Notes to Condensed Consolidated Financial
Statements
June 30, 2014
1. Organization and
Basis of Presentation
PositiveID, through
its wholly owned subsidiary MicroFluidic Systems (“MFS”) (collectively, the “Company” or “PositiveID”),
develops molecular diagnostic systems for bio-threat detection, for rapid diagnostic testing, and also develops assays to detect
a range of biological threats. The Company’s M-BAND (Microfluidic Bio-agent Autonomous Networked Detector) system is an airborne
bio-threat detection system developed for the homeland defense industry, to detect biological weapons of mass destruction. The
Company is also developing the handheld automated pathogen detection system Firefly Dx for rapid diagnostics, both for point of
need and clinical applications.
Authorized Common Stock (Reverse Stock
Split)
As of June 30, 2014,
the Company was authorized to issue 470 million shares of common stock. On April 18, 2013, the Company’s Board
of Directors approved a reverse stock split in the ratio of 1-for- 25 and the Company filed a Certificate of Amendment to its Second
Amended and Restated Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to affect the
reverse stock split.
Going Concern
The Company’s
unaudited consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of June
30, 2014, the Company had a working capital deficiency of approximately $6.8 million, a stockholder’s deficit of approximately
$6.7 million and an accumulated deficit of $128.5 million, compared to a working capital deficiency of $5.6 million, a stockholder’s
deficit of $4.9 million and an accumulated deficit of $124.6 million as of December 31, 2013. The Company has incurred
operating losses since its inception, and had not generated revenue from continuing operations from 2009, until the three months
ended June 30, 2014. The current operating losses are the result of research and development expenses and selling, general and
administrative expenses. While the Company began recognizing revenue during the three months ended June 30, 2014, the Company expects
its operating losses to continue through at least the next twelve months. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern.
The Company’s
ability to continue as a going concern is dependent upon its ability to obtain financing to fund the continued development of its
products and to support working capital requirements. Until the Company is able to achieve operating profits, the Company
will continue to seek to access the capital markets. In 2013 the Company raised approximately $1.4 million from the issuance
of convertible preferred stock, common stock under an equity line financing, and convertible debt. During the six months
ended June 30, 2014, the Company raised $1.1 million, net of fees, from the issuance of convertible notes and convertible preferred
stock (see Note 4). In March and April 2013 the Company received $1,500,000 in two equal installments, under its license
agreement with The Boeing Company (see Note 9).
On March 28,
2014, the Company entered into an agreement, in the form of a purchase order, from UTC Aerospace Systems (“UTAS”) to
support a contract for the U.S. Department of Defense (“DoD”). On July 9, 2014 the Company received an additional purchase
order, bringing the total value of the fixed price arrangement to $1.0 million. Pursuant to the agreement, work commenced in April
2014 and is expected to be completed by October of 2014. As of June 30, 2014 the Company had received $490 thousand (net of $7,350
in fees) of the contract value and had recognized revenue of $420 thousand. The remaining value of the agreement is expected to
be received and recognized during the remainder of 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
unaudited consolidated financial statements do not include any adjustments relating to recoverability of assets and classifications
of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
Basis of Presentation
The accompanying
condensed consolidated balance sheet as of December 31, 2013 has been derived from the Company’s audited financial statements
included in its Annual Report on Form 10-K for the year ended December 31, 2013. The accompanying unaudited condensed consolidated
financial statements as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 have been prepared in accordance
with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules
and regulations of the Securities Exchange Commission (“SEC”). Certain information and note disclosures normally included
in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations,
although the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of
the Company’s management, all adjustments (including normal recurring adjustments) necessary for a fair presentation for
the periods presented have been reflected as required by Regulation S-X, Rule 10-01.
POSITIVEID CORPORATION
Notes to Condensed Consolidated Financial
Statements
June 30, 2014
The unaudited condensed
consolidated statements of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results
that may be expected for the entire year. These statements should be read in conjunction with the consolidated financial statements
and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
New Accounting Pronouncements
In June
2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “
Revenue from Contracts
with Customers”.
The update gives entities a single comprehensive model to use in reporting information about
the amount and timing of revenue resulting from contracts to provide goods or services to customers. The proposed ASU,
which would apply to any entity that enters into contracts to provide goods or services, would supersede the revenue
recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry
Topics of the Codification. Additionally, the update would supersede some cost guidance included in Subtopic 605-35, Revenue
Recognition – Construction-Type and Production-Type Contracts. The update removes inconsistencies and weaknesses in
revenue requirements and provides a more robust framework for addressing revenue issues and more useful information to users
of financial statements through improved disclosure requirements. In addition, the update improves comparability of
revenue recognition practices across entities, industries, jurisdictions, and capital markets and simplifies the preparation
of financial statements by reducing the number of requirements to which an entity must refer. The update is effective for
annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The
Company is currently evaluating the impact this standard may have
on our results of operations, cash flows or financial condition.
In June 2014, FASB
issued Accounting Standards Update (“ASU”) No. 2014-12, “
Compensation – Stock Compensation ( Topic 718
); Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the
Requisite Service Period”.
The amendments in this ASU apply to all reporting entities that grant their employees
share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after
the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved
after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in
Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. For all entities,
the amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December
15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities.
Entities
may apply the amendments in this ASU either (a) prospectively to all awards granted or modified after the effective date or
(b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual
period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is
adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the
financial statements should be recognized as an adjustment to the opening retained earnings balance at that date.
Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the
compensation cost. The Company is currently evaluating the impact this standard may have on our results of operations, cash flows or financial condition.
2. Summary of Significant
Accounting Policies
Principles of Consolidation
The unaudited condensed
consolidated financial statements include the accounts of PositiveID Corporation and its wholly-owned subsidiary. All significant
inter-company balances and transactions have been eliminated in consolidation.
Revenue Recognition
Revenue is recognized when persuasive evidence
of an arrangement exists, collectability of arrangement consideration is reasonably assured, the arrangement fees are fixed or
determinable and delivery of the product or service has been completed.
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.
POSITIVEID CORPORATION
Notes to Condensed Consolidated Financial
Statements
June 30, 2014
Convertible Notes With Variable Conversion
Options
The Company has entered
into convertible notes, some of which contain variable conversion options, whereby the outstanding principal and accrued interest
may be converted, by the holder, into common shares at a fixed discount to the price of the common stock at the time of conversion.
The Company measures the fair value of the notes at the time of issuance, which is the result of the share price discount at the
time of conversion, and records the premium as accretion to interest expense to the date of first conversion, typically six months.
Use of Estimates
The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Loss
per Common Share
Basic and diluted loss
per common share for all periods presented is calculated based on the weighted average common shares outstanding for the period.
The following potentially dilutive securities were outstanding as of June 30, 2014 and 2013 and were not included in the computation
of dilutive loss per common share because the effect would have been anti-dilutive (in thousands):
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June 30,
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2014
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|
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2013
|
|
Convertible preferred stock
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|
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54,482
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12
|
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Stock options
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|
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2,857
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428
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Warrants
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|
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2,490
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636
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Unvested restricted shares of common stock
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3,432
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5,865
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63,261
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6,941
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Segment Information
The Company operates
in a single market segment.
Reclassification
Certain items previously
reported in the consolidated financial statement captions have been reclassified to conform to the current financial statement
presentation.
3. Acquisitions/Dispositions
MicroFluidic Systems Acquisition
On May 23, 2011, the
Company acquired all of the outstanding capital stock of MFS in a transaction accounted for using the purchase method of accounting
(the “Acquisition”). Since MFS’s inception, its key personnel have had an important role in developing
technologies to automate the process of biological pathogen detection.
In connection with the
Acquisition, the Company is also required to make certain earn-out payments, which as of January 1, 2014 can total up to a maximum
of $2,000,000 payable in shares of the Company’s common stock, upon certain conditions being achieved in 2014 (the “Earn-Out
Payment”). There was also opportunity for the MFS sellers to achieve Earn-Out Payments in 2011 through 2013. Targets
were not met in either of those three years. The earn-out for 2014 is based on MFS achieving certain earnings targets
for the respective year, subject to a maximum Earn-Out Payment of $2,000,000. Additionally, approximately two-thirds
of the earn-out is capped at $8.00 per share. Further, the Company is prohibited from making any Earn-Out Payment until
stockholder approval is obtained if the aggregate number of shares to be issued exceeds 19.99% of the Company’s common stock
outstanding immediately prior to the closing. In the event the Company is unable to obtain any required stockholder approval, the
Company is obligated to pay the applicable Earn-Out Payment in cash to the sellers. In addition, the Company may pay any Earn-Out
Payment in cash at its option.
POSITIVEID CORPORATION
Notes to Condensed Consolidated Financial
Statements
June 30, 2014
The estimated purchase
price of the Acquisition include the contingent earnout consideration of approximately $750,000. The fair value of the contingent
consideration was estimated based upon the present value of the probability-weighted expected future payouts under the earn-out
arrangement. On October 31, 2011, the Company entered into an agreement with two of the selling MFS shareholders pursuant to which
the two individuals waived their right to any earn-out compensation for 2011 in settlement of the closing working capital adjustment
provisions of the purchase agreement. The two individuals, who had a combined ownership interest in MFS of 68% also agreed to receive
any future earnout consideration at a price of no lower than $8 per share.
Sale
of Subsidiary to Related Party
On January 11, 2012,
VeriTeQ Acquisition Corporation, or VeriTeQ, which is owned and controlled by our former chairman and chief executive officer,
Scott Silverman, purchased all of the outstanding capital stock of PositiveID Animal Health, or Animal Health, in exchange for
a secured promissory note in the amount of $200,000, or the Note, and 4 million shares of common stock of VeriTeQ representing
a 10% ownership interest, to which no value was ascribed. The Note accrued interest at 5% per annum. Payments under the Note were
to begin on January 11, 2013 and are due and payable monthly, and the Note matures on January 11, 2015. The Note was secured by
substantially all of the assets of Animal Health pursuant to a security agreement dated January 11, 2012, or the VeriTeQ Security
Agreement. Mr. Caragol was a director of VeriTeQ Acquisition Corporation until July 8, 2013. Mr. Krawitz, a director of the Company,
was a director of VeriTeQ Acquisition and VeriTeQ Corporation, its successor, until June 17, 2014.
In connection with
the sale, we entered into a license agreement with VeriTeQ dated January 11, 2012, or the Original License Agreement, which granted
VeriTeQ a nonexclusive, perpetual, nontransferable, license to utilize our biosensor implantable radio frequency identification
(RFID) device that is protected under United States Patent No. 7,125,382, “Embedded Bio Sensor System,” or the Patent,
for the purpose of designing and constructing, using, selling and offering to sell products or services related to the VeriChip
business, but excluding the GlucoChip or any product or application involving blood glucose detection or diabetes management. Pursuant
to the Original License Agreement, we were to receive royalties in the amount of 10% on all gross revenues arising out of or relating
to VeriTeQ’s sale of products, whether by license or otherwise, specifically relating to the Patent, and a royalty of 20%
on gross revenues that are generated under the Development and Supply Agreement between us and Medical Components, Inc., or Medcomp,
dated April 2, 2009, to be calculated quarterly with royalty payments due within 30 days of each quarter end. The total cumulative
royalty payments under the agreement with Medcomp will not exceed $600,000.
We also entered into
a shared services agreement with VeriTeQ on January 11, 2012, or the Shared Services Agreement, pursuant to which we agreed to
provide certain services to VeriTeQ in exchange for $30,000 per month. The term of the Shared Services Agreement commenced on January
23, 2012. The first payment for such services is not payable until VeriTeQ receives gross proceeds of a financing of at least $500,000.
On June 25, 2012, the Shared Services Agreement was amended, pursuant to which all amounts owed to us under the Shared Services
Agreement as of May 31, 2012 were converted into shares of common stock of VeriTeQ. In addition, effective June 1, 2012, the level
of shared services was decreased and the monthly charge for the shared services under the Shared Services Agreement was reduced
from $30,000 to $12,000. Furthermore, on June 26, 2012, the Original License Agreement was amended pursuant to which the license
was converted from a nonexclusive license to an exclusive license, subject to VeriTeQ meeting certain minimum royalty requirements
as follows: 2013 $400,000; 2014 $800,000; and 2015 and thereafter $1,600,000.
On August 28, 2012,
we entered into an Asset Purchase Agreement with VeriTeQ, or the VeriTeQ Asset Purchase Agreement, whereby VeriTeQ purchased all
of the intellectual property, including patents and patents pending, related to our embedded biosensor portfolio of intellectual
property. Under the VeriTeQ Asset Purchase Agreement, we are to receive royalties in the amount of ten percent (10%) on all gross
revenues arising out of or relating to VeriTeQ’s sale of products, whether by license or otherwise, specifically relating
to the embedded biosensor intellectual property, to be calculated quarterly with royalty payments due within 30 days of each quarter
end. In 2012, there are no minimum royalty requirements. Minimum royalty requirements thereafter, and through the remaining life
of any of the patents and patents pending, are identical to the minimum royalties due under the Original License Agreement.
Simultaneously
with the VeriTeQ Asset Purchase Agreement, we entered into a license agreement with VeriTeQ which granted us an exclusive, perpetual,
transferable, worldwide and royalty-free license to the Patent and patents pending that are a component of the GlucoChip in the
fields of blood glucose monitoring and diabetes management. In connection with the VeriTeQ Asset Purchase Agreement, the Original
License Agreement, as amended June 26, 2012, was terminated. Also on August 28, 2012, the VeriTeQ Security Agreement was amended,
pursuant to which the assets sold by us to VeriTeQ under the VeriTeQ Asset Purchase Agreement and the related royalty payments
were added as collateral under the Security Agreement.
On August
28, 2012, the Shared Services Agreement was further amended, pursuant to which, effective September 1, 2012, the level of services
provided was decreased and the monthly charge for the shared services under the Shared Services Agreement was reduced from $12,000
to $5,000. On April 22, 2013, the Company entered into a non-binding letter agreement with VeriTeQ in which the Company agreed
to provide up to an additional $60,000 of support during April and May 2013.
POSITIVEID CORPORATION
Notes to Condensed Consolidated Financial
Statements
June 30, 2014
The new agreements
and amendments to existing agreements between the Company and VeriTeQ Acquisition Corporation on August 28, 2012 were entered into
to transfer ownership of the underlying intellectual property, primarily patents, to VeriTeQ, with a license back to the Company
for the one application that the Company retained. The royalty rates set in the original license were maintained and the rates
in the Shared Services Agreement, as amended, were adjusted to reflect a decreased level of support between the two companies.
The intent of these agreements and amendments, and all agreements that followed in 2012 through 2013, was to better position VeriTeQ
Acquisition Corporation for a third party capital transaction and were negotiated at arm's length. No additional financial consideration
was conveyed in conjunction with these agreements and amendments. It was the Company's intent in its transactions with VeriTeQ
Corporation to maximize and monetize its returns for the benefit of the Company.
On July 8, 2013, the
Company entered into a Letter Agreement with VeriTeQ, to amend certain terms of several agreements between PositiveID and VeriTeQ.
The Letter Agreement amended certain terms of the Shared Services Agreement entered into between PositiveID and VeriTeQ on January
11, 2012, as amended; the Asset Purchase Agreement entered into on August 28, 2012, as amended; and the Secured Promissory Note
dated January 11, 2012. The Letter Agreement defines the conditions of termination of the Shared Services Agreement, including
payment of the approximate $290,000 owed from VeriTeQ to PositiveID, the elimination of minimum royalties payable to PositiveID
under the Asset Purchase Agreement, as well as certain remedies if VeriTeQ fails to meet certain sales levels, and to amend the
Note, which has a current balance of $228,000, to include a conversion feature under which the Note may be repaid, at VeriTeQ’s
option, in equity in lieu of cash. The agreements entered into on July 8, 2013 were negotiated in conjunction with VeriTeQ Acquisition
Corporation’s merger transaction with Digital Angel Corporation, resulting in a public company now called VeriTeQ Corporation.
The terms of the agreements were made to benefit both the Company and VeriTeQ. The Company benefitted as its equity interest in
VeriTeQ became an equity interest in a public company, allowing future realization of the Company’s holdings. No additional
financial consideration was conveyed in conjunction with these agreements and amendments. The changes were also a condition to
closing of the merger agreement set by Digital Angel, VeriTeQ’s merger partner.
During October 2013
VeriTeQ arranged a financing with a group of eight buyers (the “Buyers”). In conjunction with that transaction the
Buyers offered the Company a choice of either selling its interest in VeriTeQ, including 871,754 shares and its convertible promissory
note (which had a balance of $203,694 at the time of the transaction), which was convertible into 135,793 shares of VeriTeQ stock,
for $750,000, or alternatively, to lock up its shares for a period of one year. The Board of Directors of the Company considered
a number of factors, including the Company’s liquidity and access to capital, and the prospects for return on the VeriTeQ
shares in twelve months. The Board concluded that it was in the best interest of Company to sell its interest in VeriTeQ to the
Buyers.
As a result, on November
8, 2013 the Company entered into a letter agreement (the “November Letter Agreement”) with VeriTeQ and on November
13, 2013, the Company entered into a Stock Purchase Agreement (“SPA”) with the Buyers. On November 13, 2013 VeriTeQ
entered into a financing transaction with Hudson Bay Master Fund Ltd. (“Hudson”) and other participants, including
most of the Buyers.
Pursuant to the November
Letter Agreement, VeriTeQ 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.
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 Condensed Consolidated Financial
Statements
June 30, 2014
|
(i)
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$0.0025 per strip sold until SGMC has paid aggregate Consideration of $1,000,000; and
|
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(ii)
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$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.
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4. Equity and Debt Financing Agreements
Ironridge Series F Preferred Stock Financings
Beginning in July 2011,
the Company entered into a series of financings with Ironridge involving the Company’s Series F convertible preferred stock.
Since July 2011 and through June 30, 2014, a total of 3,150 Series F shares have been issued and 2,650 have been converted into
common shares. No Series F shares have been redeemed. As of June 30, 2014 there are 500 shares of Series F outstanding.
On August 26, 2013,
the Company entered into a Stock Purchase Agreement (the “Ironridge Stock Purchase Agreement”) and a Registration Rights
Agreement (the “Ironridge Registration Rights Agreement” and, collectively, the “Ironridge Agreements”)
with Ironridge Global IV, Ltd., a British Virgin Islands business company (“Ironridge”). Pursuant to the Ironridge
Agreements, the Company agreed to issue 450 shares of Series F Preferred Stock (“Series F”) to Ironridge in exchange
for $300,000. Additionally, the Company issued 100 shares and 50 shares of Series F as commitment and documentation fees, respectively.
During the six months ended June 30, 2014, 400 of these Series F shares were converted into 13,758,398 shares of common stock.
As of June 30, 2014, 200 of these Series F shares are outstanding.
The Company has the
option to buy back any shares of Series F at the liquidation value plus accrued dividends, without any premium. The Company also
agreed to file a Registration Statement covering the common shares underlying the Series F within 30 days of closing and to use
its best efforts to get the Registration Statement effective. As the Registration Statement was not effective within 90 days of
closing on January 10, 2014 the Company issued 150 shares of Series F to Ironridge as liquidated damages, for which an expense
in the amount of $150,000 has been recorded during the six months ended June 30, 2014. On February 25, 2014, these 150 shares of
Series F were converted into 3,398,389 shares of common stock.
On February 27, 2014,
the Company entered into a Stock Purchase Agreement with Ironridge Global IV, Ltd., a British Virgin Islands business company (“Ironridge”).
Pursuant to the agreement, the Company agreed to issue 150 shares of Series F to Ironridge in exchange for $100,000. Additionally,
the Company issued 50 shares of Series F as commitment and documentation fees, and in March 2014 issued an additional 100 shares
of Series F as liquidated damages, for which an expense in the amount of $100,000 was recorded, in fulfillment of its obligations
under the agreement. As of June 30, 2014, all 300 of these Series F shares are outstanding.
During the three months
ended June 30, 2014, the Company converted 100 shares of Series F Preferred stock into 3,348,458 shares of common stock. Through
June 30, 2014, the Company and Ironridge had converted a total of 2,650 shares of Series F Preferred Stock, pursuant to which the
Company issued a total of 33,177,323 shares of common stock to the Ironridge Entities.
In connection with the
Series F conversions, the Company recorded beneficial conversion dividends during the three months ended June 30, 2014 and 2013
totaling $84,000 and $1.1 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. These charges are non-cash charges.
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.
POSITIVEID CORPORATION
Notes to Condensed Consolidated Financial
Statements
June 30, 2014
In addition, if the
Company determines to liquidate, dissolve or wind-up its business, or engage in any deemed liquidation event, it must redeem the
Series F Preferred Stock at the applicable early redemption price set forth above.
Conversion.
The Series F Preferred Stock is convertible into shares of the Company’s common stock at the applicable Ironridge Entities
option or at the Company’s option at any time after six months from the date of issuance of the Series F Preferred Stock.
The fixed conversion price is equal to $0.50 per share which represented a premium of 32% over the closing price of the Company’s
common stock on the trading day immediately before the date the Company announced the entry into the Series F Agreement (the “Series
F Conversion Price”).
If the Company or Ironridge
elects to convert the Series F Preferred Stock into common stock and the closing bid price of the Company’s common stock
exceeds 150% of the Series F Conversion Price for any 20 consecutive trading days, the Company will issue that number of shares
of its common stock equal to the early redemption price set forth above multiplied by the number of shares subject to conversion,
divided by the Series F Conversion Price. If the Company elects to convert the Series F Preferred Stock into common stock
and the closing bid price of the Company’s common stock is less than 150% of the Series F Conversion Price, the Company will
issue an initial number of shares of its common stock equal to 130% of the early redemption price set forth above multiplied by
the number of shares subject to conversion, divided by the lower of (i) the Series F Conversion Price and (ii) 100% of the closing
bid price of a share of the Company’s common stock on the trading day immediately before the date of the conversion notice.
After 20 trading days,
the Ironridge Entity shall return, or the Company shall issue, a number of conversion shares (the “Series F Reconciling Conversion
Shares”), so that the total number of conversion shares under the conversion notice equals the early redemption price set
forth above multiplied by the number of shares of subject to conversion, divided by the lower of (i) the Series F Conversion Price
and (ii) 85% of the average of the daily volume-weighted average prices of the Company’s common stock for the lowest three
is the twenty trading days following the Ironridge Entity’s receipt of the conversion notice. However, if the trading
price of the Company’s common stock during any one or more of the 20 trading days following the Ironridge Entity’s
receipt of the conversion notice falls below 70% of the closing bid price on the day prior to the date the Company gives notice
of its intent to convert, the Ironridge Entity will return the Series F Reconciling Conversion Shares to the Company and the pro
rata amount of the conversion notice will be deemed canceled.
The Company cannot issue
any shares of common stock upon conversion of the Series F Preferred Stock if it would result in an Ironridge Entity being deemed
to beneficially own, within the meaning of Section 13(d) of the Securities Exchange Act, more than 9.99% of the total shares of
common stock then outstanding. Furthermore, until stockholder approval is obtained or the holder obtains an opinion of counsel
reasonably satisfactory to the Company and its counsel that such approval is not required, both the holder and the Company are
prohibited from delivering a conversion notice if, as a result of such exercise, the aggregate number of shares of common stock
to be issued, when aggregated with any common stock issued to holder or any affiliate of holder under any other agreements or arrangements
between the Company and the holder or any applicable affiliate of the holder, such aggregate number would, under NASDAQ Marketplace
rules (or the rules of any other exchange where the common stock is listed), exceed the Cap Amount (meaning 19.99% of the common
stock outstanding on the date of the Series F Agreement). If delivery of a conversion notice is prohibited by the preceding sentence
because the Cap Amount would be exceeded, the Company must, upon the written request of the holder, hold a meeting of its stockholders
within sixty (60) days following such request, and use its best efforts to obtain the approval of its stockholders for the transactions
described herein.
Due to the above variations
in the conversion price, the beneficial conversion feature is considered contingent and not measurable or recorded until the actual
conversion dates. The beneficial conversion feature is recorded as a constructive dividend and was $480,000 for the six months
ended June 30, 2014.
Convertible Note Financings
On August 15, 2012,
the Company borrowed $100,000 pursuant to a convertible note, in connection with which it issued to the lender immediately exercisable
warrants to purchase 111,111 shares of common stock at an initial exercise price of $0.45 per share. The debt was recorded
at a discount in the amount of $32,888, representing the relative fair value of the warrants. Additionally, a liability of $49,000
was recorded as the fair value of the warrant as a result of a down round adjustment to the exercise price of the warrants. In
connection with the issuance of the $100,000 note there is a beneficial conversion feature of approximately $25,000, which was
amortized over the one year term of the note. During 2013, the note principal and interest was fully converted into an aggregate
of 421,656 shares of common stock. All related debt discount and beneficial conversion feature were fully amortized in conjunction
with the conversion of the note. On January 15, 2014 the warrants were converted, on a cashless basis, into 1,666,399 shares of
common stock.
POSITIVEID CORPORATION
Notes to Condensed Consolidated Financial
Statements
June 30, 2014
On November 8, 2012,
the Company borrowed $100,000 pursuant to a convertible note, in connection with which it issued the lender immediately exercisable
warrants to purchase 100,000 shares of common stock at an initial exercise price of $0.50 per share. As an inducement
to enter into the loan the Company issued the lender 74,000 shares of common stock with a fair value of $37,925 at the time of
issuance, which was amortized over the one year life of the note. The debt was recorded at a discount in the amount
of $32,683, representing the relative fair value of the warrants. Additionally, a liability of $49,000 was recorded as the fair
value of the warrant as a result of a down round adjustment to the exercise price of the warrants. In connection with the issuance
of the $100,000 note there was a beneficial conversion feature of approximately $25,000, which will be amortized over the one year
term of the note. During 2013, the note principal and interest was fully converted into an aggregate of 1,758,299 shares of common
stock. All related debt discount and beneficial conversion feature were fully amortized in conjunction with the conversion of the
note. On February 28, 2014 the warrants were converted, on a cashless basis, into 3,051,564 shares of common stock.
On February 27, 2013,
the Company borrowed $75,000 pursuant to a convertible note, in connection with which it issued the lender immediately exercisable
warrants to purchase 68,182 shares of common stock at an initial exercise price of $0.55 per share. The debt was recorded
at a discount in the amount of $28,125, representing the relative fair value of the warrants. Additionally, a liability of $35,687
was recorded as the fair value of the warrant as a result of a down round adjustment to the exercise price of the warrants. In
connection with the issuance of the $75,000 note there is a beneficial conversion feature of approximately $18,750, which will
be amortized over the one year term of the note. During 2013, the note principal and interest was fully converted into an aggregate
of 4,155,937 shares of common stock. All related debt discount and beneficial conversion feature were fully amortized in conjunction
with the conversion of the note. During the quarter ended June 30, 2014, the warrants were converted, on a cashless basis, into
2,304,215 shares of common stock.
On June 4, 2013, the
Company borrowed $50,000 pursuant to a convertible note, in connection with which it issued the lender immediately exercisable
warrants to purchase 104,167 shares of common stock at an initial exercise price of $0.24 per share. The debt was recorded
at a discount in the amount of $23,684, representing the relative fair value of the warrants. The debt shall accrete
in value over its one year term to its face value of approximately $50,000. Additionally, a liability of $23,223 was recorded as
the fair value of the warrant as a result of a down round adjustment to the exercise price of the warrants. In connection with
the issuance of the $50,000 note there is a beneficial conversion feature of approximately $12,500, which will be amortized over
the one year term of the note. In 2013, $47,850 principal balance of the convertible note was converted into 2,600,000 shares of
common stock. As of March 2014, remaining balance of the note principal and interest was fully converted into 725,734 shares of
common stock. All related debt discount and beneficial conversion feature were fully amortized in conjunction with the conversion
of the note. During the quarter ended June 30, 2014, the warrants were converted, on a cashless basis, into 1,508,848 shares of
common stock.
On July 3, 2013, the
Company entered into a Securities Purchase Agreement for a new convertible promissory note (the "Purchase Agreement").
Pursuant to the terms of the Purchase Agreement the investor committed to purchase an 8% Convertible Promissory Note (the "Convertible
Promissory Note") in the principal amount of $78,500, with a maturity date of April 8, 2014, convertible into shares of common
stock, $0.001 par value per share, of the Company, upon the terms and subject to the limitations and conditions set forth in such
Convertible Promissory Note. Interest shall commence accruing on the date that the Note is issued and shall be computed on the
basis of a 365-day year and the actual number of days elapsed. The holder may convert the Convertible Promissory Note into common
shares of stock at a 42% discount to the price of common shares in the ten days prior to conversion. In connection with the issuance
of the Convertible Promissory Note, the Company recorded a premium of $56,845 which was amortized over the life of the Note. As
of June 30, 2014, the outstanding principal and interest on the Convertible Promissory Note was converted, on a cashless basis,
into 5,790,072 shares of common stock.
On December 13, 2013,
the Company entered into a Securities Purchase Agreement for a new convertible promissory note (the “December Purchase Agreement”).
Pursuant to the terms of the December Purchase Agreement the investor committed to purchase an 8% Convertible Promissory Note (the
“December Convertible Promissory Note”) in the principal amount of $103,500, with a maturity date of September 17,
2014, convertible into shares of common stock, $0.001 par value per share, of the Company (the “Common Stock”), upon
the terms and subject to the limitations and conditions set forth in such December Convertible Promissory Note. Interest shall
commence accruing on the date that such note is issued and shall be computed on the basis of a 365-day year and the actual number
of days elapsed. The holder may convert the December Convertible Promissory Note into common shares of stock at a 39% discount
to the price of common shares in the ten days prior to conversion. In connection with the issuance of the December Convertible
Promissory Note, the Company recorded a premium of $66,172 all of which was amortized in the six months ended June 30, 2014. The
underlying Note maybe prepaid, subject to an escalating premium, prior to maturity and conversion. During the quarter ended June
30, 2014, $83,500 principal balance of the convertible note was converted into 2,520,748 shares of common stock. As of June 30,
2014, the outstanding principal and interest on the December Convertible Promissory Note was $25,927.
POSITIVEID CORPORATION
Notes to Condensed Consolidated Financial
Statements
June 30, 2014
On January 24, 2014,
the Company entered into a Securities Purchase Agreement for a convertible promissory note (the “January Purchase Agreement”).
Pursuant to the terms of the January Purchase Agreement the investor committed to purchase an 8% Convertible Promissory Note (the
“January Convertible Promissory Note”) in the principal amount of $78,500 with a maturity date of October 28, 2014,
convertible into shares Common Stock, upon the terms and subject to the limitations and conditions set forth in such Convertible
Promissory Note. Interest shall commence accruing on the date that such note is issued and shall be computed on the basis of a
365-day year and the actual number of days elapsed. The holder may convert the January Convertible Promissory Note into common
shares of stock at a 39% discount to the price of common shares in the ten days prior to conversion. In connection with the issuance
of the January Convertible Promissory Note, the Company computed a premium of $50,189 as the note is considered stock settled debt
under ASC 480. The interest expense related to the accretion of that premium in the six months ended June 30, 2014 was $41,643.
The underlying note maybe prepaid, subject to an escalating premium, prior to maturity and conversion. As of June 30, 2014, the
outstanding principal and interest on the January Convertible Promissory Note was $82,059.
On February 20, 2014,
the Company borrowed $82,500 pursuant to a convertible note with an OID of $7,500 resulting in cash received of $75,000. The debt
was issued at a 10% discount, matures twenty four months from the date funded, has a one-time 10% interest charge if not paid within
90 days, and is convertible at the option of the lender into shares of the Company’s common stock at the lesser of $0.042
per share or 60% of the average of the two lowest closing prices in the 25 trading days prior to conversion. The note might
be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal
and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance
of the note, the Company recorded a beneficial conversion feature of $30,000. The amortization expense recorded in the six months
ended June 30, 2014 was approximately $5,908. As of June 30, 2014, the outstanding principal and interest on the note was $84,375.
On February 21, 2014,
the Company entered into a financing arrangement pursuant to which it borrowed $100,000 in unsecured debt, convertible at the discretion
of the lender. The debt was issued at a 10% discount, matures on August 21, 2014, has an interest rate of 10%, and is convertible
at the option of the lender into shares of the Company’s common stock at a 40% discount to the lowest closing price in the
20 trading days prior to conversion. The note might be accelerated if an event of default occurs under the terms
of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the
Company is delinquent in its SEC filings. In connection with the issuance of the note, the Company computed a premium of $66,667
as the note is considered stock settled debt under ASC 480, all of which was accreted and charged to interest expense in the six
months ended June 30, 2014. As of June 30, 2014, the outstanding principal and interest on the note was $105,702.
On March 4, 2014 the
Company borrowed two notes of $75,000, each from a separate lender with maturity dates of March 4, 2015. Under each agreement the
Company received $65,750, which was net of legal and due diligence fees. The notes bear interest at 8% per annum and are convertible
at the option of the lender into shares of the Company’s common stock at a 40% discount to the lowest closing bid price in
the 20 trading days prior to conversion. The notes might be accelerated if an event of default occurs under the
terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if
the Company is delinquent in its SEC filings. In conjunction with each note the Company also issued an additional note, of identical
terms, each for $75,000. The additional note was paid for by the issuance of a note payable from the lenders to the Company. In
the event that the original note is not repaid prior to six months from its issuance, the lender has the option of converting the
additional note into shares of the Company’s common stock at a 40% discount to lowest closing bid price in the 20 trading
days prior to conversion, subject to the notes payable to the Company having been paid in full. The additional note
payable has been netted with the related note receivable. In connection with the issuance of the notes, the Company computed a
premium of $100,000 as the debt is considered a stock settled debt under ASC 480. The amortization expense related to that premium
recorded in the six months ended June 30, 2014 was $59,730. As of June 30, 2014, the outstanding principal and interest on the
notes was $154,000. On May 5, 2014 one of the $75,000 notes receivable due to the company was paid, for which the Company received
$65,750, net of fees. Concurrent with the repayment the Company and the lender entered into two new convertible notes, for $75,000
each, on identical terms to the March 4, 2014 convertible notes. Each of these two notes was paid for by the issuance of notes
payable from the lenders to the Company, each for $75,000, on identical terms to the March 4, 2014 notes. These two new notes have
been netted for presentation purposes. In connection with the payment of the note receivable to the Company, the Company computed
a premium of $50,000 related to one of the additional notes that had been entered into on March 4, 2014. The amortization expense
related to that premium recorded in the six months ended June 30, 2014 was $21,705.
On March 19, 2014
the Company borrowed $52,500 with a maturity date of March 19, 2015, pursuant to a financing agreement. Under the agreement the
Company received $46,000, which was net of legal and due diligence fees. The note bears interest at 8% per annum and is convertible
at the option of the lender into shares of the Company’s common stock at a 40% discount to the lowest closing bid price in
the 20 trading days prior to conversion. The note might be accelerated if an event of default occurs under the
terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if
the Company is delinquent in its SEC filings. In connection with the issuance of the notes, the Company computed a premium of $35,000
as the note is considered stock settled debt under ASC 480. The amortization expense related to that premium recorded in the six
months ended June 30, 2014 was approximately $18,824. As of June 30, 2014, the outstanding principal and interest on the notes
was $53,900.
On April 4, 2014 the
Company borrowed $50,000 with a maturity date of April 4, 2015, pursuant to a financing agreement. Under the agreement the Company
received $44,000, which was net of legal and due diligence fees. The note bears interest at 8% per annum and is convertible at
the option of the lender into shares of the Company’s common stock at a 40% discount to the price of common shares in the
twenty days prior to conversion. The note might be accelerated if an event of default occurs under the terms of the note,
including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent
in its SEC filings. In connection with the issuance of the note, the Company computed a premium of $33,333 as the note is considered
stock settled debt under ASC 480. The amortization expense related to that premium recorded in the six months ended June 30, 2014
was $15,135. As of June 30, 2014, the outstanding principal and interest on the notes was $51,000.
POSITIVEID CORPORATION
Notes to Condensed Consolidated Financial
Statements
June 30, 2014
On April 14, 2014 the
Company borrowed $63,000 with a maturity date of January 2, 2015, pursuant to a financing agreement. Under the agreement the Company
received $60,000, which was net of legal fees. The note bears interest at 8% per annum and is convertible at the option of the
lender into shares of the Company’s common stock at a 39% discount to the price of common shares in the ten days prior to
conversion. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s
failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In
connection with the issuance of the note, the Company computed a premium of $40,279 as the note is considered stock settled debt
under ASC 480. The amortization expense related to that premium recorded in the six months ended June 30, 2014 was $16,765. As
of June 30, 2014, the outstanding principal and interest on the notes was $64,656.
On April 16, 2014, the
Company entered into a financing arrangement pursuant to which borrowed $110,000 in unsecured debt with a maturity date of April
16, 2016, convertible at the discretion of the lender. The Company issued a convertible note in favor of a lender with a principal
sum of $110,000. The debt was issued at a 10% original issue discount resulting in proceeds of $100,000, has an interest
rate of 10%, and is convertible at the option of the lender into shares of the Company’s common stock at the lesser of $0.042
per share or 60% of the average of the two lowest closing prices in the 25 trading days prior to conversion. The note might
be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal
and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance
of the note, the Company recorded a beneficial conversion feature of $40,000. The amortization expense recorded in the quarter
ended June 30, 2014 was approximately $5,000. As of June 30, 2014, the outstanding principal and interest on the notes was $111,500.
On April 25, 2014 the
Company borrowed $50,000 with a maturity date of January 25, 2015, pursuant to a financing agreement. Under the agreement the Company
received $45,000, which was net of legal and due diligence fees. The note bears interest at 8% per annum and is convertible at
the option of the lender into shares of the Company’s common stock at a 40% discount to the price of common shares in the
ten days prior to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including
the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in
its SEC filings. In connection with the issuance of the note, the Company computed a premium of $33,333 as the note is considered
stock settled debt under ASC 480. The amortization expense related to that premium recorded in the six months ended June 30, 2014
was $11,892.As of June 30, 2014, the outstanding principal and interest on the notes was $50,960.
On May 22, 2014
the Company borrowed $63,000 with a maturity date of February 27, 2015, pursuant to a financing agreement. Under the agreement
the Company received $60,000, which was net of legal fees. The note bears interest at 8% per annum and is convertible at the option
of the lender into shares of the Company’s common stock at a 39% discount to the price of common shares in the ten days prior
to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s
failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In
connection with the issuance of the note, the Company computed a premium of $40,279 as the note is considered stock settled debt
under ASC 480. The amortization expense related to that premium recorded in the six months ended June 30, 2014 was $6,749. As of
June 30, 2014, the outstanding principal and interest on the notes was $63,700.
On June 17, 2014 the
Company borrowed of $25,000, with a maturity date of June 17, 2015, pursuant to a financing agreement. Under the agreement the
Company received $22,000, which was net of legal and due diligence fees. The notes bear interest at 8% per annum and are convertible
at the option of the lender into shares of the Company’s common stock at a 40% discount to the lowest closing bid price in
the 20 trading days prior to conversion. The note might be accelerated if an event of default occurs under the
terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if
the Company is delinquent in its SEC filings. In connection with the issuance of the note, the Company computed a premium of $16,667.
The amortization expense related to that premium recorded in the six months ended June 30, 2014 was $991. As of June 30, 2014,
the outstanding principal and interest on the notes was $25,167.
On June 17, 2014
the Company borrowed $40,000 with a maturity date of June 17, 2015, pursuant to a financing agreement. Under the agreement the
Company received $36,000, which was net of legal and due diligence fees. The note bears interest at 8% per annum and is convertible
at the option of the lender into shares of the Company’s common stock at a 40% discount to the lowest closing bid price in
the 20 trading days prior to conversion. The note might be accelerated if an event of default occurs under the
terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if
the Company is delinquent in its SEC filings. In connection with the issuance of the notes, the Company computed a premium of $26,667.
The amortization expense related to that premium recorded in the six months ended June 30, 2014 was $1,441. As of June 30, 2014,
the outstanding principal and interest on the notes was $40,267.
POSITIVEID CORPORATION
Notes to Condensed Consolidated Financial
Statements
June 30, 2014
On June 17, 2014, the
Company borrowed $55,000 with a maturity date of June 17, 2016, pursuant to a convertible note. The debt was issued at a 10%
original issue discount resulting in proceeds of $50,000, has an interest rate of 10%, and is convertible at the option of the
lender into shares of the Company’s common stock at a 40% discount to the lowest closing price in the 20 trading days prior
to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including the
Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its
SEC filings. In connection with the issuance of the notes, the Company computed a premium of $36,667. The amortization expense
related to that premium recorded in the six months ended June 30, 2014 was $2,378. As of June 30, 2014, the outstanding principal
and interest on the notes was $55,229.
Subsequent to June 30,
2014, the Company entered into four new convertible notes totaling $393,000, with proceeds to the Company of $340,000, net of fees.
The terms of the notes are substantially similar the Company’s other convertible notes, which carry interest rates between
8% to 10% and have a holder option to convert outstanding principal and interest into common shares of the company at a 40% discount
to the price of the common stock at the time of conversion. In conjunction with one of the notes the Company issued a warrant for
1,000,000 common shares which are convertible at a price of $0.08, which has a cashless exercise option and does not have pricing
resets.
Debenture Financing
Effective as of January
16, 2013, the Company entered into a Securities Purchase Agreement (the “TCA Purchase Agreement”) with TCA Global Credit
Master Fund, LP, a Cayman Islands limited partnership (“TCA”), pursuant to which TCA may purchase from the Company
up to $5,000,000 senior secured, convertible only upon default, redeemable debentures (the “Debentures”). A $550,000
Debenture was purchased by TCA on January 16, 2013 (the “First Debenture”).
The maturity date of
the First Debenture was January 16, 2014, subject to adjustment (the “Maturity Date”). The First Debenture bears interest
at a rate of twelve percent (12%) per annum. The Company additionally pays a 7% premium on all scheduled principal payments. The
Company, at its option, may repay the principal, interest, fees and expenses due under the Debenture, including a 7% redemption
premium on the outstanding principal balance, and in full and for cash, at any time prior to the Maturity Date, with three (3)
business days advance written notice to the holder. At any time while the Debenture is outstanding, but only upon the occurrence
of an event of default under the TCA Purchase Agreement or any other transaction documents, the holder may convert all or any portion
of the outstanding principal, accrued and unpaid interest, redemption premium and any other sums due and payable under the First
Debenture or any other transaction document (such total amount, the “Conversion Amount”) into shares of the Company’s
common stock at a price equal to (i) the Conversion Amount divided by (ii) eighty-five (85%) of the average daily volume weighted
average price of the Company’s common stock during the five (5) trading days immediately prior to the date of conversion.
The Debenture also contains a provision whereby TCA may not own more than 4.99% of the Company’s common stock at any one
time.
As consideration for
entering into the TCA Purchase Agreement, the Company paid to TCA (i) a transaction advisory fee in the amount of $22,000, (ii)
a due diligence fee equal to $10,000, and (iii) document review and legal fees in the amount of $12,500.
As further consideration,
the Company agreed to issue to TCA that number of shares of the Company’s common stock that equals $100,000 (the “Incentive
Shares”). For purposes of determining the number of Incentive Shares issuable to TCA, the Company’s common stock was
valued at the volume weighted average price for the five (5) trading days immediately prior to the date of the TCA Purchase Agreement,
as reported by Bloomberg, and 191,388 shares were issued. It is the intention of the Company and TCA that the value of the Incentive
Shares shall equal $100,000. In the event the value of the Incentive Shares issued to TCA does not equal $100,000 after a twelve
month evaluation date, the TCA Purchase Agreement provides for an adjustment provision allowing for necessary action (either the
issuance of additional shares to TCA or the return of shares previously issued to TCA to the Company’s treasury). At the
end of the twelve month evaluation date on January 16, 2014, the value of the incentive shares was $12,000 and consequently, the
Company was obligated to issue to TCA, see further discussion below. Additionally, the Company paid a broker fee consisting of
$22,000 and 52,632 shares of its common stock for arranging this financing. Such fee was recorded as a cost of capital, or reduction
to stockholder’s equity.
In connection with the
TCA Purchase Agreement, the Company entered into a Security Agreement (the “TCA Security Agreement”) with TCA. As security
for the Company’s obligations to TCA under the Debentures, the TCA Purchase Agreement and any other transaction document,
the TCA Security Agreement grants to TCA a continuing, second priority security interest in all of the Company’s assets and
property, wheresoever located and whether now existing or hereafter arising or acquired. This security interest is subordinate
to the security interest of The Boeing Company (“Boeing”), who has a secured interest supporting that certain Boeing
License Agreement (defined below). (See Note 9)
On March 18, 2013, the
Company entered into an Intercreditor and Non-Disturbance Agreement (the “Intercreditor Agreement”) among PositiveID
and MFS; VeriGreen Energy Corporation, Steel Vault Corporation, IFTH NY Sub, Inc., and IFTH NJ Sub, Inc. Boeing, and TCA. The Intercreditor
Agreement sets forth the agreement of Boeing and TCA as to their respective rights and obligations with respect to the Boeing Collateral
(as described below) and the TCA Collateral (as described below) and their understanding relative to their respective positions
in the Boeing Collateral and the TCA Collateral.
The “Boeing Collateral”
includes, among other things, all Intellectual Property Rights (as defined in the Intercreditor Agreement) in the M-BAND Technology
(as defined in the Intercreditor Agreement), including without limitation certain patents and patent applications set forth in
the Intercreditor Agreement. The TCA Collateral includes any and all property and assets of PositiveID. The liens of Boeing on
the Boeing Collateral are senior and prior in right to the liens of TCA on the Boeing Collateral and such liens of TCA on the Boeing
Collateral are junior and subordinate to the liens of Boeing on the Boeing Collateral.
POSITIVEID CORPORATION
Notes to Condensed Consolidated Financial
Statements
June 30, 2014
On August 21, 2013,
the Company entered into a First Amendment to Securities Purchase Agreement (the “Amendment”) with TCA. Pursuant to
the Amendment, principal payments for July through October were deferred and the maturity date for the entire first Debenture was
extended to May 16, 2014 and in exchange for this principal holiday, the Company and TCA agreed to increase the outstanding principal
balance by $80,000. In connection with this Amendment, the Company accounted for this modification as an extinguishment and recorded
a charge to interest expense in the amount of $139,000 during the year ended December 31, 2013, comprised of $59,000 relating to
the write-off of unamortized debt discount and the $80,000.
Beginning in January
2014 the Company was not current in its payments under the Debenture. On April 3, 2014 TCA sold its rights under the TCA SPA, Debenture,
Security Agreement and all related transaction documents to Ironridge, releasing the Company of all of its obligations to TCA,
including the obligation to issue the additional $88,000 incentive shares as discussed above. The sale price paid from Ironridge
to TCA was $425,000. Also on April 3, 2014 the Company and Ironridge amended the Debenture, setting the amount owed as of
April 3, 2014 at $425,000, extending the maturity date to April 2, 2015, lowering the interest rate to 3.4% and to amend the formula
for conversion of Debenture principal and interest into common shares of the Company. Pursuant to the amended Debenture,
Ironridge has the right, at any time, to request the conversion of principal and accrued interest into free trading shares
of common Stock of the Company at a price equal to: (i) the conversion amount; divided by (ii) an amount, equal to 85% of the closing
bid price of the Company's common stock on April 3, 2014, not to exceed 85% of the average of the daily volume weighted average
prices of the Company's common Stock for any five of the trading days from April 3, 2014 until the date that the Debenture is paid
or converted in full. There was no material gain or loss on this modification. At the time of the amendment the Company recorded
a conversion premium of $75,000, all of which was amortized in the six months ended June 30, 2014. As of June 30, 2014 the $428,613
balance of the Debenture has been recorded as convertible debt on the balance sheet.
Equity Line Financing
On May 10, 2013, the
Company entered into an investment agreement (the “Investment Agreement”) and a registration rights agreement (the
“RRA”) with IBC Funds LLC (“IBC”), a Nevada limited liability company. Pursuant to the terms of the Investment
Agreement, IBC committed to purchase up to $5,000,000 of the Company’s common stock over a period of up to thirty-six (36)
months. From time to time during the thirty-six (36) month period commencing on the day immediately following the effectiveness
of the IBC Registration Statement (defined below), the Company may deliver a drawdown notice to IBC which states the dollar amount
that the Company intends to sell to IBC on a date specified in the drawdown notice. The maximum investment amount per notice shall
be equal to two hundred percent (200%) of the average daily volume of the common stock for the ten consecutive trading days immediately
prior to date of the applicable drawdown notice so long as such amount does not exceed 4.99% of the outstanding shares of the Company’s
common stock. The purchase price per share to be paid by IBC shall be calculated at a twenty percent (20%) discount to the average
of the three lowest prices of the Company’s common stock during the ten (10) consecutive trading days immediately prior to
the receipt by IBC of the drawdown notice. Additionally, the Investment Agreement provides for a commitment fee to IBC
of 104,000 shares of the Company's common stock (the “IBC Commitment Shares”). The IBC Commitment Shares were issued
May 10, 2013. Such commitment shares were recorded as a cost of capital, or reduction of shareholder’s equity when issued.
Pursuant to the RRA,
the Company is obligated to file a registration statement (the “IBC Registration Statement”) with the Securities and
Exchange Commission covering the shares of its common stock underlying the Investment Agreement, including the IBC Commitment Shares,
within 21 days after the closing of the transaction. Such IBC Registration Statement was filed on May 10, 2013.
On May 10, 2013, the
Company entered into a Securities Purchase Agreement with IBC whereby IBC agreed to purchase 40,064, shares of common stock for
$12,500. The proceeds of the sale of the shares will be used to fund the Company’s legal expenses associated with
the Investment Agreement. These shares were included in the IBC Registration Statement filed May 10, 2013. During
2013, the Company issued 4,500,000 shares to IBC under the equity line (inclusive of the commitment shares), for which it received
$333,802, net of fees, in proceeds. The Company has no intention of registering any further shares under this equity line, or accessing
this equity line in the future.
Other Financings
On July 9, 2012, the
Company issued a Secured Promissory Note (the “H&K Note”) in the principal amount of $849,510 to Holland &
Knight LLP (“Holland & Knight”), its external legal counsel, in support of amounts due and owing to Holland &
Knight as of June 30, 2012. The H&K Note is non-interest bearing, and principal on the H&K Note is due and payable as soon
as practicably possible by the Company. The Company has agreed to remit payment against the H&K Note immediately upon each
occurrence of any of the following events: (a) completion of an acquisition or disposition of any of the Company’s assets
or stock or any of the Company’s subsidiaries’ assets or stock with gross proceeds in excess of $750,000, (b) completion
of any financing with gross proceeds in excess of $1,500,000, (c) receipt of any revenue in excess of $750,000 from the licensing
or development of any of the Company’s or the Company’s subsidiaries’ products, or (d) any liquidation or reorganization
of the Company’s assets or liabilities. The amount of payment to be remitted by the Company shall equal one-third of the
gross proceeds received by the Company upon each occurrence of any of the above events, until the principal is repaid in full.
If the Company receives $3,000,000 in gross proceeds in any one financing or licensing arrangement, the entire principal balance
shall be paid in full. The H&K Note was secured by substantially all of the Company’s assets pursuant to a
security agreement between the Company and Holland & Knight dated July 9, 2012. In conjunction with the TCA Purchase
Agreement and the Boeing License Agreement (defined below), Holland & Knight agreed to terminate its security interest. As
of June 30, 2014, the Company had repaid $250,000 of the H&K Note and the outstanding balance was $591,010.
POSITIVEID CORPORATION
Notes to Condensed Consolidated Financial
Statements
June 30, 2014
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 June 30, 2014, the outstanding principal and interest on the Caragol Note was $107,764.
On June 5, 2013, the
Company entered into a Settlement and Agreement and Release (the “Settlement Agreement”) with IBC pursuant to which
the Company agreed to issue common stock to in exchange for the settlement of $214,535.98 (the “Settlement Amount”)
of past-due accounts payable of the Company. IBC purchased the accounts payable from certain vendors of the Company, pursuant
to the terms of separate receivable purchase agreements between IBC and each of such vendors (the “Assigned Accounts”).
The Assigned Accounts relate to certain legal, accounting, and financial services provided to the Company. The Settlement Agreement
became effective and binding upon the Company and IBC upon execution of the Order by the Court on June 7, 2013.
Pursuant to the terms
of the Settlement Agreement approved by an order from the Circuit Court of the Twelfth Judicial Circuit for Sarasota County, Florida
(the “Order”), on June 7, 2013, the Company agreed to issue to IBC shares (the “Settlement Shares”) of
the Company’s Common Stock. The Settlement Agreement provides that the Settlement Shares will be issued in one or more tranches,
as necessary, sufficient to satisfy the Settlement Amount through the issuance of freely trading securities issued pursuant to
Section 3(a)(10) of the Securities Act. Pursuant to the Settlement Agreement, IBC may deliver a request to the Company which states
the dollar amount (designated in U.S. Dollars) of Common Stock to be issued to IBC (the “Share Request”). The parties
agree that the total amount of Common Stock to be delivered by the Company to satisfy the Share Request shall be issued at a thirty
percent (30%) discount to market based upon the average of the volume weighted average price of the Common Stock over the three
(3) trading day period preceding the Share Request. Additional tranche requests shall be made as requested by IBC until the Settlement
Amount is paid in full so long as the number of shares requested does not make IBC the owner of more than 4.99% of the outstanding
shares of Common Stock at any given time. The Company has recorded a charge of $91,944 during 2013 representing the total cost
to the company for settling the $214,535 claim by issuing shares of common stock at a 30% discount. During 2013, the entire amount
of the settlement was converted into 3,637,681 common shares.
5. Stock-Based Compensation
On August 26, 2011,
the Company’s stockholders approved and adopted the PositiveID Corporation 2011 Stock Incentive Plan (the “2011 Plan”).
The 2011 Plan provides for awards of incentive stock options, nonqualified stock options, restricted stock awards, performance
units, performance shares, SARs and other stock-based awards to employees and consultants. Under the 2011 Plan, up to 1 million
shares of common stock may be granted pursuant to awards.
A summary of option
activity under the Company’s stock incentive plans as of June 30, 2014, and changes during the six months then ended is presented
below (in thousands, except per share amounts):
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
Per Share
|
|
Outstanding at January 1, 2014
|
|
|
1,409
|
|
|
$
|
2.83
|
|
Granted
|
|
|
1,450
|
|
|
$
|
0.04
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
(3
|
)
|
|
$
|
127.88
|
|
Outstanding at June 30, 2014
|
|
|
2,856
|
|
|
$
|
1.29
|
|
Exercisable at June 30, 2014
|
|
|
2,757
|
|
|
$
|
1.34
|
|
POSITIVEID CORPORATION
Notes to Condensed Consolidated Financial
Statements
June 30, 2014
The Black-Scholes model, which the Company
uses to determine compensation expense, requires the Company to make several key judgments including:
|
●
|
the value of the Company’s common stock;
|
|
●
|
the expected life of issued stock options;
|
|
●
|
the expected volatility of the Company’s stock price;
|
|
●
|
the expected dividend yield to be realized over the life of the stock option; and
|
|
●
|
the risk-free interest rate over the expected life of the stock options.
|
The Company’s
computation of the expected life of issued stock options was determined based on historical experience of similar awards giving
consideration to the contractual terms of the stock-based awards, vesting schedules and expectations about employees’ future
length of service. The interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. The computation
of volatility was based on the historical volatility of the Company’s common stock.
A summary of restricted
stock outstanding under the Company’s stock incentive plans as of June 30, 2014 and changes during the six months then ended
is presented below (in thousands):
Unvested at January 1, 2014
|
|
|
300
|
|
Issued
|
|
|
—
|
|
Vested
|
|
|
(100
|
)
|
Forfeited
|
|
|
—
|
|
Unvested at June 30, 2014
|
|
|
200
|
|
During the three and
six months ended June 30, 2014 the Company issued 2.2 million and 6.0 million restricted shares, respectively, to employees, directors
and consultants. The shares issued to employees and directors vest over periods from April 1, 2014 to January 1, 2016. Restricted
shares issued to consultants are usually fully vested. As of June 30, 2014 the Company has 3.2 million unvested restricted shares
outstanding, not issued under stock incentive plans. During the three and six months ended June 30, 2014 the Company recorded $258,000
and $652,000 of compensation expense related to restricted shares.
As of June 30, 2014,
2.5 million warrants to purchase the Company’s common stock have been granted outside of the Company’s plans, which
remain outstanding as of June 30, 2014. These warrants were granted at exercise prices ranging from $0.06 to $22.0 per share, are
fully vested and are exercisable for a period from five to seven years.
The Company recorded
an expense related to stock options, restricted stock issued, and issuance of Series I Preferred to employees and advisors of approximately
$0.3 million and $0.2 million for the three months ended June 30, 2014 and 2013, respectively and $1.4 million and $0.5 million
for the six months ended June 30, 2014 and 2013, respectively.
As of June 30, 2014
the Company had $0.6 million of unamortized compensation related to stock option and restricted share grants. This compensation
will be amortized as an operating expense over the remainder of 2014, and the year ended December 31, 2015.
Series I Preferred Stock
On September 30, 2013
the Board of Directors authorized 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.
POSITIVEID CORPORATION
Notes to Condensed Consolidated Financial
Statements
June 30, 2014
On September 30, 2013,
the Company issued 413 shares of Series I Preferred Stock to settle $413,000 of accrued and unpaid compensation to its Board of
Directors and management (see Note 8), at a conversion price of $0.036, which was the closing bid price on September 30, 2013.
The Series I Preferred Stock will vest on January 1, 2016, subject to acceleration in the event of conversion or redemption. The
Series I Preferred may also be converted into common shares in advance of their vesting, at the option of the holder, which in
turn accelerates the vesting.
On November 5, 2013,
the Company filed an Amended and Restated Certificate of Designation of Series I Preferred Stock (the “Amended Certificate
of Designation”). The Amended Certificate of Designation was filed to clarify and revise the mechanics of conversion and
certain conversion rights of the holders of Series I Preferred Stock. No other rights were modified or amended in the Amended Certificate
of Designation.
On December 31, 2013,
the three independent directors were each granted 25 shares of Series I, as a component of their 2014 board compensation. On January
14, 2014 an additional 512 shares of Series I were issued to the Company’s CEO, President and Senior Vice President. Of these
shares 381 were issued to the Company’s chief executive officer as follows: (i) 138 shares issued for 2013 incentive compensation,
(ii) 143 shares were issued for his agreement to amend his employment contract and reduce his annual salary from the remainder
of the term of the contract to $200,000, per annum, and (iii) 100 shares of Series I as a tax equalization payment to compensate
Mr. Caragol for taxes paid on unrealized stock compensation during prior years. All Series I shares granted vest on January 1,
2016. The Series I Preferred may also be converted into common shares in advance of their vesting, at the option of the holder,
which in turn accelerates vesting. As such the Company recorded an expense in the amount of $763,000 representing the fair value
of the shares during the six months ended June 30, 2014.
6. Income Taxes
The Company had an effective
tax rate of nil for the three and six months ended June 30, 2014 and 2013. The Company incurred losses before taxes for the three
and six months ended June 30, 2014 and 2013. However, it has not recorded a tax benefit for the resulting net operating loss carryforwards,
as the Company has determined that a full valuation allowance against its net deferred tax assets was appropriate based primarily
on its historical operating results.
In July 2008, the Company
completed the sale of all of the outstanding capital stock of Xmark to Stanley. In January 2010, Stanley received a notice
from the Canadian Revenue Agency (“CRA”) that the CRA would be performing a review of Xmark’s Canadian tax returns
for the periods 2005 through 2008. This review covers all periods that the Company owned Xmark.
In February 2011, and
as revised on November 9, 2011, Stanley received a notice from the CRA that the CRA completed its review of the Xmark returns and
was questioning certain deductions attributable to allocations from related companies on the tax returns under review. In November
and December 2011, the CRA and the Ministry of Revenue of the Province of Ontario issued notices of reassessment confirming the
proposed adjustments. The total amount of the income tax reassessments for the 2006-2008 tax years, including both provincial and
federal reassessments, plus interest, was approximately $1.4 million.
On January 20, 2012,
the Company received an indemnification claim notice from Stanley related to the matter. The Company did not agree with the
position taken by the CRA, and filed a formal appeal related to the matter on March 8, 2012. In addition, on March 28, 2012, Stanley
received assessments for withholding taxes on deemed dividend payments in respect of the disallowed management fee totaling approximately
$0.2 million, for which we filed a formal appeal on June 7, 2012. In October 2012, the Company submitted a Competent Authority
filing to the U.S. IRS seeking relief in the matter. In connection with the filing of the appeals, Stanley was required to remit
an upfront payment of a portion of the tax reassessment totaling approximately $950,000. The Company has also filed a formal appeal
related to the withholding tax assessments, pursuant to which Stanley was required to remit an additional upfront payment of approximately
$220,000. Pursuant to a letter agreement dated March 7, 2012, the Company has agreed to repay Stanley for the upfront payments,
plus interest at the rate of five percent per annum, in 24 equal monthly payments beginning on June 1, 2012. To the extent that
the Company and Stanley reach a successful resolution of the matter through the appeals process, the upfront payment (or a portion
thereof) will be returned to Stanley or the Company as applicable. As of June 30, 2014 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. The $500,000 is recorded as a tax contingency liability in the accompanying unaudited condensed consolidated
financial statements for quarter ended June 30, 2014.
POSITIVEID CORPORATION
Notes to Condensed Consolidated Financial
Statements
June 30, 2014
7. Legal Proceedings
The Company is a party
to certain legal actions, as either plaintiff or defendant, arising in the ordinary course of business, none of which is expected
to have a material adverse effect on the Company’s business, financial condition or results of operations. However, litigation
is inherently unpredictable, and the costs and other effects of pending or future litigation, governmental investigations, legal
and administrative cases and proceedings, whether civil or criminal, settlements, judgments and investigations, claims or charges
in any such matters, and developments or assertions by or against the Company relating to the Company or to the Company’s
intellectual property rights and intellectual property licenses could have a material adverse effect on the Company’s business,
financial condition and operating results.
8. Employment Contracts
and Stock Compensation to Related Parties
On December 6, 2011,
the Compensation Committee approved a First Amendment to Employment and Non-Compete Agreement (the “First Caragol Amendment”)
between the Company and Mr. Caragol in connection with Mr. Caragol’s assumption of the position of Chairman of the Board
of the Company effective December 6, 2011. The First Caragol Amendment amends the Employment and Non-Compete Agreement dated November
11, 2010, between the Company and Mr. Caragol and provides for, among other things, the elimination of any future guaranteed raises
and bonuses, other than a 2011 bonus of $375,000 to be paid beginning January 1, 2012 in twelve (12) equal monthly payments. This
bonus was not paid during 2012 and on January 8, 2013, $300,000 of such bonus was converted into 738,916 shares of our restricted
common stock, which vest on January 1, 2016. The remaining $75,000 was paid through the issuance of Series I Preferred
Stock (see below). The First Caragol Amendment obligates the Company to grant to Mr. Caragol an aggregate of 0.5 million
shares of restricted stock over a four-year period as follows: (i) 100,000 shares upon execution of the First Caragol Amendment,
which shall vest on January 1, 2014, (ii) 100,000 shares on January 1, 2012, which shall vest on January 1, 2015, (iii) 100,000 shares
on January 1, 2013, which shall vest on January 1, 2015, (iv) 100,000 shares on January 1, 2014, which shall vest on January 1,
2016, and (v) 100,000 shares on January 1, 2015, which shall vest on January 1, 2016. Stock compensation expense related
to the restricted share grants totaled approximately $67,000 and $180,000 for the six months ended June 30, 2014 and 2013, respectively.
On January 14, 2014, Mr. Caragol’s agreement was further amended, lowering his salary to $200,000 per annum through the remaining
term of the agreement in exchange for the issuance of 138 shares of Series I Preferred Stock.
On February 21, 2013,
the Board approved a Tax Equalization Plan to compensate board members for permanent out-of-pocket tax payments incurred by
accepting equity compensation in lieu of cash consideration between 2010-2012. The total plan compensation is $510,000 in aggregate
and was expensed during 2013.
On September 30, 2013,
the Board of Directors of the Company agreed to satisfy $1,003,000 of accrued compensation owed to its directors, officers and
management (collectively, the “Management”) through a liability reduction plan (the “Plan”). Under this
Plan the Company’s Management agreed to accept a combination of PositiveID Corporation Series I Convertible Preferred Stock
(the “Series I Preferred Stock”) and to accept the transfer of Company owned shares of common stock in VeriTeQ Corporation
(f/k/a Digital Angel Corporation) (“VeriTeQ”), a Delaware corporation, in settlement of accrued compensation.
In connection with the
Plan $590,000 of accrued compensation was settled through the commitment to transfer 327,778 shares of VeriTeQ common stock (out
of the 1,199,532 total shares of VeriTeQ common stock that were issuable to the Company upon the conversion of VeriTeQ’s
Series C convertible preferred stock owned by the Company). The Series C conversion was completed on October 22, 2013. The VeriTeQ
shares were valued at $1.80 (adjusted to reflect the 1 for 30 reverse split by VeriTeQ on October 22, 2013), which was a 21% discount
to the closing bid price on September 30, 2013, to reflect liquidity discount and holding period restrictions.
On October 22, 2013,
gain of $590,000 was recognized upon the issuance of the 327,778 shares of VeriTeQ Common Stock in relation to the conversion of
the VeriTeQ Series C convertible preferred stock.
In connection with the
Plan, $413,000 of accrued and unpaid compensation was settled through the issuance of 413 shares of the Company’s Series
I Preferred Stock. The Series I Preferred Stock is convertible into shares of the Company’s Common Stock, at a conversion
price of $0.036 per share, which was the closing bid price on September 30, 2013, and will vest on January 1, 2016, subject to
acceleration in the event of conversion or redemption (see Note 5).
On September 28, 2012,
the employment of Bryan D. Happ, our chief financial officer terminated. In connection with the termination of Happ’s Employment
and Non-Compete Agreement dated September 30, 2011, we and Mr. Happ entered into a Separation Agreement and General Release, or
the Separation Agreement, on September 28, 2012. Pursuant to the Separation Agreement, Mr. Happ is due to receive payments totaling
$404,423, or the Compensation, consisting of past-due accrued and unpaid salary and bonus amounts plus termination compensation.
Of the Compensation, $100,000 was paid with 200,000 shares of our restricted common stock (such shares not issued under a stockholder
approved plan) and $304,423 was be paid in cash. As of June 30, 2014, we have paid $140,834 of the cash balance to Mr. Happ.
9. Agreements with
The Boeing Company
On December 20, 2012,
the Company entered into a Sole and Exclusive License Agreement (the “Boeing License Agreement”), a Teaming Agreement
(“Teaming Agreement”), and a Security Agreement (“Boeing Security Agreement”) with The Boeing Company (“Boeing”).
POSITIVEID CORPORATION
Notes to Condensed Consolidated Financial
Statements
June 30, 2014
The Boeing License Agreement
provides Boeing the exclusive license to manufacture and sell PositiveID’s M-BAND airborne bio-threat detector for the U.S.
Department of Homeland Security’s BioWatch Generation 3 opportunity, as well as other opportunities (government or commercial)
that may arise in the North American market. As consideration for entering into the Boeing License Agreement, Boeing
agreed to pay a license fee of $2.5 million (the “Boeing License Fee”) to the Company in three installments, which
were paid in full during 2012 and 2013. The $2.5 million license fee received as of June 30, 2014 has been recorded as deferred
revenue.
Under the Teaming Agreement,
the Company retained exclusive rights to serve as the reagent and assay supplier of the M-BAND systems to Boeing. The Company also
retained all rights to sell M-BAND units, reagents and assays in international markets.
Pursuant to the Boeing
Security Agreement, the Company granted Boeing a security interest in all of its assets, including the licensed products and intellectual
property rights (as defined in the Boeing License Agreement), to secure the Company’s performance under the Boeing License
Agreement.
10. Subsequent Events
Subsequent to June 30, 2014, the Company
entered into four new convertible notes totaling $393,000, with proceeds to the Company of $340,000, net of fees. The terms of
the notes are substantially similar the Company’s other convertible notes (see Note 4), which carry interest rates between
8% to 10% and have a holder option to convert outstanding principal and interest into common shares of the company at a 40% discount
to the price of the common stock at the time of conversion. In conjunction with one of the notes the Company issued a warrant
for 1,000,000 common shares which are convertible at a price of $0.08, which has a cashless exercise option and does not have
pricing resets.
Subsequent to June 30, 2014,
the remaining balance of the December Convertible Promissory Note, representing principal and accrued interest of $24,140,
was converted into 773,718 shares of common stock. In addition, the January Convertible Promissory Note, which had
a balance of $81,640, including principal and accrued interest, was converted into 3,132,485 shares of common
stock. Additionally, on July 30, 2014, the Company converted 100 shares of Series F Preferred stock into 5,020,964
shares of common stock. The Company also issued additional 188,040 shares of common stock in relation to prior Series F
Preferred stock conversion during the three months ended June 30, 2014.
Special Note Regarding Forward-Looking
Statements
This Quarterly
Report on Form 10-Q (this “Report”) contains forward-looking statements, within the meaning of Section 27A of
the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), that reflect our current estimates, expectations and projections about our
future results, performance, prospects and opportunities. Forward-looking statements include, without limitation, statements about
our market opportunities, our business and growth strategies, our projected revenue and expense levels, possible future consolidated
results of operations, the adequacy of our available cash resources, our financing plans, our competitive position and the effects
of competition and the projected growth of the industries in which we operate, as well as the following statements:
|
●
|
the expectation that operating losses will continue for the near future, and that until we are able to achieve profits, we intend to continue to seek to access the capital markets to fund the development of our products;
|
|
●
|
that we seek to structure our research and development on a project basis to allow management of costs and results on a discrete short term project basis, the expectation that doing so may result in quarterly expenses that rise and fall depending on the underlying project status, and the expectation that this method of managing projects may allow us to minimize our firm fixed commitments at any given point in time;
|
|
●
|
that based on our review of the correspondence and evaluation of the supporting detail involving the Canada Revenue Agency audit, we do not believe that the ultimate resolution of this dispute will have a material negative impact on our historical tax liabilities or results of operations;
|
|
●
|
that we intend to continue to explore strategic opportunities, including potential acquisition opportunities of businesses that are complementary to ours;
|
|
●
|
that we do not anticipate declaring any cash dividends on our common stock;
|
|
●
|
that our ability to continue as a going concern is dependent upon our ability to obtain financing to fund the continued development of our products and working capital requirements;
|
|
●
|
that we are well positioned to compete for the next generation BioWatch system;
|
|
●
|
that M-BAND was developed in accordance with DHS guidelines;
|
|
●
|
that our current cash resources, our expected access to capital under the equity line financing arrangements, and, if necessary, delaying and/or reducing certain research, development and related activities and costs, that we will have sufficient funds available to meet our working capital requirements for the near-term future;
|
|
●
|
that our products have certain technological advantages, but maintaining these advantages will require continual investment in research and development, and later in sales and marketing;
|
|
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that if any of our manufacturers or suppliers were to cease supplying us with system components, we would be able to procure alternative sources without material disruption to our business, and that we plan to continue to outsource any manufacturing requirements of our current and under development products;
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that medical application of our Firefly Dx product will require FDA clearance;
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that we will receive royalties in the amount of ten percent on all gross revenues arising out of or relating to VeriTeQ’s sale of products, whether by license or otherwise, specifically relating to the United States Patent No. 7,125,382, “Embedded Bio Sensor System”, and a royalty of twenty percent on gross revenues generated under the Development and Supply Agreement between us and Medcomp dated April 2, 2009;
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that we anticipate recognizing the entire $2.5 million fee under the Boeing License Agreement as revenue in accordance with applicable accounting literature and Securities and Exchange Commission guidance; and
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that we will receive royalties related to our license of the
iglucose
™ technology to Smart Glucose Meter Corp (“SGMC”) for up to $2 million based on potential future revenues of glucose test strips sold by SGMC.
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This Report also
contains forward-looking statements attributed to third parties relating to their estimates regarding the size of the future market
for products and systems such as our products and systems, and the assumptions underlying such estimates. Forward-looking statements
include all statements that are not historical facts and can be identified by forward-looking statements such as “may,”
“might,” “should,” “could,” “will,” “intends,” “estimates,”
“predicts,” “projects,” “potential,” “continue,” “believes,” “anticipates,”
“plans,” “expects” and similar expressions. Forward-looking statements are only predictions based on our
current expectations and projections, or those of third parties, about future events and involve risks and uncertainties.
Although we believe
that the expectations reflected in the forward-looking statements contained in this Report are based upon reasonable assumptions,
no assurance can be given that such expectations will be attained or that any deviations will not be material. In light of these
risks, uncertainties and assumptions, the forward-looking statements, events and circumstances discussed in this Quarterly Report
on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking
statements. Important factors that could cause our actual results, level of performance or achievements to differ materially from
those expressed or forecasted in, or implied by, the forward-looking statements we make in this Report are discussed under “Item
1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2013 and include:
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our ability to predict the extent of future losses or when we will become profitable;
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our ability to continue as a going concern;
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our ability to successfully consider, review, and if appropriate, implement other strategic opportunities;
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our expectation that we will incur losses, on a consolidated basis, for the foreseeable future;
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our ability to fund our operations and continued development of our products, including M-BAND and Firefly;
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our ability to obtain and maximize the amount of capital that we will have available to pursue business opportunities;
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our ability to obtain patents on our products, the validity, scope and enforceability of our patents, and the protection afforded by our patents;
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the potential for costly product liability claims and claims that our products infringe the intellectual property rights of others;
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our ability to comply with current and future regulations relating to our businesses;
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the potential for patent infringement claims to be brought against us asserting that we are violating another party’s intellectual property rights;
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the potential for an unfavorable outcome relating to the Canadian tax audit;
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our ability to be awarded government contracts;
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our ability to establish and maintain proper and effective internal accounting and financial controls;
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our ability to successfully identify strategic partners or acquirers for the GlucoChip and the breath glucose detection system;
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our ability to receive royalties under the Asset Purchase Agreement with VeriTeQ;
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our ability to receive payments from the Shared Services Agreement with VeriTeQ;
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our ability to pay obligations when due which may result in an event of default under our financing arrangements;
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You should not place
undue reliance on any forward-looking statements. In addition, past financial or operating performance is not necessarily a reliable
indicator of future performance, and you should not use our historical performance to anticipate future results or future period
trends. Except as otherwise required by federal securities laws, we disclaim any obligation or undertaking to disseminate any updates
or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations
or any change in events, conditions or circumstances on which any such statement is based. All forward-looking statements attributable
to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements included in this
Quarterly Report on Form 10-Q and under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the
year ended December 31, 2013. These are factors that could cause our actual results to differ materially from expected results.
Other factors besides those listed could also adversely affect us.