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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

  

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

 

For the quarterly period ended September 30, 2014

OR

 

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

 

For the transition period from                       to

 

Commission File Number: 001-33297

 

POSITIVEID CORPORATION

(Exact name of registrant as specified in its charter)

 

DELAWARE   06-1637809
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
1690 South Congress Avenue, Suite 201    
Delray Beach, Florida 33445   (561) 805-8000
(Address of principal executive offices, including zip code)   (Registrant’s telephone number, including area 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 ¨

 

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 þ No ¨

 

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 ¨ Accelerated filer ¨ Non-accelerated filer ¨ 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 ¨ No þ

 

The number of shares outstanding of each of the issuer’s classes of common stock as of the close of business on November 10, 2014 is as follows:

 

Class   Number of Shares
Common Stock: $0.01 Par Value   159,125,099

  

 
 

  

TABLE OF CONTENTS

 

PART I —FINANCIAL INFORMATION  
   
ITEM 1. FINANCIAL STATEMENTS  
   
Condensed Consolidated Balance Sheets — September 30, 2014 (unaudited) and December 31, 2013 1
   
Unaudited Condensed Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2014 and 2013 2
   
Unaudited Condensed Consolidated Statement of Stockholders’ Deficit — Nine Months Ended September 30, 2014 3
   
Unaudited Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2014 and 2013 4
   
Notes to Unaudited Condensed Consolidated Financial Statements 5
   
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 22
   
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 24
   
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27
   
ITEM 4. CONTROLS AND PROCEDURES 27
   
PART II — OTHER INFORMATION  
   
ITEM 1. LEGAL PROCEEDINGS 28
   
ITEM 1A. RISK FACTORS 28
   
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 28
   
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 29
   
ITEM 4. MINE SAFETY DISCLOSURES 29
   
ITEM 5. OTHER INFORMATION 29
   
ITEM 6. EXHIBITS 29
   
SIGNATURES 29

 

 
 

  

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

   

POSITIVEID CORPORATION

Condensed Consolidated Balance Sheets

(In thousands, except share data)

 

   September 30,
2014
(Unaudited)
   December 31,
2013
 
         
Assets          
Current Assets:          
Cash and cash equivalents  $418   $165 
Prepaid expenses and other current assets   14    81 
Total Current Assets   432    246 
           
Property and Equipment, net   6    11 
Goodwill   510    510 
Intangibles, net   408    623 
Other assets   11    11 
Total Assets  $1,367   $1,401 
           
Liabilities and Stockholders’ Deficit          
Current Liabilities:          
Accounts payable  $303   $498 
Accrued expenses and other current liabilities   530    652 
Short-term convertible debt, net of discounts and premiums   1,993    460 
Notes payable   700    696 
Embedded conversion option liability   914     
Tax contingency   500    500 
Contingent earn-out liability   254    514 
Deferred revenue   2,609    2,500 
Total Current Liabilities   7,803    5,820 
           
Long Term Liabilities:          
Mandatorily  redeemable preferred stock; Series I Preferred, 1,000 shares designated – 1,000 and 488 shares issued and outstanding, liquidation preference of $1,050 and $494 at September 30, 2014 and December 31, 2013, respectively   1,226    494 
Total Liabilities   9,029    6,314 
           
Commitments and contingencies (Note 7)          
           
Stockholders’ Deficit:          
Preferred stock, 5,000,000 shares authorized, $.001 par value;
Convertible Series F Preferred, 2,500 shares designated – 200 and 600 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively;  liquidation preference of $207 and $615, at September 30, 2014 and December 31, 2013, respectively
        
Common stock, 470,000,000 shares authorized, $.01 par value; 116,741,642 and 45,425,186 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively   1,167    454 
Additional paid-in capital   121,251    119,256 
Accumulated deficit   (130,080)   (124,623)
Total Stockholders’ Deficit   (7,662)   (4,913)
Total Liabilities and Stockholders’ Deficit  $1,367   $1,401 

 

See accompanying unaudited notes to unaudited condensed consolidated financial statements.

 

1
 

   

POSITIVEID CORPORATION

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2014   2013   2014   2013 
Revenue  $325   $   $745   $ 
Operating expenses:                    
Direct labor   103        197     
Selling, general and administrative   691    675    3,365    3,460 
Research and development   123    149    318    483 
Total operating expenses   917    824    3,880    3,943 
Operating loss   (592)   (824)   (3,135)   (3,943)
                     
Interest expense   (974)   (240)   (1,818)   (525)
Change in contingent earn-out liability   251    225    260    131 
Change in fair value of embedded conversion option liability   (14)       (14)    
Other income (expense)       44    (7)   162 
Net loss   (1,329)   (795)   (4,714)   (4,175)
                     
Preferred stock dividends   (21)   1    (74)   93 
Beneficial conversion on preferred stock   (263)   (2,506)   (743)   (6,990)
Net loss attributable to common stockholders  $(1,613)  $(3,300)  $(5,531)  $(11,072)
                     
Loss per common share attributable to common stockholders – basic and diluted  $(0.02)  $(0.20)  $(0.07)  $(0.74)
                     
Weighted average shares outstanding – basic and diluted   86,875    16,203    77,318    14,929 

  

See accompanying unaudited notes to unaudited condensed consolidated financial statements.

 

2
 

  

POSITIVEID CORPORATION

Condensed Consolidated Statement of Changes in Stockholders’ Deficit

For the Nine Months Ended September 30, 2014

(In thousands)

(Unaudited)

 

   Series F Preferred
Stock
   Common Stock   Additional
Paid-in
   Accumulated   Total
Stockholders’
 
   Shares   Amount   Shares   Amount   Capital   Deficit   (Deficit) 
                             
Balance at December 31, 2013   600   $    45,425   $454   $119,256   $(124,623)  $(4,913)
Issuance of Series F Preferred shares for sale, net of costs   200                100        100 
Issuance of Series F Preferred shares as fees, net of costs   250                250        250 
Conversion of Series F Preferred shares and accrued dividends payable   (850)       31,817    318    (280)       38 
Beneficial conversion dividends for Series F Preferred conversion                   743    (743)    
Common Stock issued pursuant to convertible note conversions           22,916    229    266        495 
Reclassification of Premium on convertible notes upon conversion                   221        221 
Beneficial conversion value  of convertible debt                   70        70 
Reclassification of derivative liability upon debt conversion                   31        31 
Cashless exercise of warrants issued related to financing agreements           8,531    85    (85)        
Reclassification of warrant liability upon conversion of warrants                   22        22 
Relative fair-value of  warrant issued with debt                   41        41 
Common shares issued as compensation           8,050    81    690        771 
Preferred stock dividends                   (74)       (74)
Net loss for the nine months ended September 30, 2014                       (4,714)   (4,714)
Balance at September 30, 2014   200   $    116,739   $1,167   $121,251   $(130,080)  $(7,662)

   

See accompanying unaudited notes to unaudited condensed consolidated financial statements.

 

3
 

  

POSITIVEID CORPORATION

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   Nine Months Ended
September 30,
 
   2014   2013 
         
Cash flows from operating activities:          
Net loss  $(4,714)  $(4,175)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   225    288 
Stock-based compensation   1,527    607 
Series F stock issued as penalty fee   250     —  
Changes in fair value of embedded conversion option liability   14     — 
Convertible debt discounts and premium amortization   1,406    426 
Discount on liability settlement       92 
Warrant fair-value adjustments       (143)
Non-cash interest expense and financing costs   200    23 
Changes in operating assets and liabilities:          
Increase in prepaid expenses and other current assets   (8)   (213)
(Decrease) increase in accounts payable and accrued expenses   (551)   185 
Increase in deferred revenue   109    1,500 
Net cash used in operating activities   (1,542)   (1,410)
Cash flows from investing activity:          
Purchase of property and equipment   (5)   (3)
Net cash used in investing activity   (5)   (3)
Cash flows from financing activities:          
Proceeds from issuances of Series F Preferred Stock, net of fees   100    1,050 
Proceeds from convertible debt financing, net of fees   1,700    688 
Principal payments on short-term debt       (338)
Net cash provided by financing activities   1,800    1,400 
Net (decrease) increase in cash and cash equivalents   253    (13)
Cash and cash equivalents, beginning of period   165    111 
Cash and cash equivalents, end of period  $418   $98 
Supplementary Cash Flow Information:          
Cash paid for interest  $   $ 
Cash paid for income tax  $   $ 
Non-cash financing and investing activities:          
Preferred dividends converted into common stock  $38   $48 
Conversion of promissory notes into common stock  $664   $242 
Beneficial conversion value recognized as dividend in Series F preferred stock conversions  $743   $ 
Beneficial conversion value recorded on new debt  $70   $ 
Relative fair value of warrants issued with debt  $41   $ 
Reclassification of embedded conversion option liability upon conversion of debt  $31   $ 
Reclassification of warrant liability upon exercise of warrants  $22   $ 
Issuance of shares for fee  $   $142 
Issuance of warrants for advisory services  $   $110 
Equity conversion of accrued compensation payable  $   $801 
Discounts recorded for loan fees and OID  $165   $ 
Embedded conversion liability discount  $930   $ 

 

See accompanying unaudited notes to unaudited condensed consolidated financial statements.

 

4
 

  

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

 

1.   Organization and Basis of Presentation

 

PositiveID, including its wholly owned subsidiary MicroFluidic Systems (“MFS”) (collectively, the “Company” or “PositiveID”), develops molecular diagnostic systems for bio-threat detection, for rapid diagnostic testing, and also develops assays to detect a range of biological threats. The Company’s M-BAND (Microfluidic Bio-agent Autonomous Networked Detector) system is an airborne bio-threat detection system developed for the homeland defense industry, to detect biological weapons of mass destruction.  The Company is also developing the handheld automated pathogen detection system Firefly Dx for rapid diagnostics, both for point of need and clinical applications.

  

Authorized Common Stock (Reverse Stock Split)

 

As of September 30, 2014, the Company was authorized to issue 470 million shares of common stock.  On April 18, 2013, the Company’s Board of Directors approved a reverse stock split in the ratio of 1-for- 25 and the Company filed a Certificate of Amendment to its Second Amended and Restated Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to affect the reverse stock split. All share and per share information in the accompanying consolidated financial statements and footnotes has been retroactively adjusted to reflect the reverse stock split.

 

Going Concern

 

The Company’s unaudited consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of September 30, 2014, the Company had a working capital deficiency of approximately $7.4 million, a stockholder’s deficit of approximately $7.7 million and an accumulated deficit of $130.0 million, compared to a working capital deficiency of $5.6 million, a stockholder’s deficit of $4.9 million and an accumulated deficit of $124.6 million as of December 31, 2013.  The Company has incurred operating losses since its inception, and had not generated revenue until the three months ended September 30, 2014 and the three months ended September 30, 2014. The current operating losses are the result of research and development expenses and selling, general and administrative expenses. While the Company began recognizing revenue during the three months ended June 30, 2014, the Company expects its operating losses to continue through at least the next twelve months. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company’s ability to continue as a going concern is dependent upon its ability to obtain financing to fund the continued development of its products and to support working capital requirements.  Until the Company is able to achieve operating profits, the Company will continue to seek to access the capital markets.  In 2013 the Company raised approximately $1.8 million from the issuance of convertible preferred stock, common stock under an equity line financing, and convertible debt.  During the nine months ended September 30, 2014, the Company raised $1.8 million, net of fees, from the issuance of convertible notes and convertible preferred stock (see Note 4).  In March and April 2013 the Company received $1,500,000 in two equal installments, under its license agreement with The Boeing Company (see Note 9). 

 

 On March 28, 2014, the Company entered into an agreement, in the form of a purchase order, from UTC Aerospace Systems (“UTAS”) to support a contract for the U.S. Department of Defense (“DoD”). On July 9, 2014 the Company received an additional purchase order, bringing the total value of the fixed price arrangement to $1.0 million. Pursuant to the agreement, work commenced in April 2014 and was expected to be substantially complete by the end of 2014. As of September 30, 2014 the Company had received $854,000 of the contract value and had recognized revenue of $745 thousand. The remaining value of the agreement is expected to be received and recognized during the remainder of 2014 and early 2015.

 

The Company intends to continue to access capital to provide funds to meet its working capital requirements for the near-term future. In addition and if necessary, the Company could reduce and/or delay certain discretionary research, development and related activities and costs. However, there can be no assurances that the Company will be able to negotiate additional sources of equity or credit for its long term capital needs. The Company’s inability to have continuous access to such financing at reasonable costs could materially and adversely impact its financial condition, results of operations and cash flows, and result in significant dilution to the Company’s existing stockholders. The Company’s unaudited consolidated financial statements do not include any adjustments relating to recoverability of assets and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Basis of Presentation

 

The accompanying condensed consolidated balance sheet as of December 31, 2013 has been derived from the Company’s audited financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2013. The accompanying unaudited condensed consolidated financial statements as of September 30, 2014 and for the three and nine months ended September 30, 2014 and 2013 have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of the Company’s management, all adjustments (including normal recurring adjustments) necessary for a fair presentation for the periods presented have been reflected as required by Regulation S-X, Rule 10-01.

 

5
 

  

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

 

The unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2014 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

New Accounting Pronouncements

 

In June 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “ Revenue from Contracts with Customers”.  The update gives entities a single comprehensive model to use in reporting information about the amount and timing of revenue resulting from contracts to provide goods or services to customers. The proposed ASU, which would apply to any entity that enters into contracts to provide goods or services, would supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, the update would supersede some cost guidance included in Subtopic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts. The update removes inconsistencies and weaknesses in revenue requirements and provides a more robust framework for addressing revenue issues and more useful information to users of financial statements through improved disclosure requirements. In addition, the update improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the impact this standard may have on our results of operations, cash flows or financial condition. 

 

In June 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-12, “ Compensation – Stock Compensation ( Topic 718 ); Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”.  The amendments in this ASU apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. For all entities, the amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities.

 

Entities may apply the amendments in this ASU either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. The Company is currently evaluating the impact this standard may have on our results of operations, cash flows or financial condition.

 

In August 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40); Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This update requires management of the Company to evaluate whether there is substantial doubt about the Company’s ability to continue as a going concern. This update is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The Company does not expect this standard to have an impact on the Company’s consolidated financial statements upon adoption.

 

2.  Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The unaudited condensed consolidated financial statements include the accounts of PositiveID Corporation and its wholly-owned subsidiary. All significant inter-company balances and transactions have been eliminated in consolidation.

 

Revenue Recognition

 

Revenue is recognized when persuasive evidence of an arrangement exists, collectability of arrangement consideration is reasonably assured, the arrangement fees are fixed or determinable and delivery of the product or service has been completed.

 

6
 

 

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

 

If at the outset of an arrangement, the Company determines that collectability is not reasonably assured, revenue is deferred until the earlier of when collectability becomes probable or the receipt of payment. If there is uncertainty as to the customer’s acceptance of the Company’s deliverables, revenue is not recognized until the earlier of receipt of customer acceptance or expiration of the acceptance period. If at the outset of an arrangement, the Company determines that the arrangement fee is not fixed or determinable, revenue is deferred until the arrangement fee becomes estimable, assuming all other revenue recognition criteria have been met.

 

To date, the Company has generated revenue from two sources: (1) professional services (consulting & advisory), and (2) technology licensing.

 

Specific revenue recognition criteria for each source of revenue is as follows:

 

(1)Revenues for professional services, which are of short term duration, are recognized when services are provided,
(2)Through September 30, 2014 technology license sales have been one time sales of a perpetual license to manufacture and sell our M-BAND by Boeing (see Note 9). Accordingly revenue is expected to be recognized upon the completion of all terms of that license. Currently the only outstanding term is the conversion of the existing teaming agreement with Boeing into a contract or sub-contract.

    

Convertible Notes With Variable Conversion Options

 

The Company has entered into convertible notes, some of which contain variable conversion options, whereby the outstanding principal and accrued interest may be converted, by the holder, into common shares at a fixed discount to the price of the common stock at the time of conversion. The Company measures the fair value of the notes at the time of issuance, which is the result of the share price discount at the time of conversion, and records the premium as accretion to interest expense to the date of first conversion.

 

Accounting for Derivatives   

 

The Company evaluates its convertible debt, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for.  The result of this accounting treatment is that under certain circumstances the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability.  In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or expense.  Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.  Equity instruments that are initially classified as equity that become subject to reclassification under this accounting standard are reclassified to liability at the fair value of the instrument on the reclassification date.

 

Fair Value of Financial Instruments and Fair Value Measurements

 

The Company measures its financial and non-financial assets and liabilities, as well as makes related disclosures, in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”). For certain of our financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities, the carrying amounts approximate fair value due to their short maturities. Amounts recorded for notes payable, net of discount, also approximate fair value because current interest rates available to the Company for debt with similar terms and maturities are substantially the same.

 

ASC Topic 820 provides guidance with respect to valuation techniques to be utilized in the determination of fair value of assets and liabilities. Approaches include, (i) the market approach (comparable market prices), (ii) the income approach (present value of future income or cash flow), and (iii) the cost approach (cost to replace the service capacity of an asset or replacement cost). ASC Topic 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

Level 1:Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2:Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

Level 3:Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

 

Use of Estimates

 

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 revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates during the reported periods include valuation of goodwill and intangible assets, valuation of derivatives, estimate of the contingent earn-out liability, valuation of stock-based compensation and an estimate of the deferred tax asset valuation allowance.

 

Loss per Common Share

 

Basic and diluted loss per common share for all periods presented is calculated based on the weighted average common shares outstanding for the period. The following potentially dilutive securities were outstanding as of September 30, 2014 and 2013 and were not included in the computation of dilutive loss per common share because the effect would have been anti-dilutive (in thousands):

 

7
 

  

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

 

   September 30, 
   2014   2013 
Convertible preferred stock   49,760    56,018 
Stock options   2,856    409 
Warrants   3,490    1,086 
Unvested restricted shares of common stock   3,432    5,544 
    59,538    63,057 

 

Segment Information

 

The Company operates in a single market segment.

 

Reclassification

 

Certain items previously reported in the consolidated financial statement captions have been reclassified to conform to the current financial statement presentation.

  

3. Acquisitions/Dispositions

 

MicroFluidic Systems Acquisition

 

On May 23, 2011, the Company acquired all of the outstanding capital stock of MFS in a transaction accounted for using the purchase method of accounting (the “Acquisition”).  Since MFS’s inception, its key personnel have had an important role in developing technologies to automate the process of biological pathogen detection.

  

In connection with the Acquisition, the Company is also required to make certain earn-out payments, which as of January 1, 2014 can total up to a maximum of $2,000,000 payable in shares of the Company’s common stock, upon certain conditions being achieved in 2014 (the “Earn-Out Payment”). There was also opportunity for the MFS sellers to achieve Earn-Out Payments in 2011 through 2013.  Targets were not met in either of those three years.  The earn-out for 2014 is based on MFS achieving certain earnings targets for the respective year, subject to a maximum Earn-Out Payment of $2,000,000.  Additionally, approximately two-thirds of the earn-out is capped at $8.00 per share.  Further, the Company is prohibited from making any Earn-Out Payment until stockholder approval is obtained if the aggregate number of shares to be issued exceeds 19.99% of the Company’s common stock outstanding immediately prior to the closing. In the event the Company is unable to obtain any required stockholder approval, the Company is obligated to pay the applicable Earn-Out Payment in cash to the sellers. In addition, the Company may pay any Earn-Out Payment in cash at its option.

 

The estimated purchase price of the Acquisition include the contingent earnout consideration of approximately $750,000. The fair value of the contingent consideration was estimated based upon the present value of the probability-weighted expected future payouts under the earn-out arrangement. On October 31, 2011, the Company entered into an agreement with two of the selling MFS shareholders pursuant to which the two individuals waived their right to any earn-out compensation for 2011 in settlement of the closing working capital adjustment provisions of the purchase agreement. The two individuals, who had a combined ownership interest in MFS of 68% also agreed to receive any future earnout consideration at a price of no lower than $8 per share.

 

Balance of contingent earnout liability as of January 1,2013  $645 
Change in liability during 2013   (131)
Balance of contingent earnout liability as of December 31,2013   514 
Change in liability during nine months ended September 30, 2014   (260)
Balance of contingent earnout liability as of September 30, 2014  $254 

 

Sale of Subsidiary to Related Party

 

On January 11, 2012, VeriTeQ Acquisition Corporation, or VeriTeQ, which is owned and controlled by our former chairman and chief executive officer, Scott Silverman, purchased all of the outstanding capital stock of PositiveID Animal Health, or Animal Health, in exchange for a secured promissory note in the amount of $200,000, or the Note, and 4 million shares of common stock of VeriTeQ representing a 10% ownership interest, to which no value was ascribed. The Note accrued interest at 5% per annum. Payments under the Note were to begin on January 11, 2013 and are due and payable monthly, and the Note matures on January 11, 2015. The Note was secured by substantially all of the assets of Animal Health pursuant to a security agreement dated January 11, 2012, or the VeriTeQ Security Agreement. Mr. Caragol our CEO was a director of VeriTeQ Acquisition Corporation until July 8, 2013. Mr. Krawitz, a director of the Company, was a director of VeriTeQ Acquisition and VeriTeQ Corporation, its successor, until June 17, 2014. 

 

In connection with the sale, we entered into a license agreement with VeriTeQ dated January 11, 2012, or the Original License Agreement, which granted VeriTeQ a nonexclusive, perpetual, nontransferable, license to utilize our biosensor implantable radio frequency identification (RFID) device that is protected under United States Patent No. 7,125,382, “Embedded Bio Sensor System,” or the Patent, for the purpose of designing and constructing, using, selling and offering to sell products or services related to the VeriChip business, but excluding the GlucoChip or any product or application involving blood glucose detection or diabetes management. Pursuant to the Original License Agreement, we were to receive royalties in the amount of 10% on all gross revenues arising out of or relating to VeriTeQ’s sale of products, whether by license or otherwise, specifically relating to the Patent, and a royalty of 20% on gross revenues that are generated under the Development and Supply Agreement between us and Medical Components, Inc., or Medcomp, dated April 2, 2009, to be calculated quarterly with royalty payments due within 30 days of each quarter end. The total cumulative royalty payments under the agreement with Medcomp will not exceed $600,000.

 

8
 

  

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

 

We also entered into a shared services agreement with VeriTeQ on January 11, 2012, or the Shared Services Agreement, pursuant to which we agreed to provide certain services to VeriTeQ in exchange for $30,000 per month. The term of the Shared Services Agreement commenced on January 23, 2012. The first payment for such services is not payable until VeriTeQ receives gross proceeds of a financing of at least $500,000. On June 25, 2012, the Shared Services Agreement was amended, pursuant to which all amounts owed to us under the Shared Services Agreement as of May 31, 2012 were converted into shares of common stock of VeriTeQ. In addition, effective June 1, 2012, the level of shared services was decreased and the monthly charge for the shared services under the Shared Services Agreement was reduced from $30,000 to $12,000. Furthermore, on June 26, 2012, the Original License Agreement was amended pursuant to which the license was converted from a nonexclusive license to an exclusive license, subject to VeriTeQ meeting certain minimum royalty requirements as follows: 2013 $400,000; 2014 $800,000; and 2015 and thereafter $1,600,000.

 

On August 28, 2012, we entered into an Asset Purchase Agreement with VeriTeQ, or the VeriTeQ Asset Purchase Agreement, whereby VeriTeQ purchased all of the intellectual property, including patents and patents pending, related to our embedded biosensor portfolio of intellectual property. Under the VeriTeQ Asset Purchase Agreement, we are to receive royalties in the amount of ten percent (10%) on all gross revenues arising out of or relating to VeriTeQ’s sale of products, whether by license or otherwise, specifically relating to the embedded biosensor intellectual property, to be calculated quarterly with royalty payments due within 30 days of each quarter end. In 2012, there are no minimum royalty requirements. Minimum royalty requirements thereafter, and through the remaining life of any of the patents and patents pending, are identical to the minimum royalties due under the Original License Agreement.

 

Simultaneously with the VeriTeQ Asset Purchase Agreement, we entered into a license agreement with VeriTeQ which granted us an exclusive, perpetual, transferable, worldwide and royalty-free license to the Patent and patents pending that are a component of the GlucoChip in the fields of blood glucose monitoring and diabetes management. In connection with the VeriTeQ Asset Purchase Agreement, the Original License Agreement, as amended June 26, 2012, was terminated. Also on August 28, 2012, the VeriTeQ Security Agreement was amended, pursuant to which the assets sold by us to VeriTeQ under the VeriTeQ Asset Purchase Agreement and the related royalty payments were added as collateral under the Security Agreement.

 

On August 28, 2012, the Shared Services Agreement was further amended, pursuant to which, effective September 1, 2012, the level of services provided was decreased and the monthly charge for the shared services under the Shared Services Agreement was reduced from $12,000 to $5,000. On April 22, 2013, the Company entered into a non-binding letter agreement with VeriTeQ in which the Company agreed to provide up to an additional $60,000 of support during April and May 2013.

 

The new agreements and amendments to existing agreements between the Company and VeriTeQ Acquisition Corporation on August 28, 2012 were entered into to transfer ownership of the underlying intellectual property, primarily patents, to VeriTeQ, with a license back to the Company for the one application that the Company retained. The royalty rates set in the original license were maintained and the rates in the Shared Services Agreement, as amended, were adjusted to reflect a decreased level of support between the two companies. The intent of these agreements and amendments, and all agreements that followed in 2012 through 2013, was to better position VeriTeQ Acquisition Corporation for a third party capital transaction and were negotiated at arm's length. No additional financial consideration was conveyed in conjunction with these agreements and amendments. It was the Company's intent in its transactions with VeriTeQ Corporation to maximize and monetize its returns for the benefit of the Company.

 

On July 8, 2013, the Company entered into a Letter Agreement with VeriTeQ, to amend certain terms of several agreements between PositiveID and VeriTeQ. The Letter Agreement amended certain terms of the Shared Services Agreement entered into between PositiveID and VeriTeQ on January 11, 2012, as amended; the Asset Purchase Agreement entered into on August 28, 2012, as amended; and the Secured Promissory Note dated January 11, 2012.  The Letter Agreement defines the conditions of termination of the Shared Services Agreement, including payment of the approximate $290,000 owed from VeriTeQ to PositiveID, the elimination of minimum royalties payable to PositiveID under the Asset Purchase Agreement, as well as certain remedies if VeriTeQ fails to meet certain sales levels, and to amend the Note, which has a current balance of $228,000, to include a conversion feature under which the Note may be repaid, at VeriTeQ’s option, in equity in lieu of cash. The agreements entered into on July 8, 2013 were negotiated in conjunction with VeriTeQ Acquisition Corporation’s merger transaction with Digital Angel Corporation, resulting in a public company now called VeriTeQ Corporation. The terms of the agreements were made to benefit both the Company and VeriTeQ. The Company benefitted as its equity interest in VeriTeQ became an equity interest in a public company, allowing future realization of the Company’s holdings. No additional financial consideration was conveyed in conjunction with these agreements and amendments. The changes were also a condition to closing of the merger agreement set by Digital Angel, VeriTeQ’s merger partner.     

 

9
 

  

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

 

During October 2013 VeriTeQ arranged a financing with a group of eight buyers (the “Buyers”). In conjunction with that transaction the Buyers offered the Company a choice of either selling its interest in VeriTeQ, including 871,754 shares and its convertible promissory note (which had a balance of $203,694 at the time of the transaction), which was convertible into 135,793 shares of VeriTeQ stock, for $750,000, or alternatively, to lock up its shares for a period of one year. The Board of Directors of the Company considered a number of factors, including the Company’s liquidity and access to capital, and the prospects for return on the VeriTeQ shares in twelve months. The Board concluded that it was in the best interest of Company to sell its interest in VeriTeQ to the Buyers.

 

As a result, on November 8, 2013 the Company entered into a letter agreement (the “November Letter Agreement”) with VeriTeQ and on November 13, 2013, the Company entered into a Stock Purchase Agreement (“SPA”) with the Buyers. On November 13, 2013 VeriTeQ entered into a financing transaction with Hudson Bay Master Fund Ltd. (“Hudson”) and other participants, including most of the Buyers.

 

Pursuant to the November Letter Agreement, VeriTeQ was required to deliver to the Company a warrant to purchase 300,000 shares of VeriTeQ common stock at price of $2.84. The warrant has the same terms as the warrant entered into between Hudson and VeriTeQ, including a term of 5 years and customary pricing reset provisions. The November Letter Agreement also specified that the remaining outstanding payable balance owed from VeriTeQ to the Company would be repaid pursuant to the following schedule: (a) $100,000 paid upon VeriTeQ raising capital in excess of $3 million (excluding the November 18, 2013 financing with Hudson), (b) within 30 and 60 days after the initial $100,000 payment, VeriTeQ shall pay $50,000 each (total of and additional $100,000) to the Company, and (c) the remaining balance of the payable (approximately $12,000) will be paid within 90 days after the initial $100,000 payment. The Letter Agreement also included several administrative corrections to previous agreements between the Company and VeriTeQ.   

 

On October 20, 2014, the Company entered into a GlucoChip and Settlement Agreement (the “GlucoChip Agreement”) with VeriTeQ, the purpose of which is to transfer the final element of the Company’s implantable microchip business to VeriTeQ, to provide for a period of financial support to VeriTeQ to develop that technology, and to provide for settlement of the $222,115 owed by VeriTeQ to the Company under a shared services agreement under which the Company had provided financial support to VeriTeQ during 2012 and early 2013.

 

The GlucoChip Agreement provides for the termination of the License Agreement entered into between the Company and VeriTeQ on August 28, 2012, whereby the Company had retained an exclusive license to the GlucoChip technology. Pursuant to the GlucoChip Agreement, the Company retains its right to any future royalties from the sale of GlucoChip or any other implantable bio-sensor applications. The GlucoChip Agreement also provided for the settlement of the amounts owed pursuant to the Shared Services Agreement entered into between the Company and VeriTeQ on January 11, 2012, as amended. The current outstanding amount of $222,115, pursuant to the Shared Services Agreement was settled by VeriTeQ issuing a Convertible Promissory Note to the Company (“Note I”). Note I bears interest at the rate of 10% per annum; is due and payable on October 20, 2016; and may be converted by the Company at any time after 190 days of the date of closing into shares of VeriTeQ common stock at a conversion price equal to a 40% discount of the average of the three lowest daily trading prices (as set forth in Note I) calculated at the time of conversion. Note I also contains certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under Note I in the event of such defaults. Additionally, pursuant to the GlucoChip Agreement, VeriTeQ has agreed to provide an initial common share reserve of 10,000,000 shares of common stock under its outstanding warrant with the Company. In addition, VeriTeQ has agreed to increase the reserved shares to cover twice the number of shares of common stock due if the warrant were exercised in full and maintain the number of reserved shares of common stock at that level.

 

Pursuant to the GlucoChip Agreement, the Company also agreed to provide financial support to VeriTeQ, for a period of up to two years, in the form of convertible promissory notes. On October 20, 2014, the Company funded VeriTeQ $60,000 and VeriTeQ issued the Company a Convertible Promissory Note (“Note II”) in the principal amount of $60,000. Note II bears interest at the rate of 10% per annum; is due and payable on October 20, 2015; and may be converted by the Company at any time after 190 days of the date of closing into shares of VeriTeQ common stock at a conversion price equal to a 40% discount of the average of the three lowest daily trading prices (as set forth in Note II) calculated at the time of conversion. Note II also contains certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under Note II in the event of such defaults. Pursuant to the GlucoChip Agreement, the Company agreed to provide VeriTeQ with continuing financial support through issuance of additional convertible promissory notes with similar terms and conditions as Note II. The continuing financial support is not required to be more frequent than every 100 days and may not be in excess of $50,000 in any individual note.

 

As VeriTeQ is an early stage company, not yet fully capitalized, the Company plans to continue to fully reserve all note receivable and warrant balances. When proceeds are realized in the future, gains will be recognized.

 

10
 

  

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

 

License of iglucose

 

In February 15, 2013, the Company entered into an agreement the (“SGMC Agreement”) with SGMC, Easy Check, Easy-Check Medical Diagnostic Technologies Ltd., an Israeli company, and Benjamin Atkin, an individual (“Atkin”), pursuant to which the Company licensed its iglucose ™ technology to SGMC for up to $2 million based on potential future revenues of glucose test strips sold by SGMC.  These revenues will range between $0.0025 and $0.005 per strip. A person with diabetes who tests three times per day will use over 1,000 strips per year.

   

Pursuant to the SGMC Agreement, the Company granted SGMC an exclusive right and license to the intellectual property rights in the iglucose patent applications; a non-exclusive right and license to use and make a “white label” version of the iglucose websites; a non-exclusive right and license to use all documents relating to the iglucose 510(k) application to the Food and Drug Administration of the United States Government; and an exclusive right and license to the iglucose trademark. The Company has also agreed to transfer to SGMC all right, title, and interest in the www.iglucose.com and www.iglucose.net domain names.

 

In consideration for the rights and licenses discussed above, and the transfer of the domain names, SGMC shall pay to the Company the amount set forth below for each glucose test strip sold by SGMC and any sublicensees of SGMC for which results are posted by SGMC via its communications servers (the “Consideration”):

  

  (i) $0.0025 per strip sold until SGMC has paid aggregate Consideration of $1,000,000; and
  (ii) $0.005 per strip sold thereafter until SGMC has paid aggregate Consideration of $2,000,000; provided, however, that the aggregate Consideration payable by SGMC pursuant to the SGMC Agreement shall in no event exceed $2,000,000.

 

To date, no royalties have been realized from this agreement.

  

4. Equity and Debt Financing Agreements

 

Ironridge Series F Preferred Stock Financings

 

Beginning in July 2011, the Company entered into a series of financings with Ironridge involving the Company’s Series F convertible preferred stock. Since July 2011 and through September 30, 2014, a total of 3,150 Series F shares have been issued and 2,950 have been converted into common shares. No Series F shares have been redeemed. As of September 30, 2014 there are 200 shares of Series F outstanding.

 

On August 26, 2013, the Company entered into a Stock Purchase Agreement (the “Ironridge Stock Purchase Agreement”) and a Registration Rights Agreement (the “Ironridge Registration Rights Agreement” and, collectively, the “Ironridge Agreements”) with Ironridge Global IV, Ltd., a British Virgin Islands business company (“Ironridge”). Pursuant to the Ironridge Agreements, the Company agreed to issue 450 shares of Series F Preferred Stock (“Series F”) to Ironridge in exchange for $300,000. Additionally, the Company issued 100 shares and 50 shares of Series F as commitment and documentation fees, respectively. During the nine months ended September 30, 2014, these 600 shares of Series F were converted into 22,992,056 shares of common stock.

 

During the three months ended September 30, 2014, the Company converted 300 shares of Series F Preferred Stock into 14,386,197 shares of common stock. Through September 30, 2014, the Company and Ironridge had converted a total of 2,950 shares of Series F Preferred Stock, pursuant to which the Company issued a total of 47,751,499 shares of common stock to the Ironridge Entities.

 

The Company has the option to buy back any shares of Series F at the liquidation value plus accrued dividends, without any premium. The Company also agreed to file a Registration Statement covering the common shares underlying the Series F within 30 days of closing and to use its best efforts to get the Registration Statement effective. As the Registration Statement was not effective within 90 days of closing on January 10, 2014 the Company issued 150 shares of Series F to Ironridge as liquidated damages, for which an expense in the amount of $150,000 has been recorded during the nine months ended September 30, 2014. On February 25, 2014, these 150 shares of Series F were converted into 3,398,389 shares of common stock.

 

On February 27, 2014, the Company entered into a Stock Purchase Agreement with Ironridge. Pursuant to the agreement, the Company agreed to issue 150 shares of Series F to Ironridge in exchange for $100,000. Additionally, the Company issued 50 shares of Series F as commitment and documentation fees, and in March 2014 issued an additional 100 shares of Series F as liquidated damages, for which an expense in the amount of $100,000 was recorded, in fulfillment of its obligations under the agreement. During the nine months ended September 30, 2014, 100 the Series F shares were converted into 5,340,579 shares of common stock. As of September 30, 2014, there are 200 shares of the Series F are outstanding.

  

In connection with the Series F conversions, the Company recorded beneficial conversion dividends totaling $263,000 and $2.5 million during three months ended September 30, 2014 and 2013 and recorded $743,000 and $7 million during nine months ended September 30, 2014 and 2013 which represents the excess of fair value of the Company’s common stock at the date of issuance of the converted Series F Preferred Stock over the effective conversion rate, multiplied by the common shares issued upon conversion. These charges are non-cash charges.

 

11
 

  

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

 

Certificate of Designations for Series F Preferred Stock

 

On July 27, 2011, the Company filed a Certificate of Designations of Preferences, Rights and Limitations of Series F Preferred Stock with the Secretary of State of the State of Delaware. On December 19, 2013 the Certificate of Designations was amended. A summary of the Certificate of Designations, as amended, is set forth below:

 

Dividends and Other Distributions. Commencing on the date of issuance of any such shares of Series F Preferred Stock, holders of Series F Preferred Stock are entitled to receive dividends on each outstanding share of Series F Preferred Stock, which accrue in shares of Series F Preferred Stock at a rate equal to 7.65% per annum from the date of issuance.  Accrued dividends are payable upon redemption of the Series F Preferred Stock.

 

Redemption. The Company may redeem the Series F Preferred Stock, for cash or by an offset against any outstanding note payable from Ironridge Global to the Company that Ironridge Global issued, as follows.  The Company may redeem any or all of the Series F Preferred Stock at any time after the seventh anniversary of the issuance date at the redemption price per share equal to $1,000 per share of Series F Preferred Stock, plus any accrued but unpaid dividends with respect to such shares of Series F Preferred Stock (the “Series F Liquidation Value”).  Prior to the seventh anniversary of the issuance of the Series F Preferred Stock, the Company may redeem the shares at any time after six months from the issuance date at a make-whole price per share equal to the following with respect to such redeemed Series F Preferred Stock: (i) 149.99% of the Series F Liquidation Value if redeemed prior to the first anniversary of the issuance date, (ii) 141.6% of the Series F Liquidation Value if redeemed on or after the first anniversary but prior to the second anniversary of the issuance date, (iii) 133.6% of the Series F Liquidation Value if redeemed on or after the second anniversary but prior to the third anniversary of the issuance date,  (iv) 126.1% of the Series F Liquidation Value if redeemed on or after the third anniversary but prior to the fourth anniversary of the issuance date, (v) 119.0% of the Series F Liquidation Value if redeemed on or after the fourth anniversary but prior to the fifth anniversary of the issuance date, (vi) 112.3% of the Series F Liquidation Value if redeemed on or after the fifth anniversary but prior to the sixth anniversary of the issuance date, and  (vii) 106.0% of the Series F Liquidation Value if redeemed on or after the sixth anniversary but prior to the seventh anniversary of the issuance date.

 

In addition, if the Company determines to liquidate, dissolve or wind-up its business, or engage in any deemed liquidation event, it must redeem the Series F Preferred Stock at the applicable early redemption price set forth above.

 

Conversion.   The Series F Preferred Stock is convertible into shares of the Company’s common stock at the applicable Ironridge Entities option or at the Company’s option at any time after six months from the date of issuance of the Series F Preferred Stock.  The fixed conversion price is equal to $0.50 per share which represented a premium of 32% over the closing price of the Company’s common stock on the trading day immediately before the date the Company announced the entry into the Series F Agreement (the “Series F Conversion Price”).

 

If the Company or Ironridge elects to convert the Series F Preferred Stock into common stock and the closing bid price of the Company’s common stock exceeds 150% of the Series F Conversion Price for any 20 consecutive trading days, the Company will issue that number of shares of its common stock equal to the early redemption price set forth above multiplied by the number of shares subject to conversion, divided by the Series F Conversion Price.  If the Company elects to convert the Series F Preferred Stock into common stock and the closing bid price of the Company’s common stock is less than 150% of the Series F Conversion Price, the Company will issue an initial number of shares of its common stock equal to 130% of the early redemption price set forth above multiplied by the number of shares subject to conversion, divided by the lower of (i) the Series F Conversion Price and (ii) 100% of the closing bid price of a share of the Company’s common stock on the trading day immediately before the date of the conversion notice.

 

After 20 trading days, the Ironridge Entity shall return, or the Company shall issue, a number of conversion shares (the “Series F Reconciling Conversion Shares”), so that the total number of conversion shares under the conversion notice equals the early redemption price set forth above multiplied by the number of shares of subject to conversion, divided by the lower of (i) the Series F Conversion Price and (ii) 85% of the average of the daily volume-weighted average prices of the Company’s common stock for the lowest three is the twenty trading days following the Ironridge Entity’s receipt of the conversion notice.  However, if the trading price of the Company’s common stock during any one or more of the 20 trading days following the Ironridge Entity’s receipt of the conversion notice falls below 70% of the closing bid price on the day prior to the date the Company gives notice of its intent to convert, the Ironridge Entity will return the Series F Reconciling Conversion Shares to the Company and the pro rata amount of the conversion notice will be deemed canceled.

 

The Company cannot issue any shares of common stock upon conversion of the Series F Preferred Stock if it would result in an Ironridge Entity being deemed to beneficially own, within the meaning of Section 13(d) of the Securities Exchange Act, more than 9.99% of the total shares of common stock then outstanding.  Furthermore, until stockholder approval is obtained or the holder obtains an opinion of counsel reasonably satisfactory to the Company and its counsel that such approval is not required, both the holder and the Company are prohibited from delivering a conversion notice if, as a result of such exercise, the aggregate number of shares of common stock to be issued, when aggregated with any common stock issued to holder or any affiliate of holder under any other agreements or arrangements between the Company and the holder or any applicable affiliate of the holder, such aggregate number would, under NASDAQ Marketplace rules (or the rules of any other exchange where the common stock is listed), exceed the Cap Amount (meaning 19.99% of the common stock outstanding on the date of the Series F Agreement). If delivery of a conversion notice is prohibited by the preceding sentence because the Cap Amount would be exceeded, the Company must, upon the written request of the holder, hold a meeting of its stockholders within sixty (60) days following such request, and use its best efforts to obtain the approval of its stockholders for the transactions described herein.

 

12
 

  

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

 

Due to the above variations in the conversion price, the beneficial conversion feature is considered contingent and not measurable or recorded until the actual conversion dates. The beneficial conversion feature is recorded as a constructive dividend and was $743,000 for the nine months ended September 30, 2014.

 

Convertible Note Financings

 

Short-term convertible debt as of September 30, 2014 and December 31, 2013 as follows:

 

   Notes   Accrued
Interest
   Total 
             
Convertible notes with accrued interest accounted for as stock settled debt  $961   $28   $989 
Premium   428        428 
    1,389    28    1,417 
                
Convertible notes with embedded derivatives   1,079    31    1,110 
Derivative discounts   (436)       (436)
    643    31    674 
                
OID and loan fees discount   (98)       (98)
   $1,934   $59   $1,993 

 

 On August 15, 2012, the Company borrowed $100,000 pursuant to a convertible note, in connection with which it issued to the lender immediately exercisable warrants to purchase 111,111 shares of common stock at an initial exercise price of $0.45 per share.  The debt was recorded at a discount in the amount of $32,888, representing the relative fair value of the warrants. Additionally, a liability of $49,000 was recorded as the fair value of the warrant as a result of a down round adjustment to the exercise price of the warrants. In connection with the issuance of the $100,000 note there is a beneficial conversion feature of approximately $25,000, which was amortized over the one year term of the note. During 2013, the note principal and interest was fully converted into an aggregate of 421,656 shares of common stock. All related debt discount and beneficial conversion feature were fully amortized in conjunction with the conversion of the note. On January 15, 2014 the warrants were converted, on a cashless basis, into 1,666,399 shares of common stock.

 

On November 8, 2012, the Company borrowed $100,000 pursuant to a convertible note, in connection with which it issued the lender immediately exercisable warrants to purchase 100,000 shares of common stock at an initial exercise price of $0.50 per share.  As an inducement to enter into the loan the Company issued the lender 74,000 shares of common stock with a fair value of $37,925 at the time of issuance, which was amortized over the one year life of the note.  The debt was recorded at a discount in the amount of $32,683, representing the relative fair value of the warrants. Additionally, a liability of $49,000 was recorded as the fair value of the warrant as a result of a down round adjustment to the exercise price of the warrants. In connection with the issuance of the $100,000 note there was a beneficial conversion feature of approximately $25,000, which will be amortized over the one year term of the note. During 2013, the note principal and interest was fully converted into an aggregate of 1,758,299 shares of common stock. All related debt discount and beneficial conversion feature were fully amortized in conjunction with the conversion of the note. On February 28, 2014 the warrants were converted, on a cashless basis, into 3,051,564 shares of common stock.

 

On February 27, 2013, the Company borrowed $75,000 pursuant to a convertible note, in connection with which it issued the lender immediately exercisable warrants to purchase 68,182 shares of common stock at an initial exercise price of $0.55 per share.  The debt was recorded at a discount in the amount of $28,125, representing the relative fair value of the warrants. Additionally, a liability of $35,687 was recorded as the fair value of the warrant as a result of a down round adjustment to the exercise price of the warrants. In connection with the issuance of the $75,000 note there is a beneficial conversion feature of approximately $18,750, which will be amortized over the one year term of the note. During 2013, the note principal and interest was fully converted into an aggregate of 4,155,937 shares of common stock. All related debt discount and beneficial conversion feature were fully amortized in conjunction with the conversion of the note. During the nine months ended September 30, 2014, the warrants were converted, on a cashless basis, into 2,304,215 shares of common stock.

 

13
 

  

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

 

On June 4, 2013, the Company borrowed $50,000 pursuant to a convertible note, in connection with which it issued the lender immediately exercisable warrants to purchase 104,167 shares of common stock at an initial exercise price of $0.24 per share.  The debt was recorded at a discount in the amount of $23,684, representing the relative fair value of the warrants.  The debt shall accrete in value over its one year term to its face value of approximately $50,000. Additionally, a liability of $23,223 was recorded as the fair value of the warrant as a result of a down round adjustment to the exercise price of the warrants. In connection with the issuance of the $50,000 note there is a beneficial conversion feature of approximately $12,500, which will be amortized over the one year term of the note. In 2013, $47,850 principal balance of the convertible note was converted into 2,600,000 shares of common stock. During the three months ended September 30, 2014, remaining balance of the note principal and interest was fully converted into 725,734 shares of common stock. All related debt discount and beneficial conversion feature were fully amortized in conjunction with the conversion of the note. During the nine months ended September 30, 2014, the warrants were converted, on a cashless basis, into 1,508,848 shares of common stock.

On July 3, 2013, the Company entered into a Securities Purchase Agreement for a new convertible promissory note (the "Purchase Agreement"). Pursuant to the terms of the Purchase Agreement the investor committed to purchase an 8% Convertible Promissory Note (the "Convertible Promissory Note") in the principal amount of $78,500, with a maturity date of April 8, 2014, convertible into shares of common stock, $0.01 par value per share, of the Company, upon the terms and subject to the limitations and conditions set forth in such Convertible Promissory Note. Interest shall commence accruing on the date that the Note is issued and shall be computed on the basis of a 365-day year and the actual number of days elapsed. The holder may convert the Convertible Promissory Note into common shares of stock at a 42% discount to the price of common shares in the ten days prior to conversion. In connection with the issuance of the Convertible Promissory Note, the Company recorded a premium of $56,845 which was amortized over the life of the Note. During the nine months ended September 30, 2014, the outstanding principal and interest on the Convertible Promissory Note was converted, into 5,790,072 shares of common stock.

 

On December 13, 2013, the Company entered into a Securities Purchase Agreement for a new convertible promissory note (the “December Purchase Agreement”). Pursuant to the terms of the December Purchase Agreement the investor committed to purchase an 8% Convertible Promissory Note (the “December Convertible Promissory Note”) in the principal amount of $103,500, with a maturity date of September 17, 2014, convertible into shares of common stock, $0.01 par value per share, of the Company (the “Common Stock”), upon the terms and subject to the limitations and conditions set forth in such December Convertible Promissory Note. Interest shall commence accruing on the date that such note is issued and shall be computed on the basis of a 365-day year and the actual number of days elapsed. The holder may convert the December Convertible Promissory Note into common shares of stock at a 39% discount to the price of common shares in the ten days prior to conversion. In connection with the issuance of the December Convertible Promissory Note, the Company computed a premium of $66,172 all of which was amortized as of June 30, 2014. During the nine months ended September 30, 2014, the outstanding principal and interest on the December Convertible Promissory Note was converted, into 3,294,466 shares of common stock.

 

On January 24, 2014, the Company entered into a Securities Purchase Agreement for a convertible promissory note (the “January Purchase Agreement”). Pursuant to the terms of the January Purchase Agreement the investor committed to purchase an 8% Convertible Promissory Note (the “January Convertible Promissory Note”) in the principal amount of $78,500 with a maturity date of October 28, 2014, convertible into shares Common Stock, upon the terms and subject to the limitations and conditions set forth in such Convertible Promissory Note. Interest shall commence accruing on the date that such note is issued and shall be computed on the basis of a 365-day year and the actual number of days elapsed. The holder may convert the January Convertible Promissory Note into common shares of stock at a 39% discount to the price of common shares in the ten days prior to conversion. In connection with the issuance of the January Convertible Promissory Note, the Company recorded a computed of $50,189 as the note is considered stock settled debt under ASC 480, all of which was amortized as of the nine months ended September 30, 2014. During the nine months ended September 30, 2014, the outstanding principal and interest on the January Convertible Promissory Note was converted, into 3,132,485 shares of common stock.

 

On February 20, 2014, the Company borrowed $82,500 pursuant to a convertible note with an OID of $7,500 resulting in cash received of $75,000. The debt matures twenty four months from the date funded, has a one-time 10% interest charge if not paid within 90 days, and is convertible at the option of the lender into shares of the Company’s common stock at the lesser of $0.042 per share or 60% of the average of the two lowest closing prices in the 25 trading days prior to conversion.  The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the notes, the Company recorded a debt discount of $75,000 which has been fully amortized as of the quarter ended September 30, 2014. During the nine months ended September 30, 2014, $54,564 of the outstanding principal and interest of the Note was converted, into 2,600,000 shares of common stock. As of September 30, 2014, the outstanding principal and interest on the note was $34,798. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $91,061 was recorded when the note was entered into. The derivative liability is remeasured at each balance sheet date and was $28,450 at September 30, 2014.

 

On February 21, 2014, the Company entered into a financing arrangement pursuant to which it borrowed $100,000 in unsecured debt, convertible at the discretion of the lender. The debt was issued at a 10% discount, matures on August 21, 2014, has an interest rate of 10%, and is convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the lowest closing price in the 20 trading days prior to conversion.  In connection with the issuance of the note, the Company computed a premium of $66,667 as the note is considered stock settled debt under ASC 480, all of which was accreted and charged to interest expense in the nine months ended September 30, 2014. During the quarter ended September 30, 2014, the outstanding principal and interest on the Convertible Promissory Note was converted, into 4,149,378 shares of common stock.

 

14
 

  

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

 

 On March 13, 2014, the Company borrowed two notes of $75,000, each from a separate lender with maturity dates of March 4, 2015. Under each agreement the Company received $65,750, which was net of legal and due diligence fees. The notes bear interest at 8% per annum and are convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the lowest closing bid price in the 20 trading days prior to conversion.  The notes might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In conjunction with each note the Company also issued an additional note, of identical terms, each for $75,000. The additional note was paid for by the issuance of a note payable from the lenders to the Company. In the event that the original note is not repaid prior to six months from its issuance, the lender has the option of converting the additional note into shares of the Company’s common stock at a 40% discount to lowest closing bid price in the 20 trading days prior to conversion, subject to the notes payable to the Company having been paid in full.  The additional note payable has been netted with the related note receivable. In connection with the issuance of the notes, the Company computed a premium of $100,000 as the debt is considered a stock settled debt under ASC 480, all of which was amortized during the nine months ended September 30, 2014. During the three months ended September 30, 2014, $59,124 of the principal and interest was converted, into 3,224,359 shares of common stock. The remaining outstanding principal and interest on the notes as of September 30, 2014 was $97,500. On May 5, 2014 one of the $75,000 notes receivable due to the company was paid, for which the Company received $65,750, net of fees. Concurrent with the repayment the Company and the lender entered into two new convertible notes, for $75,000 each, on identical terms to the March 4, 2014 convertible notes. Each of these two notes was paid for by the issuance of notes payable from the lenders to the Company, each for $75,000, on identical terms to the March 4, 2014 notes. These two new notes have been netted for presentation purposes. In connection with the payment of the note receivable to the Company, the Company recorded a premium of $50,000 related to one of the additional notes that had been entered into on March 4, 2014, all of which was amortized as of the nine months ended September 30, 2014. As of September 30, 2014, the outstanding principal and interest on the additional note was $77,433.

 

 On March 24, 2014, the Company borrowed $52,500 with a maturity date of March 19, 2015, pursuant to a financing agreement. Under the agreement the Company received $46,000, which was net of legal and due diligence fees. The note bears interest at 8% per annum and is convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the lowest closing bid price in the 20 trading days prior to conversion.  The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the notes, the Company recorded a premium of $35,000 as the note is considered stock settled debt under ASC 480, all of which was accreted and charged to interest expense in the nine months ended September 30, 2014. As of September 30, 2014, the outstanding principal and interest on the notes was $54,686.

 

On April 7, 2014, the Company borrowed $50,000 with a maturity date of April 4, 2015, pursuant to a financing agreement. Under the agreement the Company received $44,000, which was net of legal and due diligence fees. The note bears interest at 8% per annum and is convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the price of common shares in the twenty days prior to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the note, the Company computed a premium of $33,333 as the note is considered stock settled debt under ASC 480. The amortization expense related to that premium computed in the nine months ended September 30, 2014 was $27,387. As of September 30, 2014, the outstanding principal and interest on the notes was $51,929.

  

On April 14, 2014, the Company borrowed $63,000 with a maturity date of January 2, 2015, pursuant to a financing agreement. Under the agreement the Company received $60,000, which was net of legal fees. The note bears interest at 8% per annum and is convertible at the option of the lender into shares of the Company’s common stock at a 39% discount to the price of common shares in the ten days prior to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the note, the Company computed a premium of $40,279 as the note is considered stock settled debt under ASC 480. The amortization expense related to that premium recorded in the nine months ended September 30, 2014 was $36,795. As of September 30, 2014, the outstanding principal and interest on the notes was $65,334.

 

On April 16, 2014, the Company borrowed $110,000 pursuant to a convertible note with an OID of $10,000 resulting in cash received of $100,000. The debt matures twenty four months from the date funded, has a one-time 10% interest charge if not paid within 90 days, and is convertible at the option of the lender into shares of the Company’s common stock at the lesser of $0.042 per share or 60% of the average of the two lowest closing prices in the 25 trading days prior to conversion.  The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the notes, the Company recorded a debt discount of $139,997. The amortization expense related to that debt discount recorded in the quarter ended September 30, 2014 was $114,997. As of September 30, 2014, the outstanding principal and interest on the notes was $117,161. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $139,997 was recorded when the note was entered into. The derivative liability is remeasured at each balance sheet date and was $96,908 at September 30, 2014.

 

15
 

  

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

 

On April 25, 2014, the Company borrowed $50,000 with a maturity date of January 25, 2015, pursuant to a financing agreement. Under the agreement the Company received $45,000, which was net of legal and due diligence fees. The note bears interest at 8% per annum and is convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the price of common shares in the ten days prior to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the note, the Company computed a premium of $33,333 as the note is considered stock settled debt under ASC 480. The amortization expense related to that premium recorded in the nine months ended September 30, 2014 was $27,387. As of September 30, 2014, the outstanding principal and interest on the notes was $51,732.

 

 On May 30, 2014, the Company borrowed $63,000 with a maturity date of February 27, 2015, pursuant to a financing agreement. Under the agreement the Company received $60,000, which was net of legal fees. The note bears interest at 8% per annum and is convertible at the option of the lender into shares of the Company’s common stock at a 39% discount to the price of common shares in the ten days prior to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the note, the Company computed a premium of $40,279 as the note is considered stock settled debt under ASC 480. The amortization expense related to that premium recorded in the nine months ended September 30, 2014 was $26,780. As of September 30, 2014, the outstanding principal and interest on the notes was $64,698.

 

On June 19, 2014, the Company borrowed of $25,000, with a maturity date of June 17, 2015, pursuant to a financing agreement. Under the agreement the Company received $22,000, which was net of legal and due diligence fees. The notes bear interest at 8% per annum and are convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the lowest closing bid price in the 20 trading days prior to conversion.  The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the note, the Company computed a premium of $16,667 as the note is considered stock settled debt under ASC 480. The amortization expense related to that premium recorded in the nine months ended September 30, 2014 was $9,279. As of September 30, 2014, the outstanding principal and interest on the notes was $25,564.

 

 On June 20, 2014, the Company borrowed $40,000 with a maturity date of June 17, 2015, pursuant to a financing agreement. Under the agreement the Company received $36,000, which was net of legal and due diligence fees. The note bears interest at 8% per annum and is convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the lowest closing bid price in the 20 trading days prior to conversion.  The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the notes, the Company computed a premium of $26,667 as the note is considered stock settled debt under ASC 480. The amortization expense related to that premium recorded in the nine months ended September 30, 2014 was $14,703. As of September 30, 2014, the outstanding principal and interest on the notes was $40,894.

 

On June 18, 2014, the Company borrowed $55,000 with a maturity date of June 17, 2016, pursuant to a convertible note. The debt was issued at a 10% original issue discount resulting in proceeds of $50,000, has an interest rate of 10%, and is convertible at the option of the lender into shares of the Company’s common stock at the lesser of (i) a 40% discount to the lowest closing price in the 20 trading days prior to conversion or (ii) $0.075. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the notes, the Company recorded a debt discount of $50,000 related to the derivative liability. The amortization expense related to that debt discount recorded in the quarter ended September 30, 2014 was $29,278. As of September 30, 2014, the outstanding principal and interest on the notes was $34,623. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $59,623 was recorded when the note was entered into. The derivative liability is remeasured at each balance sheet date and was $56,968 at September 30, 2014.

 

On July 3, 2014, the Company borrowed $115,000 with a maturity date of July 3, 2015, pursuant to a convertible note. Under the agreement the Company received $100,000, which was net of legal and due diligence fees. The Note has an interest rate of 8%, and is convertible at the option of the lender into shares of the Company’s common stock at the lesser of $0.06 per share or a 40% discount of the lowest closing bid prices in the 15 trading days prior to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the notes, the Company recorded a debt discount of $58,571 relating to derivative liability. The amortization expense related to that discount recorded in the quarter ended September 30, 2014 was $88,059. As of September 30, 2014, the outstanding principal and interest on the notes was $117,161. In conjunction with the Note, the Company granted the lender a warrant for 1,000,000 common shares at a strike price of $0.08. The warrant has a life of three years and its relative fair value of $41,429 has been recorded as a debt discount and additional paid in capital at September 30, 2014. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $124,666 related to the derivative liability was recorded when the note was entered into. The derivative liability is remeasured at each balance sheet date and was $109,914 at September 30, 2014.

 

16
 

  

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

 

On July 7, 2014, the Company borrowed $53,000 with a maturity date of March 25, 2015, pursuant to a financing agreement. Under the agreement the Company received $50,000, which was net of legal fees. The note bears interest at 8% per annum and is convertible at the option of the lender into shares of the Company’s common stock at a 39% discount to the price of common shares in the ten days prior to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the note, the Company computed a premium of $33,885 as the note is considered stock settled debt under ASC 480. The amortization expense related to that premium recorded in the quarter ended September 30, 2014 was $16,208. As of September 30, 2014, the outstanding principal and interest on the notes was $54,068.

On July 9, 2014, the Company borrowed $110,000 with a maturity date of July 9, 2015, pursuant to a convertible note. The debt was issued at a 10% original issue discount resulting in proceeds of $90,000, net of legal fees. The note bears an interest rate of 10%, and is convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the lowest closing price during the 15 days prior to the election to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the note, the Company computed a premium of $73,333 as the note is considered stock settled debt under ASC 480. The amortization expense related to that premium recorded in the quarter ended September 30, 2014 was $36,469. As of September 30, 2014, the outstanding principal and interest on the notes was $112,772.

 

On July 17, 2014, the Company borrowed $115,000 with a maturity date of July 17, 2016, pursuant to a convertible note. The debt was issued at a 10% original issue discount resulting in proceeds of $100,000, has an interest rate of 10%, and is convertible at the option of the lender into shares of the Company’s common stock at the lesser of $0.06 per share or a 40% discount of the lowest closing bid prices in the 20 trading days prior to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the notes, the Company recorded a debt discount of $100,000 related to the derivative liability. The amortization expense related to that debt discount recorded in the quarter ended September 30, 2014 was $74,666. As of September 30, 2014, the outstanding principal and interest on the notes was $117,331. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $124,666 was recorded when the note was entered into. The derivative liability is remeasured at each balance sheet date and was $109,912 at September 30, 2014.

 

On August 19, 2014, the Company borrowed $66,000 with a maturity date of August 15, 2015, pursuant to a convertible note. The debt was issued at a 10% original issue discount resulting in proceeds of $54,500, net of legal fees. The Note has an interest rate of 8%, and is convertible at the option of the lender into shares of the Company’s common stock at the lesser of $0.06 per share or a 60% of the average of the three lowest closing bid prices 15 trading days prior to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the notes, the Company recorded a debt discount of $54,500 related to the derivative liability. The amortization expense related to that premium recorded in the quarter ended September 30, 2014 was $30,673. As of September 30, 2014, the outstanding principal and interest on the notes was $66,882. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $71,548 was recorded when the note was entered into. The derivative liability is remeasured at each balance sheet date and was $66,910 at September 30, 2014.

 

On August 21, 2014, the Company borrowed $110,000 with a maturity date of August 21, 2015, pursuant to a convertible note. The debt was issued at a 10% original issue discount resulting in proceeds of $90,000, net of legal fees. The note bears an interest rate of 10%, and is convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the lowest closing price during the 15 days prior to the election to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the note, the Company computed a premium of $73,333 as the note is considered stock settled debt under ASC 480. The amortization expense related to that premium recorded in the quarter ended September 30, 2014 was $24,180. As of September 30, 2014, the outstanding principal and interest on the notes was $111,931.

 

On September 4, 2014, the Company borrowed $110,000 pursuant to a convertible note with an OID of $10,000 resulting in cash received of $100,000.The debt matures twenty four months from the date funded, has a one-time 10% interest charge if not paid within 90 days, and is convertible at the option of the lender into shares of the Company’s common stock at the lesser of $0.042 per share or 60% of the average of the two lowest closing prices in the 25 trading days prior to conversion.  The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the notes, the Company recorded a debt discount of $100,000. As of September 30, 2014, the outstanding principal and interest on the notes was $111,085. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $119,246 was recorded when the note was entered into. The derivative liability is remeasured at each balance sheet date and was $113,937 at September 30, 2014.

 

17
 

  

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

 

On September 11, 2014, the Company borrowed $75,000 pursuant to the back-end note in conjunction with the March 13, 2014 financing agreement. The debt has an interest rate of 10% and the Company received proceeds of $67,750, net of fees, In the event that the original note is not repaid prior to six months from its issuance, the lender has the option of converting the additional note into shares of the Company’s common stock at a 40% discount to lowest closing bid price in the 20 trading days prior to conversion, subject to the notes payable to the Company having been paid in full. In connection with the issuance of the note, the Company computed a premium of $50,000 as the note is considered stock settled debt under ASC 480. The premium has been fully amortized during the quarter ended September 30, 2014. As of September 30, 2014, the outstanding principal and interest on the notes was $75,493.

 

On September 19, 2014, the Company borrowed $55,000 with a maturity date of September 19, 2015, pursuant to a convertible note. The debt was issued at a 10% original issue discount resulting in proceeds of $50,000, has an interest rate of 10%, and is convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the lowest closing price in the 20 trading days prior to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the notes, the Company recorded a debt discount of $50,000 related to the derivative liability. The amortization expense related to that discount recorded in the quarter ended September 30, 2014 was $15,873. As of September 30, 2014, the outstanding principal and interest on the notes was $55,452. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $59,623 was recorded when the note was entered into. The derivative liability is remeasured at each balance sheet date and was $58,115 at September 30, 2014.

 

On September 22, 2014, Company closed a Securities Purchase Agreement providing for the purchase of two Convertible Redeemable Notes in the aggregate principal amount of $100,000, with the first note being in the amount of $50,000 and the second note being in the amount of $50,000. The first note was funded on September 22, 2014, with the Company receiving $45,000 of net proceeds, which was net of legal and due diligence fees. In connection with the issuance of the first note, the Company computed a premium of $33,333 as the note is considered stock settled debt under ASC 480. The amortization expense related to that premium recorded for the quarter ended September 30, 2014 was $5,405 As of September 30, 2014, the outstanding principal and interest on the first note was $50,329.The second note was initially paid for by the issuance of an offsetting $50,000 secured note issued by the lender to the Company. The funding of the second note is subject to certain conditions as described in the second note. The two notes bear interest at the rate of 8% per annum; are due and payable on September 15, 2015; and may be converted at the option of the lender into shares of Company common stock at a conversion price equal to a 40% discount of the lowest closing bid price calculated at the time of conversion. The two notes also contain certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the two Notes in the event of such defaults.

 

On September 22, 2014, the Company borrowed $54,750 with a maturity date of June 19, 2015, pursuant to a financing agreement. Under the agreement the Company received $50,000, which was net of legal and due diligence fees. The note bears interest at 8% per annum and is convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the price of common shares in the ten days prior to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the note, the Company computed a premium of $36,500 as the note is considered stock settled debt under ASC 480. The amortization expense related to that premium recorded in the nine months ended September 30, 2014 was $5,919.As of September 30, 2014, the outstanding principal and interest on the notes was $55,110.

 

Subsequent to September 30, 2014, the Company entered into four new convertible notes totaling $358,000, with proceeds to the Company of $319,000, net of fees. The terms of the notes are substantially similar the Company’s other convertible notes, which carry interest rates between 8% to 10% and have a holder option to convert outstanding principal and interest into common shares of the company at a 40% discount to the price of the common stock at the time of conversion. Additionally, in October 2014, the Company received proceeds of $65,750, net of fees, for a note in conjunction with the March 11, 2014 financing agreement.

 

Debenture Financing

 

Effective as of January 16, 2013, the Company entered into a Securities Purchase Agreement (the “TCA Purchase Agreement”) with TCA Global Credit Master Fund, LP, a Cayman Islands limited partnership (“TCA”), pursuant to which TCA may purchase from the Company up to $5,000,000 senior secured, convertible only upon default, redeemable debentures (the “Debentures”). A $550,000 Debenture was purchased by TCA on January 16, 2013 (the “First Debenture”).

  

18
 

  

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

 

The maturity date of the First Debenture was January 16, 2014, subject to adjustment (the “Maturity Date”). The First Debenture bears interest at a rate of twelve percent (12%) per annum. The Company additionally pays a 7% premium on all scheduled principal payments. The Company, at its option, may repay the principal, interest, fees and expenses due under the Debenture, including a 7% redemption premium on the outstanding principal balance, and in full and for cash, at any time prior to the Maturity Date, with three (3) business days advance written notice to the holder. At any time while the Debenture is outstanding, but only upon the occurrence of an event of default under the TCA Purchase Agreement or any other transaction documents, the holder may convert all or any portion of the outstanding principal, accrued and unpaid interest, redemption premium and any other sums due and payable under the First Debenture or any other transaction document (such total amount, the “Conversion Amount”) into shares of the Company’s common stock at a price equal to (i) the Conversion Amount divided by (ii) eighty-five (85%) of the average daily volume weighted average price of the Company’s common stock during the five (5) trading days immediately prior to the date of conversion. The Debenture also contains a provision whereby TCA may not own more than 4.99% of the Company’s common stock at any one time.

 

As consideration for entering into the TCA Purchase Agreement, the Company paid to TCA (i) a transaction advisory fee in the amount of $22,000, (ii) a due diligence fee equal to $10,000, and (iii) document review and legal fees in the amount of $12,500.

 

As further consideration, the Company agreed to issue to TCA that number of shares of the Company’s common stock that equals $100,000 (the “Incentive Shares”). For purposes of determining the number of Incentive Shares issuable to TCA, the Company’s common stock was valued at the volume weighted average price for the five (5) trading days immediately prior to the date of the TCA Purchase Agreement, as reported by Bloomberg, and 191,388 shares were issued. It is the intention of the Company and TCA that the value of the Incentive Shares shall equal $100,000. In the event the value of the Incentive Shares issued to TCA does not equal $100,000 after a twelve month evaluation date, the TCA Purchase Agreement provides for an adjustment provision allowing for necessary action (either the issuance of additional shares to TCA or the return of shares previously issued to TCA to the Company’s treasury). At the end of the twelve month evaluation date on January 16, 2014, the value of the incentive shares was $12,000 and consequently, the Company was obligated to issue to TCA, see further discussion below. Additionally, the Company paid a broker fee consisting of $22,000 and 52,632 shares of its common stock for arranging this financing. Such fee was recorded as a cost of capital, or reduction to stockholder’s equity.

 

In connection with the TCA Purchase Agreement, the Company entered into a Security Agreement (the “TCA Security Agreement”) with TCA. As security for the Company’s obligations to TCA under the Debentures, the TCA Purchase Agreement and any other transaction document, the TCA Security Agreement grants to TCA a continuing, second priority security interest in all of the Company’s assets and property, wheresoever located and whether now existing or hereafter arising or acquired. This security interest is subordinate to the security interest of The Boeing Company (“Boeing”), who has a secured interest supporting that certain Boeing License Agreement (defined below). (See Note 9)

 

On March 18, 2013, the Company entered into an Intercreditor and Non-Disturbance Agreement (the “Intercreditor Agreement”) among PositiveID and MFS; VeriGreen Energy Corporation, Steel Vault Corporation, IFTH NY Sub, Inc., and IFTH NJ Sub, Inc. Boeing, and TCA. The Intercreditor Agreement sets forth the agreement of Boeing and TCA as to their respective rights and obligations with respect to the Boeing Collateral (as described below) and the TCA Collateral (as described below) and their understanding relative to their respective positions in the Boeing Collateral and the TCA Collateral.

 

The “Boeing Collateral” includes, among other things, all Intellectual Property Rights (as defined in the Intercreditor Agreement) in the M-BAND Technology (as defined in the Intercreditor Agreement), including without limitation certain patents and patent applications set forth in the Intercreditor Agreement. The TCA Collateral includes any and all property and assets of PositiveID. The liens of Boeing on the Boeing Collateral are senior and prior in right to the liens of TCA on the Boeing Collateral and such liens of TCA on the Boeing Collateral are junior and subordinate to the liens of Boeing on the Boeing Collateral.

 

On August 21, 2013, the Company entered into a First Amendment to Securities Purchase Agreement (the “Amendment”) with TCA. Pursuant to the Amendment, principal payments for July through October were deferred and the maturity date for the entire first Debenture was extended to May 16, 2014 and in exchange for this principal holiday, the Company and TCA agreed to increase the outstanding principal balance by $80,000. In connection with this Amendment, the Company accounted for this modification as an extinguishment and recorded a charge to interest expense in the amount of $139,000 during the year ended December 31, 2013, comprised of $59,000 relating to the write-off of unamortized debt discount and the $80,000.

 

Beginning in January 2014 the Company was not current in its payments under the Debenture. On April 3, 2014 TCA sold its rights under the TCA SPA, Debenture, Security Agreement and all related transaction documents to Ironridge, releasing the Company of all of its obligations to TCA, including the obligation to issue the additional $88,000 incentive shares as discussed above.  The sale price paid from Ironridge to TCA was $425,000.  Also on April 3, 2014 the Company and Ironridge amended the Debenture, setting the amount owed as of April 3, 2014 at $425,000, extending the maturity date to April 2, 2015, lowering the interest rate to 3.4% and to amend the formula for conversion of Debenture principal and interest into common shares of the Company.  Pursuant to the amended Debenture, Ironridge has the right, at any time, to request the conversion of principal and accrued interest  into free trading shares of common Stock of the Company at a price equal to: (i) the conversion amount; divided by (ii) an amount, equal to 85% of the closing bid price of the Company's common stock on April 3, 2014, not to exceed 85% of the average of the daily volume weighted average prices of the Company's common Stock for any five of the trading days from April 3, 2014 until the date that the Debenture is paid or converted in full. There was no material gain or loss on this modification. At the time of the amendment the Company recorded a discount of $341,902 relating to a derivative liability of which $256,426 was amortized in the nine months ended September 30, 2014. As of September 30, 2014 the $433,353 balance of the Debenture has been recorded as convertible debt on the balance sheet. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $341,902 was recorded when the Note was amended. The derivative liability is remeasured at each balance sheet date and was $272,986 at September 30, 2014.

 

19
 

 

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

  

Equity Line Financing

 

On May 10, 2013, the Company entered into an investment agreement (the “Investment Agreement”) and a registration rights agreement (the “RRA”) with IBC Funds LLC (“IBC”), a Nevada limited liability company. Pursuant to the terms of the Investment Agreement, IBC committed to purchase up to $5,000,000 of the Company’s common stock over a period of up to thirty-six (36) months. From time to time during the thirty-six (36) month period commencing on the day immediately following the effectiveness of the IBC Registration Statement (defined below), the Company may deliver a drawdown notice to IBC which states the dollar amount that the Company intends to sell to IBC on a date specified in the drawdown notice. The maximum investment amount per notice shall be equal to two hundred percent (200%) of the average daily volume of the common stock for the ten consecutive trading days immediately prior to date of the applicable drawdown notice so long as such amount does not exceed 4.99% of the outstanding shares of the Company’s common stock. The purchase price per share to be paid by IBC shall be calculated at a twenty percent (20%) discount to the average of the three lowest prices of the Company’s common stock during the ten (10) consecutive trading days immediately prior to the receipt by IBC of the drawdown notice.  Additionally, the Investment Agreement provides for a commitment fee to IBC of 104,000 shares of the Company's common stock (the “IBC Commitment Shares”). The IBC Commitment Shares were issued May 10, 2013. Such commitment shares were recorded as a cost of capital, or reduction of shareholder’s equity when issued.

 

Pursuant to the RRA, the Company is obligated to file a registration statement (the “IBC Registration Statement”) with the Securities and Exchange Commission covering the shares of its common stock underlying the Investment Agreement, including the IBC Commitment Shares, within 21 days after the closing of the transaction.  Such IBC Registration Statement was filed on May 10, 2013.

 

On May 10, 2013, the Company entered into a Securities Purchase Agreement with IBC whereby IBC agreed to purchase 40,064, shares of common stock for $12,500.  The proceeds of the sale of the shares will be used to fund the Company’s legal expenses associated with the Investment Agreement.  These shares were included in the IBC Registration Statement filed May 10, 2013. During 2013, the Company issued 4,500,000 shares to IBC under the equity line (inclusive of the commitment shares), for which it received $333,802, net of fees, in proceeds. The Company has no intention of registering any further shares under this equity line, or accessing this equity line in the future.

 

Other Financings

 

On July 9, 2012, the Company issued a Secured Promissory Note (the “H&K Note”) in the principal amount of $849,510 to Holland & Knight LLP (“Holland & Knight”), its external legal counsel, in support of amounts due and owing to Holland & Knight as of June 30, 2012. The H&K Note is non-interest bearing, and principal on the H&K Note is due and payable as soon as practicably possible by the Company. The Company has agreed to remit payment against the H&K Note immediately upon each occurrence of any of the following events: (a) completion of an acquisition or disposition of any of the Company’s assets or stock or any of the Company’s subsidiaries’ assets or stock with gross proceeds in excess of $750,000, (b) completion of any financing with gross proceeds in excess of $1,500,000, (c) receipt of any revenue in excess of $750,000 from the licensing or development of any of the Company’s or the Company’s subsidiaries’ products, or (d) any liquidation or reorganization of the Company’s assets or liabilities. The amount of payment to be remitted by the Company shall equal one-third of the gross proceeds received by the Company upon each occurrence of any of the above events, until the principal is repaid in full. If the Company receives $3,000,000 in gross proceeds in any one financing or licensing arrangement, the entire principal balance shall be paid in full.  The H&K Note was secured by substantially all of the Company’s assets pursuant to a security agreement between the Company and Holland & Knight dated July 9, 2012.  In conjunction with the TCA Purchase Agreement and the Boeing License Agreement (defined below), Holland & Knight agreed to terminate its security interest.  As of September 30, 2014, the Company had repaid $250,000 of the H&K Note and the outstanding balance was $591,010.

 

On September 7, 2012, the Company issued a Secured Promissory Note (the “Caragol Note”) in the principal amount of $200,000 to William J. Caragol (“Caragol”), the Company’s chairman and chief executive officer, in connection with a $200,000 loan to the Company by Caragol. The Caragol Note accrues interest at a rate of 5% per annum, and principal and interest on the Caragol Note are due and payable on September 6, 2013. The Company agreed to accelerate the repayment of principal and interest in the event that the Company raises at least $1,500,000 from any combination of equity sales, strategic agreements, or other loans, with no prepayment penalty for any paydown prior to maturity. The Caragol Note was secured by a subordinated security interest in substantially all of the assets of the Company pursuant to a Security Agreement between the Company and Caragol dated September 7, 2012 (the “Caragol Security Agreement”). The Caragol Note may be accelerated if an event of default occurs under the terms of the Caragol Note or the Caragol Security Agreement, or upon the insolvency, bankruptcy, or dissolution of the Company. In December, 2012, the Company paid $100,000 of the principal amount of the Caragol Note and all accrued interest owed on the date of payment.  In conjunction with the TCA Purchase Agreement and the Boeing License Agreement (defined below), Caragol agreed to terminate his security interest, effective January 16, 2013. As of September 30, 2014, the outstanding principal and interest on the Caragol Note was $109,044.

 

20
 

 

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

  

On June 5, 2013, the Company entered into a Settlement and Agreement and Release (the “Settlement Agreement”) with IBC pursuant to which the Company agreed to issue common stock to in exchange for the settlement of $214,536 (the “Settlement Amount”) of past-due accounts payable of the Company.  IBC purchased the accounts payable from certain vendors of the Company, pursuant to the terms of separate receivable purchase agreements between IBC and each of such vendors (the “Assigned Accounts”). The Assigned Accounts relate to certain legal, accounting, and financial services provided to the Company. The Settlement Agreement became effective and binding upon the Company and IBC upon execution of the Order by the Court on June 7, 2013.

 

Pursuant to the terms of the Settlement Agreement approved by an order from the Circuit Court of the Twelfth Judicial Circuit for Sarasota County, Florida (the “Order”), on June 7, 2013, the Company agreed to issue to IBC shares (the “Settlement Shares”) of the Company’s Common Stock. The Settlement Agreement provides that the Settlement Shares will be issued in one or more tranches, as necessary, sufficient to satisfy the Settlement Amount through the issuance of freely trading securities issued pursuant to Section 3(a)(10) of the Securities Act. Pursuant to the Settlement Agreement, IBC may deliver a request to the Company which states the dollar amount (designated in U.S. Dollars) of Common Stock to be issued to IBC (the “Share Request”). The parties agree that the total amount of Common Stock to be delivered by the Company to satisfy the Share Request shall be issued at a thirty percent (30%) discount to market based upon the average of the volume weighted average price of the Common Stock over the three (3) trading day period preceding the Share Request. Additional tranche requests shall be made as requested by IBC until the Settlement Amount is paid in full so long as the number of shares requested does not make IBC the owner of more than 4.99% of the outstanding shares of Common Stock at any given time. The Company has recorded a charge of $91,944 during 2013 representing the total cost to the company for settling the $214,535 claim by issuing shares of common stock at a 30% discount. During 2013, the entire amount of the settlement was converted into 3,637,681 common shares.

 

Embedded Conversion Option Derivatives

 

Due to the conversion terms of certain promissory notes, the embedded conversion options met the criteria to be bifurcated and presented as derivative liabilities.  The Company calculated the estimated fair values of the liabilities for embedded conversion option derivative instruments at the original note inception dates and as of September 30, 2014 using the Black-Scholes option pricing model using the share prices of the Company’s stock on the dates of valuation and using the following ranges for volatility, expected term and the risk free interest rate at each respective valuation date, no dividend has been assumed for any of the periods:

 

   Note Inception Date   September 30, 2014 
Volatility   188%   188%
Expected Term   0.6 - 1 years    0.03- 0.50 years 
Risk Free Interest Rate   2%   2%

 

The following reflects the initial fair value on the note inception dates and changes in fair value through September 30, 2014:

 

Note inception date fair value allocated to debt discount  $929,973 
Note inception date fair value allocated to other expense   202,358 
Change in fair value in 2014-(gain) loss   (188,068)
Reclassification for converted notes   (30,163)
Embedded conversion option derivative liability fair value on September 30, 2014  $914,100 

  

21
 

 

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

  

Fair Value Measurements

 

We currently measure and report at fair value the liability for embedded conversion option derivatives.  The fair value liabilities for price adjustable convertible debt instruments have been recorded as determined utilizing the BSM option pricing model as previously discussed. The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2014:

 

   Balance at
September
30, 2014
   Quoted
Prices in
Active
Markets for
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
       (Level 1)   (Level 2)   (Level 3) 
Liabilities:                    
Fair value of liability for embedded conversion option derivative instruments  $914,100   $-   $-   $914,100 

 

5. Stock-Based Compensation

 

On August 26, 2011, the Company’s stockholders approved and adopted the PositiveID Corporation 2011 Stock Incentive Plan (the “2011 Plan”). The 2011 Plan provides for awards of incentive stock options, nonqualified stock options, restricted stock awards, performance units, performance shares, SARs and other stock-based awards to employees and consultants. Under the 2011 Plan, up to 1 million shares of common stock may be granted pursuant to awards.

 

A summary of option activity under the Company’s stock incentive plans as of September 30, 2014, and changes during the nine months then ended is presented below (in thousands, except per share amounts):

 

   Number of
Options
   Weighted
Average
Exercise
Price
Per Share
 
Outstanding at January 1, 2014   1,409   $2.83 
Granted   1,450   $0.04 
Exercised      $ 
Forfeited   (3)  $136.13 
Outstanding at September 30, 2014   2,856   $1.26 
Exercisable at September 30, 2014   2,756   $1.31 

 

The Black-Scholes model, which the Company uses to determine compensation expense, requires the Company to make several key judgments including:

 

  the value of the Company’s common stock;
  the expected life of issued stock options;
  the expected volatility of the Company’s stock price;
  the expected dividend yield to be realized over the life of the stock option; and
  the risk-free interest rate over the expected life of the stock options.

 

 The Company’s computation of the expected life of issued stock options was determined based on historical experience of similar awards giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations about employees’ future length of service. The interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. The computation of volatility was based on the historical volatility of the Company’s common stock.

 

A summary of restricted stock outstanding under the Company’s stock incentive plans as of September 30, 2014 and changes during the nine months then ended is presented below (in thousands):

 

Unvested at January 1, 2014   300 
Issued    
Vested   (100)
Forfeited    
Unvested at September 30, 2014   200 

 

22
 

 

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

  

During the three and nine months ended September 30, 2014 the Company issued 2.1 million and 8.1 million restricted shares, respectively, to employees, directors and consultants. The shares issued to employees and directors vest over periods from April 1, 2014 to January 1, 2016. Restricted shares issued to consultants are usually fully vested. As of September 30, 2014 the Company has 3.2 million unvested restricted shares outstanding, not issued under stock incentive plans. During the three and nine months ended September 30, 2014, the Company recorded $119,000 and $771,000 of compensation expense related to restricted shares.

 

As of September 30, 2014, 3.5 million warrants to purchase the Company’s common stock have been granted outside of the Company’s plans, which remain outstanding as of September 30, 2014. These warrants were granted at exercise prices ranging from $0.06 to $22.0 per share, are fully vested and are exercisable for a period from five to seven years.

 

The Company recorded an expense related to stock options, restricted stock issued, and issuance of Series I Preferred to employees and advisors of approximately $0.1 million and $0.2 million for the three months ended September 30, 2014 and 2013, respectively and $1.5 million and $0.6 million for the nine months ended September 30, 2014 and 2013, respectively.

 

As of September 30, 2014 the Company had $0.4 million of unamortized compensation related to stock option and restricted share grants. This compensation will be amortized as an operating expense over the remainder of 2014, and the year ended December 31, 2015.

 

Series I Preferred Stock

 

On September 30, 2013 the Board of Directors authorized and in November 2013 the Company filed with the State of Delaware, a Certificate of Designations of Preferences, Rights and Limitations of Series I Preferred Stock (the “Certificate”). The Series I Preferred Stock ranks junior to the Company’s Series F Preferred Stock and to all liabilities of the Company and is senior to the Common Stock and any other preferred stock. The Series I Preferred Stock has a stated value per share of $1,000, a dividend rate of 6% per annum, voting rights on an as-converted basis and a conversion price equal to the closing bid price of the Company’s Common Stock on the date of issuance. The Series I Preferred Stock is required to be redeemed (at stated value, plus any accrued dividends) by the Company after three years or any time after one year, the Company may at its option, redeem the shares subject to a ten-day notice (to allow holder conversion). The Series I Preferred Stock is convertible into the Company’s Common Stock, at stated value plus accrued dividends, at the closing bid price on September 30, 2013, any time at the option of the holder and by the Company in the event that the Company’s closing stock price exceeds 400% of the conversion price for twenty consecutive trading days. The Company has classified the Series I Preferred Stock as a liability in the consolidated balance sheet due to the mandatory redemption feature. The Series I Preferred Stock has voting rights equal to the number of shares of Common Stock that Series I Preferred Stock is convertible into, times twenty-five. The holders of Series I Preferred Stock will have voting control in situations requiring shareholder vote.

  

On September 30, 2013, the Company issued 413 shares of Series I Preferred Stock to settle $413,000 of accrued and unpaid compensation to its Board of Directors and management (see Note 8), at a conversion price of $0.036, which was the closing bid price on September 30, 2013.  The Series I Preferred Stock will vest on January 1, 2016, subject to acceleration in the event of conversion or redemption. The Series I Preferred may also be converted into common shares in advance of their vesting, at the option of the holder, which in turn accelerates the vesting.

 

On November 5, 2013, the Company filed an Amended and Restated Certificate of Designation of Series I Preferred Stock (the “Amended Certificate of Designation”). The Amended Certificate of Designation was filed to clarify and revise the mechanics of conversion and certain conversion rights of the holders of Series I Preferred Stock. No other rights were modified or amended in the Amended Certificate of Designation.

 

On December 31, 2013, the three independent directors were each granted 25 shares of Series I, as a component of their 2014 board compensation. On January 14, 2014 an additional 512 shares of Series I were issued to the Company’s CEO, President and Senior Vice President. Of these shares 381 were issued to the Company’s chief executive officer as follows: (i) 138 shares issued for 2013 incentive compensation, (ii) 143 shares were issued for his agreement to amend his employment contract and reduce his annual salary from the remainder of the term of the contract to $200,000, per annum, and (iii) 100 shares of Series I as a tax equalization payment to compensate Mr. Caragol for taxes paid on unrealized stock compensation during prior years. All Series I shares granted vest on January 1, 2016. The Series I Preferred may also be converted into common shares in advance of their vesting, at the option of the holder, which in turn accelerates vesting. As such the Company recorded an expense since vesting is at the holder’s option in the amount of $763,000 representing the fair value of the shares during the nine months ended September 30, 2014.

 

23
 

 

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

  

6. Income Taxes

 

The Company had an effective tax rate of nil for the three and nine months ended September 30, 2014 and 2013. The Company incurred losses before taxes for the three and nine months ended September 30, 2014 and 2013. However, it has not recorded a tax benefit for the resulting net operating loss carryforwards, as the Company has determined that a full valuation allowance against its net deferred tax assets was appropriate based primarily on its historical operating results.

 

In July 2008, the Company completed the sale of all of the outstanding capital stock of Xmark to Stanley. In January 2010, Stanley received a notice from the Canadian Revenue Agency (“CRA”) that the CRA would be performing a review of Xmark’s Canadian tax returns for the periods 2005 through 2008.  This review covers all periods that the Company owned Xmark.

 

In February 2011, and as revised on November 9, 2011, Stanley received a notice from the CRA that the CRA completed its review of the Xmark returns and was questioning certain deductions attributable to allocations from related companies on the tax returns under review. In November and December 2011, the CRA and the Ministry of Revenue of the Province of Ontario issued notices of reassessment confirming the proposed adjustments. The total amount of the income tax reassessments for the 2006-2008 tax years, including both provincial and federal reassessments, plus interest, was approximately $1.4 million.

 

On January 20, 2012, the Company received an indemnification claim notice from Stanley related to the matter. The Company did not agree with the position taken by the CRA, and filed a formal appeal related to the matter on March 8, 2012. In addition, on March 28, 2012, Stanley received assessments for withholding taxes on deemed dividend payments in respect of the disallowed management fee totaling approximately $0.2 million, for which we filed a formal appeal on June 7, 2012. In October 2012, the Company submitted a Competent Authority filing to the U.S. IRS seeking relief in the matter. In connection with the filing of the appeals, Stanley was required to remit an upfront payment of a portion of the tax reassessment totaling approximately $950,000. The Company has also filed a formal appeal related to the withholding tax assessments, pursuant to which Stanley was required to remit an additional upfront payment of approximately $220,000. Pursuant to a letter agreement dated March 7, 2012, the Company has agreed to repay Stanley for the upfront payments, plus interest at the rate of five percent per annum, in 24 equal monthly payments beginning on June 1, 2012. To the extent that the Company and Stanley reach a successful resolution of the matter through the appeals process, the upfront payment (or a portion thereof) will be returned to Stanley or the Company as applicable. As of September 30, 2014 the Company had made payments to Stanley of $385,777.

 

On February 28, 2014 the Company received final notice from the CRA. The Company has determined that it will not further appeal the decision in the final notice. The Company and Stanley are in the process of submitting the amended tax returns necessary to effect the final adjustments. Based on management’s estimate the Company’s liability to Stanley is between $350,000 and $500,000. The Company recorded a tax expense of $371,000 for the year ended December 31, 2013 to reflect this adjusted tax obligation to Stanley and has recorded as a tax contingency liability of $500,000 in the accompanying unaudited condensed consolidated financial statements as of September 30, 2014.

 

7. Legal Proceedings

 

The Company is a party to certain legal actions, as either plaintiff or defendant, arising in the ordinary course of business, none of which is expected to have a material adverse effect on the Company’s business, financial condition or results of operations. However, litigation is inherently unpredictable, and the costs and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings, whether civil or criminal, settlements, judgments and investigations, claims or charges in any such matters, and developments or assertions by or against the Company relating to the Company or to the Company’s intellectual property rights and intellectual property licenses could have a material adverse effect on the Company’s business, financial condition and operating results.

 

8.   Employment Contracts and Stock Compensation to Related Parties

 

On December 6, 2011, the Compensation Committee approved a First Amendment to Employment and Non-Compete Agreement (the “First Caragol Amendment”) between the Company and Mr. Caragol in connection with Mr. Caragol’s assumption of the position of Chairman of the Board of the Company effective December 6, 2011. The First Caragol Amendment amends the Employment and Non-Compete Agreement dated November 11, 2010, between the Company and Mr. Caragol and provides for, among other things, the elimination of any future guaranteed raises and bonuses, other than a 2011 bonus of $375,000 to be paid beginning January 1, 2012 in twelve (12) equal monthly payments. This bonus was not paid during 2012 and on January 8, 2013, $300,000 of such bonus was converted into 738,916 shares of our restricted common stock, which vest on January 1, 2016.  The remaining $75,000 was paid through the issuance of Series I Preferred Stock (see below).  The First Caragol Amendment obligates the Company to grant to Mr. Caragol an aggregate of 0.5 million shares of restricted stock over a four-year period as follows: (i) 100,000 shares upon execution of the First Caragol Amendment, which shall vest on January 1, 2014, (ii) 100,000 shares on January 1, 2012, which shall vest on January 1, 2015, (iii) 100,000  shares on January 1, 2013, which shall vest on January 1, 2015, (iv) 100,000 shares on January 1, 2014, which shall vest on January 1, 2016, and (v) 100,000  shares on January 1, 2015, which shall vest on January 1, 2016. Stock compensation expense related to the restricted share grants totaled approximately $101,000 and $271,000 for the nine months ended September 30, 2014 and 2013, respectively. On January 14, 2014, Mr. Caragol’s agreement was further amended, lowering his salary to $200,000 per annum through the remaining term of the agreement in exchange for the issuance of 138 shares of Series I Preferred Stock.

 

24
 

 

POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

  

On February 21, 2013, the Board approved a Tax Equalization Plan to compensate board members for permanent out-of-pocket tax payments incurred by accepting equity compensation in lieu of cash consideration between 2010-2012. The total plan compensation is $510,000 in aggregate and was expensed during 2013.

 

On September 30, 2013, the Board of Directors of the Company agreed to satisfy $1,003,000 of accrued compensation owed to its directors, officers and management (collectively, the “Management”) through a liability reduction plan (the “Plan”). Under this Plan the Company’s Management agreed to accept a combination of PositiveID Corporation Series I Convertible Preferred Stock (the “Series I Preferred Stock”) and to accept the transfer of Company owned shares of common stock in VeriTeQ Corporation (f/k/a Digital Angel Corporation) (“VeriTeQ”), a Delaware corporation, in settlement of accrued compensation.

 

In connection with the Plan $590,000 of accrued compensation was settled through the commitment to transfer 327,778 shares of VeriTeQ common stock (out of the 1,199,532 total shares of VeriTeQ common stock that were issuable to the Company upon the conversion of VeriTeQ’s Series C convertible preferred stock owned by the Company). The Series C conversion was completed on October 22, 2013. The VeriTeQ shares were valued at $1.80 (adjusted to reflect the 1 for 30 reverse split by VeriTeQ on October 22, 2013), which was a 21% discount to the closing bid price on September 30, 2013, to reflect liquidity discount and holding period restrictions.

 

On October 22, 2013, gain of $590,000 was recognized upon the issuance of the 327,778 shares of VeriTeQ Common Stock in relation to the conversion of the VeriTeQ Series C convertible preferred stock.

 

In connection with the Plan, $413,000 of accrued and unpaid compensation was settled through the issuance of 413 shares of the Company’s Series I Preferred Stock. The Series I Preferred Stock is convertible into shares of the Company’s Common Stock, at a conversion price of $0.036 per share, which was the closing bid price on September 30, 2013, and will vest on January 1, 2016, subject to acceleration in the event of conversion or redemption (see Note 5).

 

On September 28, 2012, the employment of Bryan D. Happ, our chief financial officer terminated. In connection with the termination of Happ’s Employment and Non-Compete Agreement dated September 30, 2011, we and Mr. Happ entered into a Separation Agreement and General Release, or the Separation Agreement, on September 28, 2012. Pursuant to the Separation Agreement, Mr. Happ is due to receive payments totaling $404,423, or the Compensation, consisting of past-due accrued and unpaid salary and bonus amounts plus termination compensation. Of the Compensation, $100,000 was paid with 200,000 shares of our restricted common stock (such shares not issued under a stockholder approved plan) and $304,423 was paid in cash. As of September 30, 2014, we have paid $149,134 of the cash balance to Mr. Happ.

 

9.   Agreements with The Boeing Company

 

On December 20, 2012, the Company entered into a Sole and Exclusive License Agreement (the “Boeing License Agreement”), a Teaming Agreement (“Teaming Agreement”), and a Security Agreement (“Boeing Security Agreement”) with The Boeing Company (“Boeing”).

 

The Boeing License Agreement provides Boeing the exclusive license to manufacture and sell PositiveID’s M-BAND airborne bio-threat detector for the U.S. Department of Homeland Security’s BioWatch Generation 3 opportunity, as well as other opportunities (government or commercial) that may arise in the North American market.  As consideration for entering into the Boeing License Agreement, Boeing agreed to pay a license fee of $2.5 million (the “Boeing License Fee”) to the Company in three installments, which were paid in full during 2012 and 2013. The $2.5 million license fee received as of September 30, 2014 has been recorded as deferred revenue.

 

Under the Teaming Agreement, the Company retained exclusive rights to serve as the reagent and assay supplier of the M-BAND systems to Boeing. The Company also retained all rights to sell M-BAND units, reagents and assays in international markets. Upon the Teaming Agreement being terminated or replaced by a contractor subcontract, the Company expects to recognize the deferred revenue related to the Boeing License Agreement.

 

Pursuant to the Boeing Security Agreement, the Company granted Boeing a security interest in all of its assets, including the licensed products and intellectual property rights (as defined in the Boeing License Agreement), to secure the Company’s performance under the Boeing License Agreement.

 

10.   Subsequent Events

 

Subsequent to September 30, 2014, the Company entered into four new convertible notes totaling $358,000, with proceeds to the Company of $319,000, net of fees (see Note 4). In addition, the Company issued approximately 30 million shares in connection with the conversion of approximately $551,000 of convertible promissory notes. The Company also issued approximately 11 million shares pursuant to the preferred stock agreement dated February 28, 2014, in connection with the conversion of the final 200 Series F Preferred Stock.

 

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POSITIVEID CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2014

  

On October 20, 2014 the Company entered into a GlucoChip and Settlement Agreement with VeriTeQ, the purpose of which is to transfer the final element of the Company’s implantable microchip business to VeriTeQ, to provide for a period of financial support to VeriTeQ to develop that technology, and to provide for settlement of the $222,115 owed by VeriTeQ to the Company under a shared services agreement under which the Company had provided financial support to VeriTeQ during 2012 and early 2013 (see Note 3).

 

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Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, without limitation, statements about our market opportunities, our business and growth strategies, our projected revenue and expense levels, possible future consolidated results of operations, the adequacy of our available cash resources, our financing plans, our competitive position and the effects of competition and the projected growth of the industries in which we operate, as well as the following statements:

 

  the expectation that operating losses will continue for the near future, and that until we are able to achieve profits, we intend to continue to seek to access the capital markets to fund the development of our products;

 

  that we seek to structure our research and development on a project basis to allow management of costs and results on a discrete short term project basis, the expectation that doing so may result in quarterly expenses that rise and fall depending on the underlying project status, and the expectation that this method of managing projects may allow us to minimize our firm fixed commitments at any given point in time;

 

  that based on our review of the correspondence and evaluation of the supporting detail involving the Canada Revenue Agency audit, we do not believe that the ultimate resolution of this dispute will have a material negative impact on our historical tax liabilities or results of operations;

 

  that we intend to continue to explore strategic opportunities, including potential acquisition opportunities of businesses that are complementary to ours;

 

  that we do not anticipate declaring any cash dividends on our common stock;

 

  that our ability to continue as a going concern is dependent upon our ability to obtain financing to fund the continued development of our products and working capital requirements;

 

  that we are well positioned to compete for the next generation BioWatch system;

 

  that M-BAND was developed in accordance with DHS guidelines;

 

  that our current cash resources, our expected access to capital under the equity line financing arrangements, and, if necessary, delaying and/or reducing certain research, development and related activities and costs, that we will have sufficient funds available to meet our working capital requirements for the near-term future;

 

  that our products have certain technological advantages, but maintaining these advantages will require continual investment in research and development, and later in sales and marketing;

 

  that if any of our manufacturers or suppliers were to cease supplying us with system components, we would be able to procure alternative sources without material disruption to our business, and that we plan to continue to outsource any manufacturing requirements of our current and under development products;

  

  that medical application of our Firefly Dx product will require FDA clearance;

 

  that we will receive royalties in the amount of ten percent on all gross revenues arising out of or relating to VeriTeQ’s sale of products, whether by license or otherwise, specifically relating to the United States Patent No. 7,125,382, “Embedded Bio Sensor System”, and a royalty of twenty percent on gross revenues generated under the Development and Supply Agreement between us and Medcomp dated April 2, 2009;

 

  that we anticipate recognizing the entire $2.5 million fee under the Boeing License Agreement as revenue in accordance with applicable accounting literature and Securities and Exchange Commission guidance; and

 

  that we will receive royalties related to our license of the iglucose ™ technology to Smart Glucose Meter Corp (“SGMC”) for up to $2 million based on potential future revenues of glucose test strips sold by SGMC.

  

 This Report 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.

 

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Although we believe that the expectations reflected in the forward-looking statements contained in this Report 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 Report 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 Report are discussed under “Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2013 and include:

 

  our ability to predict the extent of future losses or when we will become profitable;

 

  our ability to continue as a going concern;

 

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

 

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

 

  our ability to fund our operations and continued development of our products, including M-BAND  and Firefly;

 

  our ability to obtain and maximize the amount of capital that we will have available to pursue business opportunities;

 

  our ability to obtain patents on our products, the validity, scope and enforceability of our patents, and the protection afforded by our patents;

 

  the potential for 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;

 

  the potential for patent infringement claims to be brought against us asserting that we are violating another party’s intellectual property rights;

 

  our ability to be awarded government contracts;

 

  our ability to establish and maintain proper and effective internal accounting and financial controls;

  our ability to successfully identify strategic partners or acquirers for the GlucoChip and the breath glucose detection system;

  

  our ability to receive royalties under the Asset Purchase Agreement with VeriTeQ;

 

  our ability to pay obligations when due which may result in an event of default under our financing arrangements;

 

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, 2013. 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.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes included in Item 1 of this Report as well as our Annual Report on Form 10-K for the year ended December 31, 2013.

 

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Overview

 

PositiveID develops molecular diagnostic systems for bio-threat detection and rapid medical testing.  The Company also develops fully automated pathogen detection systems and assays to detect a range of biological threats. The Company’s M-BAND (Microfluidic Bio-agent Autonomous Networked Detector) system is an airborne bio-threat detection system developed for the homeland defense industry, to detect biological weapons of mass destruction.  PositiveID is also developing automated pathogen detection systems for rapid diagnostics, both for clinical and point of need applications (the Firefly Dx).

 

Since its inception, and prior to acquisition, PositiveID, through its wholly-owned subsidiary MFS, has received over $50 million in government grants and contract work for the Department of Defense, DHS, the Federal Bureau of Investigation, the National Aeronautics and Space Administration, the Defense Advanced Research Projects Agency and industrial clients.  MFS holds a substantial portfolio of key patents/patents pending primarily for the automation of biological detection using real-time analysis for the rapid, reliable and specific identification of pathogens.

 

Beginning in 2011 and continuing through 2013, as a part of our refocusing our business, we set out to (1) align ourselves with strong strategic partners to prepare our M-BAND product for the DHS’s next generation BioWatch program, which has been estimated to be a $3 billion program over five years; (2) identify a research and development contract to complete the development of our clinical/point of demand diagnostic platform, the Firefly system; and (3) reduce our operating costs to focus solely on those initiatives. The results of these efforts continue on an ongoing basis through 2014.

 

Subsequent to acquiring MFS in 2011, the Company has: (1) sold substantially all of the assets of NationalCreditReport.com, which it had acquired in connection with the Steel Vault Merger in 2011; (2) sold its VeriChip and HealthLink businesses; (3) drastically reduced its operating cost and cash burn; (4) entered into a license agreement and teaming agreement with Boeing for its M-BAND system in the fourth quarter of 2012; (5) executed into an exclusive license for its iglucose technology.  The Company will continue to either seek strategic partners or acquirers for its glucose breath detection technology.

 

Results of Operations

 

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

 

Revenue

 

We reported revenue of $325,000 and nil for the three months ended September 30, 2014 and 2013, respectively. On March 28, 2014 the Company entered into an agreement, in the form of a purchase order, from UTC Aerospace Systems (“UTAS”) to support a contract for the U.S. Department of Defense (“DoD”). Pursuant to the agreement, work commenced in April 2014 and is expected to be completed in early 2015. In July 2014 the Company received an additional purchase order to increase the scope and value of the agreement. The terms of this fixed price agreement include a total value of $1,008,000 to PositiveID, paid in monthly installments between April and October, 2014.

 

This agreement will support the DoD Joint United States Forces Korea Portal and Integrated Threat Recognition (“JUPITR”) Program, which is intended to detect biological threats in order to protect our nation’s warfighters and allies. Under the JUPITR program the DoD will test and evaluate PositiveID’s biological detection and identification product, M-BAND. The assessment will baseline performance, reliability, maintainability, ease of use, and cost of operation to provide the “best of breed” and most affordable options for the U.S. Army and U.S. Air Force.

 

We entered into the Boeing License Agreement in December 2012.  The Company has deferred the $2.5 million received in conjunction with the Boeing License Agreement and anticipates recognizing the entire $2.5 million fee as revenue in accordance with applicable accounting literature and SEC guidance.

 

The Company continues to bid on various potential new U.S. Government contracts; however, there can be no assurance that we will be successful in obtaining any such contracts.

 

Direct Labor

 

Direct labor consists of compensation expense for employees and consultants working directly on the Company’s revenue producing agreements. Direct labor was $103,000 and nil for the three months ended September 30, 2014 and 2013, respectively, related to the contract discussed above, on which work began in April 2014.

 

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. Included in selling, general and administrative expense is all non-cash, equity based compensation. Other significant costs include depreciation and amortization, professional fees for accounting and legal services, consulting fees and facilities costs.

 

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Selling, general and administrative expense increased by $16,000, or 2.4%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. This increase was primarily the result of an increase in for the cost of general and administrative cost in the three months ended September 30, 2014 compared to the three months ended September 30, 2013.

  

Research and Development

 

Our research and development expense consists primarily of labor and materials costs associated with various development projects, including testing, developing prototypes and related expenses. Our research and development costs include payments to our project partners and acquisition of in process research and development.  We seek to structure our research and development on a project basis to allow the management of costs and results on a discrete short term project basis.  This may result in quarterly expenses that rise and fall depending on the underlying project status.  We expect this method of managing projects to allow us to minimize our firm fixed commitments at any given point in time.

 

Research and development expense decreased by $26,000, or 17.5%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The decrease was primarily attributable to the increase in direct labor and the timing of the development expenses related to our molecular diagnostic products.

 

Change in Contingent Earn-Out Liability and Change in Fair Value of Embedded Conversion Option Liability

 

The change in contingent earn-out liability increased by $26,000 or 11.6%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The increase was primarily attributed to the change, or decrease, in the fair-value of the contingent earn-out liability in the three months ended September 30, 2014 as the end of the earn out period (December 31, 2014) approaches.

 

The change in fair value of embedded conversion option liability increased by approximately $14,000 or 100%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The increase was primarily attributed to the change in the fair-value of the derivative liability in the three months ended September 30, 2014.

 

Interest and Other Income (Expense) (net)

 

Interest expense (net) increased by approximately $734,000 or 306%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The increase was primarily attributed to the amortization of fair value premiums and debt discounts related to the increased level of borrowing, through convertible notes, in the three months ended September 30, 2014.

 

Other income decreased by approximately $44,000 or 100%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The decrease was primarily attributed to the reduction of warrant liability in the three months ended September 30, 2014.

 

 Beneficial Conversion Dividend on Preferred Stock

 

Beneficial conversion dividend on preferred stock for the three months ended September 30, 2014 and 2013 was approximately $263,000 and $2.5 million, respectively.  This amount in both periods is a non-cash charge.  The decrease of $2.2 million is primarily the result of decreased Series F preferred conversions during the three months ended September 30, 2014 as compared to the three months ended September 30, 2013.

 

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

 

Revenue

 

We reported revenue of $745,000 and nil for the nine months ended September 30, 2014 and 2013, respectively. On March 28, 2014 the Company entered into an agreement, in the form of a purchase order, from UTAS to support a contract for the DoD. Pursuant to the agreement, work commenced in April 2014 and is expected to be completed in early 2015. In July 2014 the Company received an additional purchase order to increase the scope and value of the agreement. The terms of this fixed price agreement include a total value of $1,008,000 to PositiveID, paid in monthly installments between April and October, 2014.

 

This agreement will support the DoD JUPITR Program, which is intended to detect biological threats in order to protect our nation’s warfighters and allies. Under the JUPITR program the DoD will test and evaluate PositiveID’s biological detection and identification product, M-BAND. The assessment will baseline performance, reliability, maintainability, ease of use, and cost of operation to provide the “best of breed” and most affordable options for the U.S. Army and U.S. Air Force.

 

We entered into the Boeing License Agreement in December 2012.  The Company has deferred the $2.5 million received in conjunction with the Boeing License Agreement and anticipates recognizing the entire $2.5 million fee as revenue in accordance with applicable accounting literature and SEC guidance.

 

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The Company continues to bid on various potential new U.S. Government contracts; however, there can be no assurance that we will be successful in obtaining any such contracts.

 

Direct Labor

 

Direct labor consists of compensation expense for employees and consultants working directly on the Company’s revenue producing agreements. Direct labor was $197,000 and nil for the nine months ended September 30, 2014 and 2013, respectively, related to the contract discussed above, on which work began in April 2014. 


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. Included in selling, general and administrative expense is all non-cash, equity based compensation. Other significant costs include depreciation and amortization, professional fees for accounting and legal services, consulting fees and facilities costs.

  

Selling, general and administrative expense decreased by $95,000, or 2.8%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. This decrease was related to the Company’s continuing efforts to reduce general and administrative expenses.

 

Research and Development

 

Our research and development expense consists primarily of labor and materials costs associated with various development projects, including testing, developing prototypes and related expenses. Our research and development costs include payments to our project partners and acquisition of in process research and development.  We seek to structure our research and development on a project basis to allow the management of costs and results on a discrete short term project basis.  This may result in quarterly expenses that rise and fall depending on the underlying project status.  We expect this method of managing projects to allow us to minimize our firm fixed commitments at any given point in time.

 

Research and development expense decreased by $165,000, or 34%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The decrease was primarily attributable to the increase in direct labor and the timing of the development expenses related to our molecular diagnostic products.

 

Change in Contingent Earn-Out Liability and Change in Fair Value of Embedded Conversion Option Liability

 

The change in contingent earn-out liability increased by $129,000 or 98%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The increase was primarily attributed to the change, or decrease, in the fair-value of the contingent earn-out liability in the nine months ended September 30, 2014 as the end of the earn out period (December 31, 2014) approaches.

 

The change in fair value of embedded conversion option liability increased by approximately $14,000 or 100%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The increase was primarily attributed to the change in the fair-value of the derivative liability in the nine months ended September 30, 2014.

 

Interest and Other Income (Expense) (net)

 

Interest expense increased by approximately $1.3 million or 246%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The increase was primarily attributed to the amortization of fair value premiums and debt discounts related to the increased level of borrowing, through convertible notes, in the nine months ended September 30, 2014.

 

Other income decreased by approximately $169,000 or 104%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The decrease was primarily attributed to the reduction of warrant liability in the nine months ended September 30, 2014.

 

Beneficial Conversion Dividend on Preferred Stock

 

Beneficial conversion dividend on preferred stock for the nine months ended September 30, 2014 and 2013 was approximately $0.7 and $7 million, respectively.  This amount in both periods is a non-cash charge.  The decrease of $6.3 million is primarily the result of decreased Series F preferred conversions during the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013.

 

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Liquidity and Capital Resources

 

As of September 30, 2014, cash and cash equivalents totaled $418,000 compared to cash and cash equivalents of $165,000 at December 31, 2013.

 

Cash Flows from Operating Activities

 

Net cash used in operating activities totaled approximately $1.5 million and $1.4 million during the nine months ended September 30, 2014 and 2013, respectively, primarily to fund operating losses. This increase in cash used in operating activities was primarily the result of efforts to reduce current liabilities.

 

Cash Flows from Investing Activities

 

Net cash used in investing activities was not significant for the nine months ended September 30, 2014 or 2013.

 

Cash Flows from Financing Activities

 

Financing activities provided cash of approximately $1.8 million and $1.4 million during the nine months ended September 30, 2014 and 2013, respectively, primarily related to proceeds from the issuance of convertible notes and the sale of Series F Preferred Stock.

 

Financial Condition

 

As of September 30, 2014, we had a working capital deficiency of approximately $7.4 million and an accumulated deficit of approximately $130.0 million, compared to a working capital deficit of approximately $5.6 million and an accumulated deficit of approximately $124.6 million as of December 31, 2013. The decrease in working capital was primarily due to operating losses for the period, deferral of the Boeing license payments and the reclassification of the tax contingency as a current liability.

 

We have incurred operating losses since our inception. The current operating losses are the result of research and development expenditures, selling, general and administrative expenses related to our projects and products.  We expect our operating losses to continue through at least the next twelve months. These conditions raise substantial doubt about our ability to continue as a going concern.

 

Our ability to continue as a going concern is dependent upon our ability to obtain financing to fund the continued development of our products and to support working capital requirements. Until we are able to achieve operating profits, we will continue to seek to access the capital markets.  In 2013 we raised approximately $1.4 million, net of principal repayments on a debenture, from the issuance of convertible preferred stock, common stock under an equity line financing, and convertible debt. Additionally, in 2013 we collected $1.5 million under our license agreement with Boeing.  For the nine months ended September 30, 2014 we have raised approximately $1.8 million, net, from convertible debt and preferred stock issuances.

 

Additionally, on March 28, 2014 the Company entered into an agreement, amended and augmented in July 2014, in the form of a purchase order, from UTAS to support a contract for the DoD. Pursuant to the agreement, work commenced in April 2014 and is expected to be substantially complete by the end of 2014. The terms of this fixed price agreement include a total value of $1,008,000 to PositiveID, paid in monthly installments between April and October, 2014.

 

During 2014 and 2015, we will need to raise additional capital, including capital not currently available under our current financing agreements in order to execute our business plan.

 

We intend to continue to access capital to provide funds to meet our working capital requirements for the near-term future. In addition and if necessary, we could reduce and/or delay certain discretionary research, development and related activities and costs. However, there can be no assurances that we will be able to derive sufficient funding from past financing sources or be successful in negotiating additional sources of equity or credit for our long-term capital needs.  Our inability to have continuous access to such financing at reasonable costs could materially and adversely impact our financial condition, results of operations and cash flows, and result in significant dilution to our existing stockholders.

 

Off-Balance Sheet Arrangements

 

None.

 

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.

 

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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 Exchange Act as of September 30, 2014. This evaluation (the “disclosure controls evaluation”) was done under the supervision and with the participation of management, including the person(s) performing the function of our chief executive officer (“CEO”) and acting chief financial officer (“CFO”). Rules adopted by the SEC require that in this section of this Report we present the conclusions of the CEO and CFO about the effectiveness of our disclosure controls and procedures as of September 30, 2014 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 Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to our management, including the CEO and acting 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 acting CFO had concluded that, as of September 30, 2014, our disclosure controls and procedures were effective to provide reasonable assurance that the foregoing objectives are achieved.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act that occurred during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

We are a party to certain legal actions, as either plaintiff or defendant, arising in the ordinary course of business, none of which is expected to have a material adverse effect on our business, financial condition or results of operations. However, litigation is inherently unpredictable, and the costs and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings, whether civil or criminal, settlements, judgments and investigations, claims or charges in any such matters, and developments or assertions by or against us relating to the Company or to our intellectual property rights and intellectual property licenses could have a material adverse effect on our business, financial condition and operating results.

 

Item 1A. Risk Factors.

 

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

 

Item 2. Unregistered Sale of Equity Securities.

 

During the three months ended September 30, 2014, we issued shares of our common stock, par value $0.01 per share that were not registered under the Securities Act, and were not previously disclosed in a Current Report on Form 8-K as follows:

 

1.On July 2, 2014, we issued 773,718 shares of our common stock to Asher Enterprises, Inc. in connection with the conversion of a promissory note.

 

2.On July 30, 2014, we issued 1,123,596 shares of our common stock to Asher Enterprises, Inc. in connection with the conversion of a promissory note.

 

3.On July 30, 2014, we issued 5,209,004 of our common shares to Ironridge Global IV, LLC pursuant to the preferred stock agreement dated August 26, 2013.

 

4.On August 5, 2014, we issued 679,245 shares of our common stock to Asher Enterprises, Inc. in connection with the conversion of a promissory note.

 

5.On August 7, 2014, we issued 1,329,644 shares of our common stock to Asher Enterprises, Inc. in connection with the conversion of a promissory note.

 

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6.On August 7, 2014, we issued 2,000,000 shares of our common stock to a consultant pursuant to a consulting agreement. Pursuant to a settlement agreement, these shares will be returned to the Company due to non-performance of agreed upon consulting services.

 

7.On August 18, 2014, we issued 4,024,654 of our common shares to Ironridge Global IV, LLC pursuant to the preferred stock agreement dated August 26, 2013.

 

8.On August 21, 2014, we issued 700,000 shares of our common stock to JMJ Financial in connection with the conversion of a promissory note.

 

9.On August 22, 2014, we issued 100,000 shares of our common stock to a consultant pursuant to a consulting agreement.

 

10.On August 25, 2014, we issued 4,149,378 shares of our common stock to Redwood Fund II, LLC in connection with the conversion of a promissory note.

 

11.On September 4, 2014, we issued 2,000,000 shares of our common stock to a consultant pursuant to a consulting agreement.

 

12.On September 9, 2014, we issued 900,000 shares of our common stock to JMJ Financial in connection with the conversion of a promissory note.

 

13.On September 12, 2014, we issued 5,340,579 of our common shares to Ironridge Global IV, LLC pursuant to the preferred stock agreement dated February 28, 2014.

 

14.On September 15, 2014, we issued 269,350 shares of our common stock to Union Capital, LLC in connection with the conversion of a promissory note.

 

15.On September 16, 2014, we issued 376,344 shares of our common stock to Adar Bays, LLC in connection with the conversion of a promissory note.

 

16.On September 19, 2014, we issued 840,035shares of our common stock to Union Capital, LLC in connection with the conversion of a promissory note.

 

17.On September 23, 2014, we issued 868,767 shares of our common stock to Union Capital, LLC in connection with the conversion of a promissory note.

 

18.On September 24, 2014, we issued 1,000,000 shares of our common stock to JMJ Financial in connection with the conversion of a promissory note.

 

19.On September 29, 2014, we issued 869,863 shares of our common stock to Union Capital, LLC in connection with the conversion of a promissory note.

 

Except as discussed below, the shares of 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. Our reliance on Section 4(2) of the Securities Act was based upon the following factors: (a) the transaction did not involve a public offering; (b) there were only a limited number of offerees; (c) there were no subsequent or contemporaneous public offerings of the securities by us; (d) the securities were not broken down into smaller denominations; and (e) the negotiations for the sale of the stock took place directly between the offeree and us.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

We have listed the exhibits by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K on the Exhibit list attached to this Report.

  

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

POSITIVEID CORPORATION

(Registrant)

     
Date: November 17, 2014 By:   /s/ William J. Caragol
    William J. Caragol
   

Chairman of the Board,

Chief Executive Officer and Acting Chief Financial Officer

(Principal Executive Officer and Acting 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, January 27, 2012, May 31, 2012 and April 18, 2013 (1)
3.2     Amended and Restated By-laws of PositiveID Corporation adopted as of December 12, 2005, as amended on March 16, 2010 (2)
4.1     Amended and Restated Certificate of Designation of the Series I Preferred Stock (3)
4.4     Amended and Restated Certificate of Designation of the Series F Preferred Stock (4)
10.1     Securities Purchase Agreement, dated August 13, 2014, with Toledo Advisors LLC (5)
10.2     First Convertible Promissory Note dated August 13, 2014 with Toledo Advisors LLC (5)
10.3     Second Convertible Promissory Note dated August 13, 2014 with Toledo Advisors LLC (5)
10.4     Financing Agreement, dated June 30, 2014, with Macallan Partners, LLC (5)
10.5     Convertible Debenture, dated June 30, 2014, with Macallan Partners, LLC (5)
10.6     Promissory Note, dated February 20, 2014, with JMJ Financial (6)
10.7     Securities Purchase Agreement, dated September 15, 2014, with Union Capital, LLC (7)
10.8     First 8% Convertible Redeemable Note, dated September 15, 2014, with Union Capital, LLC (7)
10.9     First 8% Convertible Redeemable Note, dated September 15, 2014, with Union Capital, LLC (7)
10.10     Securities Purchase Agreement, dated September 19, 2014, with Auctus Private Equity Fund, LLC (7)
10.11     Convertible Promissory Note, dated September 19, 2014, with Auctus Private Equity Fund, LLC (7)
31.1 *   Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS *   XBRL Instance Document
101.SCH *   XBRL Taxonomy Extension Schema Document
101.CAL *   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF *   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB *   XBRL Taxonomy Extension Label Linkbase Document
101.PRE *   XBRL Taxonomy Extension Presentation Linkbase Document

  

* Filed herewith.
Furnished herewith
(1) Incorporated by reference to the Form 8-K/A previously filed by PositiveID Corporation on April 26, 2013.
(2) Incorporated by reference to the Form 10-K previously filed by PositiveID Corporation on March 19, 2010.
(3) Incorporated by reference to Exhibit 4.1 of the Form 8-K filed by PositiveID Corporation on November 12, 2013.
(4) Incorporated by reference to Exhibit 4.1 of the Form 8-K filed by PositiveID Corporation on December 19, 2013.
(5) Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on August 22, 2014.
(6) Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on September 5, 2014.
(7) Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on September 26, 2014.

 

 

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