Attached files
file | filename |
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EX-3.1 - EXHIBIT 3.1 - POSITIVEID Corp | c00256exv3w1.htm |
EX-32.1 - EXHIBIT 32.1 - POSITIVEID Corp | c00256exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - POSITIVEID Corp | c00256exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - POSITIVEID Corp | c00256exv31w1.htm |
EX-10.1 - EXHIBIT 10.1 - POSITIVEID Corp | c00256exv10w1.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 March 31, 2010
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-33297
POSITIVEID CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE | 06-1637809 | |
(State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) | |
organization) |
1690 South Congress Avenue, Suite 200 | (561) 805-8008 | |
Delray Beach, Florida 33445 | (Registrants telephone number, including area code) | |
(Address of principal executive offices, | ||
including zip code) |
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 April 30, 2010 is as follows:
Class | Number of Shares | |
Common Stock: $0.01 Par Value | 26,105,071 |
POSITIVEID CORPORATION
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Exhibit 3.1 | ||||||||
Exhibit 10.1 | ||||||||
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 share data and par value)
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current Assets: |
||||||||
Cash |
$ | 4,911 | $ | 6,423 | ||||
Prepaid expenses and other current assets |
261 | 193 | ||||||
Total Current Assets |
5,172 | 6,616 | ||||||
Equipment, net of accumulated depreciation |
133 | 122 | ||||||
Intangibles |
1,212 | | ||||||
Other assets |
34 | 34 | ||||||
Goodwill |
2,450 | 4,200 | ||||||
$ | 9,001 | $ | 10,972 | |||||
Liabilities and Stockholders Equity |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 658 | $ | 576 | ||||
Accrued expenses and other current liabilities |
804 | 775 | ||||||
Accrued preferred stock dividend payable |
204 | 90 | ||||||
Total Current Liabilities |
1,666 | 1,441 | ||||||
Commitments and contingencies |
||||||||
Stockholders Equity: |
||||||||
Preferred stock, authorized 5,000,000
shares of $.001 par value; 462 shares
issued and outstanding at March 31, 2010
and December 31, 2009 (liquidation
preference of $4,620 March 31, 2010 and
December 31, 2009) |
| | ||||||
Common stock, authorized 70,000,000 shares
of $.01 par value; issued and outstanding
23,356,908 and 21,840,433 shares at
March 31, 2010 and December 31, 2009,
respectively |
234 | 218 | ||||||
Additional paid-in capital |
64,652 | 63,018 | ||||||
Accumulated deficit |
(57,551 | ) | (53,705 | ) | ||||
Total Stockholders Equity |
7,335 | 9,531 | ||||||
$ | 9,001 | $ | 10,972 | |||||
See accompanying notes to unaudited condensed consolidated financial statements.
1
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POSITIVEID CORPORATION
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
For the Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Revenue |
$ | 673 | $ | 8 | ||||
Cost of sales |
216 | | ||||||
Gross profit |
457 | 8 | ||||||
Operating expenses: |
||||||||
Selling, general and administrative |
3,780 | 1,370 | ||||||
Research and development |
538 | | ||||||
Total operating expenses |
4,318 | 1,370 | ||||||
Operating loss |
(3,861 | ) | (1,362 | ) | ||||
Other income, net |
15 | 12 | ||||||
Net loss |
(3,846 | ) | (1,350 | ) | ||||
Preferred stock dividend |
(114 | ) | | |||||
Net loss attributable to common stockholders |
$ | (3,960 | ) | $ | (1,350 | ) | ||
Net loss attributable to common
shareholders per common share basic and
diluted |
$ | (0.20 | ) | $ | (0.11 | ) | ||
Weighted average number of shares
outstanding basic and diluted |
19,865 | 12,043 |
See accompanying notes to unaudited condensed consolidated financial statements.
2
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POSITIVEID CORPORATION
Condensed Consolidated Statement of Stockholders Equity
For the Three Months Ended March 31, 2010
(In thousands)
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Preferred Shares | Common Shares | Paid-in | Accumulated | Comprehensive | Stockholders | |||||||||||||||||||||||||||
Number | Amount | Number | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||||||||
Balance December 31, 2009 |
462 | | 21,840 | $ | 218 | $ | 63,018 | $ | (53,705 | ) | $ | | $ | 9,531 | ||||||||||||||||||
Net loss |
| | | | | (3,846 | ) | | (3,846 | ) | ||||||||||||||||||||||
Share based compensation |
| | 585 | 6 | 1,088 | | | 1,094 | ||||||||||||||||||||||||
Issuance of shares from option
exercises |
| | 632 | 7 | 312 | | | 319 | ||||||||||||||||||||||||
Accrual of preferred stock dividend |
| | | | (114 | ) | | | (114 | ) | ||||||||||||||||||||||
Shares issued for the acquisition
of Easy Check |
| | 300 | 3 | 348 | | | 351 | ||||||||||||||||||||||||
Balance March 31, 2010 |
462 | | 23,357 | $ | 234 | $ | 64,652 | $ | (57,551 | ) | $ | | $ | 7,335 | ||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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POSITIVEID CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
For the Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (3,846 | ) | $ | (1,350 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities |
||||||||
Depreciation and amortization |
546 | 8 | ||||||
Share based compensation |
1,094 | 239 | ||||||
Acquisition of in-process research and development |
351 | | ||||||
Gain on sale of fixed asset |
| (1 | ) | |||||
Issuance of shares for settlement of litigation |
| 250 | ||||||
Non cash interest income |
| (5 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
Increase (decrease) in prepaid expenses and other current assets |
(68 | ) | 24 | |||||
Increase (decrease) in accounts payable and accrued expenses |
111 | (119 | ) | |||||
Net cash used in discontinued operations |
| (60 | ) | |||||
Net cash used in operating activities |
(1,812 | ) | (1,014 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchase of equipment |
(19 | ) | (9 | ) | ||||
Proceeds from sale of equipment |
| 5 | ||||||
Net cash used in investing activities |
(19 | ) | (4 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from exercise of stock options |
319 | | ||||||
Net cash provided by financing activities |
319 | | ||||||
Net decrease in cash |
(1,512 | ) | (1,018 | ) | ||||
Cash, beginning of period |
6,423 | 3,229 | ||||||
Cash, end of period |
$ | 4,911 | $ | 2,211 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
1. Business and Basis of Presentation
PositiveID Corporation (the Company) is a Delaware corporation formed in November 2001. The
Company commenced operations in January 2002 as VeriChip Corporation. On February 14, 2007, the
Company completed an initial public offering of its common stock, selling 3,100,000 shares of its
common stock at a price of $6.50 per share.
The Company has historically developed, marketed and sold radio frequency identification,
frequently referred to as RFID, systems used for the identification of people in the healthcare
market. Beginning in the fourth quarter of 2009, with the acquisition of Steel Vault Corporation
(Steel Vault), the Company is pursuing its strategy to provide unique health and security
identification tools to protect consumers and businesses, operating in two key segments: HealthID
and ID Security.
The Companys HealthID segment is focused on the development of the glucose-sensing microchip,
with Receptors, LLC. In the field of diabetes management the Company also acquired, in
February 2010, the assets of Easy Check Medical Diagnostics, LLC (Easy Check), including the Easy
Check breath analysis system and the iGlucose wireless communication system. The Company issued
300,000 shares of common stock with a fair value of $351,000 as consideration for this transaction.
As the development of these projects had not yet reached technological feasibility, the Company
recorded the value of this transaction as research and development in the accompanying condensed
consolidated statement of operations for the period ended March 31, 2010.
The Company is also continuing the development of the Rapid Flu Detection system, and other
health related products, built on the Companys core intellectual property. The HealthID segment
also includes the VeriMed system, which uses an implantable passive RFID microchip (the VeriChip)
that is used in patient identification applications. Each implantable microchip contains a unique
verification number that is read when it is scanned by the Companys scanner. In October 2004, the
U.S. Food and Drug Administration, or FDA, cleared its VeriMed Health Link system for use in
medical applications in the United States.
The Companys ID Security segment includes its Identity Security suite of products, sold
through its NationalCreditReport.com brand and its Health Link personal health record (PHR). The
Companys NationalCreditReport.com business was acquired in conjunction with its merger with Steel
Vault in November 2009. NationalCreditReport.com offers consumers a variety of identity security
products and services primarily on a subscription basis. These services help consumers protect
themselves against identity theft or fraud and understand and monitor their credit profiles and
other personal information, which include credit reports, credit monitoring and credit scores. In
the first quarter of 2010, the Company re-launched its Health Link PHR business. The Company plans
to focus its marketing efforts on partnering with health care providers and exchanges, physician
groups, Electronic Medical Record (EMR) system vendors, and insurers to use Health Link as a PHR
provided to their patients. The Company will also seek to partner with pharmaceutical companies who
wish to communicate with its online community through various forms of value added content and
advertising.
The accompanying unaudited condensed consolidated financial statements of the Company and its
subsidiaries as of March 31, 2010 and December 31, 2009 (the December 31, 2009 financial
information included in this report has been extracted from the Companys audited financial
statements included in its Annual Report on Form 10-K for the year ended December 31, 2009), and
for the three months ended March 31, 2010 and 2009 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.
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
The unaudited condensed consolidated statements of operations for the three months ended March
31, 2010 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, 2009.
Revenue Recognition
The Companys revenue recognition policy is as follows:
Product Sales
Revenue from product sales are recorded at gross amounts. As the Company is in the initial
process of commercializing these systems, the level of distributor or physician returns cannot yet
be reasonably estimated. Accordingly, the Company does not recognize revenues until the following
criteria are met:
| a purchase order has been received or a contract has been executed; | ||
| the product is shipped; | ||
| title has transferred; | ||
| the price is fixed or determinable; | ||
| there are no uncertainties regarding customer acceptance; | ||
| collection of the sales proceeds is reasonably assured; and | ||
| the period during which the distributor or physician has a right to return the product has elapsed. |
The Company intends to recognize revenue from consignment sales, if any, when all of the
criteria listed above have been met and after the receipt of notification of such product sales
from the distributors customers (e.g., physicians). Once the level of returns can be reasonably
estimated, revenues (net of expected returns) will be recognized when all of the criteria above are
met for either direct or consignment sales.
Health Link and VeriMed Services
The services for maintaining subscriber information on the Companys Health Link and VeriMed
databases are sold on a stand-alone contract basis, and treated according to the terms of the
contractual arrangements then in effect. Revenue from the database service will be recognized over
the term of the subscription period or the terms of the contractual arrangements then in effect.
With respect to the sales of products whose functionality is dependent on services (e.g.,
database records maintenance), the revenue recognition policy will follow the ultimate
arrangements.
ID Security Services
Revenue is recognized when persuasive evidence of an arrangement exists, collectibility of
arrangement consideration is reasonably assured, the arrangement fees are fixed or determinable and
delivery of the product or service has been completed. A significant portion of the Companys
revenue is derived from the Companys processing of transactions related to the provision of
information services to customers, in which case revenue is recognized, assuming all other revenue
recognition criteria are met, when the services are provided. Another portion of the Companys
revenues relate substantially to monthly subscription fee-based credit monitoring contracts under
which a customer pays a preset fee for a predetermined or unlimited number of transactions or
services provided
during the subscription period. Revenue related to subscription fee-based contracts having an
unlimited volume is recognized ratably during the contract term.
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
If at the outset of an arrangement, the Company determines that collectability is not
reasonably assured, revenue is deferred until the earlier of when collectability becomes probable
or the receipt of payment. If there is uncertainty as to the customers acceptance of the Companys
deliverables, revenue is not recognized until the earlier of receipt of customer acceptance or
expiration of the acceptance period. If at the outset of an arrangement, the Company determines
that the arrangement fee is not fixed or determinable, revenue is deferred until the arrangement
fee becomes estimable, assuming all other revenue recognition criteria have been met.
In October 2009, the FASB issued amended revenue recognition guidance for arrangements with
multiple deliverables. The new guidance requires the use of managements best estimate of selling
price (BESP) for the deliverables in an arrangement when vendor specific objective evidence (VSOE),
vendor objective evidence (VOE) or third party evidence (TPE) of the selling price is not
available. In addition, excluding specific software revenue guidance, the residual method of
allocating arrangement consideration is no longer permitted, and an entity is required to allocate
arrangement consideration using the relative selling price method. In accordance with the guidance,
the company has elected to early adopt its provisions as of January 1, 2010 on a prospective basis
for all new or materially modified arrangements entered into on or after that date. The adoption of
this guidance did not have a material impact on the condensed consolidated financial statements.
As discussed above, effective January 1, 2010 the company has adopted on a prospective basis for
all new or materially modified arrangements entered into on or after that date the amended
accounting guidance for multiple-deliverable revenue arrangements and the amended guidance related
to the scope of existing software revenue recognition guidance. The amended guidance does not
generally change the units of accounting for the companys revenue transactions. Most of the
companys products and services qualify as separate units of accounting.
To the extent the Company sells products that may consist of multiple deliverables the revenue
recognition is subject to specific guidance that deliverable is accounted for in accordance with
such specific guidance. A multiple-deliverable arrangement is separated into more than one unit of
accounting if the following criteria are met:
| The delivered item(s) has value to the client on a stand-alone basis; and | ||
| If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the company. |
If these criteria are not met, the arrangement is accounted for as one unit of accounting
which would result in revenue being recognized ratably over the contract term or being deferred
until the earlier of when such criteria are met or when the last undelivered element is delivered.
If these criteria are met for each element and there is a relative selling price for all units of
accounting in an arrangement, the arrangement consideration is allocated to the separate units of
accounting based on each units relative selling price.
Deferred revenue consists of amounts billed in excess of revenue recognized on sales of
information services, relating generally to subscription fees.
Share-Based Compensation
Share-based compensation expenses are reflected in the Companys consolidated statement of
operations under selling, general and administrative expenses and research and development
expenses.
The Companys computation of expected life is determined based on the simplified method as the
Company does not have sufficient historical exercise data to provide a reasonable basis upon which
to estimate the expected term due to the limited period of time its equity shares have been
publicly traded. The interest rate is based on the U.S. Treasury Yield curve in effect at the time
of grant. The Companys computation of expected volatility is based on the historical volatility of
comparable companies average historical volatility.
Share-based compensation expense is reflected in the condensed consolidated statement of
operations in selling, general and administrative expense and research and development expenses.
Research and Development
Research and development costs are expensed as incurred and consist of development work
associated with the Companys existing and potential products. The Companys research and
development expenses relate primarily to share-based compensation to its project partner Receptors,
LLC, payroll costs for engineering personnel and costs associated with various projects, including
testing, developing prototypes and related expenses.
Loss Per Common Share and Common Share Equivalent
The Company presents basic income (loss) per common share and, if applicable, diluted income
(loss) per share, pursuant to the provisions of ASC 260 Earnings Per Share. Basic income (loss)
per common share is based on the weighted average number of common shares outstanding in each year
and after preferred stock dividend requirements. The calculation of diluted income (loss) per
common share assumes that any dilutive convertible preferred shares outstanding at the beginning of
each year or the date issued were convertible at those dates, with preferred stock dividend
requirements and outstanding common shares adjusted accordingly. It also assumes that outstanding
common shares were increased by shares issuable upon exercise of those stock options and warrants
for which average period market price exceeds exercise price, less shares that could have been
purchased by the Company with related proceeds.
The Company issued two tranches of Series A Preferred Stock (the Preferred Stock) of 296 and
166 shares at $10,000 per share in September and October 2009, respectively. The preferred shares
are non-voting, non-participating and may be converted into common shares or cash at the Companys
option. The conversion of the preferred shares is determined by a fixed conversion price which was
determined upon the closing of the preferred shares, $3.07 and $1.60, respectively. Therefore the
two tranches of preferred shares are convertible into approximately 964,000 and 1,037,000 common
shares, respectively.
The Company is required to issue an annual dividend on the Preferred Stock payable in
Preferred Stock on the anniversary date of the tranche closing. As of March 31, 2010, a preferred
dividend with a fair value of $204,000 has been accrued and would be convertible into approximately
86,000 shares of common stock.
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
If at the Companys option, it elects to convert the Preferred Stock into common shares the
Company will be required to provide the holders with a specified return as discussed in Note 4
Financing Agreements. The two tranches would be convertible into a maximum of approximately 2.9
million common shares after the fourth anniversary of the issuances of each tranche.
Had
the Company elected to convert all the then outstanding 462 shares of Preferred Stock on March 31, 2010, the
preferred holder would have been entitled to 2,702,000 common shares with a fair value of
approximately $3,512,000 based upon the closing price of the Companys common stock on March 31,
2010.
The following were outstanding as of March 31, 2010 and 2009, and were not included in the
computation of dilutive loss per share because the net effect would have been anti-dilutive:
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Convertible preferred stock and accrued dividends |
2,087 | | ||||||
Stock options |
3,546 | 1,004 | ||||||
Warrants |
454 | | ||||||
Unvested restricted common stock |
2,645 | 1,417 | ||||||
8,732 | 2,421 | |||||||
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.
3. Acquisitions
Merger with Steel Vault
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, 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). The Merger Agreement provided for the Companys conversion of each outstanding share of
Steel Vaults common stock into 0.5 shares of common stock of the Company. At the time the Merger
Agreement was signed, in September 2009, the value of the transaction was measured at $3.5 million.
Such value was validated through independent valuations. At the time the Merger was consummated,
the stock price of the Company was $1.71 per share as compared to $0.65 during September 2009 when
the merger agreement was executed. As a result, at the effective time of the Merger, in
November 2009, the value of the transaction amounted to $13.7 million as compared to approximately
$3.5 million at the time the merger agreement was signed in September 2009. The purchase price
includes Steel Vaults approximately 6,696,000 stock options and 908,000 warrants outstanding which
were converted into 3,349,000 options and 454,000 warrants to acquire shares of the Companys
common stock at the effective exchange date rate, and which were measured at the fair value using
the Black-Scholes model on the Merger completion date.
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Based on an assessment underlying the preliminary purchase price allocation the Company
performed as of December 31, 2009, the determination was made that the estimated fair value of
Steel Vault was approximately $3.5 million as of December 31, 2009. Accordingly, the Company
recognized a charge attributable to the reduced carrying amount of goodwill by approximately
$10.2 million. The total purchase price of the business acquired was allocated based on a final
valuation as follows:
Cash |
$ | 72 | ||
Equipment and other assets |
142 | |||
Trademarks and domain names |
500 | |||
Subscriber base |
1,250 | |||
Goodwill |
2,450 | |||
Current liabilities |
(910 | ) | ||
Total |
3,504 | |||
Charge attributable to adjustment of goodwill |
10,170 | |||
Total price paid |
$ | 13,674 | ||
The primary reasons the purchase price of the acquisition exceeded the fair value of the
net assets acquired, which resulted in the recognition of goodwill of $2.5 million, were to provide
entry into the industry and growth opportunities from new or enhanced product offerings and the
acquisition of the existing workforce that are not recognized as assets apart from goodwill. In
addition, the Company identified intangible assets for trademarks and domain names of $500,000 with
a life of 5 years, and a subscriber base of $1,250,000 with a life of 12 months. Amortization
expense of $538,000 was recorded for the three months ended March 31, 2010 associated with the
intangible assets.
Easy Check Asset Purchase
On February 11, 2010, the Company purchased the assets of Easy Check, including the Easy Check
breath analysis system and the iGlucoseTM wireless communication system. The Company
issued 300,000 shares of common stock in connection with the purchase with a fair value of $351,000
based on a stock price of $1.17. The entire purchase price was expensed as in-process research and
development as the development of these projects had not yet reached technological feasibility and
had no alternative future uses. Easy Check did not have any tangible assets at the time of the
purchase.
Proforma
The results of Steel Vault have been included in the condensed consolidated statements of
operations since the date of acquisition. Unaudited pro forma results of operations for the three
months ended March 31, 2009 are included below. Such pro forma information assumes that the Steel
Vault acquisition occurred as of January 1, 2009, and revenue is presented in accordance with the
Companys accounting policies. This summary is not necessarily indicative of what the Companys
results of operations would have been had the Company and Steel Vault been combined entities during
such period, nor does it purport to represent results of operations for any future periods.
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Three Months Ended | ||||
(In thousands, except per share amounts) | March 31, 2009 | |||
Revenue |
$ | 66 | ||
Net loss attributable to common shareholders |
$ | (2,354 | ) | |
Net loss attributable to common
shareholders per common share basic
and diluted |
$ | (0.19 | ) |
4. Financing Agreements
On September 29, 2009, the Company entered into a Convertible Preferred Stock Purchase
Agreement (the Purchase Agreement) with Optimus, under which Optimus is committed to purchase up
to $10 million of convertible 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 (R & R), a company controlled by Scott R. Silverman, the Companys chairman and
chief executive officer, loaned shares of common stock to Optimus equal to 135% of the aggregate
purchase price for each tranche pursuant to Stock Loan Agreements between R & R and Optimus. R & R
was paid a $100,000 fee in October 2009 plus will be paid 2% interest for the fair value of the
loaned shares for entering into the stock loan arrangement. The aggregate amount of shares loaned
under any and all Stock Loan Agreements, together with all other shares sold by or on behalf of the
Company, cannot exceed one-third of the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the Company in any 12 month period. R & R 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 loaned Optimus
1.3 million, 800,000 and 600,000 shares, respectively, of Company common stock.
Optimus is obligated to purchase such Preferred Stock on the tenth trading day after any
Notice date, subject to satisfaction of certain closing conditions, including (i) that the Company
is listed for and trading on a trading market, (ii) the representations and warranties of the
Company set forth in the Purchase Agreement are true and correct as if made on each tranche date,
(iii) Optimus shall have received a commitment fee of $800,000 payable only on the first tranche
closing date in the event the gross proceeds from the first tranche closing exceed $800,000; and
(iv) that no such purchase would result in Optimus and its affiliates beneficially owning more than
9.99% of the Companys common stock. In the event the closing bid price of the Companys common
stock during any one or more of the nine trading days following the delivery of a Notice falls
below 75% of the closing bid price on the trading day prior to the Notice date and Optimus
determines not to complete the tranche closing, then the Company may, at its option, proceed to
issue some or all of the applicable shares, provided that the conversion price for the Preferred
Stock that is issued shall reset at the lowest closing bid price for such nine trading day period.
Dividends and Other Distributions. Commencing on the first anniversary of the date of issuance
of any such shares of Preferred Stock, holders of Preferred Stock shall be entitled to receive
dividends on each outstanding share of Preferred Stock, which shall accrue in shares of Preferred
Stock at a rate equal to 10% per annum from the date of issuance. Accrued dividends shall be
payable annually on the anniversary of the issuance date. No dividend shall be payable with respect
to shares of Preferred Stock that are redeemed for cash or converted into shares of common stock
prior to the first anniversary of the issuance date with respect to such shares. For the three
months ended March 31, 2010, the Company had accrued dividends of $204,000 (approximately $137,000
and $67,000 for the first and second tranche, respectively.).
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Liquidation. Upon any liquidation, dissolution or winding up of the Company after payment or
provision for payment of debts and other liabilities of the Company, before any distribution or
payment is made to the holders of any other class or series of stock, the holders of Preferred
Stock shall first be entitled to be paid out of the assets of the Company available for
distribution to its stockholders an amount with respect to the Preferred Stock liquidation value,
after which any remaining assets of the Company shall be distributed among the holders of the other
class or series of stock in accordance with the Companys Certificates of Designations and
Certificate of Incorporation. At March 31, 2010, the liquidation value was $4.6 million.
Redemption. The Company may redeem, for cash, any or all of the Preferred Stock at any time at
the redemption price per share equal to $10,000 per share of Preferred Stock (the Series A
Liquidation Value), plus any accrued but unpaid dividends with respect to such shares of Preferred
Stock (the Redemption Price). If the Company exercises this redemption option with respect to any
Preferred Stock prior to the fourth anniversary of the issuance of such Preferred Stock, then in
addition to the Redemption Price, the Company must pay to Optimus a make-whole price per share
equal to the following with respect to such redeemed Preferred Stock: (i) 35% of the Series A
Liquidation Value if redeemed prior to the first anniversary of the issuance date, (ii) 27% of the
Series A Liquidation Value if redeemed on or after the first anniversary but prior to the second
anniversary of the issuance date, (iii) 18% of the Series A Liquidation Value if redeemed on or
after the second anniversary but prior to the third anniversary of the issuance date, and (iv) 9%
of the Series A Liquidation Value if redeemed on or after the third anniversary but prior to the
fourth anniversary of the issuance date.
In addition, the Companys redemption of the Preferred Stock, to the extent such Preferred
Stock was not converted into shares of common stock, was mandatory in the event that the Company
did not receive stockholder approval for the transactions described in the Purchase Agreement on or
before March 31, 2010, which approval was obtained on November 10, 2009.
On September 29, 2009, the Company exercised the first tranche of this financing, to issue 296
shares of Preferred Stock, for a tranche amount of approximately $3.0 million at a conversion price
of $3.07 per share of common stock. In support of this tranche, R & R loaned Optimus 1.3 million
shares of common stock. This tranche closed on October 13, 2009, and the Company received proceeds
of approximately $3.0 million, less the fees due on the entire financing commitment of $800,000. On
November 5, 2009, the Company closed the second tranche of this financing, issuing 166 shares of
Preferred Stock, for a tranche amount of approximately $1.7 million at a conversion price of $1.60
per share of common stock. In support of this tranche, R & R loaned Optimus approximately
1.4 million shares of common stock. There was no beneficial conversion feature on the Preferred
Stock as the stock prices were greater than the conversion prices on the dates of issuance.
As of March 31, 2010, the Preferred Stock and related accrued dividends are convertible into
approximately 2.1 million shares of common stock. As of March 31, 2010 the total amount of common
stock the Preferred Stock and dividends are convertible into over the life of the Preferred Stock
is 2.9 million shares.
5. Stockholders Equity
Stock Option Plans
In April 2002, the Companys Board of Directors approved the VeriChip Corporation 2002
Flexible Stock Plan (the VeriChip 2002 Plan). Under the VeriChip 2002 Plan, the number of shares
for which options, SARs or performance shares may be granted is approximately 2.0 million. As of
March 31, 2010, approximately 1.9 million options and restricted shares, net of forfeitures, have
been granted to directors, officers and employees under the VeriChip 2002 Plan, and 0.3 million of
the options or shares granted were outstanding as of March 31, 2010. All the outstanding options
are fully vested and do not expire until seven to nine years from the vesting date. As of March 31,
2010, no SARs have been granted and 30,108 shares may still be granted under the VeriChip 2002
Plan.
On April 27, 2005, the Companys Board of Directors approved the VeriChip Corporation 2005
Flexible Stock Plan (the VeriChip 2005 Plan). Under the VeriChip 2005 Plan, the number of shares
for which options, SARs or performance shares may be granted is approximately 0.3 million. As of
March 31, 2010, approximately 0.3 million options have been granted under the VeriChip 2005 Plan.
All of the options are fully vested and do not expire until nine years from the vesting date. As of
March 31, 2010, no SARs have been granted and 832 shares may still be granted under the VeriChip
2005 Plan.
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
On June 17, 2007, the Company adopted the VeriChip 2007 Stock Incentive Plan, which was
amended and restated on December 16, 2008 (the VeriChip 2007 Plan). Under the VeriChip 2007 Plan,
the number of shares for which options, restricted shares, SARs or performance shares may be
granted is 3.0 million. As of March 31, 2010, approximately 3.0 million options and shares have
been granted under the VeriChip 2007 Plan. As of March 31, 2010, no SARs have been granted and
12,962 shares may be granted under the VeriChip 2007 Plan.
On November 10, 2009, the Company adopted the VeriChip 2009 Stock Incentive Plan (the
VeriChip 2009 Plan). Under the VeriChip 2009 Plan, the number of shares for which options, SARs
or performance shares may be granted is 5.0 million. As of March 31, 2010, approximately 2.2
million options and shares have been granted under the VeriChip 2009 Plan. As of March 31, 2010, no
SARs have been granted and 2.8 million shares may be granted under the VeriChip 2009 Plan.
In addition, as of March 31, 2010, 0.3 million options and shares of the Companys common
stock have been granted outside of the Companys plans, and 0.3 million of the options or shares
granted were outstanding as of March 31, 2010. These options were granted at exercise prices
ranging from $0.23 to $8.55 per share, are fully vested and are exercisable for a period of up to
seven years.
At the effective time of the Merger, the Company assumed all of Steel Vaults obligations
under the SysComm International Corporation 2001 Flexible Stock Plan, as amended and restated, and
each option outstanding thereunder, provided that the obligation to issue shares of the Companys
stock, as adjusted to reflect the exchange ratio set forth in the Merger Agreement, was substituted
for the obligation to issue shares of Steel Vault common stock.
On November 10, 2009, pursuant to the Steel Vault Merger, approximately 6.7 million
outstanding Steel Vault options were converted into 3.3 million Company options. These options were
granted at exercise prices ranging from $0.36 to $2.00 per share, are fully vested and are
exercisable for a period up to ten years from the vest date.
A summary of option activity under the Companys option plans as of March 31, 2010, and
changes during the three months then ended is presented below:
Weighted Average | ||||||||
Number of | Exercise Price Per | |||||||
Options | Share | |||||||
Outstanding on January 1, 2010 |
4,215 | $ | 1.73 | |||||
Granted |
| | ||||||
Exercised |
(632 | ) | 0.50 | |||||
Forfeited |
(37 | ) | 0.28 | |||||
Outstanding on March 31, 2010 |
3,546 | 1.97 | ||||||
Exercisable on March 31, 2010 (1) |
3,440 | 2.02 | ||||||
Shares available on March 31, 2010 for options and common shares that
may be granted |
2,809 |
(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 $1.30 at March 31, 2010. As of March 31, 2010, the aggregate intrinsic value of all options outstanding was $2 million. |
The 632,000 options exercised during the quarter ended March 2010 had a total intrinsic value
of $608,000. Cash received from the option exercise was $319,000. There were no options exercised
in the quarter ended March 31, 2009.
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
The following table summarizes information about stock options at March 31, 2010:
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 | |||||||||||||||
$0.00 to $0.36 |
833 | 8.65 | $ | 0.36 | 833 | $ | 0.36 | |||||||||||||
$0.37 to $0.62 |
1,167 | 5.60 | 0.47 | 1,061 | 0.48 | |||||||||||||||
$0.68 to $1.99 |
594 | 2.20 | 0.83 | 594 | 0.83 | |||||||||||||||
$2.00 to $5.75 |
523 | 4.49 | 4.39 | 523 | 4.39 | |||||||||||||||
Above $5.75 |
429 | 3.84 | 7.78 | 429 | 7.78 | |||||||||||||||
3,546 | 5.37 | 1.97 | 3,440 | 2.02 | ||||||||||||||||
A summary of restricted stock outstanding as of March 31, 2010 and 2009 and changes during the
three months then ended, respectively, is presented below:
2010 | 2009 | |||||||
Unvested at January 1 |
4,192 | 1,520 | ||||||
Issued |
420 | | ||||||
Vested |
(1,967 | ) | (103 | ) | ||||
Forfeited or Expired |
| | ||||||
Unvested at March 31 |
2,645 | 1,417 | ||||||
There are inherent uncertainties in making estimates about forecasts of future operating
results and identifying comparable companies and transactions that may be indicative of the fair
value of the Companys securities. The Company believes that the estimates of the fair value of its
common stock at each option grant date were reasonable under the circumstances.
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.
There were no options granted in the three months ended March 31, 2010 and 2009.
Warrants
On November 10, 2009, pursuant to the Steel Vault Merger, all outstanding Steel Vault warrants
were converted into approximately 0.5 million Company warrants. These warrants were granted at
exercise prices ranging from $0.60 to $1.16 per share, are fully vested and are exercisable for a
period from five to ten years from the vest date. The expiration of 0.2 million warrants is in
December 2010, and the expiration of 0.3 million warrants is in 2014.
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Share-Based Compensation
Share-based compensation expense is recognized using the fair-value based method for all
awards granted. Compensation expense for awards granted is recognized over the requisite service
period based on the grant-date fair value of those options.
Forfeitures are estimated at the time of grant and require the estimates to be revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company recorded an expense, related to share based compensation, of approximately $1.1
million and $0.2 million for the three months ended March 31, 2010 and 2009, respectively.
In December 2008, the Company authorized the grant of approximately 519,000 shares of its
restricted common stock to Mr. Caragol, its then acting chief financial officer, in lieu of salary.
The shares vested according to the following schedule: (i) 20% vested on the grant date, and
(ii) 80% vested on January 1, 2010. Compensation expense of approximately nil and $146,000 was
recorded in the three months ended March 31, 2010 and 2009, respectively, for these shares.
In December 2008, the Company authorized the grant of approximately 602,000 shares of its
restricted common stock to Mr. Silverman, its then executive chairman, in lieu of salary, which
vested on January 1, 2010. Compensation expense of approximately nil and $55,000 was recorded in
the three months ended March 31, 2010 and 2009, respectively, for these shares.
In December 2008, the Company issued 400,000 shares of its restricted common stock to members
of the board of directors, which vested on January 1, 2010. The Company determined the value of the
stock to be approximately $100,000 based on the value of its common stock on the date of grant. The
value of the outstanding restricted stock was amortized as compensation expense over the vesting
period. The Company recorded compensation expense of approximately nil and $36,000 in the three
months ended March 31, 2010 and 2009, respectively, associated with this restricted stock.
In December 2008, the Company issued options exercisable for approximately 170,000 shares of
common stock; 130,000 to employees and 40,000 to a consultant.
The Company determined the fair value of the 130,000 employee options to be $18,000 on the
date of grant based on an estimate of the fair value using the Black-Scholes valuation model as
described above. The fair value of the grant is being recognized as compensation expense over the
vesting period. Accordingly, the compensation expense recorded in connection with these options was
approximately $1,500 for the three months ended March 31, 2010 and 2009.
The Company recorded compensation expense associated with the 40,000 options to the consultant
using the variable accounting method which requires the Company to re-measure the compensation
expense associated with these options at the end of each reporting period until the options are
vested. Compensation expense recorded in connection with these options for the three months ended
March 31, 2010 and 2009 was approximately $6,000 and $1,000, respectively.
In September and October 2009, the Company authorized the grant of approximately 350,000
shares of its restricted common stock to a research and development partner. The Company recorded
research and development expense associated with the restricted stock using the variable accounting
method that requires the Company to re-measure the compensation expense associated with the
restricted stock at the end of each reporting period until the restricted stock is vested.
Compensation expense recorded in connection with the restricted stock for the three months ended
March 31, 2010 was approximately $162,000. The shares were fully vested as of March 31, 2010.
In November and December 2009, the Company authorized the grant of restricted stock for
approximately 375,000 shares of common stock: 50,000 to an employee and 325,000 to consultants.
The Company determined the fair value of the 50,000 shares issued to the employee to be
approximately $83,000 based on the closing price of the Companys common stock on the date of
grant. The fair value of the grant will be recognized as compensation expense over the vesting
period. Accordingly, the Company recognized approximately $15,000 in compensation expense for the
three months ended March 31, 2010 in connection with this grant.
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
The Company recorded compensation expense associated with the 325,000 shares of restricted
stock issued to consultants using the variable accounting method that requires the Company to
re-measure the compensation expense associated with these shares at the end of each reporting
period until the shares are vested. Compensation expense recorded in connection with the shares for
the three months ended March 31, 2010 was approximately $59,000.
In November 2009, the Company authorized the grant of 2.0 million shares of its restricted
common stock to its executive officers which vest on a pro-rata basis through 2012. The Company
determined the value of the stock to be $3.3 million based on the value of its common stock on the
dates of grant. The value of the outstanding restricted stock is being amortized as compensation
expense over the vesting period. The Company recorded compensation expense of approximately
$548,000 in the three months ended March 31, 2010 associated with this restricted stock.
In January 2010, the Company authorized the grant of 50,000 shares of its common stock to a
consultant. The Company determined the value of the stock to be approximately $56,000 based on the
value of its common stock on the dates of grant and recorded the full amount as compensation
expense in the three months ended March 31, 2010.
In January 2010, the Company authorized the grant of 100,000 shares of its common stock to an
employee, 50% of which vested immediately and the other 50% of which will vest on July 1, 2010. The
Company determined the value of the stock to be approximately $109,000 based on the value of its
common stock on the dates of grant. The Company recorded compensation expense of approximately
$78,000 in the three months ended March 31, 2010 associated with this restricted stock.
In January 2010, the Company authorized the grant of 385,000 shares of its common stock to
members of its Board of Directors of which 370,000 shares were restricted. The Company determined
the value of the stock to be approximately $420,000 based on the value of its common stock on the
dates of grant. The value of the outstanding restricted stock was amortized as compensation expense
over the vesting period. The Company recorded compensation expense of approximately $98,000 in the
three months ended March 31, 2010 associated with this stock.
In February 2010, the Company authorized the grant of 50,000 shares of its common stock to a
consultant. The Company determined the value of the stock to be approximately $70,000 based on the
value of its common stock on the dates of grant and recorded the full amount as compensation
expense in the three months ended March 31, 2010.
6. Income Taxes
The Company had an effective tax rate of nil for the three months ended March 31, 2010 and
2009. The Company incurred losses before taxes for the three months ended March 31, 2010 and 2009.
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.
In January 2010, the Company received a notice from the Canadian Revenue Agency (CRA), that
the CRA would be performing a review of Xmarks Canadian tax returns for the periods 2005 through
2008. The Company plans to comply with all CRA information requests. This review will cover all
periods that the Company owned Xmark.
The Company recognizes any interest accrued related to unrecognized tax benefits or exposures
in interest expense and penalties in operating expenses. During the three months ended March 31,
2010 and 2009, there was no such interest or penalty.
7. Legal Proceedings
The Company is a party to various legal actions, as either plaintiff or defendant, arising in
the ordinary course of business, none of which is expected to have a material adverse effect on its
business, financial condition or results of operations. However, litigation is inherently
unpredictable, and the costs and other effects of pending or future litigation, governmental
investigations, legal and administrative cases and proceedings, whether civil or criminal,
settlements, judgments and investigations, claims or charges in any such matters, and developments
or
assertions by or against the Company relating to it or to its intellectual property rights and
intellectual property licenses could have a material adverse effect on the Companys business,
financial condition and operating results.
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
8. Related Party Transactions
Blue Moon
As of April 26, 2010, Mr. Silverman beneficially owned 41.4% of the Companys outstanding
common stock, including the 1,035,000 shares that are directly owned by Blue Moon Energy Partners,
LLC (Blue Moon) and 4,755,556 directly owned by R & R. Mr. Silverman, the Companys chief
executive officer and chairman of the Board of Directors, is a manager and controls a member of
Blue Moon (i.e., R & R). William J. Caragol, the Companys president, chief financial officer and
member of the Board of Directors, is a manager and member of Blue Moon.
Optimus Financing
On September 29, 2009, the Company entered into the Purchase Agreement with Optimus, under
which Optimus is committed to purchase up to $10 million of convertible Preferred Stock in one or
more tranches. To facilitate the transactions contemplated by the Purchase Agreement, R & R loaned
shares of common stock to Optimus equal to 135% of the aggregate purchase price for each tranche
pursuant to Stock Loan Agreements between R & R and Optimus. For more information regarding this
transaction, see Note 4, Financing Agreements, to these condensed consolidated financial
statements.
9. Segments
Since the Merger with Steel Vault on November 10, 2009, the Company operates in two business
segments: HealthID and ID Security.
HealthID Segment
The Company HealthID segment in conjunction with its development partner, Receptors, LLC, is
currently focused on the development of the glucose-sensing microchip. In the field of diabetes
management the Company acquired, in February 2010, the assets of Easy Check Medical Diagnostics,
LLC, including the Easy Check breath analysis system and the iGlucose wireless communication
system. All three of these products are currently under development.
The Company also intends to continue the development of the Rapid Flu Detection system, and
other health related products, built on the Companys core intellectual property. The Companys
HealthID segment also includes the VeriMed system, which uses the RFID microchip VeriChip that is
used in patient identification applications. Each implantable microchip contains a unique
verification number that is read when it is scanned by the Companys scanner. In October 2004, the
FDA, cleared the Companys VeriMed Health Link system for use in medical applications in the United
States.
ID Security Segment
The Companys ID Security segment focuses on selling a variety of identity security products
and services primarily on a subscription basis through its subsidiary, NationalCreditReport.com.
These services help consumers protect themselves against identity theft or fraud and understand and
monitor their credit profiles and other personal information, which include credit reports, credit
monitoring and credit scores.
In the first quarter of 2010, the Company re-launched its Health Link PHR business. The
Company plans to focus its marketing efforts on partnering with health care providers and
exchanges, physician groups, EMR system vendors, and insurers to use Health Link as a PHR provided
to their patients. The Company will also seek to partner with pharmaceutical companies who wish to
communicate with its online community through various forms of value added content and advertising.
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies. The Company evaluates performance based on segment income as
presented below.
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
The following is selected segment data as of and for the period ended:
Total From | ||||||||||||
Health | ID | Continuing | ||||||||||
ID | Security | Operations | ||||||||||
As of and For the Three Months Ended March 31, 2010 |
||||||||||||
Revenue |
$ | 75 | $ | 598 | $ | 673 | ||||||
Operating loss |
(2,695 | ) | (1,166 | ) | (3,861 | ) | ||||||
Loss from continuing operations before income taxes |
(2,683 | ) | (1,163 | ) | (3,846 | ) | ||||||
Total assets of continuing operations |
$ | 4,902 | $ | 4,099 | $ | 9,001 |
Total From | ||||||||||||
Health | ID | Continuing | ||||||||||
ID | Security | Operations | ||||||||||
As of and For the Three Months Ended March 31, 2009 |
||||||||||||
Revenue |
$ | 8 | $ | | $ | 8 | ||||||
Operating loss |
(1,362 | ) | | (1,362 | ) | |||||||
Loss from continuing operations before income taxes |
(1,350 | ) | | (1,350 | ) | |||||||
Total assets of continuing operations |
$ | 7,046 | $ | | $ | 7,046 |
10. Supplementary Cash Flow Information
In the three months ended March 31, 2010 and 2009, the Company had the following non-cash
investing and financing activities:
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Non-cash financing and investing activities: |
||||||||
Accrued dividend payable |
114 | | ||||||
Issuance of common stock and options for Easy Check acquisition |
351 | |
11. Subsequent Events
Development/Master Agreement
On April 22, 2010, the Company amended its Development/Master Agreement with Receptors, LLC in
conjunction with Phase II of that development program. The goal of Phase II is to develop a
prototype sensing system to sub-type identify the influenza virus, especially H1N1, in a nasal swab
or nasal wash sample. As part of this agreement, the Company will pay Receptors LLC $160,000 and
issue to it 240,000 shares of Company common stock.
Preferred Stock Purchase Agreement
On April 28, 2010, the Company entered into a Preferred Stock Purchase Agreement (the
Preferred Purchase Agreement) with Socius Capital Group, LLC doing business as Socius Technology
Capital Group, LLC (Socius Technology) under which Socius Technology is committed to purchase up
to $4.2 million in shares of non-convertible Series B Preferred Stock of the Company (the
Preferred Stock) in one or more tranches (each a Preferred Tranche), at $10,000 per share of
Preferred Stock. Under the terms of the Preferred Purchase
Agreement, from time to time and at the Companys sole discretion, the Company may present
Socius Technology with a notice to purchase such Preferred Stock (the Preferred Notice). Socius
Technology is obligated to purchase such Preferred Stock on the third trading day after the
Preferred Notice date, subject to satisfaction of certain closing conditions, including (i) that
the Companys common stock is listed for and trading on a trading market, (ii) the representations
and warranties of the Company set forth in the Preferred Purchase Agreement are true and correct as
if made on each Preferred Tranche date, and (iii) Socius Technology shall have received a
commitment fee of $105,000 payable on the first tranche closing date (collectively, the Closing
Conditions).
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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Stock Purchase Agreement
On April 28, 2010, the Company entered into a Stock Purchase Agreement (the Purchase
Agreement) with Socius CG II, Ltd., a Bermuda exempted company (Socius) under which Socius is
committed to purchase in connection with any Preferred Tranche, up to that number of shares of
common stock equal in dollar amount to 100% of the applicable Preferred Tranche amount (the Common
Tranche), at a per share price equal to the average of the individual daily volume weighted
average price calculated over the ten trading days preceding the applicable tranche notice of the
common stock on the date the Company provides notice of such tranche (the Investment Price).
Under the Purchase Agreement, the Company has also agreed to issue in connection with any Common
Tranche, two-year warrants to purchase shares of Common Stock equal in dollar amount to 35% of the
applicable Common Tranche, at an exercise price per share equal to the Investment Price.
Socius may pay the Investment Price for the common stock, at Socius option, in cash or a
secured promissory note. Socius may pay the warrant exercise price, at Socius option, in cash, a
secured promissory note, or, if applicable, by cashless exercise. The promissory note bears
interest at 2.0% per year calculated on a simple interest basis. The entire principal balance and
interest thereon is due and payable on the fourth anniversary of the date of the promissory note,
but no payments are due so long as the Company is in default under the Preferred Purchase Agreement
or the warrants or if there are any shares of Preferred Stock issued or outstanding. The
promissory note is secured by the borrowers right, title and interest in all outstanding shares of
the Companys common stock and other securities with a fair market value equal to
the principal amount of the promissory note. The Companys right to deliver a tranche notice to
Socius pursuant to the Purchase Agreement is subject to the Closing Conditions and also that no
purchase would result in Socius and its affiliates beneficially owning more than 9.99% of the
common stock. Unless the Company obtains stockholder approval or Socius obtains an opinion of
counsel that stockholder approval is not required, Socius may not exercise a warrant if, as a
result of such exercise, the aggregate number of shares of common stock issued upon exercise of all
warrants it holds plus the aggregate number of shares of common stock issued under the Purchase
Agreement would exceed 19.99% of the Companys common stock outstanding. If at any time, upon the
exercise of all warrants issued to Socius, Socius holds more than 19.99% of the Companys
outstanding common stock, the Company will be required to obtain stockholder approval of the
transactions with Socius.
Tranche Draw Down
On April 29, 2010, the Company presented Socius Technology with a Preferred Notice to purchase
$2.3 million of Preferred Stock in a Preferred Tranche. Upon the closing of the Preferred Tranche,
which occurred on May 4, 2010, the Company issued 230 shares of Preferred Stock. In connection
with the Preferred Notice, the Company also presented Socius with a notice to purchase $2.3 million
of common stock and warrants to purchase 600,746 shares of common stock. The Company issued
1,716,417 shares of common stock at an Investment Price per share of $1.34, paid in the form a
secured promissory note, and a warrant to purchase 600,746 shares of common stock to Socius, at an
exercise price equal to the Investment Price of $1.34, which warrant Socius exercised on April 29,
2010 and paid in the form of a secured promissory note.
Executive Compensation
On November 12, 2009, our Compensation Committee approved a 2010 executive compensation
arrangement for Messrs. Silverman and Caragol whereby beginning January 1, 2010, Mr. Silverman and
Mr. Caragol received a base salary of $375,000 and $225,000, respectively. Additionally, the
Compensation Committee has the authority to approve a discretionary bonus for 2010, a portion of
which is guaranteed, to each of Mr. Silverman and Mr. Caragol based on the following factors:
development of the rapid virus sensor project, development of the glucose-sensing microchip
project, the financial performance of the business of our wholly-owned subsidiary, National Credit
Report.com, strategic acquisitions, the overall financial condition/health of the 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. Mr. Silverman and Mr. Caragol are entitled
to Company-paid health insurance, non-allocable expenses of $45,000 and $20,000, respectively, and
each are entitled to an automobile allowance and other automobile expenses, including insurance,
gasoline and maintenance costs. On May 4, 2010, our Compensation Committee approved a change to
the above-referenced compensation arrangement and in lieu of (i) cash salary for the remainder of
2010 for Messrs. Silverman and Caragol and (ii) the minimum cash bonus obligation of $200,000 to each of Messrs.
Silverman and Caragol pursuant to the bonus structure set forth above, it approved the issuance of
675,000 shares of the Companys restricted stock to Mr. Silverman and 525,000 shares of the
Companys restricted stock to Mr. Caragol. These restricted shares were issued under our 2009
Stock Incentive Plan and will vest according to the following schedule: (i) 50% vest on January 1,
2011; and (ii) 50% vest on January 1, 2012. Mr. Silvermans and Mr. Caragols rights and interests
in the unvested portion of the restricted stock are subject to forfeiture in the event they resign
prior to January 1, 2012 or are terminated for cause prior to January 1, 2012, with said cause
being defined as a conviction of a felony or such person being prevented from providing services to
us as a result of such persons violation of any law, regulation and/or rule. The estimated
fair value of the aforementioned 1,200,000 shares is approximately $1.7 million and will be
expensed ratably over the vesting period.
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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, as well as
the following statements:
| we plan to focus our marketing efforts on partnering with heath care providers and exchanges, physician groups, EMR system vendors, and insurers to use Health Link as a PHR provided to their patients; | ||
| we seek to partner with pharmaceutical companies who wish to communicate with their online community through various forms of value added content and advertising; | ||
| we intend to recognize revenue from consignment sales, if any, when all of the criteria listed under Note 1, Revenue Recognition, in our notes to financial statements have been met and after receipt of notification of such product sales from distributors customers; | ||
| we intend to continue the development of the Rapid Flu Detection system, and other health related products, built on our core intellectual property; | ||
| based on projects in progress, we expect research and development to increase; | ||
| we expect the trend of selling, general and administrative expenses to be similar on an annualized basis; and | ||
| we believe that with the cash we have on hand, we will have sufficient funds available to cover our cash requirements through the next twelve months. |
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,
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; |
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| our ability to fund our operations and continued development of our products, including the Rapid Flu Detection System, the glucose-sensing microchip, the Easy Check breath glucose detection system and the iGlucose wireless communication system; | ||
| our ability to complete the Phase II of the Rapid Flu Detection System by the end of 2010 or at all and Phase II of the glucose-sensing microchip development program by mid 2010 or at all; | ||
| 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; | ||
| our ability to successfully develop and commercialize the breath glucose detection system and the iGlucose wireless communication device and the glucose-sensing microchip, and the market acceptance of these devices and the microchip; | ||
| our ability to obtain patents on our products, including the Easy Check breath glucose detection system and the iGlucose wireless communication device, the validity, scope and enforceability of our patents, and the protection afforded by our patents; | ||
| we may become subject to costly product liability claims and claims that our products infringe the intellectual property rights of others; | ||
| our ability to comply with current and future regulations relating to our businesses; | ||
| uncertainty as to whether a market for our VeriMed system will develop and whether we will be able to generate more than a nominal level of revenue from this business; | ||
| 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; | ||
| our ability to provide uninterrupted, secure access to the Health Link and VeriMed databases; and | ||
| our ability to establish and maintain proper and effective internal accounting and financial controls. |
You should not place undue reliance on any forward-looking statements. In addition, past
financial or operating performance is not necessarily a reliable indicator of future performance,
and you should not use our historical performance to anticipate future results or future period
trends. Except as otherwise required by federal securities laws, we disclaim any obligation or
undertaking to disseminate any updates or revisions to any forward-looking statement contained in
this 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,
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 our 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, 2009.
Overview
We have historically developed, marketed and sold radio frequency identification, frequently
referred to as RFID, systems used for the identification of people in the healthcare market.
Beginning in the fourth quarter of 2009, with the acquisition of Steel Vault, the Company intends
to pursue its strategy to provide unique health and security identification tools to protect
consumers and businesses, operating in two key segments: HealthID and ID Security.
HealthID Segment
Our HealthID segment is currently focused on the development of the glucose-sensing microchip,
based on our proprietary intellectual property and developed in conjunction with Receptors LLC
(Receptors) of Chaska, Minnesota.
The Company also intends to continue the development of the Rapid Flu Detection system, and
other health related products, built on the Companys core intellectual property. Our HealthID
segment also includes the VeriMed system, which uses an implantable passive RFID microchip (the
VeriChip) that is used in patient identification applications. Each implantable microchip
contains a unique verification number that is read when it is scanned by our scanner. In October
2004, the U.S. Food and Drug Administration, or FDA, cleared our VeriMed Health Link system for use
in medical applications in the United States.
ID Security Segment
Our ID Security segment includes our Identity Security suite of products, sold through our
NationalCreditReport.com brand and our Health Link personal health record. Our
NationalCreditReport.com business was acquired in conjunction with our merger with Steel Vault in
November 2009. NationalCreditReport.com offers consumers a variety of identity security products
and services primarily on a subscription basis. These services help consumers protect themselves
against identity theft or fraud and understand and monitor their credit profiles and other personal
information, which include credit reports, credit monitoring and credit scores. In the first
quarter of 2010, we re-launched our Health Link personal health record (PHR). We plan to focus
our marketing efforts on partnering with health care providers and exchanges, physician groups,
Electronic Medical Record (EMR) system vendors, and insurers to use Health Link as a PHR provided
to their patients. We will also seek to partner with pharmaceutical companies who wish to
communicate with our online community through various forms of value added content and advertising.
The Company continues to focus on its HealthID and ID Security businesses, including the
development of the glucose sensing microchip, the Easy Check breath glucose detection system, the
iGlucose wireless communication system, the Rapid Flu Detection System, the Health Link PHR, and
its operating business in identity security. The Company intends to continue to explore potential
strategic transactions with third parties in the healthcare, identification, and animal health
sectors.
Recent Developments
In February 2010, we acquired the assets of Easy Check Medical Diagnostics, LLC, including the
Easy Check breath glucose detection system and the iGlucose wireless communication system. These
products are currently under development.
In February 2010, we successfully completed Phase I development of our rapid virus detection
system, a non-invasive, point-of-care test to test patient samples and identify various forms of
influenza within minutes. In Phase I development of the virus detection system, which utilizes
PositiveIDs exclusively licensed Receptors CARA (Combinatorial Artificial Receptor Array)
platform, the Company successfully achieved proof-of-concept. CARA support and complementary
competitor agents were developed to detect the presence of influenza in a model nasal wash matrix.
The fluorescently labeled competitor agents compete for binding to the CARA support surface. When
competitor agents are displaced from the CARA surface by virus, a fluorescent signal is produced.
Model nasal wash samples that contain influenza are distinguished from samples that do not contain
influenza.
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In March 2010, we filed with the U.S. Patent and Trademark Office a non-provisional patent
application for our iGlucose system, currently under development, which uses wireless SMS messaging
to automatically communicate a diabetic patients blood glucose levels from any data-capable
glucose meter to an online database.
In April, 2010, we amended our Development/Master Agreement with Receptors to document the
terms of Phase II development of our rapid virus detection system. We agreed to pay Receptors
$160,000 and issue it 240,000 shares of restricted common stock, of which Receptors has
registration rights, in exchange for completion of Phase II.
On April 28, 2010, we entered into the Preferred Purchase Agreement with Socius Technology,
under which Socius Technology is committed to purchase up to $4.2 million in Preferred Stock, and
the Purchase Agreement with Socius, under which Socius is committed to purchase up to $4.2 million
in common stock, payable in the form of cash or secured promissory note. Under the Purchase
Agreement, we have agreed to issue in connection with any Common Tranche, warrants to purchase
shares of our common stock equal in dollar amount to 35% of the applicable Common Tranche, at an
exercise price per share equal to the Investment Price. For more information on these
transactions, see Note 11, Subsequent Events, to our condensed consolidated financial statements.
On April 29, 2010, we presented Socius Technology with a Preferred Notice to purchase $2.3
million of Preferred Stock in a Preferred Tranche. Upon the closing of the Preferred Tranche,
which occurred on May 4, 2010, we issued 230 shares of Preferred Stock. In connection with the
Preferred Notice, we also presented Socius with a notice to purchase $2.3 million of common stock
and warrants to purchase 600,746 shares of common stock. We issued 1,716,417 shares of common
stock at an Investment Price per share of $1.34, paid in the form a secured promissory note, and a
warrant to purchase 600,746 shares of common stock to Socius, at an exercise price equal to the
Investment Price of $1.34, which warrant Socius exercised on April 29, 2010 and paid in the form of
a secured promissory note.
Results of Operations
With the acquisition of Steel Vault in November 2009, the Company operates in two key
segments: HealthID and ID Security. The following are the segment results for the three months
ended March 31, 2010 and 2009.
For the Three Months Ended | ||||||||||||
March 31, 2010 | ||||||||||||
HealthID | ID Security | Total | ||||||||||
Revenue |
$ | 75 | $ | 598 | 673 | |||||||
Cost of sales |
45 | 171 | 216 | |||||||||
Gross Profit |
30 | 427 | 457 | |||||||||
Operating expenses: |
||||||||||||
Selling, general and administrative |
2,187 | 1,593 | 3,780 | |||||||||
Research and development |
538 | | 538 | |||||||||
Total operating expenses |
2,725 | 1,593 | 4,318 | |||||||||
Operating loss |
(2,695 | ) | (1,166 | ) | (3,861 | ) | ||||||
Interest / other income and (expense), net |
12 | 3 | 15 | |||||||||
Loss from continuing operations |
$ | (2,683 | ) | $ | (1,163 | ) | (3,846 | ) | ||||
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For the Three Months Ended | ||||||||||||
March 31, 2009 | ||||||||||||
HealthID | ID Security | Total | ||||||||||
Revenue |
$ | 8 | $ | | 8 | |||||||
Cost of sales |
| | | |||||||||
Gross Profit |
8 | | 8 | |||||||||
Operating expenses: |
||||||||||||
Selling, general and administrative |
1,370 | | 1,370 | |||||||||
Research and development |
| | | |||||||||
Total operating expenses |
1,370 | | 1,370 | |||||||||
Operating loss |
(1,362 | ) | | (1,362 | ) | |||||||
Interest / other income and (expense), net |
12 | | 12 | |||||||||
Loss from continuing operations |
$ | (1,350 | ) | $ | | (1,350 | ) |
HealthID Segment
Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
Revenue
Revenue was $75,000 for the three months ended March 31, 2010 compared to $8,000 for the three
months ended March 31, 2009. The increase in revenue was attributable primarily to the sale of our
new 8 millimeter microchips to a medical device partner.
Gross Profit and Gross Profit Margin
Our cost of sales consists of finished goods and inventory valuation charges. The microchips
used in our VeriMed system as well as our new 8 millimeter microchips are purchased as finished
goods under the terms of our former agreement with Digital Angel Corporation.
We had a gross profit of $30,000 in 2010 compared to a gross profit of $8,000 in 2009. This
increase is attributed to the sale of 8-millimeter microchips to a medical device partner.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of compensation for employees
in executive, sales, marketing and operational functions, including finance and accounting, and
corporate development. Other significant costs include depreciation and amortization, professional
fees for accounting and legal services, consulting fees and facilities costs.
Selling, general and administrative expense increased by $0.8 million to $2.2 million for the
three months ended March 31, 2010 compared to $1.4 million for the three months ended March 31,
2009. This increase was primarily a result of the increase in share-based compensation from $0.2
million in the three months ended March 31, 2009 to $1.1 million in the three months ended March
31, 2010.
Selling, general and administrative expense included depreciation and amortization expense of
approximately $8,000 for the three months ended March 31, 2010 and 2009.
Research and Development
Our research and development expense consists primarily of costs associated with various
projects, including testing, developing prototypes and related expenses. Research and development
expense was $0.5 million for the three months ended March 31, 2010 compared to nil for the three
months ended March 31, 2009. Our research and development costs represent payments to our project
partner and acquisition of in process research and development.
ID Security Segment
The ID Security segment reflects the results of National Credit Report.com from the
acquisition of Steel Vault on November 10, 2009.
Three Months Ended March 31, 2010
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Revenue
Revenue of $0.6 million for the three months ended March 31, 2010 resulted from sales of our
identity security products through our National Credit Report.com subsidiary. At March 31, 2010,
the Company had approximately 11,000 subscribers for its credit monitoring services compared to
approximately 20,000 subscribers at November 10, 2009, the date of the Steel Vault Merger.
Annualizing the revenue would not be indicative of the results of the Company due to the upward
trend in subscribers.
Gross Profit and Gross Profit Margin
Cost of sales consists primarily of the costs related to purchasing the data, reporting and
monitoring services from our supplier in order to provide services to our customers.
We had a gross profit of $0.4 million for the three months ended 2010 from our identity
security products through National Credit Report.com. Annualizing gross profit would not be
indicative of trend or pattern due to the Companys upward trend and growth in subscribers.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of compensation for employees
in sales, marketing and operational functions, including finance and accounting. Other significant
costs include professional fees for accounting and legal services, and consulting fees.
Selling, general and administrative expense for the three months ended March 31, 2010 was $1.6
million. The Company expects the trend of selling, general and administrative expenses to be
similar on an annualized basis.
Liquidity and Capital Resources
As of March 31, 2010, unrestricted cash totaled $4.9 million compared to unrestricted cash of
approximately $6.4 million at December 31, 2009.
Cash Flows Used in Operating Activities
Net cash used in operating activities totaled $1.8 million and $1.0 million during the three
months ended March 31, 2010 and 2009, respectively. For each of the periods presented, cash was
used primarily to fund operating losses, and payments of accounts payable and accrued expenses.
Cash Flows from Investing Activities
Investing activities used cash of $19,000 and $4,000 during the three months ended March 31,
2010 and 2009, respectively, which was used to purchase equipment.
Cash Flows from Financing Activities
Financing activities provided cash of $0.3 million and nil during the three months ended
March 31, 2010 and 2009, respectively. In 2010, cash was provided by issuance of common shares from
stock option exercises.
Preferred Stock Purchase Agreement
On April 28, 2010, we entered into the Preferred Purchase Agreement with Socius Technology
under which Socius Technology is committed to purchase up to $4.2 million in shares of our
Preferred Stock in one or more Preferred Tranches, at $10,000 per share of Preferred Stock. Under
the terms of the Preferred Purchase Agreement, from time to time and at our sole discretion, we
may present Socius Technology with a Preferred Notice. Socius Technology is obligated to purchase such
Preferred Stock on the third trading day after the Preferred Notice date, subject to satisfaction
of the Closing Conditions.
Stock Purchase Agreement
On April 28, 2010, we entered into the Purchase Agreement with Socius under which Socius is
committed to purchase in connection with any Preferred Tranche, the up to that number of shares of
common stock equal in dollar amount to the Common Tranche, at a per share price equal to the
Investment Price. Under the Purchase Agreement, we also agreed to issue in connection with any
Common Tranche, two-year warrants to purchase shares of common stock equal in dollar amount to 35%
of the applicable Common Tranche, at an exercise price per share equal to the Investment Price.
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Socius may pay the Investment Price for the common stock, at Socius option, in cash or a
secured promissory note. Socius may pay the warrant exercise price, at Socius option, in cash, a
secured promissory note, or, if applicable, by cashless exercise. The promissory note bears
interest at 2.0% per year calculated on a simple interest basis. The entire principal balance and
interest thereon is due and payable on the fourth anniversary of the date of the promissory note,
but no payments are due so long as we are in default under the Preferred Purchase Agreement or the
warrants or if there are any shares of Preferred Stock issued or outstanding. The promissory note
is secured by the borrowers right, title and interest in all outstanding shares of our common stock and other securities with a fair market value equal to the principal amount of
the promissory note. Our right to deliver a tranche notice to Socius pursuant to the Purchase
Agreement is subject to the Closing Conditions and also that no purchase would result in Socius and
its affiliates beneficially owning more than 9.99% of the common stock. Unless we obtain
stockholder approval or Socius obtains an opinion of counsel that stockholder approval is not
required, Socius may not exercise a warrant if, as a result of such exercise, the aggregate number
of shares of common stock issued upon exercise of all warrants it holds plus the aggregate number
of shares of common stock issued under the Purchase Agreement would exceed 19.99% of our common
stock outstanding. If at any time, upon the exercise of all warrants issued to Socius, Socius
holds more than 19.99% of our outstanding common stock, we will be required to obtain stockholder
approval of the transactions with Socius.
Tranche Draw Down
On April 29, 2010, we presented Socius Technology with a Preferred Notice to purchase $2.3
million of Preferred Stock in a Preferred Tranche. Upon the closing of the Preferred Tranche,
which occurred on May 4, 2010, we issued 230 shares of Preferred Stock. In connection with the
Preferred Notice, we also presented Socius with a notice to purchase $2.3 million of common stock
and warrants to purchase 600,746 shares of common stock. We issued 1,716,417 shares of common
stock at an Investment Price per share of $1.34, paid in the form a secured promissory note, and a
warrant to purchase 600,746 shares of common stock to Socius, at an exercise price equal to the
Investment Price of $1.34, which warrant Socius exercised on April 29, 2010 and paid in the form of
a secured promissory note.
Financial Condition
As of March 31, 2010, we had working capital of approximately $3.5 million and an accumulated
deficit of $57.6 million compared to a working capital of approximately $5.2 million and an
accumulated deficit of approximately $53.7 million as of December 31, 2009. The decrease in working
capital was primarily due to operating losses, described above.
We believe that with the cash we have on hand, we will have sufficient funds available to
cover our cash requirements through the next twelve months.
Impact of Recently Issued Accounting Standards
In January 2010, the Financial Accounting Standard Board (FASB) issued ASU 2010-06,
Improving Disclosures about Fair Value Measurements. The ASU requires disclosing the amounts of
significant transfers in and out of Level 1 and 2 fair value measurements and to describe the
reasons for the transfers. The disclosures are effective for reporting periods beginning after
December 15, 2009. Additionally, disclosures of the gross purchases, sales, issuances and
settlements activity in Level 3 fair value measurements will be required for fiscal years beginning
after December 15, 2010.
In January 2010, the FASB issued Accounting Standards Update 2010-01, Equity (Topic 505):
Accounting for Distributions to Shareholders with Components of Stock and Cash (A Consensus of the
FASB Emerging Issues Task Force). This amendment to Topic 505 clarifies that the stock portion of a
distribution to shareholders that allows them to elect to receive cash or stock with a limit on the
amount of cash that will be distributed is not a stock dividend for purposes of applying Topics 505
and 260. ASU 2010-01 is effective for interim and annual periods ending on or after December 15,
2009, and would be applied on a retrospective basis. The Company does not expect the provisions of
ASU 2010-01 to have a material effect on the financial position, results of operations or cash
flows of the Company.
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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 4. | 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 March 31, 2010. This evaluation (the
disclosure controls evaluation) was done under the supervision and with the participation of
management, including our chief executive officer (CEO)
and chief financial officer (CFO). Rules adopted by the SEC require that in this section of our
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 March 31, 2010 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 March 31, 2010, our disclosure controls and procedures were effective to provide
reasonable assurance that the foregoing objectives are achieved.
Changes in Internal Control Over Financial Reporting
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 March 31, 2010 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 7 to the Condensed Financial Statements in Part I, Item I of
this Form 10-Q is incorporated herein by reference.
Item 1A. | Risk Factors. |
Item 1A
to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31,
2009 includes a detailed discussion of other risk factors that could materially affect our
business, financial condition or future results.
There can be no assurance that we will receive any proceeds from the sale of the shares or the
exercise of warrants since both can be paid for at Socius option by a secured promissory note.
Under the terms of the Purchase Agreement, Socius may pay for the shares and the exercise of
the warrants by issuing to us a secured promissory note. Therefore, it is possible that we will not
receive any proceeds from the sale of the shares or exercise of the warrants. Further, we have the
right to redeem the Preferred Stock issued to Socius Technology by offset of the secured promissory
notes we receive from Socius as payment for the shares issued under the Purchase Agreement or upon
exercise of the warrants. Therefore, it is possible that we will not receive cash proceeds upon
maturity of the secured promissory notes that we receive from Socius.
Sales of shares to Socius pursuant to the Purchase Agreement and the resale of such shares by
Socius may result in declines in the price of our common stock.
The shares of common stock Socius purchases under the Purchase Agreement are freely tradable
and Socius may promptly sell the shares we issue to them under the Purchase Agreement in the public
markets. Such sales, and the potential for such sales, could cause the market price of our shares
to decline significantly. To the extent of any such decline, any subsequent draw downs that we
request under the Purchase Agreement would require the issuance of a greater number of shares to
Socius. This may result in significant dilution to our stockholders.
Future sales of common stock by our existing stockholders may cause our stock price to fall.
The market price of our common stock could decline as a result of sales by our existing
stockholders of shares of common stock in the market, or the perception that these sales could
occur. These sales might also make it more difficult for us to sell equity securities at a time and
price that we deem appropriate. As of April 30, 2010, we had 26,105,071 shares of common stock
outstanding (which includes 2,955,160 unvested shares of restricted stock granted to our
employees), and we had warrants to purchase 454,000 shares of common stock and options to purchase
3,606,491 shares of common stock outstanding. All of the shares of common stock issuable upon
exercise of our outstanding warrants and any vested options will be freely tradable without
restriction under the federal securities laws unless purchased by our affiliates. Scott R.
Silverman, our chairman and chief executive officer, William J. Caragol, our president and chief
financial officer, R & R Consulting Partners, LLC, a holding company owned and controlled by Mr.
Silverman, and Blue Moon Energy Partners, LLC, a company for which Mr. Silverman is a manager and
controls a member (i.e., R & R Consulting Partners, LLC) and for which Mr. Caragol is a manager and
member, have entered into lock-up agreements pursuant to which they cannot sell any of our
securities for thirty days following the date we provide a tranche notice to Socius.
Our stockholders may be diluted by our future issuance of common stock to Socius and the exercise
of warrants to purchase common stock.
Pursuant to the Purchase Agreement, we may sell to Socius up to an additional $1.9 million of
our shares of common stock at the Investment Price. In addition, we may issue to Socius warrants
to purchase up to an additional $665,000 shares of our common stock at an exercise price equal to
the Investment Price. The number of shares of our common stock issuable upon exercise of warrants
issued to Socius, and therefore the dilution of existing common stockholders, is subject to
increase as a result of certain sales of our securities that trigger the antidilution provisions of
those warrants at a price below the applicable exercise price of those warrants. Future exercises
of those warrants and future issuance of common stock to Socius pursuant to the Purchase Agreement
may dilute the ownership interests of our current stockholders.
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Our ability to raise funds under the Preferred Purchase Agreement will depend on several factors,
including the trading volume for our common stock.
In connection with any Preferred Tranche, Socius is required to purchase shares of common
stock equal in dollar amount to 100% of the applicable Preferred Tranche amount. Under the Purchase
Agreement, Socius may not make any advances which would require Socius to purchase shares of common
stock that would result in Socius owning more than 9.99% of our outstanding shares of common stock.
Our ability to sell additional shares of common stock to Socius and raise funds under the Preferred
Purchase Agreement will depend on Socius ability to sell shares of common stock previously
purchased under the Purchase Agreement. This will depend, among other factors, on the trading
volume for our shares on the NASDAQ Capital Market and prevailing conditions in the capital markets
generally.
We do not anticipate declaring any cash dividends on our common stock.
In July 2008 we declared, and in August 2008 we paid, a special cash dividend of $15.8 million
on our capital stock. Any future determination with respect to the payment of dividends will be at
the discretion of our board of directors and will be dependent upon our financial condition,
results of operations, capital requirements, general business conditions, terms of financing
arrangements and other factors that our board of directors may deem relevant. In addition, our
convertible preferred stock purchase agreement with Optimus Capital Partners, LLC prohibits the
payment of cash dividends on any of our capital stock except shares of Series A Preferred Stock
while any shares of Series A Preferred Stock are outstanding.
Item 2. | Unregistered Sale of Equity Securities. |
During the three months ended March 31, 2010, we sold 350,000 shares of our common stock that
were not registered under the Securities Act of 1933, as amended.
On February 11, 2010, we issued 300,000 shares of our common stock, valued at approximately
$351,000, to Easy Check Diagnostics, LLC in connection with the acquisition of the assets of Easy
Check Medical Diagnostics, LLC. Additional payment in the form of shares (maximum 200,000 shares)
and product royalties may be paid in the future based on successful patent grants and product or
license revenues.
On March 16, 2010, we authorized the grant of 50,000 shares of our common stock to Receptors,
LLC, in connection with the execution of an amended and restated license agreement.
The shares of common stock described in this Item 2 were issued 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 not involving any public offering.
Item 4. | Other Information. |
On November 12, 2009, our Compensation Committee approved a 2010 executive compensation
arrangement for Messrs. Silverman and Caragol whereby beginning January 1, 2010, Mr. Silverman and
Mr. Caragol received a base salary of $375,000 and $225,000, respectively. Additionally, the
Compensation Committee has the authority to approve a discretionary bonus for 2010, a portion of
which is guaranteed, to each of Mr. Silverman and Mr. Caragol based on the following factors:
development of the rapid virus sensor project, development of the glucose-sensing microchip
project, the financial performance of the business of our wholly-owned subsidiary, National Credit
Report.com, strategic acquisitions, the overall financial condition/health of the 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. Mr. Silverman and Mr. Caragol are entitled
to Company-paid health insurance, non-allocable expenses of $45,000 and $20,000, respectively, and
each are entitled to an automobile allowance and other automobile expenses, including insurance,
gasoline and maintenance costs. On May 4, 2010, our Compensation Committee approved a change to
the above-referenced compensation arrangement and in lieu of (i) cash salary for the remainder of
2010 for Messrs. Silverman and Caragol and (ii) the minimum cash bonus obligation to Messrs.
Silverman and Caragol pursuant to the bonus structure set forth above, it approved the issuance of
675,000 shares of the Companys restricted stock to Mr. Silverman and 525,000 shares of the
Companys restricted stock to Mr. Caragol. These restricted shares were issued under our 2009
Stock Incentive Plan and will vest according to the following schedule: (i) 50% vest on January 1,
2011; and (ii) 50% vest on January 1, 2012. Mr. Silvermans and Mr. Caragols rights and interests
in the unvested portion of the restricted stock are subject to forfeiture in the event they resign
prior to January 1, 2012 or are terminated for cause prior to January 1, 2012, with said cause
being defined as a conviction of a felony or such person being prevented from providing services to
us as a result of such persons violation of any law, regulation and/or rule.
Item 5. | 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 thereunto duly authorized.
POSITIVEID CORPORATION (Registrant) |
||||
Date: May 6, 2010 | By: | /s/ William J. Caragol | ||
William J. Caragol | ||||
President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) |
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Exhibit Index
Exhibit | ||||
Number | Description | |||
3.1 | * | Second Amended and Restated Certificate of Incorporation of PositiveID
Corporation filed with the Secretary of State of Delaware on December 18,
2006, as amended on November 10, 2009 |
||
3.2 | Amended and Restated By-laws of PositiveID Corporation adopted as of
December 12, 2005, as amended on March 16, 2010(1) |
|||
4.1 | Form of Specimen Common Stock Certificate (1) |
|||
10.1 | * | First Amendment to Development/Master Agreement, dated April 22, 2010,
between PositiveID Corporation and Receptors LLC |
||
10.2 | Amended and Restated License Agreement, dated February 26, 2010, between
PositiveID Corporation and Receptors LLC(1) |
|||
10.3 | Amended and Restated Development/Master Agreement, dated February 26,
2010, between PositiveID Corporation and Receptors LLC(1) |
|||
10.4 | PositiveID Animal Health Corporation 2010 Flexible Stock Plan(1) |
|||
10.5 | Form of Restricted Stock Award Agreement under the PositiveID Animal
Health Corporation 2010 Flexible Stock Plan(1) |
|||
10.6 | Form of Non-Qualified Stock Option Award Agreement under PositiveID Animal
Health Corporation 2010 Flexible Stock Plan(1) |
|||
10.7 | Preferred Stock Purchase Agreement, dated April 28, 2010, between
PositiveID Corporation and Socius Capital Group, LLC(2) |
|||
10.8 | Stock Purchase Agreement, dated April 28, 2010, between PositiveID
Corporation and Socius CG II, Ltd. (2) |
|||
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 Form 10-K previously filed by PositiveID Corporation on March 19, 2010. | |
(2) | Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on April 29, 2010. |
30