensing device for use
in the human body and applications in related fields. In connection with the License Agreement,
the Company and Receptors entered into a Development/Master Agreement pursuant to which the Company
will engage the services of Receptors to develop a glucose sensing device for use in the human
body. Under the Development/Master Agreement, Receptors will provide glucose sensing system
optimization and demonstrate a fluorescence system bench scale prototype by March 31, 2010. As
consideration, the Company made a cash payment of $100,000 to Receptors and issued 150,000
restricted shares of Company common stock as payment under the Development/Master Agreement. The
Company must pay Receptors royalties of forty-five percent (45%) of the net sales of the Licensed
Products relating to implantable glucose sensing device for use in the human body markets and
applicational areas in related fields worldwide. The Company must also pay Receptors forty-five
percent (45%) of any revenue received from the sale of the Licensed Products, other than for sales
described in the immediately preceding sentence.
On November 10, 2009 the Company completed the acquisition of Steel Vault pursuant to the
Merger Agreement. See Note 1 Business and Basis of Presentation for further details.
The Company will issue approximately 5,067,290 shares of its common stock in connection with
the Merger, and has reserved an additional 3,802,409 shares of its common stock for issuance in
connection with the Companys assumption of Steel Vaults outstanding options and warrants. No
fractional shares of the Companys common stock will be issued in connection with the Merger.
Instead, the Company will make a cash payment to each Steel Vault stockholder who would otherwise
receive a fractional share. The Company will account for the merger using the acquisition method of
accounting for business combinations, with the Company being considered the acquiror of Steel
Vault, in conformity with GAAP. This means that the Company will allocate the purchase price to the
fair value of assets, including identifiable intangible assets acquired and liabilities assumed
from the current minority owners of Steel Vault at the effective time of the Merger, with the
excess purchase price, if any, being recorded as goodwill. Under the acquisition method of
accounting, goodwill is not amortized but is tested for impairment at the time of the acquisition
and at least annually thereafter.
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Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, 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. This
Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q are discussed under Item
1A. Risk Factors and elsewhere in our Annual Report on Form 10-K for the year ended December 31,
2008, as supplemented by Item 1A. Risk Factors of our Quarterly Reports for the periods ended
March 31, 2009, June 30, 2009 and September 30, 2009, and include:
| our ability to continue listing our common stock on the Nasdaq Stock Market (Nasdaq); | ||
| 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; | ||
| 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; | ||
| uncertainty as to whether a market for our Health Link system will develop and whether we will be able to generate more than a nominal level of revenue from this business; |
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| the potential for patent infringement claims to be brought against us asserting that we hold no rights for the use of the implantable microchip technology and that we are violating another partys intellectual property rights. If such a claim is successful, we could be enjoined from engaging in activities to market the systems that utilize the implantable microchip and be required to pay substantial damages; | ||
| market acceptance of our VeriMed system, which will depend in large part on the future availability of insurance reimbursement for the VeriMed system microchip implant procedure from government and private insurers, and the timing of such reimbursement, if it, in fact, occurs; | ||
| our ability to provide uninterrupted, secure access to the Health Link database; | ||
| our ability to consummate the transactions in connection with and as provided by the Merger Agreement; | ||
| our ability to complete the Phase I of the H1N1 triage detection system and Phase II of the glucose-sensing microchip development programs during the first half of 2010 or at all; | ||
| 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 and energy sectors; 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q and under the
section entitled Risk Factors in our Annual Report on Form 10-K for the year ended December 31,
2008, as supplemented by Item 1A. Risk Factors of our Quarterly Reports for the periods ended
March 31, 2009, June 30, 2009 and September 30, 2009. These are factors that could cause our actual
results to differ materially from expected results. Other factors besides those listed could also
adversely affect us.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis of the Companys financial condition and results of
operations should be read in conjunction with the accompanying financial statements and related
notes included in Item 1 of this Quarterly Report on Form 10-Q as well as our Annual Report on Form
10-K for the year ended December 31, 2008.
The Company has historically developed, marketed, and sold radio frequency identification
(frequently referred to as RFID) systems used for the identification and protection of people in
the healthcare market. The Companys VeriMed system uses the human-implantable passive RFID
microchip that is used in patient identification applications, securely linking a patient to their
personal health record as maintained in the Companys proprietary database. Each implantable
VeriChip microchip contains a unique verification number that is read when it is scanned by the
Companys scanner. In October 2004, the U.S. Food and Drug Administration, or FDA, cleared our
VeriMed system for use in medical applications in the United States.
In July 2009, the Company completed the sale of all of the outstanding capital stock of Xmark
to Stanley for $47.9 million in cash, which consisted of cash payment of $43.4 million in July
2008 and a second cash payment of $4.5 million which was defined under an escrow agreement and was
released July 21, 2009. The Xmark business included all of the operations of our previously
reported healthcare security and industrial segments. The financial position, results of operations
and cash flows of Xmark for 2008 have been reclassified as a discontinued operation.
Recent Developments
On August 27, 2009, the board of directors of the Company appointed Scott R. Silverman as the
Companys chief executive officer. Mr. Silverman will also continue to serve as the chairman of the
board of directors of the Company. On November 10, 2009, the board of directors of the Company
appointed William J. Caragol, previously acting chief financial officer, as president, chief
financial officer and a director of the Company.
On September 8, 2009, the Company and Steel Vault Corporation, a Delaware corporation (Steel
Vault), issued a joint press release announcing the signing of an Agreement and Plan of
Reorganization (the Merger Agreement), dated September 4, 2009, among the Company, Steel Vault
and VeriChip Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the Company
(the Acquisition Subsidiary), pursuant to which the Acquisition Subsidiary was merged with and
into Steel Vault on November 10, 2009, with Steel Vault surviving and becoming a wholly-owned
subsidiary of the Company (the Merger). Upon the consummation of the Merger, each outstanding
share of Steel Vaults common stock was converted into 0.5 shares of common stock of the Company.
At the time of the Merger, the Company changed its name to PositiveID Corporation, changed its
stock ticker symbol with Nasdaq to PSID effective November 11, 2009, and continues to be listed
on the Nasdaq Capital Market.
On September 21, 2009, the Company expanded its partnership with Receptors LLC
(Receptors)and launched the development of a triage detection system for detection of the H1N1
virus; in conjunction with that development program the Company received an exclusive license to
Receptors patents utilized in that development.
On September 29, 2009, the Company entered into a financing commitment of up to $10,000,000
with Optimus Technology Capital Partners, LLC (Optimus) under which Optimus is potentially
committed to purchase up to $10 million of the Companys convertible Series A Preferred Stock in
one or more tranches. The Company plans to use the funds to develop a virus triage detection
system for the H1N1 virus, to develop an in vivo glucose-sensing RFID microchip and to support its
working capital requirements and general corporate purposes.
On October 6, 2009, the Company entered into a development partnership with Receptors to
launch Phase II development of an in vivo glucose-sensing RFID microchip. Also on October 6, 2009,
the Company received an exclusive license to RECEPTORS Patent No. 7,504,364 titled Methods of
Making Arrays and Artificial Receptors and Patent No. 7,469,076 Sensors Employing Combinatorial
Artificial Receptors, to use in conjunction with the Companys Patent No. 7,125,382 entitled
Embedded Bio-Sensor System, for the purpose of developing an in vivo glucose-sensing RFID
microchip.
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Results of Operations
During the nine months ended September 30, 2009, the Company focused its resources on the
process of evaluating the timing and nature of its future investments and expenditures related to
its VeriMed, VeriTrace and VeriGreen businesses. During this time the Company has undertaken a cost
reduction program to maximize the amount of capital that it will have available to pursue business
opportunities in the healthcare and energy sectors.
Beginning in the fourth quarter of 2009, with the acquisition of Steel Vault, the Company
intends to pursue its strategy to offer identification tools and technologies for consumers and
businesses, including healthcare identification products, initially focused on the Health Link
personal health record and the identification security products currently offered by
NationalCreditReport.com.
The Company also intends to continue the development of the H1N1 triage detection system, the
glucose sensing RFID microchip and other health related products, built on the Companys core
intellectual property.
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
Revenue
Revenue for the three months ended September 30, 2009 and 2008 were $104,000 and $6,000,
respectively, primarily from the sale of the Companys VeriTrace systems to state and local
governments.
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, and facilities costs.
Selling, general and administrative expense decreased $11.1 million to $0.8 million for the
three months ended September 30, 2009 as compared to $11.9 million for the three months ended
September 30, 2008. In the three months ended September 30, 2008, contractual payments of
$7.0 million were made to management of the Company as a result of the sale of Xmark to The Stanley
Works, as well as transactional expenses associated with our sale of Xmark, the marketing of our
VeriMed business and the costs resulting from equity based compensation. During the three months
ended September 30, 2009 and 2008, the Company incurred stock-based compensation expense of
$0.2 million and $3.5 million, respectively. On July 18, 2008, as a result of our sale of Xmark
Corporation, all outstanding unvested options and restricted shares became fully vested. As a
result, we recorded $3.2 million as an expense, reflecting the unamortized balance at July 18,
2008.
Interest Expense
Interest expense was nil and $40,000 for the three months ended September 30, 2009 and 2008,
respectively. The interest expense in 2008 was a result of loan agreements in 2008, which were
retired upon the sale of Xmark.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
Revenue
Revenue for the nine months ended September 30, 2009 and 2008 were $161,000 and $41,000,
respectively, primarily from the sale of the Companys VeriTrace systems to state and local
governments.
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, and facilities costs.
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Selling, general and administrative expense decreased $15.6 million to $3.1 million for the
nine months ended September 30, 2009 as compared to $18.7 million for the nine months ended
September 30, 2008. During the nine months ended September 30, 2009, the Company incurred
$0.3 million related to legal settlements, $0.2 million related to transactional costs related to
the evaluation of several strategic opportunities, and $0.2 million related to
merger costs. In the nine months ended September 30, 2008, contractual payments of
$7.0 million were made to the Companys management as a result of the sale of Xmark to The Stanley
Works, as well as marketing costs associated with our VeriMed business, and costs resulting from
equity based compensation. During the nine months ended September 30, 2009 and 2008, the Company
incurred stock-based compensation expense of $0.5 million and $5.0 million, respectively. On
July 18, 2008, as a result of our sale of Xmark Corporation, all outstanding unvested options and
restricted shares became fully vested. As a result, we recorded $3.2 million as an expense,
reflecting the unamortized balance at July 18, 2008.
Interest Expense
Interest expense was nil and $0.9 million for the nine months ended September 30, 2009 and
2008, respectively. The interest expense in 2008 was a result of loan agreements in 2008, which
were retired upon the sale of Xmark.
Gain on Sale
During the nine months ended September 30, 2009 and 2008, there was a gain on sale of
$4.4 million and $6.2 million, respectively. The gain in 2009 was a result of the recognition of
previously deferred gain from the sale of Xmark.
Liquidity and Capital Resources
As of September 30, 2009, cash totaled $4.5 million compared to cash of approximately
$3.2 million at December 31, 2008.
Cash Flows Used in Operating Activities
Net cash used in operating activities totaled $2.7 million and $17.1 million during the nine
months ended September 30, 2009 and 2008, respectively. For each of the periods presented, cash was
used primarily to fund operating losses, and payments of accounts payable and accrued expenses, as
well as cash used to fund discontinued operations in 2008. In the nine months ended September 30,
2008, the Company also used cash of $9.1 million for the settlement of contractual payments to
management and other costs related to the sale of Xmark to Stanley.
Cash Flows from Investing Activities
Investing activities provided cash of $3.9 million and $43.2 million during the nine months
ended September 30, 2009 and 2008, respectively. Cash provided by investing activities includes
proceeds from the sale of Xmark of $4.4 million in 2009 and $47.9 million in 2008, net of the
$4.5 million of the proceeds that were held in escrow for twelve months following the close of the
transaction to provide for indemnification obligations. In the nine
months ended September 30, 2009,
$0.5 million was also used to purchase a secured convertible promissory note from Steel Vault.
Cash Flows from Financing Activities
Financing activities used cash of nil and used cash of $28.5 million during the nine months
ended September 30, 2009 and 2008, respectively. During the first nine months of 2008 the Company
borrowed $8.0 million from Valens Offshore SPV II, Corp. (the Lender), a portion of which was
used to repay Digital Angel and the Royal Bank of Canada, which had previously provided a working
capital line to the Companys subsidiary, Xmark. In conjunction with the sale of Xmark, the Company
retired all of its outstanding debt to Digital Angel and to Lender. On August 28, 2008, the Company
paid a special dividend of $15.8 million, or $1.35 per share, to all stockholders of record on
August 18, 2008.
Financial Condition
As of September 30, 2009, the Company had working capital of approximately $4.0 million and an
accumulated deficit of approximately $40.7 million compared to working capital of approximately
$2.3 million and an accumulated deficit of approximately $42.1 million as of December 31, 2008. The
increase in working capital was primarily due to the release of $4.4 million from the escrow
agreement between the Company and Stanley, stemming from the Companys sale of Xmark, offset by
operating losses, described above.
The Company believes that with the cash it has on hand, it will have sufficient funds
available to cover its cash requirements through the next twelve months.
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Item 3. | 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 4T. | 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 Securities
Exchange Act of 1934, as amended (the Exchange Act) as of September 30, 2009. This evaluation
(the disclosure controls evaluation) was done under the supervision and with the participation of
management, including the person(s) performing the function of our chief executive officer (CEO)
and chief financial officer (CFO). Rules adopted by the SEC require that in this section of our
Quarterly Report on Form 10-Q we present the conclusions of the CEO and CFO about the effectiveness
of our disclosure controls and procedures as of September 30, 2009 based on the disclosure controls
evaluation.
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 Quarterly Report
on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms. Our disclosure controls and procedures are also intended to ensure that
such information is accumulated and communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure. There are inherent limitations
to the effectiveness of any system of disclosure controls and procedures, including the possibility
of human error and the circumvention or overriding of the controls and procedures. Accordingly,
even effective disclosure controls and procedures can only provide reasonable assurance of
achieving their control objectives, and management necessarily is required to use its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Conclusion. Based upon the disclosure controls evaluation, our CEO and CFO have concluded
that, as of September 30, 2009, our disclosure controls and procedures were effective to provide
reasonable assurance that the foregoing objectives are achieved.
Changes in Internal Control Over Financial Reporting
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 quarter ended September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. | Legal Proceedings. |
The information set forth in Note 9 Legal Proceedings to the condensed consolidated financial
statements in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.
Item 1A. | Risk Factors. |
Risks Related to the Merger
The significant costs associated with the Merger may not prove to be justified in light of the
benefits ultimately realized and could adversely affect future liquidity and operating results.
The Company estimates that it will incur direct transaction costs of approximately
$0.3 million associated with the Merger, which will be included as a part of the total purchase
cost for accounting purposes. In addition, Steel Vault estimates that it will incur direct
transaction costs estimated to be approximately $0.2 million, which will be expensed as incurred
for accounting purposes. These numbers are estimates that are subject to increase. The Company and
Steel Vault believe the combined company may incur charges to operations, which are not currently
reasonably estimable, in the quarter in which the Merger is completed or the following quarters, to
reflect costs associated with integrating certain operations of the two companies. The combined
company may incur additional material charges in subsequent quarters to reflect additional costs
associated with the Merger.
Charges to earnings may adversely affect the market value of the combined companys common stock
following the Merger.
In accordance with accounting principles generally accepted in the United States, the
combined company will account for the Merger using the acquisition method of accounting, which will
result in charges to earnings that could have a material effect on the market value of Company
common stock following the closing of the Merger. Under the acquisition method of accounting, the
combined company expects to allocate approximately 28% of the estimated purchase price to Steel
Vaults net tangible assets, amortizable intangible assets, and intangible assets with indefinite
lives based on their fair values as of the date of the closing of the Merger, and will record the
excess as goodwill. The Company will incur additional depreciation and amortization expense over
the useful lives of certain of the net tangible and intangible assets acquired in connection with
the Merger. In addition, to the extent the value of goodwill or intangible assets with indefinite
lives becomes impaired, the Company may be required to incur material charges relating to the
impairment of those assets. These depreciation, amortization and potential impairment charges could
have a material effect on the Companys results of operations.
The combined company may be unable to successfully integrate Steel Vaults and the Companys
operations or to realize the anticipated benefits of the Merger. As a result, the value of Company
common stock may be adversely affected.
The Company and Steel Vault entered into the Merger Agreement because each company
believes that the Merger will be beneficial to each of the Company, Steel Vault, and their
respective stockholders. Currently, each company operates as an independent public company. The new
combined company will be called PositiveID Corporation and will offer identification tools and
technologies for consumers and businesses. The companies believe that the formation of PositiveID
Corporation represents the convergence of a pioneer in personal health records, the Company, with a
leader in the identity security space, Steel Vault, which is focused on access and security of a
consumers critical data. The companies believe that joining personal health records and identity
security solutions provides a solid foundation for organic growth and a strong, flexible platform
for future offers. Achieving the anticipated synergies, growth opportunities and cost savings from
the Merger will depend in part upon whether the two companies integrate their businesses in an
efficient and effective manner. The companies may not be able to accomplish this integration
process smoothly or successfully. The companies may not be able to achieve the anticipated
operating and cost synergies or long-term strategic benefits of the Merger. An inability to realize
the full extent of, or any of, the anticipated benefits of the Merger, as well as any delays
encountered in the
integration process, could have an adverse effect on the business and results of operations of
the combined company, which may affect the value of the shares of Company common stock after the
completion of the Merger.
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In order to be successful, the combined company must retain and motivate key employees, and failure
to do so could seriously harm the combined company.
In order to be successful, the combined company must retain and motivate executives and
other key employees, including those in managerial, sales and technical positions. Employees of the
Company or Steel Vault may experience uncertainty about their future roles in the combined company
until or after strategies with regard to the combined company are announced or executed. These
circumstances may adversely affect the combined companys ability to attract and retain key
management, sales and technical personnel. The combined company also must continue to motivate
employees and keep them focused on the strategies and goals of the combined company, which may be
particularly difficult because of the potential distractions of the Merger.
Resales of Company common stock following the Merger may cause the market price of Company common
stock to decrease.
As of November 9, 2009, the Company had 14,160,628 shares of common stock outstanding,
and an aggregate of 1,004,296 shares of Company common stock were issuable upon the exercise of
outstanding employee or director stock options. In connection with the Merger on November 10, 2009,
the Company issued approximately 5,067,290 shares of Company common stock in the Merger based on
the number of shares of Steel Vault common stock outstanding on November 10, 2009, and reserved an
additional approximately 3,802,409 shares of Company common stock for issuance in connection with
the Companys assumption of Steel Vaults outstanding options and warrants. The issuance of these
new shares of Company common stock and the sale of additional shares of Company common stock that
may become eligible for sale in the public market from time to time upon exercise of options or
other rights will increase the total number of shares of Company common stock outstanding. This
increase will be substantial. Sales of a significant number of shares of Company common stock could
have the effect of depressing the market price for Company common stock.
Industry and Business Risks Related to the Company and Its Businesses
In the past, the Company has failed to meet applicable Nasdaq Stock Market requirements and was
subject to delisting by the Nasdaq Stock Market. If delisting were to occur in the future, it would
adversely affect the market liquidity of its common stock and harm its businesses.
On October 21,
2008, the Company received a letter from Nasdaq indicating that it was not
in compliance with the Nasdaqs requirements for continued listing because, for the 30 consecutive
business days prior to October 16, 2008, the bid price of its common stock closed below the minimum
$1.00 per share price requirement for continued listing under Nasdaq Marketplace Rule 5450 (the
Rule) and, its common stock had not maintained a minimum market value of publicly held shares
(MVPHS) of $5 million as required for continued inclusion by the Rule. On November 17, 2008, the
Company received a notice from Nasdaq indicating that its stockholders equity at September 30,
2008 was less than the $10 million in stockholders equity required for continued listing on The
Nasdaq Global Market under Marketplace Rule 5450(b)(1)(A). In its notice, Nasdaq requested that the
Company provide its plan to achieve and sustain compliance with the continued listing requirements
of The Nasdaq Global Market, including the minimum stockholders equity requirement, before
December 2, 2008, which the Company complied with. On February 27, 2009, it filed an application to
transfer the listing of its common stock from the Nasdaq Global Market to the Nasdaq Capital
Market.
On March 5, 2009, the Company received a notice from Nasdaq indicating that it had not
evidenced compliance with the $10 million in stockholders equity requirement for continued listing
on the Nasdaq Global Market under Marketplace Rule 5450(b)(1)(A), and that it did not meet the
requirements for continued listing on The Nasdaq Capital Market because its stockholders equity at
December 31, 2008 of $2.4 million was below the $2.5 million requirement under Marketplace
Rule 5550(b). As a result, its securities were subject to delisting. The Company appealed the Nasdaq
staffs determination and requested an oral hearing before a Nasdaq Listing Qualifications Panel,
which took place on April 23, 2009 and temporarily stayed the delisting of its common stock.
On May 27, 2009, the Nasdaq Hearings Panel granted its request to remain listed on The Nasdaq
Stock Market and its request to transfer to The Nasdaq Capital Market, effective May 29, 2009. On
July 24, 2009, the Company received a letter from Nasdaq advising that it is in compliance with all
applicable continued listing standards. Additionally, as of the date of this Quarterly Report on
Form 10-Q, the Company meets The Nasdaq Capital Market MVPHS requirement of $1 million.
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On September 30, 2009, the Company received a letter from Nasdaq indicating that, since
the closing bid price of the Companys common stock had been at $1.00 per share or greater for at
least ten consecutive business days, the Company had regained compliance with the Rule. However,
there is no assurance that the Company will be able to maintain compliance with the Nasdaqs
requirements for continued listing in the future.
If the Companys common stock were delisted from the Nasdaq Stock Market, trading of its
common stock most likely would 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 Companys business and may
hinder or delay its ability to consummate potential strategic transactions or investments. Such
delisting could also adversely affect the Companys ability to obtain financing for the
continuation of its operations and could result in the loss of confidence by investors, suppliers
and employees.
Risks Related to the Companys Product Development Efforts
The Company and its development partner Receptors LLC are in the early stages of developing a
virus triage detection system for the H1N1 virus and an in vivo glucose-sensing RFID microchip, the
effectiveness of both of which is unproven.
The Company and its
development partner, Receptors, are engaged in the research and
development of applying Receptors patented AFFINITY by DESIGNtm
CARAtm platform to the detection and classification of pandemic
threat viruses, such as the H1N1 virus, as well as the research and development of an in vivo
glucose-sensing RFID microchip. The effectiveness of this detection system and the effectiveness of
this sensor/microchip system are yet to be determined. As a result, there can be no assurance that
the Company 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 the Companys business, results
of operations, and financial condition.
The Companys product research and development activities may not result in a
commercially-viable virus triage detection system or in a commercially-viable in vivo
glucose-sensing RFID microchip.
Both products are in the early stages of development. Both the virus triage detection
system and the in vivo glucose-sensing RFID microchip are therefore prone to the risks of failure
inherent in diagnostic product development. The Company and 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 the
Company and Receptors do not result in commercially-viable products, the Companys 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 the Company
regulatory approval of a product, the approval may take longer than the Company 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 the Company fails to comply
with applicable regulatory requirements, the Company may be
subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure
of products, operating restrictions and criminal prosecution.
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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 the Companys stock price will depend on many factors, including:
| success of the development partnership between the Company and Receptors and related development costs; |
| success and timing of regulatory filings and approvals for the virus triage detection system and the in vivo glucose-sensing RFID microchip; |
| success and timing of commercialization and product introductions of the virus triage detection system and the in vivo glucose-sensing RFID microchip; |
| introduction of competitive products into the market; |
| results of clinical trials for the virus triage detection system and the in vivo glucose-sensing RFID microchip; |
| a finding that Receptors patented AFFINITY by DESIGNtm CARAtm platform is invalid or unenforceable; |
| a finding that the virus triage detection system or the in vivo glucose-sensing RFID microchip infringes the patents of a third party; |
| payment of any royalty payments under licensing agreements; |
| unfavorable publicity regarding the Company, Receptors, or either of the companies products or competitive products; |
| termination of development efforts for the virus triage detection system; |
| timing of expenses the Company 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. |
The Company anticipates future losses and may require additional financing, and the Companys
failure to obtain additional financing when needed could force the Company to delay, reduce or
eliminate the Companys product development programs or commercialization efforts.
The Company anticipates future losses and therefore may be dependent on additional
financing to execute its business plan. Although the Company 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, the Company 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. The Companys 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 the Company needs them on terms that are acceptable to the Company, or at
all. If adequate funds are not available on a timely basis, the Company 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, the Company does not know whether any planned development phases or clinical trials for
the virus triage detection system or the in vivo glucose-sensing RFID microchip will be completed
on schedule, or at all. Furthermore, the Company cannot guarantee that any planned development
phases or clinical trials will begin on time or at all.
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The Companys future capital requirements will depend on many factors, including: the
costs of expanding the Companys sales and marketing infrastructure and manufacturing operations;
the degree of success the Company experiences in developing and commercializing the virus triage
detection system and the in vivo glucose-sensing RFID microchip; the number and types of future
products the Company develops and commercializes; the costs, timing and outcomes of regulatory
reviews associated with the Companys 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 the Companys general and
administrative expenses.
The Companys 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. The Companys 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; the Companys 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.
The Companys industry changes rapidly as a result of technological and product developments,
which may quickly render the Companys product candidates less desirable or even obsolete. If the
Company is unable or unsuccessful in supplementing its product offerings, its revenue and operating
results may be materially adversely affected.
The industry in which the Company 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. The Company may not be able to
develop and introduce new products, services and enhancements that respond to technological changes
on a timely basis. If the Companys product candidates are not accepted by the market as
anticipated, if at all, the Companys business, operating results, and financial condition may be
materially and adversely affected.
If the Company and Receptors are unable to develop and later market the product candidates in
a timely manner or at all, or if competitors develop or introduce similar products that achieve
commercialization before the product candidates enter the market, the demand for the product
candidates may decrease or the product candidates could become obsolete.
The product candidates will operate in competitive markets, where competitors may already
be well established. The Company 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 the Company and Receptors,
obtaining regulatory approvals and clearances for such products before the product candidates 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 product candidates enter the market.
If a competitors products reach the market before the product candidates, they may gain
a competitive advantage, impair the ability of the Company and Receptors to commercialize the
product candidates, or render the product candidates obsolete. There can be no assurance that
developments by competitors will not render the product candidates obsolete or noncompetitive. The
Companys financial performance may be negatively impacted
if a competitors successful product innovation reaches the market before the product
candidates or gains broader market acceptance.
The Company believes that the product candidates 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 the Company and Receptors will be
successful in maintaining these advantages. Nor is there any guarantee that the Company and
Receptors will be successful in completing development of the product candidates in any clinical
trials or in achieving sales of the product candidates, or that future margins on such products
will be acceptable.
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Item 2. | Unregistered Sale of Equity Securities and Use of Proceeds. |
On September 21, 2009, the Company and Receptors entered into a Development/Master Agreement
pursuant to which the Company will engage the services of Receptors to develop a sensing system for
the detection and identification of the influenza virus, including, but not limited to the H1N1
virus. The Company issued 200,000 restricted shares of Company common stock and made a cash payment
of $100,000 under Phase I of the Development/Master Agreement. On October 6, 2009, the Company and
Receptors entered into a Development/Master Agreement pursuant to which the Company will engage the
services of Receptors to develop a glucose sensing device for use in the human body. As
consideration, the Company made a cash payment of $100,000 to Receptors and issued 150,000
restricted shares of Company common stock as payment under the Development/Master Agreement. The
restricted stock was issued to Receptors without registration in reliance upon the exemption
provided, among others, by Section 4(2) of the Securities Act of 1933, as amended, as a transaction
by the Company not involving any public offering.
Item 5. | Other Information. |
On November 12,
2009, the Companys compensation committee (the
Compensation Committee) approved a 2010 executive compensation arrangement for Scott R.
Silverman, our Chairman of the Board and Chief Executive Officer, and William J. Caragol, our
President and Chief Financial Officer. Beginning in 2010, Mr. Silverman and Mr. Caragol will
receive a base salary of $375,000 and $225,000, respectively. Additionally, the Compensation
Committee has the authority to approve a discretionary bonus for 2010, a portion of which is
guaranteed, to each of Mr. Silverman and Mr. Caragol based on the following factors: development
of the rapid virus sensor project, development of the glucose-sensing microchip project, the
financial performance of the business of our wholly-owned subsidiary, Steel Vault, strategic
acquisitions, the overall financial condition/health of the business, and such other factors as
the Compensation Committee deems appropriate in light of any acquisitions or changes in the
business. Mr. Silverman may earn a bonus between $200,000 and
$600,000, and Mr. Caragol may earn a bonus between
$200,000 and $450,000. Each of Mr. Silverman and Mr. Caragol will receive 1,000,000 shares of
restricted stock under the PositiveID Corporation 2009 Stock Incentive Plan. These restricted
shares will vest according to the following schedule: (i) 50% vest on January 1, 2011;
and (ii) 50% vest on January 1, 2012. Mr. Silvermans and Mr. Caragols rights and
interests in the unvested portion of the restricted stock are subject to forfeiture in the event
they resign prior to January 1, 2012 or are terminated for cause prior to January 1, 2012,
with said cause being defined as a conviction of a felony or such person being prevented from
providing services to the Company as a result of such persons violation of any law,
regulation and/or rule. Mr. Silverman and Mr. Caragol are entitled to Company-paid health
insurance, non-allocable expenses of $45,000 and $20,000, respectively, and each are entitled
to an automobile allowance and other automobile expenses, including insurance, gasoline and
maintenance costs.
Item 6. | Exhibits. |
We have listed the exhibits by numbers corresponding to the Exhibit Table of Item 601 in
Regulation S-K on the Exhibit list attached to this report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
POSITIVEID CORPORATION (Registrant) |
||||
Date: November 12, 2009 | By: | /s/ William J. Caragol | ||
William J. Caragol | ||||
President and Chief Financial Officer (Principal Financial Officer) |
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Exhibit Index
Exhibit | ||||
Number | Description | |||
2.1 | Agreement and Plan of Reorganization dated September 4, 2009, among PositiveID Corporation, Steel
Vault Corporation, and VeriChip Acquisition Corp. (1) |
|||
2.2 | Amendment No. 1 to Agreement and Plan of Reorganization, dated October 1, 2009, among PositiveID
Corporation, Steel Vault Corporation, and VeriChip Acquisition Corp. (2) |
|||
3.1 | * | Second Amended and Restated Certificate of Incorporation, as amended, of PositiveID Corporation filed
with the Secretary of State of Delaware on December 18, 2006 |
||
3.2 | Amended and Restated By-laws of PositiveID Corporation adopted as of December 12, 2005 (4) |
|||
4.1 | Form of Specimen Common Stock Certificate (3) |
|||
10.1 | * | License Agreement, dated September 21, 2009, between PositiveID Corporation and Receptors LLC |
||
10.2 | * | Development/Master Agreement, dated September 21, 2009, between PositiveID Corporation and Receptors
LLC |
||
10.3 | Convertible Preferred Stock Purchase Agreement, dated September 29, 2009, between PositiveID
Corporation and Optimus Capital Partners, LLC (4) |
|||
10.4 | * | License Agreement, dated October 6, 2009, between PositiveID Corporation and Receptors LLC |
||
10.5 | * | Development/Master Agreement, dated October 6, 2009, between PositiveID Corporation and Receptors LLC |
||
31.1 | * | Certification by Chief Executive Officer, pursuant to Exchange Act Rules 13A-14(a) and 15d-14(a) |
||
31.2 | * | Certification by 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 |
* | Filed herewith. | |
(1) | Incorporated by reference to the Current Report on Form 8-K filed by PositiveID Corporation on September 8, 2009. | |
(2) | Incorporated by reference to the Current Report on Form 8-K filed by PositiveID Corporation on October 1, 2009. | |
(3) | Incorporated by reference to the Registration Statement on Form S-1 previously filed by PositiveID Corporation (Registration No. 333-130754) on December 29, 2009, as amended. | |
(4) | Incorporated by reference to the Current Report on Form 8-K filed by PositiveID Corporation on September 29, 2009. |
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