Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes
o
No
þ
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
o
No
þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes
þ
No
o
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
þ
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes
o
No
þ
The aggregate market value of the registrant’s common
stock held by non-affiliates of the registrant computed by reference to the price at which the common stock was last sold on the
OTC Bulletin Board on June 30, 2013 was $2,650,203. For purposes of this calculation, shares of common stock held by each officer
and director and by each person who owns 10% or more of the outstanding common stock have been excluded in that such persons may
be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.
At March 17, 2014, 70,500,092 shares of our common stock were outstanding.
This Annual Report on Form 10-K (this
“Annual 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:
This Annual Report on Form 10-K also contains
forward-looking statements attributed to third parties relating to their estimates regarding the size of the future market for
products and systems such as our products and systems, and the assumptions underlying such estimates. Forward-looking statements
include all statements that are not historical facts and can be identified by forward-looking statements such as “may,”
“might,” “should,” “could,” “will,” “intends,” “estimates,”
“predicts,” “projects,” “potential,” “continue,” “believes,” “anticipates,”
“plans,” “expects” and similar expressions. Forward-looking statements are only predictions based on our
current expectations and projections, or those of third parties, about future events and involve risks and uncertainties.
Although we believe that the expectations
reflected in the forward-looking statements contained in this Annual Report on Form 10-K are based upon reasonable assumptions,
no assurance can be given that such expectations will be attained or that any deviations will not be material. In light of these
risks, uncertainties and assumptions, the forward-looking statements, events and circumstances discussed in this Annual Report
on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking
statements. Important factors that could cause our actual results, level of performance or achievements to differ materially from
those expressed or forecasted in, or implied by, the forward-looking statements we make in this Annual Report on Form 10-K are
discussed under “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K and include:
You should not place undue reliance on any
forward-looking statements. In addition, past financial or operating performance is not necessarily a reliable indicator of future
performance, and you should not use our historical performance to anticipate future results or future period trends. Except as
otherwise required by federal securities laws, we disclaim any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained in this Annual Report on Form 10-K to reflect any change in our expectations or any
change in events, conditions or circumstances on which any such statement is based. All forward-looking statements attributable
to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements included in this
Annual Report on Form 10-K.
PART I
Item 1. Business
The Company
PositiveID Corporation,
through its wholly-owned subsidiary Microfluidic Systems (“MFS”) (collectively, the “Company” or “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. The Company is also developing the Firefly Dx, an automated pathogen detection
systems for rapid diagnostics, both for clinical and point of need applications.
PositiveID, formerly
known as VeriChip Corporation, was formed as a Delaware corporation by Digital Angel Corporation, or Digital Angel, in November 2001.
In January 2002, we began our efforts to create a market for radio frequency identification, or RFID, systems that utilize
our human implantable microchip. During the first half of 2005 we acquired two businesses focused on providing RFID systems for
healthcare applications. Those businesses (EXi Wireless and Instantel) were merged in 2007 to form Xmark Corporation, or Xmark,
which was a wholly-owned subsidiary of ours.
On July 18, 2008,
we completed the sale of all of the outstanding capital stock of Xmark, which at the time was principally all of our operations,
to Stanley Canada Corporation, or Stanley, a wholly-owned subsidiary of Stanley Black and Decker. The sale transaction was closed
for $47.9 million in cash, which consisted of the $45 million purchase price plus a balance sheet adjustment of approximately
$2.9 million, which was adjusted to $2.8 million at settlement of the escrow. Under the terms of the stock purchase agreement,
$43.4 million of the proceeds were paid at closing and $4.4 million was released from escrow in July 2009. As a
result, we recorded a gain on the sale of Xmark of $6.2 million, with $4.5 million of that gain deferred until 2009 when
the escrow was settled.
Following the completion
of the sale of Xmark to Stanley, we retired all of our outstanding debt for a combined payment of $13.5 million and settled
all contractual payments to Xmark’s and our officers and management for $9.1 million. On August 28, 2008, we paid
a special dividend to our stockholders of $15.8 million.
On November 12,
2008, we entered into an Asset Purchase Agreement, (“APA”), with Digital Angel Corporation and Destron Fearing Corporation,
a wholly-owned subsidiary of Digital Angel Corporation, which collectively are referred to as, “Digital Angel.” The
terms of the APA included our purchase of patents related to an embedded bio-sensor system for use in humans, and the assignment
of any rights of Digital Angel under a development agreement associated with the development of an implantable glucose sensing
microchip. We also received covenants from Digital Angel Corporation and Destron Fearing that permit the use of intellectual property
of Digital Angel related to our health care business without payment of ongoing royalties, as well as inventory and a limited period
of technology support by Digital Angel. We paid Digital Angel $500,000 at the closing of the APA.
On September 4,
2009, we, VeriChip Acquisition Corp. (the “Acquisition Subsidiary”), a Delaware corporation and our wholly-owned subsidiary
and Steel Vault Corporation (“Steel Vault”), a Delaware corporation signed an Agreement and Plan of Reorganization,
or the Merger Agreement, dated September 4, 2009, as amended, pursuant to which the Acquisition Subsidiary was merged with
and into Steel Vault on November 10, 2009, with Steel Vault surviving and becoming our wholly-owned subsidiary, (the “Merger”).
Upon the consummation of the Merger, each outstanding share of Steel Vault’s common stock, warrants and options was converted
into 12.5 shares of our common stock, warrants and options. At the closing of the Merger, we changed our name to PositiveID Corporation.
On February 11, 2010,
we entered into an asset purchase agreement, (the “EC-APA”), with Easy Check Medical Diagnostics, LLC, or ECMD, whereby
we acquired the assets of ECMD, which included the breath glucose detection system and the
iglucose
wireless communication
system. These products were in the development stage. In exchange for the assets, we issued 12,000 shares of our common stock valued
at approximately $351,000. Additional payment in the form of shares (maximum 8,000 shares) and product royalties may be paid in
the future based on successful patent grants and product or license revenues. On February 24, 2011, we issued 8,000 shares of our
common stock to ECMD to amend the EC-APA.
On May 23, 2011, we
entered into a Stock Purchase Agreement to acquire MFS, pursuant to which MFS became a wholly-owned subsidiary. MFS specializes
in the production of automated instruments for a wide range of applications in the detection and processing of biological samples,
ranging from rapid medical testing to airborne pathogen detection for homeland security.
On April 18, 2013,
our stockholders approved a reverse stock split within a range of between 1-for-10 to 1-for-25. On that same date our Board
of Directors approved a reverse stock split in the ratio of 1-for-25 and we filed a Certificate of Amendment to our 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. On April 23, 2013, the reverse stock split became effective. All share amounts in this Annual Report have
been adjusted to reflect the 1-for 25 reverse stock split.
Beginning with the
acquisition of MFS, the Company began a process to focus its operations on diagnostics and detection. Since acquiring
MFS, the Company has (i) sold substantially all of the assets of NationalCreditReport.com, which it had acquired in connection
with the Steel Vault Merger, (ii) sold its VeriChip and HealthLink businesses (both described below), and (iii) entered into an
exclusive license for its
iglucose
technology. The Company will continue to seek either strategic partners or
acquirers for its GlucoChip and its glucose breath detection system. See “Our Business” under Part I of this Form 10-K
for more information.
Our principal executive offices are located
at 1690 South Congress Avenue, Suite 201, Delray Beach, Florida 33445. Our telephone number is (561) 805-8000. Unless
the context provides otherwise, when we refer to the “Company,” “we,” “our,” or “us”
in this Annual Report on Form 10-K, we are referring to PositiveID Corporation and its consolidated subsidiaries.
GlucoChip is our trademark. This Annual Report
on Form 10-K contains trademarks and trade names of other organizations and corporations.
Available Information
We file or furnish with or to the Securities
and Exchange Commission (“SEC”) our quarterly reports on Form 10-Q, annual reports on Form 10-K, current reports on
Form 8-K, annual reports to stockholders and annual proxy statements and amendments to such filings. Our SEC filings are available
to the public on the SEC’s website at http://www.sec.gov. These reports are also available free of charge from our website
at http://www.positiveidcorp.com as soon as reasonably practicable after we electronically file or furnish such material with or
to the SEC. The information on our website is not incorporated by reference into this Annual Report or any registration
statement that incorporates this Annual Report on Form 10-K by reference.
Our Business
We are focused on the
development of microfluidic systems for the automated preparation of and performance of biological assays in order to detect biological
threats at high-value locations, as well as analyze samples in a medical environment. The Company specializes in the development
and production of automated instruments for detecting and processing biological samples. PositiveID has a substantial portfolio
of intellectual property related to sample preparation and rapid medical testing applications. Since its inception, and prior to
acquisition, MFS has received over $50 million in U.S. Government grants and contracts, primarily from the Department of Homeland
Security, (“DHS”). We have submitted, or are in the process of submitting, bids on various potential U.S. Government
contracts, and are planning to pursue the next generation of DHS’s BioWatch system, which is an autonomous biodetection program
designed to protect the nation against biological threats. The DHS is currently evaluating the timing and status of the next generation
procurement and has estimated the cost of the system at $3.1 billion over a five year period.
Our M-BAND technology,
developed under contract with the U.S. DHS Science & Technology directorate, is a bio-aerosol monitor with fully integrated
systems for sample collection, processing and detection modules. M-BAND continuously and autonomously analyzes air samples
for the detection of pathogenic bacteria, viruses, and toxins for up to 30 days. Results from individual M-BAND instruments
are reported via a secure wireless network in real time to give an accurate and up-to-date status of field conditions. M-BAND performs
high specificity detection for up to six organisms on the Centers for Disease Control’s category A and B select agents list.
MFS has developed and implemented its own biological assays, which is one of its core competencies. Further, we believe M-BAND
was developed in accordance with DHS guidelines.
In December 2012, the
Company entered into a Sole and Exclusive License Agreement, (the “Boeing License Agreement, a Teaming Agreement”),
or Teaming Agreement, and a Security Agreement, or Boeing Security Agreement, with The Boeing Company, or Boeing.
The Boeing License
Agreement provides Boeing the exclusive license to sell PositiveID’s M-BAND airborne bio-threat detector for the DHS BioWatch
next generation opportunity, as well as other opportunities (government or commercial) that may arise in the North American market. As
consideration for entry into the Boeing License Agreement, Boeing paid a license fee of $2.5 million to PositiveID in three installments,
all of which has been paid. Under the Teaming Agreement, and subject to certain conditions, the Company retained the
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. 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.
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., IFTH NJ Sub, Inc. Boeing and TCA Global Credit
Master Fund, L.P., or 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 and clarifies that Boeing’s
lien under the Boeing Security Agreement relates to the Company’s M-BAND technology.
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.
Our Firefly Dx system
is designed to deliver molecular diagnostic results from a sample in less than 30 minutes, which would enable accurate diagnostics
leading to more rapid and effective treatment than what is currently available with existing systems. Firefly is being developed
further for a broad range of biological detection situations including radiation-induced cell damage within the human body and
strains of influenza. The handheld Firefly system has already demonstrated the ability to detect and identify other
common pathogens and diseases such as E. coli, methicillin-resistant staphylococcus aureus and human papilloma virus.
Between 2011 and
2013, we entered into development partnerships and/or acquired or disposed of certain technologies concentrated in the area
of diabetes management and maintained our original business, VeriChip (defined below), in a dormant
status. Those products and their status are as follows:
VeriChip
Through the end of
2011, our business also included the VeriMed system, which uses an implantable passive RFID microchip, (the “VeriChip”).
On January 11, 2012, we contributed certain assets and liabilities related to the VeriChip business, as well as all of our assets
and liabilities relating to our Health Link business, which is a patient-controlled, online repository to store personal health
information, to our wholly-owned subsidiary, PositiveID Animal Health, or Animal Health. We ceased actively marketing the
VeriChip business in January 2008 and the Health Link business in September 2010.
On January 11, 2012,
VeriTeQ Acquisition Corporation, or VeriTeQ, which is owned and controlled by Scott R. Silverman, our former chairman and chief
executive officer, purchased all of the outstanding capital stock of Animal Health in exchange for a secured promissory note in
the amount of $200,000, (the “Note”), and 4 million shares of common stock of VeriTeQ representing a 10% ownership
interest. Our chief executive officer, Mr. Caragol, served on the Board of Directors of VeriTeQ through July 8, 2013. 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.
In connection with
the sale, we entered into a license agreement with VeriTeQ dated January 11, 2012, (“ the Original License Agreement”),
which grants VeriTeQ a license to utilize our bio-sensor implantable RFID device that is protected under United States Patent No.
7,125,382, “Embedded Bio Sensor System,” (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. 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 Patent, and a royalty of twenty percent 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.
The Company
also entered into a shared services agreement with VeriTeQ on January 11, 2012, (the “Shared Service Agreement”)
pursuant to which the Company agreed to provide certain services including accounting, office space, business development,
sales and marketing 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 the Company 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 monthly level of services was reduced and the 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 non-exclusive 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,
the Company entered into an Asset Purchase Agreement with VeriTeQ, (the “VeriTeQ Asset Purchase Agreement”), whereby
VeriTeQ purchased all of the intellectual property, including patents and patents pending, related to the Company’s embedded
biosensor portfolio of intellectual property. Under the VeriTeQ Asset Purchase Agreement, the Company is 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 were no minimum royalty requirements. Minimum royalty requirements
thereafter, and through the remaining life of any of the patents and patents pending, are as follows: (i) 2013 - $400,000; (ii)
2014- $800,000; and 2015-and thereafter - $1,600,000.
Simultaneously with
the VeriTeQ Asset Purchase Agreement, the Company entered into a license agreement with VeriTeQ granting the Company 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 the Company to VeriTeQ under the VeriTeQ Asset Purchase Agreement and the related
royalty payments were added as collateral under the VeriTeQ Security Agreement.
On August 28, 2012,
the Shared Services Agreement was further amended, pursuant to which, effective September 1, 2012, the level of services was reduced
and the monthly charge for the shared services 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.
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 $274,000 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.
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 (the “Board”)
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 SPA,
the Company sold its remaining shares of VeriTeQ common stock (871,754) and the convertible note owed from VeriTeQ to the Company
(convertible into 135,793 shares of VeriTeQ common stock). Total proceeds from the sale were $750,000, which were received by November
18, 2013. On November 13, 2013, the aggregate market value of the 871,754 shares of VeriTeQ common stock was $1.8 million, and
the aggregate market value of 135,793 shares of Common Stock underlying the promissory note was $276,000.
Pursuant to the November
Letter Agreement, VeriTeQ is required to deliver to the Company a warrant to purchase 300,000 shares of VeriTeQ common stock at
price of $2.84. The warrant will have the same terms as the warrant being entered into between Hudson and VeriTeQ, including a
term of 5 years and customary pricing reset provisions. The Company has not yet received the warrant. We have requested the issuance
of the warrant from VeriTeQ owed to PositiveID pursuant to the November Letter Agreement and VeriTeQ has not yet delivered such
warrant. The warrant strike price is currently $2.84 per share, which is significantly out of the money. PositiveID intends to
fully enforce its rights and VeriTeQ’s obligations to deliver the warrant. 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.
iglucose
The
iglucose
system
uses machine to machine technology to automatically communicate a diabetic’s glucose readings to the
iglucose
online
database.
iglucose
is intended to provide next generation, real-time data to improve diabetes management and help ensure
patient compliance, data accuracy and insurance reimbursement. In November 2011, we obtained Federal Drug Administration
of the United States Government (“FDA”), clearance.
On February 15, 2013,
we entered into an agreement, or the SGMC Agreement, with SGMC, Easy Check, Easy-Check Medical Diagnostic Technologies Ltd., an
Israeli company, and Benjamin Atkin, an individual, or Atkin, pursuant to which we licensed our
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.
The parties to the SGMC Agreement were parties to that certain Easy Check Asset Purchase Agreement. We and Atkin were also parties
to a consulting agreement dated as of February 10, 2010, which agreement was terminated upon entry into the SGMC Agreement.
Pursuant to the SGMC
Agreement, we 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 FDA; and an exclusive right and
license to the
iglucose
trademark. We 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 us 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, or 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.
|
GlucoChip
The GlucoChip, a product
that combines a glucose-sensing microtransponder based on our Patent number 7,125,382 entitled “Embedded Bio-Sensor System”
with an in-vivo glucose sensor. Our patent covers a bio-sensor system that utilizes RFID technology, combining wireless communication
with an implantable passively-powered on-chip transponder. We have partnered with Receptors, a technology company whose AFFINITY
by DESIGN™ chemistry platform can be applied to the development of selective binding products, to develop an in-vivo glucose
sensor to detect glucose levels in the human body. The glucose sensor is intended to be coupled with our microchip to read blood
glucose levels through an external scanner. The GlucoChip development is currently on hold while the Company seeks
an industry partner, licensor, or strategic buyer to continue the project.
Breath Glucose Test
The breath glucose
test, currently under development, is a non-invasive glucose detection system that measures acetone levels in a patient’s
exhaled breath. The association between acetone levels in the breath and glucose is well documented, but previous data on the acetone/glucose
correlation has been insufficient for reliable statistics. The breath glucose test detection system combines a proprietary chemical
mixture of sodium nitroprusside with breath exhalate, which is intended to create a new molecular compound that can be measured
with its patent pending technology. We believe that the use of a heavy molecule to generate a chemical reaction that can be reliably
measured may prove the close correlation between acetone concentrations found in a patient’s exhaled breath and glucose found
in his or her blood. This could eliminate a patient’s need to prick his or her finger multiple times per day to get a blood
sugar reading. In the first quarter of 2012, we commenced the first clinical trial of the breath glucose test, which is being held
at Schneider Children’s Medical Center of Israel, a preeminent research hospital. The study is currently on hold pending
a determination by the Company as to the potential changes in the study protocol. The purpose of the clinical study is to assess
the feasibility of the breath glucose test compared to a standard invasive blood glucose meter and to assess the reliability of
the breath glucose test in measuring blood glucose levels under conditions of altered blood glucose levels. The preliminary results
of the first half of the study were non-conclusive. The development of the breath glucose test is currently on hold while the Company
seeks an industry partner, licensor, or a strategic buyer to continue the project.
Sales, Marketing and Distribution
Our sales, marketing
and distribution plan for our healthcare products is to align with large medical distribution companies, and either manufacture
the products to their specification or license the products and underlying technology to them.
Manufacturing; Supply Arrangements
We have historically
outsourced the manufacturing of all the hardware components of our systems to third parties. As of December 31, 2013, we have not
had material difficulties obtaining system components. We believe that if any of our manufacturers or suppliers were to cease supplying
us with system components, we would be able to procure alternative sources without material disruption to our business. We plan
to continue to outsource any manufacturing requirements of our current and under development products.
Environmental Regulation
We must comply with
local, state, federal, and international environmental laws and regulations in the countries in which we do business, including
laws and regulations governing the management and disposal of hazardous substances and wastes. We expect our operations and products
will be affected by future environmental laws and regulations, but we cannot predict the effects of any such future laws and regulations
at this time. Our distributors who place our products on the market in the European Union are required to comply with EU Directive
2002/96/EC on waste electrical and electronic equipment, known as the WEEE Directive. Noncompliance by our distributors with EU
Directive 2002/96/EC would adversely affect the success of our business in that market. Additionally, we are investigating the
applicability of EU Directive 2002/95/EC on the restriction of the use of certain hazardous substances in electrical and electronic
equipment, known as the RoHS Directive which took effect on July 1, 2006. We do not expect the RoHS Directive will have a
significant impact on our business.
Government Regulation
Laws and Regulations Pertaining to
RFID Technologies
The GlucoChip, which
uses our implantable microchip, relies on low-power, localized use of radio frequency spectrum to operate. As a result, we must
comply with U.S. Federal Communications Commission, or FCC, and Industry Canada regulations, as well as the laws and regulations
of other jurisdictions governing the design, testing, marketing, operation and sale of RFID devices if and when we sell our products.
U.S. Federal Communications Commission
Regulations
Under FCC regulations
and Section 302 of the Communications Act, RFID devices must be authorized and comply with all applicable technical standards
and labeling requirements prior to being marketed in the United States. The FCC’s rules prescribe technical, operational
and design requirements for devices that operate on the electromagnetic spectrum at very low powers. The rules ensure that such
devices do not cause interference to licensed spectrum services, mislead consumers regarding their operational capabilities or
produce emissions that are harmful to human health. Our RFID devices are intentional radiators, as defined in the FCC’s rules.
As such, our devices may not cause harmful interference to licensed services and must accept any interference received. We must
construct all equipment in accordance with good engineering design as well as manufacturers’ practices.
Manufacturers of RFID
devices must submit testing results and/or other technical information demonstrating compliance with the FCC’s rules in the
form of an application for equipment authorization. The FCC processes each application when it is in a form acceptable for filing
and, upon grant, issues an equipment identification number. Each of our RFID devices must bear a label which displays the equipment
authorization number, as well as specific language set forth in the FCC’s rules. In addition, each device must include a
user manual cautioning users that changes or modifications not expressly approved by the manufacturer could void the equipment
authorization. As a condition of each FCC equipment authorization, we warrant that each of our devices marked under the grant and
bearing the grant identifier will conform to all the technical and operational measurements submitted with the application. RFID
devices used and/or sold in interstate commerce must meet these requirements or the equipment authorization may be revoked, the
devices may be seized and a forfeiture may be assessed against the equipment authorization grantee. The FCC requires all holders
of equipment authorizations to maintain a copy of each authorization together with all supporting documentation and make these
records available for FCC inspection upon request. The FCC may also conduct periodic sampling tests of equipment to ensure compliance.
We believe we are in substantial compliance with all FCC requirements applicable to our products and systems which are offered
for sale or lease in the United States.
Regulation by the FDA
We expect that the
Firefly Dx in addition to our currently inactive development products (our breath glucose detection device and GlucoChip product)
will require FDA clearance.
FDA Premarket Clearance
and Approval Requirements
. Generally speaking, unless an exemption applies, each medical device we wish to distribute commercially
in the United States will require either prior clearance under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or FFDCA,
or a premarket approval application, or PMA, approved by the FDA. Medical devices are classified into one of three classes —
Class I, Class II or Class III — depending on the degree of risk to the patient associated with the medical
device and the extent of control needed to ensure its safety and effectiveness. Devices deemed to pose low or moderate risks are
placed in either Class I or II, respectively. The manufacturer of a Class II device is required to submit to the FDA
a premarket notification requesting permission to commercially distribute the device and demonstrating that the proposed device
is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28,
1976 for which the FDA has not yet called for the submission of a PMA. This process is known as 510(k) clearance. Devices deemed
by the FDA to pose the greatest risk, such as life-sustaining, life-supporting implantable devices, or devices deemed not substantially
equivalent to a previously cleared 510(k) device, are considered high risk and placed in Class III, requiring premarket approval.
Pervasive and Continuing
Regulation
. After a medical device is placed on the market, numerous regulatory requirements continue to apply. These include:
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quality system regulations, or QSR, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;
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labeling regulations and FDA prohibitions against the promotion of regulated products for uncleared, unapproved or off-label uses;
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clearance or approval of product modifications that could significantly affect safety or effectiveness or that would constitute a major change in intended use;
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medical device reporting, or MDR, regulations, which require that a manufacturer report to the FDA if the manufacturer’s device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur;
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post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device; and
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medical device tracking requirements apply when the failure of the device would be reasonably likely to have serious adverse health consequences.
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Fraud and Abuse
We are subject to various
federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and false claims laws. Violations
of these laws are punishable by criminal and/or civil sanctions, including, in some instances, imprisonment and exclusion from
participation in federal and state healthcare programs, including Medicare, Medicaid and Veterans Affairs health programs. We have
never been challenged by a government authority under any of these laws and believe that our operations are in material compliance
with such laws. However, because of the far-reaching nature of these laws, there can be no assurance that we would not be required
to alter one or more of our practices to be in compliance with these laws. In addition, there can be no assurance that the occurrence
of one or more violations of these laws would not result in a material adverse effect on our financial condition and results of
operations.
Anti-Kickback Laws
We may directly or
indirectly be subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws.
In particular, the federal healthcare program Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual,
or the furnishing, arranging for or recommending a good or service, for which payment may be made in whole or part under federal
healthcare programs, such as the Medicare and Medicaid programs. Penalties for violations include criminal penalties and civil
sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs.
Federal False Claims Act
We may become subject
to the Federal False Claims Act, or FCA. The FCA imposes civil fines and penalties against anyone who knowingly submits or causes
to be submitted to a government agency a false claim for payment. The FCA contains so-called “whistle-blower” provisions
that permit a private individual to bring a claim, called a qui tam action, on behalf of the government to recover payments made
as a result of a false claim. The statute provides that the whistle-blower may be paid a portion of any funds recovered as a result
of the lawsuit.
State Laws and Regulations
Many states have enacted
laws similar to the federal Anti-Kickback Statute and FCA. The Deficit Reduction Act of 2005 contains provisions that give monetary
incentives to states to enact new state false claims acts. The state Attorneys General are actively engaged in promoting the passage
and enforcement of these laws. While the Federal Anti-Kickback Statute and FCA apply only to federal programs, many similar state
laws apply both to state funded and to commercial health care programs. In addition to these laws, all states have passed various
consumer protection statutes. These statutes generally prohibit deceptive and unfair marketing practices, including making untrue
or exaggerated claims regarding consumer products. There are potentially a wide variety of other state laws, including state privacy
laws, to which we might be subject. We have not conducted an exhaustive examination of these state laws.
Laws and Regulations Governing Privacy
and Security
There are various federal
and state laws and rules regulating the protection of consumer and patient privacy. We have never been challenged by
a governmental authority under any of these laws and believe that our operations are in material compliance with such laws. However,
because of the far reaching nature of these laws, there can be no assurance that we would not be required to alter one or more
of our systems and data security procedures to be in compliance with these laws. Our failure to protect health information
received from customers could subject us to civil or criminal liability and adverse publicity and could harm or business and impair
our ability to attract new customers.
U.S. Federal Trade Commission Oversight
An increasing focus
of the United States Federal Trade Commission’s, or FTC, consumer protection regulation is the impact of technological change
on protection of consumer privacy. Under the FTC’s statutory authority to prosecute unfair or deceptive acts and practices,
the FTC vigorously enforces promises a business makes about how personal information is collected, used and secured.
Since 1999, the FTC
has taken enforcement action against companies that do not abide by their representations to consumers of electronic security and
privacy. More recently, the FTC has found that failure to take reasonable and appropriate security measures to protect sensitive
personal information is an unfair practice violating federal law. In the consent decree context, offenders are routinely required
to adopt very specific cyber security and internal compliance mechanisms, as well as submit to twenty years of independent compliance
audits. Businesses that do not adopt reasonable and appropriate data security controls or that misrepresent privacy assurances
to users have been subject to civil penalties as high as $22.5 million.
In 2009, the FTC issued
rules requiring vendors of personal health records to notify customers of any breach of unsecured, individually identifiable health
information. Also, a third party service provider of such vendors or entities that experiences a breach must notify such
vendors or entities of the breach. If we experience a breach of our systems containing personal health records, we will be
required to provide these notices and may be subject to penalties. Violations of these requirements may be prosecuted by
the FTC as an unfair or deceptive act or practice and could result in significant harm to our reputation.
Health Insurance Portability and Accountability
Act of 1996
and the Health Information Technology for Economic and Clinical Health Act of 2009
The Health Insurance
Portability and Accountability Act of 1996 and its implementing regulations, or HIPAA, govern how various entities and individuals
can use and disclose protected health information. If we begin transmitting individually identifiable health information
in connection with certain standard transactions regulated by HIPAA, we would likely have to implement a HIPAA compliance program
to ensure our uses and disclosures of health information are done in accordance with the regulations. Under the federal
Health Information Technology for Economic and Clinical Health Act, (the “HITECH Act”), we may be subject to certain
federal privacy and security requirements relating to individually identifiable health information we maintain. We may be required
to enter into written business associate agreements with certain health care providers and health plans relating to the privacy
and security of protected health information, to the extent our customers are covered entities under HIPAA and to the extent we
receive, use or disclose protected health information on their behalf. Under the HITECH Act, we would be required by federal law
to comply with those business associate agreements, as well as certain privacy and security requirements found in HIPAA and the
HITECH Act as they relate to our activities as a business associate. If we are a covered entity or business associate
under HIPAA and the HITECH Act, compliance with those requirements would require us to, among other things, conduct a risk analysis,
implement a risk management plan, implement policies and procedures, and conduct employee training. The HITECH Act would also require
us to notify patients or our customers, to the extent that they are covered entities subject to HIPAA, of a breach of privacy or
security of individually identifiable health information. Breaches may also require notification to the Department of Health and
Human Services and the media. Experiencing a breach could have a material impact on our reputation. The standards under
HIPAA and the HITECH Act could be interpreted by regulatory authorities in ways that could require us to make material changes
to our operations. Failure to comply with these federal privacy and security laws could subject us to civil and criminal
penalties. Civil penalties can go as high as $50,000 per violation, with an annual maximum of $1.5 million for all violations of
an identical provision in a calendar year.
State Legislation
Many states have privacy
laws relating specifically to the use and disclosure of healthcare information. Federal healthcare privacy laws may preempt state
laws that are less restrictive or offer fewer protections for healthcare information than the federal law if it is impossible to
comply with both sets of laws. More restrictive or protective state laws still may apply to us, and state laws will still apply
to the extent that they are not contrary to federal law. Therefore, we may be required to comply with one or more of these multiple
state privacy laws. Statutory penalties for violation of these state privacy laws varies widely. Violations also may subject us
to lawsuits for invasion of privacy claims, or enforcement actions brought by state Attorneys General. We have not conducted an
exhaustive examination of these state laws.
Many states currently
have laws in place requiring organizations to notify individuals if there has been unauthorized access to certain unencrypted personal
information. Several states also require organizations to notify the applicable state Attorney General or other governmental entity
in the event of a data breach, and may also require notification to consumer reporting agencies if the number of individuals involved
surpasses a defined threshold. We may be required to comply with one or more of these notice of security breach laws in the event
of unauthorized access to personal information. In addition to statutory penalties for a violation of the notice of security breach
laws, we may be exposed to liability from affected individuals.
Title 201, Section 17.00
of the Code of Massachusetts Regulations, or Regulation 201, establishes standards for the protection of personal information
of Massachusetts residents. Under Regulation 201, we may be required to develop, implement and maintain a written information
security program designed to protect such personal information. We may also be required to perform a risk assessment of our existing
safeguards, and improve those areas where there is a reasonably foreseeable risk to the security, confidentiality and/or integrity
of any electronic, paper or other records that contain personal information about Massachusetts residents. Although Regulation
201 itself does not include a remedy provision, the Massachusetts Attorney General may be able to levy fines against us pursuant
to other laws, and we may also be exposed to liability from impacted individuals.
Regulation of Government Bid Process
and Contracting
Contracts with federal
governmental agencies are obtained by MFS primarily through a competitive proposal/bidding process. Although practices vary, typically
a formal Request for Proposal is issued by the governmental agency, stating the scope of work to be performed, length of contract,
performance bonding requirements, minimum qualifications of bidders, selection criteria and the format to be followed in the bid
or proposal. Usually, a committee appointed by the governmental agency reviews proposals and makes an award determination. The
committee may award the contract to a particular bidder or decide not to award the contract. The committees consider a number of
factors, including the technical quality of the proposal, the offered price and the reputation of the bidder for providing quality
care. The award of a contract may be subject to formal or informal protest by unsuccessful bidders through a governmental appeals
process. Our contracts with governmental agencies often require us to comply with numerous additional requirements regarding recordkeeping
and accounting, non-discrimination in the hiring of personnel, safety, safeguarding confidential information, management qualifications,
professional licensing requirements and other matters. If a violation of the terms of an applicable contractual provision occurs,
a contractor may be disbarred or suspended from obtaining future contracts for specified periods of time. We have never been disbarred
or suspended from seeking procurements by any governmental agency.
Health Care Reform
The Patient Protection
and Affordable Care Act, or Affordable Care Act, will likely have a dramatic effect on health care financing and insurance coverage
for Americans. A portion of the Affordable Care Act, referred to as the "Physician Sunshine Payment" provisions,
requires applicable manufacturers and distributors of drugs, devices, biological, or medical supplies covered under Medicare, Medicaid
or the Children's Health Insurance Program to report annually to the Department of Health and Human Services certain payments or
other transfers of value to physicians and teaching hospitals. They also require applicable manufacturers and applicable group
purchasing organizations to report certain information regarding the ownership or investment interests held by physicians or the
immediate family members of physicians in such entities. Final regulations implementing the Physician Sunshine Payment
provisions were issued on February 8, 2013 and are effective on April 9, 2013. The required data must be collected beginning
August 1, 2013 and reported to the Centers for Medicare and Medicaid Services by March 31, 2014. Civil monetary penalties apply
for failure to report payments, transfers of value, or physician ownership interests.. In light of the scope of
health care reform and the Affordable Care Act, and the uncertainties associated with how it will be implemented on the state and
federal level, we cannot predict its impact on the PositiveID at this time.
Interoperability Standards
The HITECH Act requires
meaningful use of certified health information technology products in order to receive certain stimulus payments or incentives
from the federal government. Regulations implementing these meaningful use standards are in various stages of development. There
is an increasing need for health care providers, government agencies, and others in the health care industry to use computer communication
and recordkeeping technology that is compatible with other systems. Many states and providers are developing systems
for health information exchange. To the extent that customers, government entities, and other stakeholders demand that
our products, such as
iglucose
, be compatible with various communication systems, we could be required to incur costs and
delays in developing and upgrading our software and products.
Competitive Conditions
We compete with many
companies in the molecular diagnostics industry and the homeland defense and clinical markets. We believe that Luminex Corporation,
Cepheid and Life Technologies Corporation will be the primary competitors for our products. Key characteristics of our markets
include long operating cycles and intense competition, which is evident through the number of bid protests (competitor protests
of U.S. government procurement awards) and the number of competitors bidding on program opportunities. It is common
in the homeland defense industry for work on major programs to be shared market among a number of companies. A company competing
to be a prime contractor may, upon ultimate award of the contract to another competitor, become a subcontractor for the ultimate
prime contracting company. It is not unusual to compete for a contract award with a peer company and, simultaneously, perform as
a supplier to or a customer of that same competitor on other contracts, or vice versa.
Research and Development
The principal objective
of our research and development program is to develop high-value molecular diagnostic products such as M-BAND and Firefly Dx. We
focus our efforts on four main areas: 1) assay development efforts to design, optimize and produce specific tests that leverage
the systems and chemistry we have developed; 2) target discovery research to identify novel micro RNA targets to be used in the
development of future assays; 3) chemistry research to develop innovative and proprietary methods to design and synthesize oligonucleotide
primers, probes and dyes to optimize the speed, performance and ease-of-use of our assays; and 4) engineering efforts to extend
the capabilities of our systems and to develop new systems. Total research and development expense was $691,000 and $861,000 for
the years ended December 31, 2013 and 2012, respectively.
As of March 17, 2014,
we had 8 full-time employees, of whom 3 were in management, finance and administration, 1 in marketing and business development,
and 4 in research and development. We consider our relationship with our employees to be satisfactory and have not experienced
any interruptions of our operations as a result of labor disagreements. None of our employees are represented by labor unions or
covered by collective bargaining agreements.
Item 1A. Risk Factors
The following risks and the risks described
elsewhere in this Annual Report on Form 10-K, including the section entitled “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” could materially affect our business, prospects, financial condition,
operating results and cash flows. If any these risks materialize, the trading price of our common stock could decline, and you
may lose all or part of your investment.
Risks Related to the Operations and Business of PositiveID
We have a history of losses and expect to incur additional
losses in the future. We are unable to predict the extent of future losses or when we will become profitable
.
For the years ended
December 31, 2013 and 2012, we experienced net losses of $4.3 million and $8.0 million, respectively and our accumulated deficit
at December 31, 2013 was $124.6 million. We reported no revenue or gross profit from continuing operations for the years
ended December 31, 2013 or 2012. Until one or more of the products is successfully brought to market, we do not anticipate generating
significant revenue or gross profit. Further, our subsidiary, MFS, reported no revenue or gross profit during the period
from the date of acquisition of May 23, 2011 through December 31, 2013 as it has had no active contracts during this period. We
have submitted, or are the process of submitting, bids on various potential new U.S. Government contracts; however, there can be
no assurance that we will be successful in obtaining any such new or other contracts.
We expect to continue
to incur operating losses for the near future. Our ability in the future to achieve or sustain profitability is based on a number
of factors, many of which are beyond our control. Even if we achieve profitability in the future, we may not be able to sustain
profitability in subsequent periods.
Our financial statements indicate conditions exist that
raise substantial doubt as to whether we will continue as a going concern.
Our annual audited financial statements
for the years ended December 31, 2013 and 2012 indicate conditions exist that raise substantial doubt as to whether we will continue
as a going concern. Our continuation as a going concern is dependent upon our ability to obtain financing to fund the continued
development of products, and working capital requirements. If we cannot continue as a going concern, our stockholders may lose
their entire investment.
Government contracts and subcontracts
are generally subject to a competitive bidding process that may affect our ability to win contract awards or renewals in the future.
We bid on government
contracts through a formal competitive process in which we may have many competitors. If awarded, upon expiration, these contracts
may be subject, once again, to a competitive renewal process if applicable. We may not be successful in winning contract awards
or renewals in the future. Our failure to renew or replace existing contracts when they expire could have a material adverse effect
on our business, financial condition, or results of operations.
Contracts and subcontracts
with United States government agencies that we may be awarded will be subject to competition and will be awarded on the basis of
technical merit, personnel qualifications, experience, and price. Our business, financial condition, and results of operations
could be materially affected to the extent that U.S. government agencies believe our competitors offer a more attractive combination
of the foregoing factors. In addition, government demand and payment for our products may be affected by public sector budgetary
cycles and funding authorizations, with funding reductions or delays adversely affecting demand for our products. In particular,
the, next generation BioWatch program is a very large program, under which we intend to bid as a subcontractor to The Boeing Company.
Our success in this process is a very important factor in our ability to increase stockholder value.
Compliance with changing regulations
concerning corporate governance and public disclosure may result in additional expenses.
There have been changing
laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act, and new
regulations promulgated by the SEC. These new or changed laws, regulations and standards are subject to varying interpretations
in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with evolving
laws, regulations and standards are likely to continue to result in increased general and administrative expenses and a diversion
of management time and attention from revenue-generating activities to compliance activities. Our board members and executive officers
could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have
difficulty attracting and retaining qualified board members and executive officers, which could harm our business. If our efforts
to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies,
we could be subject to liability under applicable laws or our reputation may be harmed.
Changes in the regulatory environment
could adversely affect our business, financial condition or results of operations.
Our operations are
subject to varying degrees of regulation by the FCC, FDA, other federal, state and local regulatory agencies and legislative bodies.
Adverse decisions or new or amended regulations or mandates adopted by any of these regulatory or legislative bodies could negatively
impact our operations by, among other things, causing unexpected or changed capital investments, lost revenues, increased costs
of doing business, and could limit our ability to engage in certain sales or marketing activities.
We depend on key personnel to manage
our business effectively, and, if we are unable to hire, retain or motivate qualified personnel, our ability to design, develop,
market and sell our systems could be harmed.
Our future success
depends, in part, on certain key employees, including William J. Caragol, our chairman of the board of directors and chief executive
officer and Lyle Probst, president of MFS, and on our ability to attract and retain highly skilled personnel. The loss of the services
of any of our key personnel may seriously harm our business, financial condition and results of operations. In addition, the inability
to attract or retain qualified personnel, or delays in hiring required personnel, particularly operations, finance, accounting,
sales and marketing personnel, may also seriously harm our business, financial condition and results of operations. Our ability
to attract and retain highly skilled personnel will be a critical factor in determining whether we will be successful in the future.
We will continue to incur the expenses
of complying with public company reporting requirements.
We have an obligation
to continue to comply with the applicable reporting requirements of the Exchange Act which includes the filing with the SEC of
periodic reports, proxy statements and other documents relating to our business, financial conditions and other matters, even though
compliance with such reporting requirements is economically burdensome.
Directors, executive officers, principal
stockholders and affiliated entities own a significant percentage of our capital stock, and they may make decisions that you do
not consider to be in the best interests of our stockholders.
As of March 17, 2014,
our current directors and executive officers beneficially owned, in the aggregate, approximately 32.6% of our outstanding voting
securities, including 26.3% owned by our chairman of the board of directors and chief executive officer. As a result,
if some or all of them acted together, they would have the ability to exert substantial influence over the election of the board
of directors and the outcome of issues requiring approval by our stockholders. This concentration of ownership may also have the
effect of delaying or preventing a change in control of the Company that may be favored by other stockholders. This could prevent
transactions in which stockholders might otherwise recover a premium for their shares over current market prices.
The Company’s officers, directors
and management hold preferred shares that give them voting control of the Company.
On September 30, 2013,
the Company issued 413 shares of Series I Preferred Stock to its current officers, directors and management (a total of six people).
On December 31, 2013 and January 14, 2014, an additional 587 shares of Series I was issued for 2013 and 2014 management and
director compensation. Each of the Series I preferred is convertible into the Company’s Common Stock, at stated value
plus accrued dividends, at the closing bid price on the issuance date, 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 Series I Preferred Stock has voting rights equivalent to twenty-five votes per common share equivalent.
The Series I preferred shares issued to all four current members
of the board of directors and management, as follows:
Name
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Position
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Preferred
Series I Issued
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Common Shares
Issuable
Upon
Conversion
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Total
Votes
|
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William J. Caragol
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Chairman and Chief Executive Officer
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631
|
|
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22,845,738
|
|
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|
571,143,457
|
|
|
Michael E. Krawitz
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|
Director
|
|
|
76
|
|
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|
2,468,283
|
|
|
|
61,707,078
|
|
|
Jeffrey S. Cobb
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|
Director
|
|
|
63
|
|
|
|
2,097,199
|
|
|
|
52,429,985
|
|
|
Ned L. Siegel
|
|
Director
|
|
|
39
|
|
|
|
1,412,122
|
|
|
|
35,303,044
|
|
|
Lyle Probst
|
|
President, MFS
|
|
|
140
|
|
|
|
5,265,028
|
|
|
|
131,625,695
|
|
|
Allison F. Tomek
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|
SVP of Corporate Development
|
|
|
51
|
|
|
|
1,849,100
|
|
|
|
46,227,497
|
|
|
Total
|
|
|
1,000
|
|
|
|
35,937,470
|
|
|
|
898,436,756
|
|
As of March 17, 2014,
our officers, directors and management now have an aggregate of 902.0 million votes on any matter brought to a vote of the holders
of our common stock, including an aggregate 898.4 million votes, or 93% of the total vote, through the ownership of Series I Preferred
Stock, and 3.6 million votes through the ownership of shares of our common stock. As a result, our officers, directors, and
management have voting control over the 968.9 million of the outstanding voting shares of the Company.
As a result, our Board
of Directors may, at any time, authorize the issuance of additional common or preferred stock without common stockholder approval,
subject only to the total number of authorized common and preferred shares set forth in our certificate of incorporation. The terms
of equity securities issued by us in future transactions may be more favorable to new investors, and may include dividend and/or
liquidation preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further
dilutive effect. Now that management has voting control over the Company, it also has the ability to approve any increase in the
amount of authorized shares of common or preferred stock; thus there are no limitations on management’s ability to continue
to make dilutive issuances of securities.
Risks Related to Our Product Development
Efforts
We anticipate future losses and will
require additional financing, and our failure to obtain additional financing when needed could force us to delay, reduce or eliminate
our product development programs or commercialization efforts.
We anticipate future
losses and therefore may be dependent on additional financing to execute our business plan. In particular, we will require additional
capital to continue to conduct the research and development and obtain regulatory clearances and approvals necessary to bring any
future products to market and to establish effective marketing and sales capabilities for existing and future products. Our operating
plan may change, and we may need additional funds sooner than anticipated to meet our operational needs and capital requirements
for product development, clinical trials and commercialization. Additional funds may not be available when we need them on terms
that are acceptable to us, or at all. If adequate funds are not available on a timely basis, we may terminate or delay the development
of one or more of our products, or delay establishment of sales and marketing capabilities or other activities necessary to commercialize
our products.
Our future capital
requirements will depend on many factors, including: the research and development of our molecular diagnostic products, the costs
of expanding our sales and marketing infrastructure and manufacturing operations; the degree of success we experience in potential monetizing
the in vivo glucose-sensing RFID microchip and the breath glucose detection system; the number and types of future products
we develop and commercialize; the costs, timing and outcomes of regulatory reviews associated with our current and future product
candidates; the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual
property-related claims; and the extent and scope of our general and administrative expenses.
Our industry changes rapidly as a
result of technological and product developments, which may quickly render our product candidates less desirable or even obsolete.
If we are unable or unsuccessful in supplementing our product offerings, our revenue and operating results may be materially adversely
affected.
The industry in which
we operate is subject to rapid technological change. The introduction of new technologies in the market, including the delay in
the adoption of these technologies, as well as new alternatives for the delivery of products and services will continue to have
a profound effect on competitive conditions in this market. We may not be able to develop and introduce new products, services
and enhancements that respond to technological changes on a timely basis. If our product candidates are not accepted by the market
as anticipated, if at all, our business, operating results, and financial condition may be materially and adversely affected.
Risks Occasioned by the Xmark Transaction
We may be liable for pre-closing
period tax obligations of Xmark.
In January 2010,
Stanley, who purchased Xmark from us, received a notice from the Canadian Revenue Agency, (the “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 we 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 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, we received an indemnification claim notice from Stanley related to the matter. We do 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 fees
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, we have agreed to repay Stanley for the upfront payment, plus interest at the rate of five percent per annum, in 24
equal monthly payments beginning on June 1, 2012. To the extent that we 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 us as
applicable. As of December 31, 2013 the Company had made payments to Stanley of $385,777 and had a remaining balance owed to
Stanley of $819,677 related to their upfront payments to CRA in 2012 prior to the final notice received on February 28, 2014
from the CRA, see below.
On February 28, 2014
the Company received final notice from the CRA. The final notice accepted a portion of the Company’s previously disallowed
deductions and disallowed others. 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 approximately $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 as of December 31, 2013. Based
on our review of the correspondence and evaluation of the supporting detail, we believe that we have adequately accrued for the
liability resulting from the final notice.
Industry and Business Risks Related to Our Legacy Healthcare
Businesses
We may never achieve market acceptance or significant
sales of our healthcare products or systems.
Through December 31,
2013, substantially all of our healthcare products (VeriChip, iglucose, GlucoChip and the glucose breath detection device) were
under development and had generated only nominal revenue. Further, we had ceased making new investment in these four products in
2012 and have sold VeriChip, licensed iglucose and are seeking partners for the glucose breath detection device and GlucoChip.
We may never achieve more than nominal or modest profits from these products and systems.
We and our development partner Receptors
are in the early stages of developing an in vivo glucose-sensing RFID microchip, the effectiveness of which is unproven.
We and our development
partner, Receptors, have been engaged in the research and development of applying Receptors’ patented AFFINITY by DESIGNTM
CARATM platform to the research and development of an in vivo glucose-sensing RFID microchip. That development program is currently
dormant, the effectiveness of this sensor/microchip system is yet to be determined. As a result, there can be no assurance that
we and Receptors will be able to successfully employ this development-stage product as a diagnostic solution for the detection
of glucose in vivo. Any failure to establish the efficacy or safety of this development-stage product could have an adverse effect
on our efforts to monetize the in vivo glucose-sensing RFID microchip.
Our efforts to monetize the in vivo glucose-sensing RFID
microchip, and breath glucose detection system may not be successful.
These products
are in the early stages of development, and are therefore prone to the risks of failure inherent in diagnostic product development.
We or Receptors may be required to complete and undertake significant clinical trials to demonstrate to the FDA that these products
are safe and effective to the satisfaction of the FDA and other non-United States regulatory authorities for their respective,
intended uses, or are substantially equivalent in terms of safety and effectiveness to existing, lawfully-marketed, non-premarket
approved devices. Clinical trials are expensive and uncertain processes that often take years to complete. Failure can occur at
any stage of the process, and successful early positive results do not ensure that the entire clinical trial or later clinical
trials will be successful. Product candidates in clinical-stage trials may fail to show desired efficacy and safety traits despite
early promising results. If the research and development activities of us or Receptors do not result in commercially-viable products,
our business, results of operations, financial condition, and stock price could be adversely affected.
Even if the FDA or
similar non-United States regulatory authorities grant us regulatory approval of a product, the approval may take longer than we
anticipate and may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements
for costly post-marketing follow up studies. Moreover, if we fail to comply with applicable regulatory requirements, we may be
subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions
and criminal prosecution.
Implantation of our implantable microchip may be found
to cause risks to a person’s health, which could adversely affect sales of our systems that incorporate the implantable microchip
.
The implantation of
our implantable VeriChip, may be found, or be perceived, to cause risks to a person’s health. Potential or perceived risks
include adverse tissue reactions, migration of the microchip and infection from implantation. There have been articles published
asserting, despite numerous studies to the contrary, that the implanted microchip causes malignant tumor formation in laboratory
animals. If more people are implanted with our implantable microchip, it is possible that these and other risks to health will
manifest themselves. Actual or perceived risks to a person’s health associated with the microchip implantation process could
result in negative publicity could damage our business reputation, leading to loss in sales of our other systems targeted at the
healthcare market which would harm our business and negatively affect our prospects.
In connection with
its acquisition of our VeriChip business, VeriTeQ agreed to indemnify us for any liabilities relating to our implantable microchip.
If VeriTeQ is unable to fulfill indemnity obligations, we would be responsible for payment of such liabilities, which could have
a material adverse impact on our financial condition.
Risks Related to Our Common Stock
Future sales of capital stock may
cause our stock price to fall, including the resale of shares by the Ironridge Entities pursuant to financing agreements.
The market price of
our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market, or the
perception that these sales could occur. These sales might also make it more difficult for us to sell equity securities at a time
and price that we deem appropriate. As of March 17, 2014, we had 70,500,092 shares of common stock outstanding and we had
warrants to purchase 2,606,327 shares of common stock and options to purchase 1,409,399 shares of common stock outstanding.
All of the shares of common stock issuable upon exercise of our outstanding warrants and any vested options will be freely tradable
without restriction under the federal securities laws unless sold by our affiliates.
On July 28, 2011, we
sold 272,479 shares of our common stock to Ironridge Global Technology under the common stock purchase agreement between us and
Ironridge Global Technology dated July 27, 2011. We also sold to Ironridge Global III, LLC, or Ironridge Global, 1,500 shares of
our Series F Preferred Stock under the preferred stock purchase agreement dated July 27, 2011. On July 12, 2012, we
issued an additional 500 shares of Series F Preferred Stock to Ironridge Technology Co. (a division of Ironridge Global IV, Ltd.)
or Ironridge (and together with Ironridge Global Technology and Ironridge Global, the “Ironridge Entities”), under
the purchase agreement between us and Ironridge dated July 12, 2012. The Series F Preferred Stock was issued in satisfaction of
any obligation of the Company to issue the success fee shares as provided for in the securities purchase agreement entered into
between the Company and Ironridge dated January 13, 2012, which terminated on April 26, 2012 by its terms. On September
12, 2012, the Company entered into a purchase agreement with Ironridge pursuant to which the Company issued 100 shares of Series
F Preferred Stock to Ironridge as a waiver to satisfy any penalties resulting from the Company’s late delivery of shares
under a conversion of Series F Preferred Stock by Ironridge. On August 26, 2013, we issued Ironridge 600 shares of Series
F Preferred Stock pursuant to the Ironridge Stock Purchase Agreement. On January 10, 2014, we issued 150 shares of Series F Preferred
Stock as penalty pursuant to the Letter Agreement dated December 18, 2013. Through March 17, 2014, the Ironridge Entities had converted
2,350 shares of Series F Preferred Stock into 25,050,475 shares of our common stock. As of March 17, 2014, there were 700
shares of Series F Preferred Stock outstanding, all of which are held by Ironridge Entities.
While shares of our
common stock may be issuable to the Ironridge Entities upon conversion of the Series F Preferred Stock, no more sales can be made
under our previous equity lines with the Ironridge Entities.
The shares of common
stock the Ironridge Entities may receive under these agreements may be freely tradable under Rule 144 or future registration statements
filed by us and they may promptly sell the shares we issue to them in the public markets. Such sales, and the potential for such
sales, could cause the market price of our shares to decline significantly.
Current stockholders may experience dilution of their
ownership interests because of the future issuance of additional shares of our common stock issued pursuant to convertible preferred
stock and debt instruments.
In the future, we may
issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our present
stockholders and the purchasers of our common stock offered hereby. We are currently authorized to issue an aggregate of 475,000,000
shares of capital stock consisting of 470,000,000 shares of common stock and 5,000,000 shares of preferred stock with preferences
and rights to be determined by our Board of Directors. As of March 17, 2014, there are 70,500,092 shares of our
common stock, 700 shares of our Series F preferred stock, and 1,000 of our Series I preferred stock outstanding. There
are 1,409,399 shares of our common stock reserved for issuance pursuant to stock option agreements. We also have 2,606,327
shares of our common stock issuable upon the exercise of outstanding warrants. We also have convertible notes with principal and
accrued interest balances of $519,617 as of March 17, 2014. These notes and our Series F and Series I preferred stock are convertible
into common stock in the future at prices determined at the time of conversion. The Series F, Series I and convertible notes would
convert into shares of common stock, based on the closing price of $0.096 on March 17, 2014, as follows:
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Principal/
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Common Share Conversion
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Liquidation
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At Current
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At 25%
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At 50%
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At 75%
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Value
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Market
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Discount
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Discount
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Discount
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Series F
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$
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722,291
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13,276,523
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17,702,031
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26,553,046
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53,106,092
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(1)
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Series I
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1,017,561
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35,937,470
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35,937,470
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35,937,470
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35,937,470
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(2)
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Convertible Notes
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519,617
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8,968,519
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11,958,025
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17,937,038
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35,874,076
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(3)
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Equity Line
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-
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-
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-
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-
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-
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(4)
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Settlement Agreement
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-
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-
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-
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-
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-
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(5)
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$
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2,259,469
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58,182,512
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65,597,526
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80,427,554
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124,917,638
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(1)
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Represents the liquidation value, including accrued dividends, on 700 shares of Series F, converted at the closing price of $0.096 on March 17, 2014 and at discounts of 25%, 50% and 75% from the closing price on March 17, 2014.
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(2)
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Represents liquidation value, including accrued dividends, on (i) 413 shares of Series I, converted at $0.036; (ii) 75 shares of Series I converted at $0.0250; (ii) 512 shares of Series I converted at $0.0245, which are fixed conversion prices.
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(3)
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The convertible notes are convertible into common stock of the company at prices determined, in the future, at the time of conversion, at discount of between 39% and 40%.. This table includes common shares conversions at the closing price of $0.096 on March 17, 2014, and at discounts of 25%, 50% and 75% from the closing price on March 17, 2014.
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(4)
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As of March 17, 2014, the Company had issued all of the 4.5 million shares that had been previously registered on Form S-1 for the Company’s equity line with IBC. The Company received $333,802 in proceeds, net of fees, from the issuances. The Company has no current intention of registering any further shares under this agreement.
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(5)
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In June 2013 the Company entered into a settlement agreement with IBC, settling a claim of $214,535, through the issuance of 3,637,681 shares of common stock. As of March 17, 2014 the obligation had been settled in full.
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Any future issuance
of our equity or equity-backed securities may dilute then-current stockholders’ ownership percentages and could also result
in a decrease in the fair market value of our equity securities, because our assets would be owned by a larger pool of outstanding
equity. As described above, we may need to raise additional capital through public or private offerings of our common or
preferred stock or other securities that are convertible into or exercisable for our common or preferred stock. We may also
issue such securities in connection with hiring or retaining employees and consultants (including stock options issued under our
equity incentive plans), as payment to providers of goods and services, in connection with future acquisitions or for other business
purposes. Our Board of Directors may at any time authorize the issuance of additional common or preferred stock without common
stockholder approval, subject only to the total number of authorized common and preferred shares set forth in our certificate
of incorporation. The terms of equity securities issued by us in future transactions may be more favorable to new investors,
and may include dividend and/or liquidation preferences, superior voting rights and the issuance of warrants or other derivative
securities, which may have a further dilutive effect. Also, the future issuance of any such additional shares of common or
preferred stock or other securities may create downward pressure on the trading price of the common stock. There can be
no assurance that any such future issuances will not be at a price (or exercise prices) below the price at which shares of the
common stock are then traded.
We do not anticipate declaring
any cash dividends on our common stock.
In July 2008 we declared,
and in August 2008 we paid, a special cash dividend of $15.8 million on our capital stock. Any future determination with respect
to the payment of dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition,
results of operations, capital requirements, general business conditions, terms of financing arrangements and other factors that
our Board of Directors may deem relevant. In addition, our Certificates of Designation for shares of Series C, Series F, Series
H and Series I Preferred Stock prohibit the payment of cash dividends on our common stock while any such shares of preferred
stock are outstanding.
Our shares may be defined as "penny
stock," the rules imposed on the sale of the shares may affect your ability to resell any shares you may purchase, if at all.
Shares of our common
stock may be defined as a “penny stock” under the Exchange Act, and rules of the SEC. The Exchange Act and such
penny stock rules generally impose additional sales practice and disclosure requirements on broker-dealers who sell our securities
to persons other than certain accredited investors who are, generally, institutions with assets in excess of $5,000,000 or individuals
with net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 jointly with spouse, or in transactions
not recommended by the broker-dealer. For transactions covered by the penny stock rules, a broker-dealer must make a suitability
determination for each purchaser and receive the purchaser's written agreement prior to the sale. In addition, the broker-dealer
must make certain mandated disclosures in penny stock transactions, including the actual sale or purchase price and actual bid
and offer quotations, the compensation to be received by the broker-dealer and certain associated persons, and deliver certain
disclosures required by the SEC. Consequently, the penny stock rules may affect the ability of broker-dealers to make a market
in or trade our common stock and may also affect your ability to resell any shares you may purchase in this offering in the public
markets.
The success and timing of development
efforts, clinical trials, regulatory approvals, product introductions, collaboration and licensing arrangements, any termination
of development efforts and other material events could cause volatility in our stock price.
Since our common stock
is thinly traded, its trading price is likely to be highly volatile and could be subject to extreme fluctuations in response to
various factors, many of which are beyond our control, including (but not necessarily limited to):
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success or lack of success in being awarded, as a subcontractor to The Boeing Company, the Stage 1 BioWatch Generation 3, Phase II contract;
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success or lack of success in being awarded research and development contracts with U.S. Government agencies;
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success or lack of success being granted patents for its core biological diagnostic and detection technologies;
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success or lack of success of monetizing the GlucoChip development partnership between us and Receptors;
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success or lack of success in monetizing the breath glucose detection system;
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introduction of competitive products into the market;
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a finding that the in vivo glucose-sensing RFID microchip and the breath glucose detection system infringes the patents of a third party;
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our ability to obtain patents on the breath glucose detection system;
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receipt of payments of any royalty payments under licensing agreements;
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unfavorable publicity regarding us or our products;
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termination of development efforts for the GlucoChip, which is the in vivo glucose-sensing RFID microchip, or the breath glucose detection system;
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timing of expenses we may incur with respect to any license or acquisition of products or technologies; and
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termination of development efforts of any product under development or any development or collaboration agreement.
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In addition, the securities
markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance
of particular companies. These market fluctuations may also significantly affect the market price of our common stock.
Our financing transactions with Optimus
may be deemed to be in violation of Section 5 of the Securities Act, and as a result security holders that purchased shares from
Optimus may have the right to rescind their purchase of such securities.
Under the terms of
the Preferred Stock Purchase Agreements with Optimus, we were able to sell convertible preferred shares, from time to time in one
or more tranches, to Optimus. We believe the sale of the convertible preferred stock to Optimus was made in compliance
with Rule 506 of Regulation D. From time to time and at our sole discretion, we could present Optimus with a notice
to purchase such convertible preferred shares. Optimus was obligated to purchase such convertible preferred shares on the twentieth
trading day after the notice date, subject to satisfaction of certain closing conditions. R & R Consulting Partners,
LLC, a company controlled by Scott R. Silverman, our former chairman and chief executive officer, Mr. Silverman, and William J.
Caragol, our then chief financial officer, loaned shares of common stock they personally owned to Optimus. We were advised
by Optimus that Optimus would then sell the borrowed shares into the market and use the proceeds from the sale of such shares to
fund the purchase of the preferred stock under the Preferred Stock Purchase Agreements. On or after the six month anniversary of
the issuance date, the preferred stock could be converted by us into shares of our common stock and the lending stockholders could
simultaneously demand return of the borrowed shares from Optimus. Optimus was able to use the shares it received upon
conversion of the convertible preferred shares to replace the borrowed shares.
If the resale of the
borrowed shares by Optimus is not deemed to be a valid secondary offering by Optimus, and is deemed to be an unregistered offering
by us with Optimus acting as an underwriter in violation of Section 5 of the Securities Act stockholders who purchased these
securities would have a number of remedies available to them, including the right to rescind the purchase of those securities.
We do not believe that
the Optimus transaction violated Section 5 since the transaction consisting of the loan of the shares was registered on the registration
statements on Form S-3 (File No. 333-157696) and (File No. 333-168085), initially filed with the SEC on March 4, 2009 and July
13, 2010, respectively, and declared effective by the SEC on March 12, 2009 and July 22, 2010, respectively. The lending
stockholders loaned the borrowed shares to Optimus. Then, Optimus was added as a new selling stockholder to the registration
statements by prospectus supplements under Rule 424(b) of the Securities Act dated September 29, 2009 and March 14, 2011, respectively.
Since Optimus acquired
the shares from the lending stockholders, who were previously named in the registration statements, and there was no change in
the aggregate number of securities or dollar amount registered, we believe Optimus was properly added as a selling stockholder. As
a result, we believe that the resale of the borrowed shares by Optimus was properly registered and was not a violation of Section
5.
Additionally, we believe
that the statute of limitations period applicable to potential claims for rescission under the Securities Act is one year commencing
on the date of violation of the federal registration requirements. We believe that the one year federal statute of limitations
on sales of shares of our common stock has expired for sales made under the Optimus transactions. Statutes of limitations under
state laws vary by state, with the limitation time period under many state statutes not typically beginning until the facts giving
rise to a violation are known. Our disclosure is not an admission that we did not comply with any federal and state registration
or disclosure requirements nor is it a waiver by us of any applicable statute of limitations or any potential defense we may have.
If we are required to pay security holders who could opt to rescind their purchase of such securities, it would have
a material adverse effect on our financial condition and results of operations. We are not presently able to accurately determine
an estimated amount for any potential rescission liability associated with the resale of the loaned shares by Optimus in the event
that the transaction were to be found to violate Section 5 of the Securities Act as we do not have knowledge of the amount and
timing of such resales, nor information regarding the state or states in which such resales may have occurred. We know
that Optimus sold all of the 248,000 loaned shares it received. We believe that the range of prices at which Optimus
sold the loaned shares was between $12.50-$80.50 per share related to 2009 Optimus transactions and between $2.75-$15.75 per share
related to 2011 Optimus transaction. No adjustment has been made in our consolidated financial statements related to the outcome
of this contingency.
Future sales of our common stock
may depress the market price of our common stock and cause stockholders to experience dilution.
The market price of
our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, including
preferred shares issued to Ironridge and shares issuable on the conversion of notes payable. We may seek additional capital through
one or more additional equity transactions in 2014; however, such transactions will be subject to market conditions and there can
be no assurance any such transaction will be completed.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters
is located in Delray Beach, Florida, where we occupy approximately 3,000 square feet of office space, under a lease that expires
on August 31, 2015. Our operations are based in Pleasanton, California, where we lease approximately 6,250 square feet
of office space under a lease that expires on April 30, 2015.
Item 3. Legal Proceedings
The Company is a party
to certain legal actions, as either plaintiff or defendant, arising in the ordinary course of business, none of which is expected
to have a material adverse effect on its business, financial condition or results of operations. However, litigation is inherently
unpredictable, and the costs and other effects of pending or future litigation, governmental investigations, legal and administrative
cases and proceedings, whether civil or criminal, settlements, judgments and investigations, claims or charges in any such matters,
and developments or assertions by or against the Company relating to it or to its intellectual property rights and intellectual
property licenses could have a material adverse effect on the Company’s business, financial condition and operating results.
Item 4. Mine Safety Disclosures
Not applicable.
Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation
PositiveID Corporation,
through its wholly-owned subsidiary Microfluidic Systems (“MFS”) (the “Company” or “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. The Company is also developing the Firefly Dx, an automated pathogen
detection systems for rapid diagnostics, both for clinical and point of need applications.
PositiveID is a Delaware
corporation formed in 2001. The Company commenced operations in 2002 as VeriChip Corporation. In 2007, the Company completed an
initial public offering of its common stock.
In July 2008, the Company
completed the sale of all of the outstanding capital stock of its subsidiary, Xmark Corporation (“Xmark”), which at
the time was principally all of the Company’s operations, to Stanley Canada Corporation (“Stanley”), a wholly-owned
subsidiary of Stanley Black and Decker. The sale transaction was closed for $47.9 million in cash, which consisted of the
$45 million purchase price plus a balance sheet adjustment of approximately $2.9 million, which was adjusted to $2.8 million
at settlement of the escrow. Under the terms of the stock purchase agreement, $43.4 million of the proceeds were paid at
closing and $4.4 million was released from escrow in July 2009. As a result, the Company recorded a gain on the sale
of Xmark of $6.2 million, with $4.5 million of that gain deferred until the escrow was settled in 2009.
Following the completion
of the sale, the Company retired all of its outstanding debt for a combined payment of $13.5 million and settled all contractual
payments to Xmark’s and the Company’s officers and management for $9.1 million. In August 2008, the Company paid
a special dividend to its stockholders of $15.8 million.
In November 2008, the
Company entered into an Asset Purchase Agreement (“APA”) with Digital Angel Corporation and Destron Fearing Corporation,
a wholly-owned subsidiary of Digital Angel Corporation, which collectively are referred to as “Digital Angel.” The
terms of the APA included the Company’s purchase of patents related to an embedded bio-sensor system for use in humans,
and the assignment of any rights of Digital Angel under a development agreement associated with the development of an implantable
glucose sensing microchip. The Company also received covenants from Digital Angel Corporation and Destron Fearing that will permit
the use of intellectual property of Digital Angel related to the Company’s health care business without payment of ongoing
royalties, as well as inventory and a limited period of technology support by Digital Angel. The Company paid Digital Angel $500,000
at the closing of the APA, which was recorded in the financials as research and development expense.
Also, in November 2008,
R & R Consulting Partners LLC, a company controlled by the Company’s then chairman and chief executive officer, purchased
5,355,556 shares of common stock from Digital Angel, at which point in time Digital Angel ceased being a stockholder.
In September 2009,
the Company, VeriChip Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the Company (the “Acquisition
Subsidiary”), and Steel Vault Corporation, a Delaware corporation (“Steel Vault”), signed an Agreement and Plan
of Reorganization (the “Merger Agreement”), dated September 4, 2009, as amended, pursuant to which the Acquisition
Subsidiary was merged with and into Steel Vault on November 10, 2009, with Steel Vault surviving and becoming a wholly-owned
subsidiary of the Company (the “Merger”). Upon the consummation of the Merger, all outstanding shares, options and
warrants of Steel Vault’s common stock were converted into approximately 5.1 million shares of common stock, 3.3 million
options, and 0.5 million warrants of the Company. At the closing of the Merger, the Company changed its name to PositiveID
Corporation.
In February 2010,
the Company acquired the assets of Easy Check Medical Diagnostics, LLC (“Easy Check”), which included the glucose
breath analysis system and the
iglucose
wireless communication system. The Company issued 300,000 shares of common
stock in February 2010, with a fair value of $351,000, as consideration for the purchase. The purchase agreement also included
certain contingent payments and cash royalties based on future revenues. (See Note 3)
In May 2011, the Company
entered into a Stock Purchase Agreement to acquire MFS, pursuant to which MFS became a wholly-owned subsidiary of the Company.
Beginning with the
acquisition of MFS, the Company began a process to focus its operations on diagnostics and detection. Since acquiring
MFS, the Company has (i) sold substantially all of the assets of NationalCreditReport.com, which it had acquired in 2009, (ii)
sold its VeriChip and HealthLink (personal health record) businesses, and (iii) entered into an exclusive license for its
iglucose
technology. The Company will continue to seek either strategic partners or acquirers for its GlucoChip (glucose
sensing microchip) and its glucose breath detection system.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
Going Concern
The Company’s
consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of December 31,
2013, we had a working capital deficiency of approximately $5.6 million and an accumulated deficit of approximately $124.6
million, compared to a working capital deficit of approximately $4.6 million and an accumulated deficit of approximately $111.3 million
as of December 31, 2012. The decrease in working capital was primarily due to operating losses for the period, offset by
cash received from Boeing under the “Boeing License Agreement,” proceeds from the sale common stock under our equity
line financing and capital raised through preferred stock and convertible debt financings.
We have incurred operating
losses prior to and since the merger that created PositiveID. The current operating losses are the result of research and development
expenditures, selling, general and administrative expenses related to our molecular diagnostics and detection products. We
expect our operating losses to continue through 2014. 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 2012 and 2013, we raised approximately $4.5 million from the issuance of convertible preferred stock, common
stock under an equity line financing, and convertible debt and $2.5 million under our license agreement with Boeing. Subsequent
to year end December 31, 2013 we have raised approximately $0.6 million, net, from a convertible debt issued and preferred stock
issuances.
Additionally, 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 DoD. This agreement is expected to be performed between
March and September, 2014. The terms of this fixed price agreement include a total value of $841,000 to PositiveID, paid in monthly
installments between April and September, 2014.
These conditions raise
substantial doubt about the Company’s ability to continue as a going concern. 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 consolidated financial statements do not include any adjustments relating recoverability
of assets and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a
going concern.
2. Summary of Significant
Accounting Policies
Principles of Consolidations
The consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have
been eliminated in the consolidation.
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.
Use of Estimates
The preparation of financial
statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the amount reported
in the financial statements and accompanying notes. Although these estimates are based on knowledge of current events and actions
the Company may undertake in the future, they may ultimately differ from actual results. Included in these estimates are assumptions
about lives of intangible and other long-lived assets, assumptions used in Black-Scholes valuation models, estimates of the fair
value of acquired assets and assumed liabilities, and the determination of whether any impairments is to be recognized on intangible,
among others.
Concentration of Credit Risk
The Company maintained
its cash in one financial institution during the years ended December 31, 2013 and 2012. Balances were insured up to Federal
Deposit Insurance Corporation (“FDIC”) limits. At times, cash deposits exceeded the federally insured limits.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
Equipment
Equipment is carried
at cost less accumulated depreciation, computed using the straight-line method over the estimated useful lives. Leasehold improvements
are depreciated over the shorter of the lease term or useful life, software is depreciated over 2 years, and equipment is
depreciated over periods ranging from 3 to 5 years. Repairs and maintenance which do not extend the useful life of the asset
are charged to expense as incurred. Gains and losses on sales and retirements are reflected in the consolidated statements of
operations.
Intangible Assets
Intangible assets are
carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful lives. Customer
contracts and relationships are being amortized over 3 years, patents are being amortized over 5 years, and non-compete agreements
are being amortized over 2 years. Intangible assets consist of the following as of December 31, 2013 and 2012 (in thousands):
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer contracts and relationships
|
|
$
|
230
|
|
|
$
|
(198
|
)
|
|
$
|
32
|
|
|
$
|
(121
|
)
|
|
$
|
109
|
|
|
Patents
|
|
|
1,223
|
|
|
|
(632
|
)
|
|
|
591
|
|
|
|
(387
|
)
|
|
|
836
|
|
|
Non-compete agreements
|
|
|
169
|
|
|
|
(169
|
)
|
|
|
-
|
|
|
|
(134
|
)
|
|
|
35
|
|
|
|
|
$
|
1,622
|
|
|
$
|
(999
|
)
|
|
$
|
623
|
|
|
$
|
(642
|
)
|
|
$
|
980
|
|
Amortization of intangible
assets amounted to approximately $357,000 and $406,000 for the year ended December 31, 2013 and 2012 respectively. Estimated future
amortization expense is as follows (in thousands):
|
2014
|
|
|
277
|
|
|
2015
|
|
|
245
|
|
|
2016
|
|
|
101
|
|
|
|
|
$
|
623
|
|
The Company continually
evaluates whether events or circumstances have occurred that indicate the remaining estimated useful lives of its definite-lived
intangible assets may warrant revision or that the remaining balance of such assets may not be recoverable. The Company uses an
estimate of the related undiscounted cash flows attributable to such asset over the remaining life of the asset in measuring whether
the asset is recoverable.
The Company records
goodwill as the excess of the purchase price over the fair values assigned to the net assets acquired in business combinations.
Goodwill is allocated to reporting units as of the acquisition date for the purpose of goodwill impairment testing. The Company’s
reporting units are those businesses for which discrete financial information is available and upon which segment management makes
operating decisions. Goodwill of a reporting unit is tested for impairment at year-end, or between testing dates if an impairment
condition or event is determined to have occurred.
In assessing potential
impairment of the intangible assets and goodwill recorded in connection with the MFS acquisition as of December 31, 2013 and 2012,
management considered the likelihood of future cash flows attributable to such assets, including but not limited to the probability
and extent of MFS’s participation in the Department of Homeland Security’s next generation BioWatch program. Based
on its analysis, management has concluded, based on information currently available, that no impairment of the intangible assets
or goodwill exists as of December 31, 2013 and 2012.
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.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
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 the extent the Company
sells products that may consist of multiple deliverables, the revenue recognition is subject to specific guidance. A multiple-deliverable
arrangement is separated into more than one unit of accounting if the following criteria are met:
|
|
·
|
the
delivered item(s) has value to the client on a stand-alone basis; and
|
|
|
·
|
if
the arrangement includes a general right of return relative to the delivered item(s),
delivery or performance of the undelivered item(s) is considered probable and substantially
in the Company’s control.
|
If these criteria
are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized ratably
over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered element
is delivered. If these criteria are met for each element and there is a relative selling price for all units of accounting in
an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative
selling price.
Reclassification
During the fourth quarter
of 2012, the Company revised its allocation method for the expenses of its MFS subsidiary between Research and Development (“R&D”)
expenses and Selling, General and Administrative (“SGA”) expenses. As a result, the Company has made reclassification
of such expenses in its quarterly reporting for 2011 (not presented herein) and 2012 increasing R&D and decreasing SGA. The
three-month expense amounts as reported in the Company’s Forms 10-Q, for the quarters ended September 30, 2012, June 30,
2012 and March 31, 2012 were changed by approximately $150,000, $140,000 and $135,000, respectively. There was no
impact on the Company’s operating loss, balance sheet or cash flow statements in any period.
Additionally, certain
items previously reported in the consolidated financial statement captions have been reclassified to conform to the current financial
statement presentation.
Stock-Based Compensation
Stock-based compensation
expenses are reflected in the Company’s consolidated statements of operations under selling, general and administrative
expenses and research and development expenses.
Income Taxes
The Company accounts
for income taxes under the asset and liability approach for the financial accounting and reporting of income taxes. Deferred taxes
are recorded based upon the tax impact of items affecting financial reporting and tax filings in different periods. A valuation
allowance is provided against net deferred tax assets when the Company determines realization is not currently judged to be more
likely than not.
The Company follows
a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition
purposes by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained
on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit
as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors
when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately
anticipate actual outcomes. Accordingly, the Company reports a liability for unrecognized tax benefits resulting from
the uncertain tax positions taken or expected to be taken on a tax return and recognizes interest and penalties, if any, related
to uncertain tax positions as interest expense. The Company does not have any uncertain tax positions at December 31, 2013 and
2012.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
Research and Development and Software
Development Costs
Research and development
costs are expensed as incurred and consist of development work associated with the Company’s existing and potential products.
The Company’s research and development expenses relate primarily to share based compensation to project partners, payroll
costs for engineering personnel and costs associated with various projects, including testing, developing prototypes and related
expenses.
The Company accounts
for software development costs by capitalizing qualifying costs from the time technological feasibility is established until the
product is available for general release to customers. In 2012, the Company recorded an impairment charge of $357,000 to write-off
it’s previously capitalized software development costs related to the
iglucose
wireless communication system. Any
proceeds from a future sale or license royalties will be recorded as income in future periods.
Accrued Expenses
Accrued expenses and
other current liabilities consisted of the following as of December 31, 2013 and 2012 (in thousands):
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
Accrued compensation
|
|
$
|
363
|
|
|
$
|
1,124
|
|
|
Other
|
|
|
264
|
|
|
|
226
|
|
|
|
|
$
|
627
|
|
|
$
|
1,350
|
|
Loss Per Common Share
The Company presents
basic income (loss) per common share and, if applicable, diluted income (loss) per share. Basic income (loss) per common share
is based on the weighted average number of common shares outstanding during the year and after preferred stock dividend requirements.
The calculation of diluted income (loss) per common share assumes that any dilutive convertible preferred shares outstanding at
the beginning of each year or the date issued were convertible at those dates, with preferred stock dividend requirements and
outstanding common shares adjusted accordingly. It also assumes that outstanding common shares were increased by shares issuable
upon exercise of those stock options and warrants for which the average period market price exceeds the exercise price, less shares
that could have been purchased by the Company with related proceeds.
The following common
shares issuable under potentially dilutive securities outstanding as of December 31, 2013 and 2012 were not included in the
computation of dilutive loss per common share because the effect would have been anti-dilutive (in thousands):
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
Common shares issuable under:
|
|
|
|
|
|
|
|
|
|
Convertible Series F Preferred Stock
|
|
|
48,060
|
|
|
|
62
|
|
|
Convertible Series I Preferred Stock
|
|
|
14,530
|
|
|
|
-
|
|
|
Stock options
|
|
|
1,409
|
|
|
|
429
|
|
|
Warrants
|
|
|
2,886
|
|
|
|
463
|
|
|
Unvested restricted common stock
|
|
|
12,267
|
|
|
|
215
|
|
|
|
|
|
79,152
|
|
|
|
1,169
|
|
3. Acquisitions/Dispositions
Microfluidic 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. MFS’s substantial portfolio of intellectual property related to
sample preparation and rapid medical testing applications is complementary to the Company’s portfolio of virus detection
and diabetes management products in development.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
As consideration for
the consummation of the Acquisition, the Company paid $250,000 to fund certain accounts payable of MFS (of which approximately
$24,000 was paid to selling shareholders) and issued 95,000 shares of common stock of the Company (the “Stock Consideration”).
Additionally, the Company issued a total of 38,857 shares of common stock in 2011 to its advisors for services rendered in conjunction
with the Acquisition. The Company incurred a nonrecurring charge of approximately $550,000 related to the direct costs of the
Acquisition, consisting of the $365,000 value of the shares of common stock issued to its advisors and $185,000 of cash costs.
The Company issued an additional 18,406 shares of common stock to the advisors during the first quarter of 2012, pursuant to which
a charge of approximately $69,000 was recorded.
In connection with
the Acquisition, the Company is also required to make certain contingent earn-out payments, up to a maximum of $4,000,000 payable
in shares of the Company’s common stock, upon certain conditions over 2013 and 2014 (the “Earn-Out Payment”).
There was also opportunity for the MFS sellers to achieve Earn-Out Payments in 2011, 2012 and 2013. Targets were not met in either
of these three years. The contingent earn-out for 2014 is based on MFS achieving certain earnings targets, 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 totaled approximately $1,653,000, comprised of (i) $24,000 in cash, (ii) Stock Consideration of $879,000
based on a stock price of $9.25 per share, and (iii) contingent 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. No earn-out was achieved for 2013 and 2012, the fair value of the contingent consideration was reassessed
to approximately $514,000 and $645,000 as of December 31, 2013 and 2012, respectively, with a corresponding credit of $131,000
and debit of $107,000 to selling, general and administrative expense in the Company’s consolidated statements of operations
for the years ended December 31, 2013 and 2012, respectively.
Under the purchase
method of accounting, the estimated purchase price of the Acquisition was allocated to MFS’s net tangible and identifiable
intangible assets and liabilities assumed based on their estimated fair values as of the date of the completion of the Acquisition,
as follows (in thousands):
|
Assets acquired:
|
|
|
|
|
|
Net tangible assets
|
|
$
|
125
|
|
|
Customer contracts and relationships
|
|
|
230
|
|
|
Patents
|
|
|
1,223
|
|
|
Non-compete agreement
|
|
|
169
|
|
|
Goodwill
|
|
|
510
|
|
|
|
|
|
2,257
|
|
|
Liabilities assumed:
|
|
|
|
|
|
Current liabilities
|
|
|
(604
|
)
|
|
Total estimated purchase price
|
|
$
|
1,653
|
|
The estimated fair
values of certain assets and liabilities were determined by management based upon a third-party valuation. No portion of the intangible
assets, including goodwill, is expected to be deductible for tax purposes.
Sale of Subsidiary to Related Party
On January 11, 2012,
VeriTeQ Acquisition Corporation (“VeriTeQ Acquisition”), which is controlled by Scott R. Silverman, our former Chairman
and Chief Executive Officer, purchased all of the outstanding capital stock of PositiveID Animal Health (“Animal Health”)
in exchange for a secured promissory note in the amount of $200,000 (the “Note”) and 4 million shares of common stock
of VeriTeQ Acquisition representing a 10% ownership interest, to which no value was ascribed. Our chief executive officer, William
J. Caragol, served on the Board of Directors of VeriTeQ until July 8, 2013. The Note accrues 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 (the
“VeriTeQ Security Agreement”). On July 8, 2013 VeriTeQ Acquisition Corporation merged with Digital Angel Corporation.
The name of the merged company is now VeriTeQ Corporation “VeriTeQ”. Mr. Krawitz a director of the Company was a director
of VeriTeQ Acquisition and continues as a director of VeriTeQ Corporation, its successor.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
In connection with
the sale, the Company entered into a license agreement with VeriTeQ (the “Original License Agreement”) which grants
VeriTeQ a non-exclusive, perpetual, non-transferable, license to utilize the Company’s bio-sensor implantable radio frequency
identification (RFID) device that is protected under United States Patent No. 7,125,382, “Embedded Bio Sensor System”
(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, the Company was 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 the Company and Medical Components, Inc. (“Medcomp”) dated April 2, 2009. The total cumulative royalty
payments under the agreement with Medcomp will not exceed $600,000.
The Company also entered
into a shared services agreement with VeriTeQ on January 11, 2012 (the “SSA”), pursuant to which the Company agreed
to provide certain services, including administrative, rent, accounting, business development and marketing, to VeriTeQ in exchange
for $30,000 per month. The SSA has also included working capital advances from time to time. The term of the Shared Services
Agreement commenced on January 23, 2012. The first payment for such services was not payable until VeriTeQ receives gross proceeds
of a financing of at least $500,000. The balance due from VeriTeQ under the SSA, including certain expenses paid by the Company
on behalf of VeriTeQ, totaled approximately $160,000 as of May 31, 2012, which was not recorded in the Company’s balance
sheet and was to be recorded on a cash basis as collected. On June 25, 2012, the level of resources provided under the SSA was
reduced and the agreement was amended, pursuant to which all amounts owed to the Company under the SSA as of May 31, 2012 were
converted into 2,285,779 shares of common stock of VeriTeQ, to which no value was ascribed. In addition, effective June 1, 2012,
the monthly charge for the shared services under the SSA was reduced from $30,000 to $12,000.
On June 26, 2012, the
Original License Agreement was amended pursuant to which the license was converted from a non-exclusive 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,
the Company entered into an Asset Purchase Agreement (“APA”) with VeriTeQ (the “VeriTeQ Asset Purchase Agreement”),
whereby VeriTeQ purchased all of the intellectual property, including patents and patents pending, related to the Company’s
embedded biosensor portfolio of intellectual property. There were no proceeds received in connection with this sale and the intellectual
property had a book value of nil. Under the VeriTeQ APA, the Company is 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, as amended.
Simultaneously with
the VeriTeQ APA, the Company entered into a license agreement with VeriTeQ granting the Company 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 APA, 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 the Company to VeriTeQ under the VeriTeQ APA and the related royalty payments were added as collateral under the VeriTeQ Security
Agreement.
On August 28, 2012,
the SSA was further amended to align with the level of services being provided, pursuant to which, effective September 1, 2012,
the monthly charge for the shared services under the SSA was reduced from $12,000 to $5,000. As of December 31, 2013 and
December 31, 2012, VeriTeQ owed the Company $213,000 and $138,000, respectively, for shared services and working capital advances,
for which no revenue has been recorded.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
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 had 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.
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.
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 SPA,
the Company sold its remaining shares of VeriTeQ common stock (871,754) and the convertible note owed from VeriTeQ to the Company
(convertible into 135,793 shares of VeriTeQ common stock). Total proceeds from the sale were $750,000, which were received by
November 18, 2013, and has been recorded as a gain in the Other Income line in the statement of operations. On November 13, 2013,
the aggregate market value of the 871,754 shares of VeriTeQ common stock was $1.8 million, and the aggregate market value of 135,793
shares of Common Stock underlying the promissory note was $276,000. No officers or directors that received shares of VeriTeQ common
stock on September 30, 2013 sold shares to any of the Buyers.
Pursuant to the November
Letter Agreement, VeriTeQ is required to deliver to the Company a warrant to purchase 300,000 shares of VeriTeQ common stock at
price of $2.84. The warrant will have the same terms as the warrant being entered into between Hudson and VeriTeQ, including a
term of 5 years and customary pricing reset provisions. We have requested the issuance of the warrant from VeriTeQ owed to PositiveID
pursuant to the November Letter Agreement and VeriTeQ has not yet delivered such warrant. The warrant strike price is currently
$2.84 per share, which is significantly out of the money. PositiveID intends to fully enforce its rights and VeriTeQ’s obligations
to deliver the warrant. The November Letter Agreement also specified that the remaining outstanding payable balance owed from
VeriTeQ to the Company under the SSA 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.
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”):
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
|
|
(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.
|
4. Financing Agreements
Optimus Financing
On September 29,
2009, the Company entered into a Convertible Preferred Stock Purchase Agreement (the “Optimus Purchase Agreement”)
with Optimus Technology Capital Partners, LLC (“Optimus”) under which Optimus was committed to purchase up to $10 million
shares of convertible Series A Preferred Stock of the Company in one or more tranches.
To facilitate the transactions
contemplated by the Optimus Purchase Agreement, R & R Consulting Partners, LLC (“R&R”), a company controlled
by Scott R. Silverman, the Company’s former chairman and chief executive officer, loaned shares of common stock of the Company
to Optimus equal to 135% of the aggregate purchase price for each tranche pursuant to stock loan agreements between R & R
and Optimus. R & R was paid a $100,000 fee in October 2009 and was to be paid 2% as interest for the fair value of the
loaned shares for entering into the stock loan arrangement. R & R could demand return of some or all of the borrowed
shares (or an equal number of freely tradable shares of common stock) at any time on or after the six-month anniversary date such
borrowed shares were loaned to Optimus, but no such demand could be made if there are any shares of Series A Preferred Stock then
outstanding. If a permitted return demand was made, Optimus was required to return the borrowed shares (or an equal number of
freely tradable shares of common stock) within three trading days after such demand. Optimus could return the borrowed shares
in whole or in part, at any time or from time to time, without penalty or premium. On September 29, 2009, October 8, 2009,
and October 21, 2009, R & R loaned Optimus 52,000, 32,000 and 24,000 shares, respectively, of Company common stock.
On September 29,
2009, the Company exercised the first tranche of the Optimus financing, pursuant to which it issued 296 shares of Series A Preferred
Stock, for a purchase price of approximately $3.0 million. In support of this tranche, R & R loaned Optimus 52,000 shares
of common stock. The tranche closed on October 13, 2009, and the Company received proceeds of approximately $3.0 million,
less the fees due on the entire financing commitment of $800,000. On November 5, 2009, the Company closed the second tranche
of this financing, issuing 166 shares of Series A Preferred Stock, for a purchase price of approximately $1.7 million. In
support of this tranche, R & R loaned Optimus approximately 56,000 shares of common stock.
On May 12, 2010, R
& R demanded the return of 108,000 shares loaned to Optimus. Also on May 12, 2010, the Company sent Optimus a notice
of its election to convert all of the outstanding shares of Series A Preferred Stock into 109,178 shares of Company common stock.
Optimus returned these shares to R & R in repayment of the loan. The conversion of the Series A Preferred Stock was
determined by a fixed conversion price that was determined at the time of the two tranche closings, which were approximately $76.75
and $40 per share, respectively. The Company was required to issue make-whole shares to Optimus equal to 35% of the Series A Liquidation
Value ($10,000 per share of Series A Preferred Stock) because the Series A Preferred Stock was redeemed prior the first anniversary
of the issuance date. On October 13, 2010, the Company filed a Certificate of Elimination with the Secretary of State of
the State of Delaware effecting the elimination of the Certificate of Designation of Preferences, Rights and Limitations of Series
A Preferred Stock. No shares of Series A Preferred Stock remained outstanding as of December 31, 2010.
On March 14, 2011,
the Company entered into an Amended and Restated Convertible Preferred Stock Purchase Agreement (the “Amended Optimus Purchase
Agreement”) with Optimus. The Amended Optimus Purchase Agreement amended and restated the Optimus Purchase Agreement, and,
among other things, specifically (i) replaced the Series A Preferred Stock issuable under the Purchase Agreement with Series C
Preferred Stock with substantially similar terms, and (ii) reduced the maximum amount of preferred stock issuable to Optimus under
the Optimus Purchase Agreement from $10 million to $8.7 million, of which $4.7 million was previously issued in 2009 as described
above.
Under the terms of
the Amended Optimus Purchase Agreement, from time to time and at the Company’s sole discretion, the Company could present
Optimus with a notice to purchase shares of Series C Preferred Stock (the “Notice”). Optimus was obligated
to purchase such Series C Preferred Stock on the twentieth trading day after any Notice date, subject to satisfaction of certain
closing conditions, including (i) that the Company is listed for and trading on a trading market, such as the Nasdaq or the
over the counter bulletin board, (ii) the representations and warranties of the Company set forth in the Amended Optimus
Purchase Agreement are true and correct as if made on each tranche date, and (iii) that no such purchase would result in
Optimus and its affiliates beneficially owning more than 9.99% of the Company’s common stock. In the event the closing bid
price of the Company’s common stock during any one or more of the nineteen trading days following the delivery of a Notice
were to fall below 75% of the closing bid price on the trading day prior to the Notice date and Optimus determined not to complete
the tranche closing, then the Company could, at its option, proceed to issue some or all of the applicable shares, provided that
the conversion price for the Preferred Stock that is issued would reset at the lowest closing bid price for such nineteen trading
day period.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
On March 14, 2011,
the Company delivered a Notice to Optimus to sell 140 shares of Series C Preferred Stock for a purchase price of approximately
$1.4 million. In support of this tranche, R & R loaned 109,178 shares, Mr. Silverman loaned 2,822 shares and William
Caragol, the Company’s current chairman and chief executive officer, loaned 28,000 shares of Company common stock to Optimus
(the “Loaned Shares”). On April 12, 2011, the tranche closed and the Company received proceeds of approximately $1.4
million, less $100,000 paid to Optimus to waive the requirement under the Amended Optimus Purchase Agreement that the conversion
price of the Series C Preferred Stock issued in the tranche be reset at the lowest closing bid price for the nineteen trading
days following the tranche notice date, which was March 14, 2011, due to the closing bid price of a share of the Company’s
common stock falling below 75% during such nineteen trading day period.
On October 12, 2011,
R & R, Mr. Caragol and Mr. Silverman demanded the return of the Loaned Shares from Optimus. Also on October 12, 2011, the
Company sent Optimus a notice of its election to convert all of the outstanding shares of Series C Preferred Stock into 140,000
shares of common stock. The conversion of the Series C Preferred Stock was determined by a fixed conversion price that was determined
at the time of the tranche closing, which was approximately $10 per share. On October 17, 2011, Optimus failed to return the Loaned
Shares within three trading days of the demand by R & R, Mr. Silverman and Mr. Caragol as required under the terms of the
Amended Optimus Purchase Agreement. No shares of Series C Preferred Stock remained outstanding as of December 31, 2012 and 2011.
On January 27, 2012,
the Company issued an aggregate of 140,000 shares of common stock to R & R, Mr. Silverman and Mr. Caragol in exchange for
the Loaned Shares. The securities that were originally issued upon conversion remain outstanding but have no voting, dividend,
distribution or other rights of common stockholders. Further, Optimus has indicated in a public filing the absence of beneficial
ownership of the 140,000 shares of common stock. The Company believes that, while the transfer agent has not yet cancelled
the original 140,000 shares, no requirements exist that legally prevent such cancellation from being effectuated.
The Company believes
that the transactions undertaken with Optimus as discussed herein were in compliance with applicable securities laws at the time
of the financing transactions, including Section 5 of the Securities Act. If a violation did occur in connection with Optimus’
resale of the common stock it received in connection with these financings, security holders who purchased these securities would
have certain remedies available to them, including the right to rescind the purchase of those securities within the applicable
statute of limitations, which under the Securities Act is one year commencing on the date of violation of the federal registration
requirements. The Company believes that the federal statute of limitations on sales of shares of the Company’s common stock
has expired for sales made under the 2009 Optimus transactions, and that the federal statute of limitations on sales of shares
of the Company’s common stock expired in 2012 for sales made under the March 2011 Optimus transaction. Statutes of limitations
under state laws vary by state, with the limitation time period under many state statutes not typically beginning until the facts
giving rise to a violation are known. The Company is applying a contingency accounting model in determining whether a liability
exists for this matter. Under this model, the Company evaluates whether a violation of the applicable securities laws has occurred
resulting in a rescission right and whether a claim for a potential violation will be asserted. The Company has determined that
there is a remote likelihood as to whether a violation has occurred. If the Company were required to pay security holders for
rescission of their purchase of such securities, it could have a material adverse effect on the Company’s financial condition
and results of operations. The Company is not presently able to accurately determine an estimated amount for any potential rescission
liability associated with the resale of the loaned shares by Optimus in the event that the transaction were to be found to violate
Section 5 of the Securities Act as it does not have knowledge of the amount and timing of such resales, nor information regarding
the state or states in which such resales may have occurred. The Company believes that the range of prices at which Optimus sold
the loaned shares were between $12.5-$80.5 per share related to the 2009 Optimus transactions and between $2.75-$15.75 per share
related to the 2011 Optimus transaction. No adjustment has been made in the accompanying consolidated financial statements related
to the outcome of this contingency. As of December 31, 2013, no shares of Series C Preferred Stock were outstanding.
Ironridge 2011 Common Stock Purchase
Agreement
On July 27, 2011, the
Company entered into a Common Stock Purchase Agreement (the “Common Stock Agreement”) with Ironridge Global Technology
under which the Company could deliver a notice to Ironridge Global Technology exercising its right to require Ironridge Global
Technology to purchase shares up to $2.5 million of its common stock at a price per share equal to $9.175. The purchase price
was equal to 102% of the per share closing bid price of the Company’s common stock as reported on a public market on the
trading day immediately before the date the Company announced that it entered into the Common Stock Agreement, which was July
27, 2011.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
Ironridge Global Technology
could pay the purchase price for the shares, at Ironridge Global Technology’s option, in cash or a secured promissory note,
except that at least $250,000 of the purchase price was required to be paid in cash. The promissory note bears interest at 1.6%
per year calculated on a simple interest basis. The entire principal balance and interest thereon is due and payable seven and
one-half years from the date of the promissory note, but no payments are due so long as the Company is in default under the Common
Stock Agreement or the Series F Agreement (defined below) or if there are any shares of Series F Preferred Stock issued or outstanding.
The promissory note is secured by Ironridge Global Technology’s right, title and interest in all shares legally or beneficially
owned by Ironridge or an affiliate, common stock and other securities with a fair market value equal to the principal amount of
the promissory note.
The Company’s
right to deliver a tranche notice to Ironridge Global Technology pursuant to the Common Stock Agreement was subject to satisfaction
of certain closing conditions, including (i) that the Company’s common stock is listed and trading on a trading market,
(ii) no uncured default exists under the Common Stock Agreement, and (iii) the Company’s representations and warranties
set forth in the common Stock Agreement are true and correct in all material respects. The Company could not deliver a notice
to Global Technology to purchase shares of its common stock if the total number of shares of common stock owned or deemed beneficially
owned by Ironridge Global Technology and its affiliates would result in Ironridge Global Technology owning or being deemed to
beneficially own more than 9.99% of all such common stock and other voting securities as would be outstanding on the date of exercise.
On July 28, 2011, the
Company presented Ironridge Global Technology with a notice to purchase $2.5 million of its common stock under the Common Stock
Agreement. Ironridge paid $250,000 in cash and the remaining $2.25 million in a promissory note, the terms of which are described
above. The Company issued an aggregate of 272,479 shares of its common stock to Ironridge Global Technology in connection with
the July 28, 2011 notice. No further shares may be sold under the Common Stock Agreement. In connection with the conversion of
1,324 shares of Series F Preferred Stock during 2012 (discussed below), a total of $1.9 million of the promissory note was repaid.
The remaining $264,000 of the promissory note was repaid during early 2013 in connection with the conversion of 376 shares of
Series F Preferred Stock (discussed below).
Ironridge Series F Preferred Stock
Financing
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.
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 December 31, 2013, a total of 2,700 Series F shares have been issued and 2,100 have been converted into common shares,
all of which were converted at the Company’s option. No Series F shares have been redeemed and no Series F shares have been
converted at the option of Ironridge. As of December 31, 2013 there are 600 shares of Series F outstanding.
The table below provides a detail of the
2,700 Series F shares issued:
|
Series
F Shares
Issued
|
|
|
Date
|
|
Type of Consideration
|
|
Amount
of
Consideration
|
|
|
|
500
|
|
|
August 15, 2011
|
|
Cash
|
|
$
|
500,000
|
|
|
|
130
|
|
|
September 20, 2011
|
|
Cash
|
|
|
1
|
|
|
|
290
|
|
|
November 14, 2011
|
|
Cash
|
|
|
193,000
|
|
|
|
290
|
|
|
November 14, 2011
|
|
Cash
|
|
|
243,000
|
|
|
|
290
|
|
|
December 5, 2011
|
|
Cash
|
|
|
188,000
|
|
|
|
500
|
|
|
July 12, 2012
|
|
Termination Fee
|
|
|
0
|
(1)
|
|
|
100
|
|
|
September 12, 2012
|
|
Waiver Fee
|
|
|
0
|
(1)
|
|
|
450
|
|
|
August 26, 2013
|
|
Cash
|
|
|
300,000
|
|
|
|
150
|
|
|
August 26, 2013
|
|
Commitment and documentation fees
|
|
|
0
|
(1)
|
|
|
2,700
|
|
|
|
|
|
|
$
|
1,424,001
|
|
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
|
(1)
|
These fees were paid to Ironridge
through the issuance of Series F Preferred Stock as more fully described below.
|
The table below provides a detail of the
2,100 Series F which have been converted by the Company:
|
Series
F Shares
Converted
|
|
|
Date
of Conversion
Notice
|
|
Number
of Shares of
Common
Issued on Conversion (1)
|
|
|
|
300
|
|
|
February 15, 2012
|
|
|
189,082
|
|
|
|
200
|
|
|
March 21, 2012
|
|
|
151,162
|
|
|
|
130
|
|
|
April 2, 2012
|
|
|
117,507
|
|
|
|
210
|
|
|
June 14, 2012
|
|
|
553,225
|
|
|
|
134
|
|
|
July 10, 2012
|
|
|
501,681
|
|
|
|
250
|
|
|
September 12, 2012
|
|
|
1,339,981
|
|
|
|
100
|
|
|
November 27, 2012
|
|
|
506,254
|
|
|
|
176
|
|
|
January 7, 2013
|
|
|
724,090
|
|
|
|
100
|
|
|
January 30, 2013
|
|
|
395,690
|
|
|
|
100
|
|
|
March 4, 2013
|
|
|
477,828
|
|
|
|
100
|
|
|
April 19, 2013
|
|
|
655,993
|
|
|
|
50
|
|
|
May 16, 2013
|
|
|
522,140
|
|
|
|
50
|
|
|
May 17, 2013
|
|
|
522,245
|
|
|
|
50
|
|
|
June 21, 2013
|
|
|
937,230
|
|
|
|
50
|
|
|
July 11, 2013
|
|
|
1,357,646
|
|
|
|
50
|
|
|
September 24, 2013
|
|
|
3,582,620
|
|
|
|
50
|
|
|
November 12, 2013
|
|
|
3,400,000
|
|
|
|
2,100
|
|
|
|
|
|
15,934,374
|
|
|
(1)
|
The shares of the Company’s
common stock issued at the time a notice of conversion is subject to reconciliation based on the average of the daily VWAPs
of the Common Stock, as reported by Bloomberg, for the 20 trading days following the notice of conversion. In addition, Ironridge
is restricted from holding more than 9.99% of our total outstanding shares at any one time. In the event that the number of
shares issuable pursuant to a notice of conversion would result in Ironridge holding more than 9.99% of the total outstanding
shares of our common stock, such shares are held in escrow to be issued at a later date. The “Number of Shares Issued
on Conversion” in the table represents the aggregate number of shares issued pursuant to the corresponding notice of
conversion once all reconciliations have been taken into account.
|
The initial 1,500
shares of Series F that were issued through December 5, 2011, were issued to Ironridge in connection with the July 27, 2011
Preferred Stock Purchase Agreement. At the time of the preferred stock transaction the Company had sold 272,479 shares of
common stock to Ironridge, for which it was paid $250,000, and a note for $2.25 million pursuant to a Common Stock Purchase
Agreement dated July 27, 2011. The 2011 preferred stock transaction was structured with both a Company conversion option,
which provided the Company with the opportunity to convert after six months using a variable pricing formula, and a holder
conversion option at a fixed price, which provided the holder a conversion option at the fixed conversion price. The holder
conversion option was structured in a manner similar to a typical warrant instrument. The Company conversion formula was
designed contemplating that the Company would desire to convert the original 1,500 Series F shares (the Company and Holder
conversion terms were subsequently amended on December 19, 2013, see below). The terms of the $2.25 million note issued in the
common stock sale required Ironridge to accelerated principal and interest payments in cash in conjunction with any Series
F conversions. As a result, between 2012 and early 2013, the Company issued 8 separate conversion notices converting
the original 1,500 shares of Series F shares and Ironridge at each notice repaid in cash the portion of the note, plus
accrued interest.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
On July 12, 2012,
the Company issued 500 shares of Series F Preferred stock to compensate Ironridge for the full and complete satisfaction
of an obligation of the Company to pay Ironridge a success fee related to the termination of the equity line stock purchase agreement
entered into by the Company and Ironridge on January 13, 2012. On September 12, 2012 the Company issued 100 shares of Series
F Preferred Stock for Ironridge waiving a Company default related to late delivery of common shares in the July 27, 2011 Preferred
Stock Purchase Agreement. Both the Company and Ironridge recognized that due to the Company’s common stock price being significantly
lower than the holder conversion fixed price, that the issuance of new preferred shares would only be valuable consideration if
the Company agreed to issue a Company conversion request at the request of Ironridge. The parties agreed that the Company would
issue a Company conversion notice at the request of Ironridge. All Series F shares issued after the original 1,500 in 2011 were
issued pursuant to this agreement; however the conversion of the original 1,500 Series F shares were solely at the discretion
of the Company.
Ironridge has always
been, and continues to be, the only holder of Series F. After entering into the August 26, 2013 Ironridge Stock Purchase Agreement,
the parties agreed to amend the Certificate of Designations of Preferences, Rights and Limitations of Series F Preferred Stock
to reflect the original and continued intention of the parties, as discussed below.
Pursuant to the 2011
common stock purchase and the preferred stock purchase agreements the Company has issued 272,479 and 15,934,374 common shares,
respectively, and at December 31, 2013 owed Ironridge an additional 86,101 common shares under those agreements. Under the 2011
preferred stock purchase agreement the Company received $1,124,001. Under the common stock purchase agreement the Company received
$250,000 at the time of initial closing, and during 2012 and 2013 received cash in payment of the $2.25 million note, plus accrued
interest. The payments under the note were made by Ironridge following the conversion of Series F preferred shares.
On December 18, 2013,
the Company entered into a letter agreement (“Letter Agreement”) with Ironridge. Pursuant to the Letter Agreement,
the Company and Ironridge amended Section 2(d) of the Ironridge Registration Rights Agreement, dated August 26, 2013. Pursuant
to that Letter Agreement the Company issued Ironridge 150 shares Series F Preferred Stock on January 10, 2014 as a penalty as
the registration statement under the Ironridge Registration Rights Agreement was not effective by January 10, 2014. If the Registration
Statement was not effective by January 24, 2014, then an additional 150 shares Series F Preferred Stock was to be owed.
The Letter Agreement also documents that the Company and Ironridge have agreed to amend and restate the Certificate of Designations
of Preferences, Rights and Limitations of Series F Preferred Stock. On January 30, 2014 Ironridge and the Company amended the
Letter Agreement, with Ironridge waiving their right to the 150 shares of Series F Preferred Stock that was to be due on
January 24, 2014 so long as the Registration Statement is effective by February 7, 2014. Such registration statement went effective
February 6, 2014.
On December 19, 2013,
the Company, in accordance with Section 151(g) of the Delaware General Corporation Law, filed an Amended and Restated Certificate
of Designation of Series F Preferred Stock (the “Amended Certificate of Designation”). The Amended Certificate of
Designation was filed to clarify and revise the mechanics of conversion of the Series F Preferred Stock. The Amended Certificate
of Designation now makes the Company and Series F conversion formula the same. No other rights were modified or amended in the
Amended Certificate of Designation.
Had the Company not
amended the Series F Certificate of Designation and had Ironridge exercised their option to convert 600 shares of Series F stock
on August 26, 2013, they would have received 1.2 million shares in the conversion, versus the 23.4 million common shares owed
pursuant to a Company conversion. Had the Company not amended the Series F Certificate of Designation and had Ironridge exercised
their option to convert 750 shares of Series F stock on March 17, 2014 they would have received 2.7 million shares in the conversion,
versus the 14.2 million common shares owed pursuant to a Company conversion.
The Series F earns
a dividend of 7.65% and is redeemable by the Company after seven years. The Series F has a liquidation value of $1,000 per share,
plus accrued dividends, and is convertible at the option of Ironridge or the Company into shares of the Company’s common
stock at a discount, and we may choose to issue shares of common stock in lieu of cash as payment of dividends on the Series F.
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 issued in August 2013
within 30 days of closing and to use its best efforts to get the Registration Statement effective. Such Registration Statement
covers the resale of shares upon conversion of the Series F preferred stock at the option of Ironridge and by the Company. Such
Registration Statement went effective on February 6, 2014.
In connection with
the Series F conversions, the Company recorded beneficial conversion dividends during the year ended December 31, 2013 and 2012
totaling $9.0 million and $15.5 million respectively, representing 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.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
On February 28, 2014,
the Company sold 150 shares of Series F to Ironridge for $100,000. The Company also issued 50 shares as fees for the financing
transaction. Further, if the Company did not have an effective registration statement on file within 30 days of closing, it was
required to issue Ironridge an additional 100 shares of Series F, which were issued in early April 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 $12.50 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.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
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.
2012 Ironridge Series H Preferred Financing
On January 13, 2012,
the Company, entered into a Preferred Stock Purchase Agreement (the “Series H Agreement”) with Ironridge, under which
Ironridge was committed to purchase for cash $500,000 in shares of the Company’s redeemable, convertible Series H Preferred
Stock (the “Series H Preferred Stock”) at $1,000 per share of Series H Preferred Stock.
Each share of Series
H Preferred Stock was convertible into shares of the Company’s common stock at any time by the holder at a conversion price
of $3.75 per share. The Series H Preferred Stock accrued dividends in the amount of 4.5% per annum, subject to increase if the
closing price of the Company’s common stock fell below $3.125 per share, up to a maximum rate of 10% per annum. The dividends
were payable quarterly, at the Company’s option, in cash or shares of the Company’s common stock. The holder of the
Series H Preferred Stock could have converted the Series H Preferred Stock into shares of the Company’s common stock at
any time at an initial conversion price of $3.75 per share plus a make-whole adjustment equal to accrued but unpaid dividends
and dividends that otherwise would be due through the 10th anniversary of the Series H Preferred Stock. The Company could have
converted the Series H Preferred Stock if the closing price of the Company’s common stock exceeded 200% of the conversion
price, and certain other conditions were met. The holder was prohibited, however, from converting the Series H Preferred Stock
into shares of the Company’s common stock if, as a result of such conversion, the holder together with its affiliates, would
have owned more than 9.99% of the total number of shares of the Company’s common stock then issued and outstanding.
On January 17, 2012,
Ironridge funded the $500,000 purchase price, pursuant to which the Company issued 500 shares of Series H Preferred Stock to Ironridge.
Through December 31, 2012, Ironridge had converted all 500 shares of Series H Preferred Stock, pursuant to which the Company issued
a total of 589,016 shares of common stock to Ironridge. In connection with the conversions, the Company recorded a total
of $1.7 million of beneficial conversion dividend in 2012, representing the excess of the fair value of the Company’s common
stock at the date of issuance of the converted Series H Preferred Stock over the effective conversion rate, multiplied by the
common shares issued upon conversion. As of December 31, 2013, no shares of Series H Preferred Stock were outstanding.
Certificate of Designations for Series
H Preferred Stock
On January 12, 2012,
the Company filed a Certificate of Designations of Preferences, Rights and Limitations of Series H Preferred Stock (the “Series
H Certificate of Designations”) with the Secretary of State of the State of Delaware and the number of shares so designated
is 500, par value $0.001 per share, which shall not be subject to increase without the consent of the holders of the Series H
Preferred Stock. A summary of the Series H Certificate of Designations is set forth below:
Dividends and Other
Distributions.
Commencing on the date of issuance of any such shares of Series H Preferred Stock, holders of Series H Preferred
Stock are entitled to receive quarterly dividends on each outstanding share of Series H Preferred Stock, which are payable, at
the Company’s option, in cash or shares of the Company’s common stock at a rate equal to 4.5% per annum from the date
of issuance. Accrued dividends are payable on the last business day of each calendar quarter and upon redemption of the Series
H Preferred Stock. The dividend rate will adjust upward by 98.2350 basis points for each $0.01 that the price of the Company’s
common stocks falls below $3.125 per share, up to a maximum rate of 10% per annum.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
Conversion.
The
Series H Preferred Stock is convertible into shares of the Company’s common stock at holder’s option at any time from
the date of issuance of the Series H Preferred Stock. If the holder elects to convert, the Company will issue that number of shares
of its common stock equal to the Early Redemption Price, as defined below, multiplied by the number of shares subject to conversion,
divided by the conversion price of $3.75 (“Series H Conversion Price”). There are no resets, ratchets or anti-dilution
provisions that adjust the Series H Conversion Price other than the customary adjustments for stock splits.
The Company may convert
the Series H Preferred Stock into common stock if the closing price of the Company’s common stock exceeds 200% of the Series
H Conversion Price for any consecutive 20 trading days and certain equity conditions are met.
Upon such conversion,
the Company will issue that number of shares of the Company’s common stock equal to the Early Redemption Price, as defined
below, multiplied by the number of shares subject to conversion, divided by the Series H Conversion Price.
Redemption.
The
Company may redeem any or all of the Series H Preferred Stock for cash at any time after the tenth anniversary of the issuance
date at the redemption price per share (the “Series H Redemption Price”), equal to $1,000 per share of Series H Preferred
Stock, plus any accrued but unpaid dividends with respect to such shares of Series H Preferred Stock (the “Series H Liquidation
Value”). Prior to the tenth anniversary of the issuance of the Series H Preferred Stock, the Company may, at its option,
redeem the shares at any time after the issuance date at a price per share equal to the Series H Liquidation Value plus the total
cumulative amount of dividends that otherwise would have been payable through the tenth anniversary of the issuance date, less
any dividends that have been paid (the “Early Redemption Price”).
In addition, if the
Company determines to liquidate, dissolve or wind-up the Company’s business, or engage in any liquidation event, it must
redeem the Series H Preferred Stock at the applicable Early Redemption Price.
The Company cannot
issue any shares of common stock upon conversion of the Series H Preferred Stock if it would result in the holder 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.
Ironridge’s obligation
to purchase the Series H Preferred Stock was subject to satisfaction of certain closing conditions, including (i) that the Company’s
common stock is listed for and trading on a trading market, (ii) no uncured default exists under the Series H Agreement, and (iii)
the Company’s representations and warranties set forth in the Series H Agreement are true and correct in all material respects.
2012 Ironridge Securities Purchase
Agreement
On January 13, 2012,
the Company also entered into a securities purchase agreement (the “Securities Purchase Agreement”) with Ironridge
whereby Ironridge agreed to purchase up to $10 million of shares of the Company’s common stock from time to time over a
24-month period. Under the terms of the Securities Purchase Agreement, Ironridge was not obligated to purchase shares of the Company’s
common stock unless and until certain conditions were met, including but not limited to the SEC declaring effective a Registration
Statement (the “First Ironridge Registration Statement”) on Form S-1 and the Company maintaining an effective First
Ironridge Registration Statement which registers Ironridge’s resale of any shares purchased by it under the facility, including
the Commitment Fee Shares and Success Fee Shares (each as defined in the Securities Purchase Agreement). The customary terms and
conditions associated with Ironridge’s registration rights were set forth in a Registration Rights Agreement that was also
entered into by the parties on January 13, 2012. As the First Ironridge Registration Statement never went effective,
the Securities Purchase Agreement was terminated on April 26, 2012. It was replaced by an agreement that was substantially equivalent
(see the Stock Purchase Agreement below).
On July 12, 2012, the
Company entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Ironridge whereby Ironridge
agreed to purchase up to $10 million of shares of the Company’s common stock from time to time over a 24-month period. Under
the terms of the Stock Purchase Agreement, Ironridge was not obligated to purchase shares of the Company’s common stock
unless and until certain conditions were met, including but not limited to the Company maintaining an effective Registration Statement
(the “Second Ironridge Registration Statement”) on Form S-1which registers Ironridge’s resale of any shares
purchased by it under the facility, including the Commitment Fee Shares (as defined below). The customary terms and conditions
associated with Ironridge’s registration rights are set forth in a Registration Rights Agreement that was also entered into
by the parties on July 12, 2012 (the “Second Ironridge Registration Rights Agreement”).
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
On August 13, 2012,
the Second Ironridge Registration Statement was declared effective by the SEC. Fifteen (15) trading days after the Second Ironridge
Registration Statement was declared effective, the Company had the right to sell and issue to Ironridge, and Ironridge was obligated
to purchase from the Company, up to $10 million of shares of the Company’s common stock over a 24-month period beginning
on such date (the “Commitment Period”). Ironridge did continuous drawdowns of 80,000 shares under the facility
until the Company sent a notice suspending the draw down notice. The draw down pricing period was the number of consecutive
trading days necessary for 240,000 shares of the Company’s stock to trade. Only one draw down was allowed in each draw
down pricing period. The purchase price for the shares was 90% of the average of the daily VWAP on each trading day during
the draw down pricing period preceding such current draw down pricing period, not to exceed the arithmetic average of any three
daily VWAPs during the draw down pricing period preceding such current draw down pricing period. For purposes of a recommencement
following a suspension, the purchase price was the lower of the foregoing and the closing price of the Company’s common
stock on the trading day prior to the recommencement date; and for purposes of the first draw down the purchase price meant
the VWAP for the 15 consecutive trading days after the effective date of the Second Ironridge Registration Statement. The Company
delivered the shares sold to Ironridge by the third trading day following the draw down pricing period. Ironridge was entitled
to liquidated damages in connection with certain delays in the delivery of any draw down shares. The Stock Purchase Agreement
also provided for a commitment fee to Ironridge of 120,000 shares of the Company’s common stock (the “Commitment Fee
Shares”). The Company issued 1,000,000 shares to Ironridge under the equity line during 2012 (inclusive of the commitment
shares), for which it received $379,220 in proceeds. During 2013, the Company issued 360,000 shares under the equity line and
had received $153,040 in proceeds. At December 31, 2013, all shares previously registered had been issued. While shares of our
common stock may be issuable to the Ironridge Entities upon conversion of the Series F Preferred Stock, no more sales can
be made under our previous equity line with the Ironridge Entities.
Convertible Note Financings
On August 14, 2012,
the Company entered into a financing arrangement pursuant to which it may borrow up to $400,000 in convertible, unsecured debt,
at the discretion of the lender. The Company issued a promissory note in favor of a lender with a principal sum of $445,000 (with
a $45,000 original issue discount). The debt is to be issued at a 10% discount, matures twelve 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 $0.50 per share or 75% of the lowest closing price 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.
On August 15, 2012,
the Company borrowed an initial $100,000 under the arrangement, 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. Debt was recorded
at a discount in the amount of $32,888, 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 $111,000. Additionally, a liability of $49,000 has been 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 will be amortized over
the one year term of the note. As of December 31, 2013, the Company has issued an aggregate of 421,656 shares of common stock
to convert the face value, interest and discount of the promissory note. All related debt discount and beneficial conversion feature
were fully amortized in conjunction with the conversion of the note. Subsequent to December 31, 2013, the warrant was exercised
using a cashless exercise and 1,666,399 shares of common stock were issued.
On November 8, 2012,
the Company borrowed an additional $100,000 under the agreement, 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 will be 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. The debt shall accrete in value over its one year
term to its face value of approximately $110,000. Additionally, a liability of $49,000 has been 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 will be amortized over the one year term
of the note. As of December 31, 2013, the Company has issued an aggregate of 1,758,299 shares of common stock to convert the face
value, interest and discount of the promissory note. All related debt discount and beneficial conversion feature were fully amortized
in conjunction with the conversion of the note. Subsequent to December 31, 2013, the warrant was exercised using a cashless
exercise and 3,051,564 shares of common stock were issued.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
On February 27, 2013,
the Company borrowed an additional $75,000 under the agreement, 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. The debt shall accrete
in value over its one year term to its face value of approximately $82,500. Additionally, a liability of $35,687 has been 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. As of December 31, 2013, the Company has issued an aggregate of 4,155,937 shares of common stock
to convert the face value, interest and discount of the promissory note. All related debt discount and beneficial conversion feature
were fully amortized in conjunction with the conversion of the note. Subsequent to December 31, 2013, the warrant
was exercised using a cashless exercise and 1,453,225 shares of common stock were issued.
On June 4, 2013, the
Company borrowed an additional $50,000 under the agreement, 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 $55,000. Additionally, a liability of $23,223 has been 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. As of December 31, 2013, the Company has issued an aggregate of 2,600,000 shares of common stock
to convert $47,580 of the convertible promissory note pursuant to the agreement. The amortization expense recorded as of December
31, 2013 was approximately $35,000.
On February 20, 2014,
the Company borrowed an additional $75,000. The debt was issued at a 10% discount, had no warrant coverage, matures twelve 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.
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 together with any note(s) issued in replacement thereof or as a dividend
thereon or otherwise with respect thereto in accordance with the terms thereof, with a maturity date of April 8, 2014, convertible
into shares of common stock, $0.001 par value per share, of the Company (the “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 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 beneficial
conversion feature of $32,970 which has been fully amortized as of December 31, 2013. The underlying Note maybe prepaid, subject
to an escalating premium, prior to maturity and conversion. As of December 31, 2013, the outstanding principal and interest on
the Convertible Promissory Note was $82,574.
On December 13, 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 $103,500 (together with any note(s) issued in replacement thereof or as a dividend
thereon or otherwise with respect thereto in accordance with the terms thereof, with a maturity date of September 17, 2014, convertible
into shares of common stock, $0.001 par value per share, of the Company (the “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 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 39% 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 beneficial
conversion feature of $40,365. The amortization expense recorded in the quarter ended December 31, 2013 was approximately $4,000.
The underlying Note maybe prepaid, subject to an escalating premium, prior to maturity and conversion. As of December 31, 2013,
the outstanding principal and interest on the Convertible Promissory Note was $104,036.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
On January 24, 2014,
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 (together with any note(s) issued in replacement thereof or as a dividend
thereon or otherwise with respect thereto in accordance with the terms thereof, with a maturity date of October 28, 2014, convertible
into shares of common stock, $0.001 par value per share, of the Company (the “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 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 39% discount to the price of common shares in the
ten days prior to conversion.
On February 21, 2014,
the Company entered into a financing arrangement pursuant to which borrowed $100,000 in unsecured debt, convertible at the discretion
of the lender. The Company issued a convertible note in favor of a lender with a principal sum of $100,000. The debt
is to be 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 60% of 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.
On March 13, 2014 the
Company borrowed $75,000, each from two separate lenders. Under each agreement the Company received $65,750, 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 the or 60% of 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 conjunction
with each note the Company issued an additional note, of identical terms, for $75,000. Each note was paid for by the issuances
of a note payable to the Company. In the event that Note is repaid after six months the lender has the option of converting the
additional note into shares of the Company’s common stock at the or 60% of the lowest closing bid price in the 20 trading
days prior to conversion.
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, redeemable debentures (the “Debentures”). A $550,000 Debenture
was purchased by TCA on January 16, 2013 (the “First Debenture”).
The maturity date of
the First Debenture is 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, 191,388 shares were issued in January 2013. 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 is obligated to issue $88,000
of additional shares 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.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
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. The principal balance as of December 31, 2013 is $300,477. In connection with this Amendment, the
Company has accounted for this modification as an extinguishment and recorded a charge to interest expense in the amount of $139,000
comprised of $59,000 relating to the write-off of unamortized debt discount and the $80,000.
Beginning in
January 2014 the Company is not current in its payments under the Debenture. On April 3, 2014 TCA sold its rights under the
TCA SPA, Debenture, Security Agreement to 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
TCA 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.
As such the Debenture has been recorded as convertible debt on the balance sheet as of December 31, 2013.
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.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
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.
As of December 31,
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 not registered any additional shares related to the Equity Line and does not
intend to.
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 the year ended December 31, 2013, the Company had repaid $250,000 of the H&K Note and the balance
outstanding as of December 31, 2013 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 year ended December 31, 2013 the outstanding principal
and interest on the Caragol Note was $105,205.
On June 5, 2013, the
Company entered into a Settlement and Agreement and Release (the “Settlement Agreement”) with IBC Funds, LLC, a Nevada
limited liability company (“IBC”) pursuant to which the Company agreed to issue common stock to in exchange for the
settlement of $214,535 (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.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
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 as of December 31, 2013 representing the
total cost to the company for settling the $214,535 claim by issuing shares of common stock at a 30% discount. As of December
31, 2013, the entire amount of the settlement was converted into 3,637,681 common shares.
5. Stockholders’
Equity
Authorized Common Stock
As of January 1, 2012,
the Company was authorized to issue 70 million shares of common stock, $0.01 par value. On January 27, 2012, the Company’s
stockholders approved an increase in the number of authorized shares of common stock of the Company from 70 million shares to
175 million shares. On May 31, 2012, the Company’s stockholders approved a further increase in the number of authorized
shares of common stock of the Company from 175 million shares to 470 million shares.
On April 18, 2013,
our stockholders approved a reverse stock split within a range of between 1-for-10 to 1-for-25. On that same date our Board
of Directors approved a reverse stock split in the ratio of 1-for-25 and we filed a Certificate of Amendment to our 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. On April 23, 2013, the reverse stock split became effective. All share amounts in this Annual Report
have been adjusted to reflect the 1-for 25 reverse stock split.
Stock Option Plans
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. As of December 31, 2013, approximately 0.9 million options and shares
have been granted under the 2011 Plan, and approximately 0.1 million remaining shares may be granted under the 2011 Plan. Awards
to employees under the Company’s stock option plans generally vest over a two-year period, with pro-rata vesting upon the
anniversary of the grant. Awards of options have a maximum term of ten years and the Company generally issues new shares upon
exercise.
In addition, as of
December 31, 2013, 2.9 million warrants to purchase the Company’s common stock have been granted outside of the Company’s
plans, which remain outstanding as of December 31, 2013. 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.
On November 10, 2009,
the Company assumed all of Steel Vault Corporation’s (“Steel Vault”) obligations under the SysComm International
Corporation 2001 Flexible Stock Plan, as amended and restated, and each option outstanding thereunder, provided that the obligation
to issue shares of the Company’s common stock, as adjusted to reflect the exchange ratio set forth in the merger with Steel
Vault, was substituted for the obligation to issue shares of Steel Vault common stock. On November 10, 2009, pursuant
to the merger with Steel Vault, approximately 268,000 outstanding Steel Vault options were converted into 132,000 Company options.
These options were granted at exercise prices ranging from $9.0 to $50.0 per share, are fully vested and are exercisable for a
period up to ten years from the vesting date.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
A summary of option
activity under the Company’s option plans for the years ended December 31, 2013 and 2012 is as follows (in thousands, except
per share amounts):
|
|
|
2013
|
|
|
2012
|
|
|
|
|
Number
of
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Number
of
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Outstanding on January 1
|
|
|
429
|
|
|
$
|
15.50
|
|
|
|
166
|
|
|
$
|
40.0
|
|
|
Granted
|
|
|
1,000
|
|
|
$
|
0.03
|
|
|
|
283
|
|
|
$
|
1.0
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
Forfeited
|
|
|
(20
|
)
|
|
$
|
135.39
|
|
|
|
(19
|
)
|
|
$
|
14.2
|
|
|
Outstanding at end of year
|
|
|
1,409
|
|
|
$
|
2.83
|
|
|
|
430
|
|
|
$
|
15.7
|
|
|
Exercisable at end of year
|
|
|
1,376
|
|
|
$
|
2.87
|
|
|
|
220
|
|
|
$
|
29.2
|
|
|
Shares available for grant at end of year
|
|
|
108
|
|
|
|
|
|
|
|
263
|
|
|
|
|
|
|
|
|
|
Outstanding
Stock Options
|
|
|
Exercisable
Stock Options
|
|
|
Range of
Exercise Prices
|
|
|
Shares
|
|
|
Weighted-
Average
Remaining
Contractual
Life (years)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
$
|
0.00
|
to
|
$9.00
|
|
|
|
1,357
|
|
|
|
11.5
|
|
|
$
|
0.64
|
|
|
|
1,324
|
|
|
$
|
0.64
|
|
|
$
|
9.25
|
to
|
$15.00
|
|
|
|
33
|
|
|
|
7.1
|
|
|
$
|
10.13
|
|
|
|
33
|
|
|
$
|
10.1
|
|
|
$
|
17.00
|
to
|
$49.75
|
|
|
|
2
|
|
|
|
7.3
|
|
|
$
|
41.13
|
|
|
|
2
|
|
|
$
|
41.13
|
|
|
$
|
73.13
|
to
|
$143.75
|
|
|
|
14
|
|
|
|
4.6
|
|
|
$
|
139.87
|
|
|
|
14
|
|
|
$
|
139.87
|
|
|
Above $143.75
|
|
|
|
3
|
|
|
|
4.55
|
|
|
$
|
226.54
|
|
|
|
3
|
|
|
$
|
226.54
|
|
|
|
|
|
|
|
|
|
1,409
|
|
|
|
11.32
|
|
|
$
|
2.83
|
|
|
|
1,376
|
|
|
$
|
2.87
|
|
|
Vested options
|
|
|
|
1,376
|
|
|
|
11.31
|
|
|
$
|
2.87
|
|
|
|
|
|
|
|
|
|
The weighted average
per share fair value of grants made in 2013 and 2012 under the Company’s incentive plans was $0.03 and $1.0, respectively.
There are inherent
uncertainties in making estimates about forecasts of future operating results and identifying comparable companies and transactions
that may be indicative of the fair value of the Company’s securities. The Company believes that the estimates of the fair
value of its common stock options at each option grant date were reasonable under the circumstances.
The Black-Scholes model,
which the Company uses to estimate the fair value of the options it grants, 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.
The fair values of
the options granted were estimated on the grant date using the Black-Scholes valuation model based on the following weighted-average
assumptions:
|
|
|
2013
|
|
|
2012
|
|
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
Expected stock price volatility
|
|
|
188
|
%
|
|
|
126
|
%
|
|
Risk-free interest rate
|
|
|
2.10
|
%
|
|
|
1.12
|
%
|
|
Expected term (in years)
|
|
|
5.0
|
|
|
|
6.0
|
|
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
A summary of restricted
stock outstanding under the stockholder approved plans outstanding as of December 31, 2013 and 2012 and changes during the
years then ended is presented below (in thousands):
|
|
|
2013
|
|
|
2012
|
|
|
Unvested at January 1
|
|
|
215
|
|
|
|
182
|
|
|
Issued
|
|
|
180
|
|
|
|
426
|
|
|
Vested
|
|
|
(95
|
)
|
|
|
(392
|
)
|
|
Forfeited
|
|
|
—
|
|
|
|
(1
|
)
|
|
Unvested at end of period
|
|
|
300
|
|
|
|
215
|
|
Warrants
On November 10,
2009, pursuant to the merger with Steel Vault, all outstanding Steel Vault warrants were converted into approximately 12,000 Company
warrants. These warrants were granted at exercise prices ranging from $15.00 to $22.00 per share, are fully vested and are exercisable
for a period of five years from the vest date. The warrants expire in 2014.
On August 15, 2012,
pursuant to a financing agreement, the Company issued immediately exercisable warrants to purchase 111,111 shares
of common stock at an initial exercise price of $0.45 per share and were exercisable for a period of five years from the vest
date. The warrants were exercised in full subsequent to December 31, 2013.
On November 8, 2012,
pursuant to a financing agreement, the Company issued immediately exercisable warrants to purchase 100,000 shares
of common stock at an initial exercise price of $0.50 per share and were exercisable for a period of five years from the vest
date. The warrants were exercised in full subsequent to December 31, 2013.
On December 19, 2012,
pursuant to an advisory agreement, the Company issued immediately exercisable warrants to purchase
240,000 shares of common stock at an initial exercise price of $0.75 per share and were exercisable for a period of five years
from the vest date. The warrants will expire in 2017. Additionally, on December 18, 2013 the Company issued immediately exercisable
warrants to purchase 2,000,000 shares of common stock at an initial exercise price of $0.06 per share and were exercisable for
a period of five years from the vest date.
On February 27, 2013,
pursuant to a financing agreement, the Company issued immediately exercisable warrants to purchase 68,182 shares
of common stock at an initial exercise price of $0.55 per share and are exercisable for a period of five years from the vest date.
The warrants expire in 2019.
On June 4, 2013, pursuant
to a financing agreement, the Company issued immediately exercisable warrants to purchase 104,167 shares of common
stock at an initial exercise price of $0.24 per share and are exercisable for a period of five years from the vest date. The warrants
expire in 2018.
On June 4, 2013, pursuant
to a consulting agreement with an advisor, the Company issued immediately exercisable warrants to purchase 250,000 shares
of common stock at an initial exercise price of $0.23 per share and are exercisable for a period of five years from the vest date.
The warrants expire in 2019.
Stock-Based Compensation
Stock-based compensation
expense for awards granted is recognized on a straight-line basis over the requisite service period based on the grant-date fair
value. Forfeitures are estimated at the time of grant and require the estimates to be revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. The Company recorded compensation expense related to stock options and restricted
stock of approximately $1,180,000 and $1,721,000 for the years ended December 31, 2013 and 2012, respectively. The intrinsic value
for all options outstanding was approximately nil and nil as of December 31, 2013 and 2012, respectively.
During the year ended
December 31, 2013, the Company issued an aggregate of 100,000 shares of restricted, under the 2011 Plan and an aggregate of 3,655,330
shares of restricted stock, outside of the approved employee stock incentive plans, to employees valued between $0.28 and $1.00
per share, and recorded related stock-based compensation of approximately $241,000. During the year ended December 31, 2012, the
Company issued, under the 2011 Plan, an aggregate of 275,000 shares of restricted stock to employees valued between $0.50 and
$4.75 per share and recorded related stock-based compensation of approximately $118,000.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
During the year ended
December 31, 2013, the Company issued, outside of the approved employee stock incentive plans, an aggregate of 1,890,019 shares
of restricted stock and, under the 2011 Plan, an aggregate of 80,000 shares of restricted stock to consultants and advisors valued
between $0.25 and $3.75 per share and recorded related stock-based compensation of approximately $124,000. During the year ended
December 31, 2013, the Company issued, outside of the approved employee stock incentive plans, an aggregate of 1,000,000 options
to advisors and recorded related stock-based compensation of approximately $27,000 for the year ended December 31, 2013.
During the year ended
December 31, 2012, the Company issued, outside of the approved employee stock incentive plans, an aggregate of 503,206 shares
of restricted stock and, under the 2011 Plan, an aggregate of 52,000 shares of restricted stock to consultants and advisors valued
between $0.25 and $3.75 per share and recorded related stock-based compensation of approximately $756,000. During the year ended
December 31, 2012, the Company issued, under the 2011 Plan, an aggregate of 282,600 options to employees and advisors and recorded
related stock-based compensation of approximately $390,000 for the year ended December 31, 2012.
Series I Preferred Stock
On September 30, 2013
the Board of Directors authorized 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 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, 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.
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 past years. All Series I shares granted vest
on January 1, 2016.
6. Income Taxes
The Company accounts
for income taxes under the asset and liability approach. Deferred taxes are recorded based upon the tax impact of items affecting
financial reporting and tax filings in different periods. A valuation allowance is provided against net deferred tax assets where
the Company determines realization is not currently judged to be more likely than not.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
The tax effects of
temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities consist
of the following (in thousands):
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
|
Accrued expenses and reserves
|
|
$
|
318
|
|
|
$
|
528
|
|
|
Stock-based compensation
|
|
|
561
|
|
|
|
284
|
|
|
Intangibles
|
|
|
(103
|
)
|
|
|
(227
|
)
|
|
Property and equipment
|
|
|
—
|
|
|
|
(1
|
)
|
|
Net operating loss carryforwards
|
|
|
27,543
|
|
|
|
26,185
|
|
|
Gross deferred tax assets
|
|
|
28,319
|
|
|
|
26,769
|
|
|
Valuation allowance
|
|
|
(28,319
|
)
|
|
|
(26,769
|
)
|
|
Net deferred taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
The valuation allowance
for U.S. deferred tax assets increased by $1.5 million in 2013 due mainly
to the generation of U.S. net operating losses and timing differences resulting from stock-based compensation. As a result of
the Company’s history of incurring operating losses a full valuation allowance against the net deferred tax asset has been
recorded at December 31, 2013 and 2012.
The difference between
the effective rate reflected in the provision for income taxes on loss before taxes and the amounts determined by applying the
applicable statutory U.S. tax rate are analyzed below:
|
|
|
2013
|
|
|
2012
|
|
|
|
|
%
|
|
|
%
|
|
|
Statutory tax benefit
|
|
|
(34
|
)
|
|
|
(34
|
)
|
|
State income taxes, net of federal effects
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
Permanent items
|
|
|
(1
|
)
|
|
|
1
|
|
|
Provision for Xmark Canadian taxes
|
|
|
9
|
|
|
|
—
|
|
|
Change in deferred tax asset valuation allowance
|
|
|
39
|
|
|
|
37
|
|
|
Provision for income taxes
|
|
|
9
|
|
|
|
—
|
|
As of December 31,
2013, the Company had U.S. federal net operating loss carry forwards of approximately $75.2 million (including approximately
$9.8 million from Steel Vault through the date of the Merger) for income tax purposes that expire in various amounts through
2033. The Company also has approximately $49.4 million of state net operating loss carryforwards that expire in various amounts
through 2033.
Based upon the change
of ownership rules under IRC Section 382, the Company experienced a change of ownership in December 2007 exceeding the 50% limitation
threshold imposed by IRC Section 382. The Company experienced subsequent changes in ownership during 2008 through 2013 as a result
of the Company issuing common shares which could potentially result in additional changes of ownership under IRC Section 382.
The acquired net operating losses of Steel Vault are subject to a similar limitation under IRC Section 382. As a result the Company’s
future utilization of its net operating loss carryforwards will be significantly limited as to the amount of use in any particular
year, and consequently may be subject to expiration.
The Company files consolidated
tax returns in the United States federal jurisdiction and in the various states in which it does business. In general, the Company
is no longer subject to U.S. federal or state income tax examinations for years before December 31, 2010.
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.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
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 December 31, 2013 the Company had made payments to Stanley
of $385,777 and had a remaining balance owed to Stanley of $819,677 related to their upfront payments to CRA in 2012.
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 approximately $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.
7. Commitments and
Contingencies
Lease Commitments
The Company leases
certain office space under noncancelable operating leases, including the Company’s corporate offices in Delray Beach, Florida
under a lease scheduled to expire in August 2015 and office space for the Company’s MFS subsidiary in Pleasanton, California
under a lease scheduled to expire in April 2015. Rent expense under operating leases totaled approximately $142,000 and $241,000
for the years ended December 31, 2013 and 2012, respectively. Future minimum lease payments under operating leases at December
31, 2013 are as follows (in thousands):
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 September 30, 2011,
the Company entered into a First Amendment to Employment and Non-Compete Agreement (the “First Silverman Amendment”)
with Mr. Silverman in connection with Mr. Silverman’s ceasing to be the Company’s Chief Executive Officer. The
First Silverman Amendment amended the Employment and Non-Compete Agreement dated November 11, 2010 between the Company and Mr.
Silverman and provided for, among other things, the issuance of restricted stock of the Company to Mr. Silverman in the aggregate
amount of approximately $3.4 million (the “Restricted Stock”) in lieu of contractually-committed cash salary and bonus
for 2012 through 2015. The Restricted Stock was to be issued based upon the average daily volume-weighted average price of the
Company’s common stock for the five trading days preceding the date of the First Silverman Amendment. The Restricted Stock
was subject to registration rights and price protection provisions, and was to be granted upon the earlier of (i) a reverse stock
split or (ii) the receipt of stockholder approval to increase the number of authorized shares of common stock of the Company to
at least 7 million shares. The Restricted Stock was price protected through the date on which the registration statement registering
such shares became effective, such that if the value of the Restricted Stock at such time was less than the average daily volume-weighted
average price of the Company’s common stock for the five trading days preceding the date of the First Silverman Amendment,
additional shares would be issued to subsidize any shortfall. On January 27, 2012, the Company issued the Restricted Stock to
Mr. Silverman, totaling 0.7 million shares.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
On December 6, 2011,
the Compensation Committee approved an Amended and Restated Employment, Consulting and Non-Compete Agreement (the “Amended
and Restated Agreement”) between the Company and Mr. Silverman in connection with Mr. Silverman’s negotiated departure
from the Board of Directors of the Company as of December 6, 2011 and his continued service as consultant to the Company until
March 1, 2012. The Amended and Restated Agreement amends and restates the Employment and Non-Compete Agreement dated November
11, 2010 between the Company and Mr. Silverman and the First Silverman Amendment, and provides for, among other things, clarification
of the terms of Mr. Silverman’s separation from the Company and continued vesting of Mr. Silverman’s unvested stock
grants. The Company also granted Mr. Silverman a security interest in substantially all of the Company’s assets (the “Security
Agreement”) until such time as the stock obligations under the Amended and Restated Agreement were fulfilled.
Under the Amended and
Restated Agreement, the Company agreed to satisfy certain contractual obligations totaling approximately $462,000, which was recorded
in accrued liabilities at December 31, 2011 (the “Contractual Obligations”), through the issuance of 98,724 shares
of common stock from the 2011 Plan to Mr. Silverman (the “Contractual Obligations Stock”) on January 2, 2012. On January
2, 2012, the Company issued the Contractual Obligations Stock to Mr. Silverman. The Company filed a registration statement
on Form S-1 for resale of the Restricted Stock (the “Registration Statement”) with the SEC on January 31, 2012, as
amended on February 2, 2012 and as further amended on February 13, 2012, March 28, 2012 and April 6, 2012.
On March 23, 2012,
the Board of Directors approved a First Amendment to the Amended and Restated Agreement (the “First Amendment to Amended
and Restated Employment Agreement”) between the Company and Mr. Silverman in connection with the elimination of any and
all price protection provisions under the Amended and Restated Agreement and any other further registration rights obligations.
Under the First Amendment to Amended and Restated Agreement, the Company agreed to issue 0.54 million shares of restricted
stock of the Company to Mr. Silverman on March 23, 2012 (the “Price Protection Shares”). The Price Protection Shares
were issued in order to (i) eliminate any and all price protection provisions under the Amended and Restated Agreement, including,
but not limited to, any price protection provisions relating to a reverse stock split, and (ii) any further registration rights
obligations. The Price Protection Shares were included on a pre-effective amendment to the Registration Statement filed
with the SEC on March 28, 2012, which Registration Statement went effective on April 10, 2012. Upon effectiveness of the Registration
Statement, the Security Agreement terminated.
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 remains deferred. 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 $363,000 and $361,598 for the year ended December 31, 2013 and 2012, respectively.
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 in the year ended December 31, 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.
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
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 will be paid in cash. The cash balance of $304,423 will be repaid at a rate of $3,700 per bi-weekly
pay period, subject to accelerated payment under certain events. As of December 31, 2013, we have paid $111,400 of
the cash balance to Mr. Happ.
Also effective September
28, 2012, the Company appointed Mr. Caragol, as the Company’s acting chief financial officer.
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”).
POSITIVEID CORPORATION
Notes to Consolidated Financial Statements
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 has been paid in full as of December 31, 2013. The $2.5 million license fee received as of December 31, 2013 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.
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.