PART I
Item
1. Business
The
Company
PositiveID
Corporation, including its wholly-owned subsidiaries PositiveID Diagnostics Inc. (f/k/a Microfluidic Systems) (“PDI”),
E-N-G Mobile Systems, Inc. (“ENG”), and Thermomedics, Inc. (“Thermomedics”), (collectively, the “Company”
or “PositiveID”), develops molecular diagnostic systems for bio-threat detection and rapid medical testing; manufactures
specialty technology vehicles; and markets the Caregiver® non-contact clinical thermometer. The Company’s fully automated
pathogen detection systems and assays are designed 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 developing Firefly Dx, an automated pathogen detection
system for rapid diagnostics, both for clinical and point-of-need applications. The Company manufactures specialty technology
vehicles focused primarily on mobile laboratory and communications applications. The Company’s Caregiver® thermometer
is an FDA-cleared, infrared thermometer for the professional healthcare market.
PositiveID,
formerly known as VeriChip Corporation, was formed as a Delaware corporation by Digital Angel Corporation in November 2001. In
January 2002, we began our efforts to create a market for radio frequency identification, or RFID, systems that utilized a human
implantable microchip. During the first half of 2005 we acquired two businesses focused on providing RFID systems for healthcare
applications. Those businesses (EXi Wireless and Instantel) were merged in 2007 to form Xmark Corporation (“Xmark”),
which was a wholly-owned subsidiary of ours.
On
July 18, 2008, we completed the sale of all of the outstanding capital stock of Xmark, which at the time was principally all of
our operations, to Stanley Canada Corporation (“Stanley”), a wholly-owned subsidiary of Stanley Black and Decker.
The sale transaction was closed for $47.9 million in cash, which consisted of the $45 million purchase price plus a balance sheet
adjustment of approximately $2.9 million, which was adjusted to $2.8 million at settlement of the escrow. Under the terms of the
stock purchase agreement, $43.4 million of the proceeds were paid at closing and $4.4 million was released from escrow in July
2009. As a result, we recorded a gain on the sale of Xmark of $6.2 million, with $4.5 million of that gain deferred until 2009
when the escrow was settled.
Following
the completion of the sale of Xmark to Stanley, we retired all of our outstanding debt for a combined payment of $13.5 million,
and settled all contractual payments to Xmark’s and our officers and management for $9.1 million. On August 28, 2008, we
paid a special dividend to our stockholders of $15.8 million.
On
May 23, 2011, we entered into a stock purchase agreement to acquire PDI, pursuant to which PDI became a wholly-owned subsidiary
of the Company. Since 2012, PDI has been doing business as PositiveID. The Company specializes in the production of automated
instruments for a wide range of applications in the detection and processing of biological samples, ranging from rapid medical
testing to airborne pathogen detection for homeland security.
On
October 21, 2015, we entered into an agreement to acquire all of the outstanding capital stock of Thermomedics, a Nevada corporation,
pursuant to a stock purchase agreement by and between PositiveID and Sanomedics Inc., a Delaware corporation (“Sanomedics”),
the shareholder of Thermomedics (collectively the “Thermomedics Acquisition”). On December 4, 2015, we entered into
a first amendment to the stock purchase agreement with Sanomedics. PositiveID, Sanomedics and Thermomedics also entered into a
management services and control Agreement (the “Control Agreement”), dated December 4, 2015, whereby PositiveID was
appointed the manager of Thermomedics. On March 4, 2016, PositiveID, Sanomedics and Thermomedics entered into a letter agreement
(the “March Agreement”), which included an amendment to the Control Agreement, an agreement to terminate intercompany
indebtedness, and an agreement for the transfer of Thermomedics’ intellectual property. Under the terms of the March Agreement,
PositiveID, Sanomedics and Thermomedics agreed to extend the closing date for the stock purchase agreement to March 31, 2016.
As a result of the Company assuming control of Thermomedics on December 4, 2015, the Company determined, pursuant to ASC 805-10-25-6,
that December 4, 2015 was the acquisition date of Thermomedics for accounting purposes and began consolidating the balance sheet
and results of operations of Thermomedics as of that date. The Company completed the acquisition of the capital stock of Thermomedics
on August 25, 2016.
On
December 22, 2015, we entered into a stock purchase agreement to acquire ENG, pursuant to which ENG became a wholly-owned subsidiary.
ENG manufactures specialty technology vehicles focused primarily on mobile labs, command and communications centers, and cellular
applications. The acquisition of ENG closed on December 24, 2015.
Beginning
with the acquisition of PDI in 2011, the Company began to focus its operations on diagnostics and detection. Since that acquisition,
the Company has either sold or exclusively licensed all of its legacy businesses, including its VeriChip assets, its iglucose™
technology, the GlucoChip technology, and its patent related to a glucose breath detection system. See “Our Business”
under Part I of this Form 10-K for more information and a description of the Company’s current business.
Our
principal executive offices are located at 1690 South Congress Avenue, Suite 201, Delray Beach, Florida 33445. Our telephone number
is (561) 805-8000. Unless the context provides otherwise, when we refer to the “Company,” “we,” “our,”
or “us” in this Annual Report, we are referring to PositiveID Corporation and its consolidated subsidiaries.
This
Annual Report on Form 10-K contains trademarks and trade names of other organizations and corporations.
Available
Information
We
file or furnish with or to the Securities and Exchange Commission (“SEC”) our quarterly reports on Form 10-Q, annual
reports on Form 10-K, current reports on Form 8-K, annual reports to stockholders and annual proxy statements and amendments to
such filings. Our SEC filings are available to the public on the SEC’s website at http://www.sec.gov. These reports are
also available free of charge on our website at http://www.psidcorp.com as soon as reasonably practicable after we electronically
file or furnish such material with or to the SEC. The information on our website is not incorporated by reference into this Annual
Report or any registration statement that incorporates this Annual Report by reference.
Our
Business
We
are a life sciences and technology company focused primarily on the healthcare and homeland security markets. Within our detection
and diagnostics business, we specialize in the development of microfluidic systems for the automated preparation of and performance
of biological assays in order to detect biological threats at high-value locations and analyze biological samples at the point
of need. Thermomedics markets the Caregiver non-contact thermometer to the professional healthcare market. Our ENG subsidiary
manufactures specialty technology vehicles. PositiveID has a substantial portfolio of intellectual property related primarily
to sample preparation and rapid medical testing applications, and the Caregiver non-contact thermometer.
Since
its inception, including PDI prior to its acquisition, we have received over $50 million in U.S. government grants and contracts,
primarily from the Department of Homeland Security (“DHS”). We have submitted, or are in the process of submitting,
bids on various potential U.S. government contracts.
M-BAND
Our
M-BAND technology, developed under contract with the U.S. DHS Science & Technology directorate, is a bio-aerosol monitor with
fully integrated systems for sample collection, processing and detection modules. M-BAND continuously and autonomously analyzes
air samples for the detection of pathogenic bacteria, viruses, and toxins for up to 30 days. Results from individual M-BAND instruments
are reported via a secure wireless network in real time to give an accurate and up-to-date status of field conditions. M-BAND
performs high specificity detection for up to six organisms on the Centers for Disease Control’s category A and B select
agents list. Further, we believe M-BAND was developed in accordance with DHS guidelines.
In
December 2012, the Company entered into a Sole and Exclusive License Agreement (the “Boeing License Agreement”), a
Teaming, (the “Teaming Agreement”) and a security agreement (the “Boeing Security Agreement”), with The
Boeing Company (“Boeing”). The Boeing License Agreement provides Boeing the exclusive license to sell PositiveID’s
M-BAND airborne bio-threat detector for the DHS BioWatch next generation opportunity, as well as other opportunities (government
or commercial) that may arise in the North American market. As consideration for entry into the Boeing License Agreement, Boeing
paid a license fee of $2.5 million (the “Boeing License Fee”) to the Company in three installments, which were paid
in full during 2012 and 2013 and was recognized as revenue during the year ended December 31, 2015. Under the Teaming Agreement,
which has now expired, and subject to certain conditions, the Company retained the exclusive rights to serve as the reagent and
assay supplier of 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.
Firefly
Dx
Our
Firefly Dx system is designed to deliver molecular diagnostic results from a sample in less than 30 minutes, which, we believe,
would enable accurate diagnostics leading to more rapid and effective treatment than what is currently available with existing
systems. The Firefly Dx breadboard prototype system has already demonstrated the ability to detect and identify common pathogens
and diseases such as E. coli, Methicillin-resistant Staphylococcus Aureus, Methicillin-susceptible Staphylococcus Aureus, Clostridium
difficile, influenza and others. Firefly Dx is designed to be a simple-to-use, point-of-care, real-time polymerase chain reaction
(“PCR”) device, which is designed for use by medical personnel at the point-of-need; first response teams to detect
biological agents associated with weapons of mass destruction; agricultural screening in domestic sectors and developing countries;
and point-of-need monitoring of pathogenic outbreaks.
We
have demonstrated in our labs that the entire Firefly Dx prototype design functions as intended through the complete sample purification
and detection process without the use of any third-party hardware. The next step in the development of Firefly Dx is to combine
these processes and breadboards into single units and demonstrate the capability to run a test from putting the raw sample in
the cartridge through sample preparation, PCR and real-time detection as a single system. We are currently seeking a government
contract or other partner to help us fund the remaining development and the build of the smaller, field-able prototype for testing
by third parties to prepare for commercialization.
Caregiver
Caregiver
is an infrared thermometer, FDA-cleared for clinical use, that measures forehead temperature in adults, children and infants,
without contact. It delivers an oral-equivalent temperature directly from the forehead in one to two seconds. Caregiver is the
world’s first clinically validated, non-contact thermometer for the healthcare providers market, which includes hospitals,
physicians’ offices, medical clinics, nursing homes and other long-term care institutions, and acute care hospitals. Caregiver
requires minimal training and is proven as accurate as other methods of clinical thermometry, which include predictive oral/rectal/axillary
electronic, infrared tympanic, temporal artery contact scanner, etc. Other temperature monitoring devices may require intensive
technique concentration, which make them prone to mistaken placement or dwell time, and may require replacement metal probes,
cords, or other parts. The Caregiver thermometer with TouchFree™ technology is less likely to transmit infectious disease
than devices that require even minimal contact. Caregiver saves medical facilities the cost of probe covers ($0.05 to $0.10 per
temperature reading), storage space and disposal costs. It is estimated that Caregiver can offer savings of $250 or more per year
per device in probe cover supplies alone.
ENG
Mobile Systems
Our
ENG subsidiary is a leader in the specialty technology vehicle market, with a focus on mobile laboratories, command and communications
applications, and mobile cellular systems. The fastest growing segment of ENG’s business over the last decade are its mobile
labs, which include government and corporate laboratories for environmental, chemical, biological, nuclear, radiological and explosives
testing in the field. ENG’s MobiLab™ Systems have become the primary choice of mobile labs for scientific and environmental
agencies and organizations throughout the country because of their productivity in the field. ENG has delivered more than 400
MobiLabs to customers around the world. The combination of PositiveID’s expert bio-detection technologies with ENG’s
advanced mobile labs is expected to offer customers a next generation, best of breed solution in the mobile laboratory space.
ENG
also provides specialty vehicle manufacturing for TV news vans and trucks, emergency response trailers, mobile command centers,
infrared inspection, and other special purpose vehicles. ENG provides technical support to customers’ field personnel through
its training and educational programs, and also offers customizable service and maintenance agreements. ENG’s mobile cellular
systems offer temporary cell sites to boost capacity, as well as the latest technology for testing site performance. During the
past 25 years, ENG has pioneered numerous engineering and design breakthroughs.
Legacy
Products
Between
2011 and 2013, we entered into license or sale agreements to dispose of certain technologies concentrated in the area of diabetes
management and patient identification. Those products and their status are as follows:
VeriChip
and GlucoChip
Throughout the course
of 2012 through 2014, the Company and VeriTeQ, a business run by a former related party (CEO of the Company through 2011), entered
into a number of agreements for the intellectual property related to the Company’s embedded biosensor portfolio, which ultimately
resulted in a GlucoChip and Settlement Agreement, entered into on October 20, 2014 (the “GlucoChip Agreement”), under
which the final element of the Company’s implantable microchip business was transferred to VeriTeQ.
Pursuant to the VeriTeQ
agreements, the Company holds a Note that was received as payment for shared services payments that the Company made on behalf
of VeriTeQ during 2011 and 2012 which Note had an original value of $222,115. The note has been fully reserved in all periods
presented. The Company also holds a five-year warrant dated November 13, 2013, with original terms entitling the Company to purchase
300,000 shares of VeriTeQ common stock at a price of $2.84. Pursuant to the terms of the warrant, in particular the full quantity
and pricing reset provisions, the warrant had an original dollar value of $852,000 and can be exercised using a cashless exercise
feature.
On October 20, 2014,
the Company entered into the GlucoChip Agreement with VeriTeQ to transfer the intellectual property related to its GlucoChip development
and to provide financial support to VeriTeQ, for a period of up to two years, in the form of convertible promissory notes. VeriTeQ
issued the Company Convertible Promissory Notes in total principal amount of $200,000, and agreed to provide VeriTeQ with continuing
financial support through the issuance of additional convertible promissory notes up to an additional amount of $205,000. As of
December 31, 2016, the Company had issued Notes with a principal value of $200,000 under the GlucoChip Agreement. As VeriTeQ is
in default of its agreements with the Company, there is no intention to provide any additional notes until such time as all defaults
are cured.
On October 19, 2015,
VeriTeQ received a default notice from its senior lender and a Notice of Disposition of Collateral advising the Company that the
senior lender, acting as collateral agent, intended to sell the assets at auction, which it did on November 4, 2015. On November
25, 2015, VeriTeQ entered into a stock purchase agreement with an unaffiliated company whereby VeriTeQ agreed to acquire all of
the issued and outstanding membership interests of that company, and on May 6, 2016, VeriTeQ completed the closing of that agreement.
Pursuant to the cashless
exercise feature of the VeriTeQ warrant and subsequent sale of the underlying shares, the Company realized $335,600 of income which
was recorded under other income in the consolidated Statement of Operations during the year ended December 31, 2015. As VeriTeQ
is an early stage company, not yet fully capitalized, the Company plans to continue to fully reserve all note receivable and warrant
balances. If and when proceeds are realized in the future, gains will be recognized. As of December 31, 2016, the Company had
outstanding convertible notes receivable from VeriTeQ of $422,115 and is also owed default principal and interest of which a full
reserve has been established as noted above.
Sales,
Marketing and Distribution
Our
sales, marketing and distribution plan for our healthcare products is to align with large medical distribution companies, and
either manufacture the products to their specification or license the products and underlying technology to them. We have entered
into various distribution agreements with several medical equipment suppliers to distribute our Caregiver thermometer. We will
also sell the Caregiver thermometer under separate agreements with commissioned independent sales representatives and smaller
distributors who have non-exclusive territorial agreements. ENG markets directly to customers through its internal sales force,
website, referrals and channel partners.
We
are subject to certain indemnification obligations in connection with our distribution agreements. We are usually required to
procure and maintain product liability insurance of specified limits per occurrence and in the aggregate, naming the contracting
party as an additional insured. Our distributors, resellers, and sales representatives typically agree not to sell competitive
products during the term of their agreements with us.
Manufacturing:
Distributor and Supplier Arrangements
We
have historically outsourced the manufacturing of all the hardware components of our systems to third parties. As of December
31, 2016, we have not had material difficulties obtaining system components. We believe that if any of our manufacturers or suppliers
were to cease supplying us with system components, we would be able to procure alternative sources without material disruption
to our business. We plan to continue to outsource any manufacturing requirements of our current and under-development products.
The
technology and functionality of the Caregiver thermometer was co-designed by our new supplier in Taiwan, which, as discussed below,
is the manufacturer and the assignor to us of the requisite U.S. governmental pre-marketing approvals. We designed the housing
of our products, incorporating our extensive thermometry engineering and clinical expertise. We are in the process of designing
and developing, with our supplier, all aspects, including technology, of our proposed second-generation products.
Under
certain agreements, the Company may be subject to penalties if they are unable to supply products under its obligations. Since
inception, the Company has never incurred any such penalties.
Environmental
Regulation
We
must comply with local, state, federal, and international environmental laws and regulations in the countries in which we do business,
including laws and regulations governing the management and disposal of hazardous substances and wastes. We expect our operations
and products will be affected by future environmental laws and regulations, but we cannot predict the effects of any such future
laws and regulations at this time. Our distributors who place our products on the market in the European Union are required to
comply with EU Directive 2002/96/EC on waste electrical and electronic equipment, known as the WEEE Directive. Noncompliance by
our distributors with EU Directive 2002/96/EC would adversely affect the success of our business in that market. Additionally,
the applicability of EU Directive 2002/95/EC on the restriction of the use of certain hazardous substances in electrical and electronic
equipment, known as the RoHS Directive which took effect on July 1, 2006 does not impact our business.
Government
Regulation
Regulation
by the FDA
The
thermometers that we market are subject to regulation by numerous regulatory bodies, including the FDA and comparable international
regulatory agencies. These agencies require manufacturers of medical devices, such as our manufacturer, to comply with applicable
laws and regulations governing the development, testing, manufacturing, labeling, marketing and distribution of medical devices.
In addition, the Quality Management System employed by our contract manufacturer must meet the FDA 21 CFR Part 820, and its manufacturing
facility is subject to periodic FDA audit. Devices are generally subject to varying levels of regulatory control, the most comprehensive
of which requires that a clinical evaluation be conducted before a device receives approval for commercial distribution. Our products
are subject to the lowest level of regulation and only require pre-marketing approval, as described below.
In
the United States, permission to distribute a new device generally can be met in one of three ways. The process relevant to our
products requires that a pre-market notification (“510(k) Submission”) be made to the FDA to demonstrate that the
device is as safe and effective as, or substantially equivalent to, a legally marketed device that is not subject to pre-market
approval (“PMA”), i.e., the “predicate” device. An appropriate predicate device for a pre-market notification
is one that (i) was legally marketed prior to May 28, 1976, (ii) was approved under a PMA but then subsequently reclassified from
class III to class II or I, or (iii) has been found to be substantially equivalent and cleared for commercial distribution under
a 510(k) Submission. Applicants must submit descriptive data and, when necessary, performance data to establish that the device
is substantially equivalent to a predicate device. (In some instances not relevant to our products, data from human clinical trials
must also be submitted in support of a 510(k) Submission. The FDA must issue an order finding substantial equivalence before commercial
distribution can occur. Changes to existing devices covered by a 510(k) Submission that do not raise new questions of safety or
effectiveness can generally be made without additional 510(k) Submissions. More significant changes, such as new designs or materials,
may require a separate 510(k) with data to support that the modified device remains substantially equivalent. The FDA has recently
begun to review its clearance process in an effort to make it more rigorous, which may require additional clinical data, time
and effort for product clearance.
We
have received a 510(k) pre-market approval from the FDA for our thermometers. This 510(k) will allow us to sell our second- generation
thermometers without additional approvals. However, we may need to obtain recertification. Depending on product changes, this
recertification may require a complete documentation package, an abbreviated documentation package or an internal documentation
package, a determination to be made by guidance documents from the FDA, in concert with our regulatory consultants.
Some
countries do not have medical device regulations, but in most foreign countries, medical devices are regulated. Frequently, regulatory
approval may first be obtained in a foreign country prior to application in the United States to take advantage of differing regulatory
requirements. If we market in foreign countries, such as the European countries, ISO 13485 is the internationally recognized standard
for medical devices. Products must comply with ISO 13485 to receive the “CE” mark. We design our products to comply
with the requirements of both the FDA and ISO 13485. We intend to conduct audits of our contract manufacturers to ensure compliance
with these regulations. If an audit uncovers problems, there is a risk of disruption in product availability.
Upon
the completion of development, we intend to apply for a Clinical Laboratory Improvement Amendments (“CLIA”) waiver
from the FDA to market Firefly Dx.
CLIA
Waiver.
Congress passed the CLIA in 1988 establishing quality standards for all laboratory testing to ensure the accuracy,
reliability and timeliness of patient test results regardless of where the test was performed. The requirements are based on the
complexity of the test and not the type of laboratory where the testing is performed. As defined by CLIA, waived tests are categorized
as “simple laboratory examinations and procedures that have an insignificant risk of an erroneous result.” The FDA
determines the criteria for tests being simple with a low risk of error and approves manufacturer’s applications for test
system waiver.
FDA
Premarket Clearance and Approval Requirements
. Generally speaking, unless an exemption applies such as applying for a CLIA
waiver, each medical device we wish to distribute commercially in the United States will require either prior clearance under
Section 510(k) of the Federal Food, Drug, and Cosmetic Act, (“FFDCA”), or a PMA, approved by the FDA. Medical devices
are classified into one of three classes — Class I, Class II or Class III — depending on the degree of risk to the
patient associated with the medical device and the extent of control needed to ensure its safety and effectiveness. Devices deemed
to pose low or moderate risks are placed in either Class I or II, respectively. The manufacturer of a Class II device is required
to submit to the FDA a premarket notification requesting permission to commercially distribute the device and demonstrating that
the proposed device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution
before May 28, 1976 for which the FDA has not yet called for the submission of a PMA. This process is known as 510(k) clearance.
Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting implantable devices, or devices
deemed not substantially equivalent to a previously cleared 510(k) device, are considered high risk and placed in Class III, requiring
premarket approval.
Pervasive
and Continuing Regulation
. After a medical device is placed on the market, numerous regulatory requirements continue to apply.
These include:
●
|
quality
system regulations, (“QSR”), which require manufacturers, including third-party manufacturers, to follow stringent
design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;
|
|
|
●
|
labeling
regulations and FDA prohibitions against the promotion of regulated products for uncleared, unapproved or off-label uses;
|
|
|
●
|
clearance
or approval of product modifications that could significantly affect safety or effectiveness or that would constitute a major
change in intended use;
|
|
|
●
|
medical
device reporting, (“MDR”), regulations, which require that a manufacturer report to the FDA if the manufacturer’s
device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute
to a death or serious injury if the malfunction were to recur;
|
|
|
●
|
post-market
surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness
data for the device; and
|
|
|
●
|
medical
device tracking requirements apply when the failure of the device would be reasonably likely to have serious adverse health
consequences.
|
Fraud
and Abuse
We
are subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and false
claims laws. Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, imprisonment
and exclusion from participation in federal and state healthcare programs, including Medicare, Medicaid and Veterans Affairs health
programs. We have never been challenged by a government authority under any of these laws and believe that our operations are
in material compliance with such laws. However, because of the far-reaching nature of these laws, there can be no assurance that
we would not be required to alter one or more of our practices to be in compliance with these laws. In addition, there can be
no assurance that the occurrence of one or more violations of these laws would not result in a material adverse effect on our
financial condition and results of operations.
Anti-Kickback
Laws
We
may directly or indirectly be subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback
laws. In particular, the federal healthcare program Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an
individual, or the furnishing, arranging for or recommending a good or service, for which payment may be made in whole or part
under federal healthcare programs, such as the Medicare and Medicaid programs. Penalties for violations include criminal penalties
and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs.
Federal
False Claims Act
We
may become subject to the Federal False Claims Act (“FCA”). The FCA imposes civil fines and penalties against anyone
who knowingly submits or causes to be submitted to a government agency a false claim for payment. The FCA contains so-called “whistle-blower”
provisions that permit a private individual to bring a claim, called a qui tam action, on behalf of the government to recover
payments made as a result of a false claim. The statute provides that the whistle-blower may be paid a portion of any funds recovered
as a result of the lawsuit.
State
Laws and Regulations
Many
states have enacted laws similar to the federal Anti-Kickback Statute and FCA. The Deficit Reduction Act of 2005 contains provisions
that give monetary incentives to states to enact new state false claims acts. The state Attorneys General are actively engaged
in promoting the passage and enforcement of these laws. While the Federal Anti-Kickback Statute and FCA apply only to federal
programs, many similar state laws apply both to state funded and to commercial health care programs. In addition to these laws,
all states have passed various consumer protection statutes. These statutes generally prohibit deceptive and unfair marketing
practices, including making untrue or exaggerated claims regarding consumer products. There are potentially a wide variety of
other state laws, including state privacy laws, to which we might be subject. We have not conducted an exhaustive examination
of these state laws.
Laws
and Regulations Governing Privacy and Security
There
are various federal and state laws and rules regulating the protection of consumer and patient privacy. We have never been challenged
by a governmental authority under any of these laws and believe that our operations are in material compliance with such laws.
However, because of the far-reaching nature of these laws, there can be no assurance that we would not be required to alter one
or more of our systems and data security procedures to be in compliance with these laws. Our failure to protect health information
received from customers could subject us to civil or criminal liability and adverse publicity and could harm or business and impair
our ability to attract new customers.
U.S.
Federal Trade Commission Oversight
An
increasing focus of the United States Federal Trade Commission’s (the “FTC”), consumer protection regulation
is the impact of technological change on protection of consumer privacy. Under the FTC’s statutory authority to prosecute
unfair or deceptive acts and practices, the FTC vigorously enforces promises a business makes about how personal information is
collected, used and secured.
Since
1999, the FTC has taken enforcement action against companies that do not abide by their representations to consumers of electronic
security and privacy. More recently, the FTC has found that failure to take reasonable and appropriate security measures to protect
sensitive personal information is an unfair practice violating federal law. In the consent decree context, offenders are routinely
required to adopt very specific cyber security and internal compliance mechanisms, as well as submit to twenty years of independent
compliance audits. Businesses that do not adopt reasonable and appropriate data security controls or that misrepresent privacy
assurances to users have been subject to civil penalties as high as $22.5 million.
In
2009, the FTC issued rules requiring vendors of personal health records to notify customers of any breach of unsecured, individually
identifiable health information. Also, a third-party service provider of such vendors or entities that experiences a breach must
notify such vendors or entities of the breach. If we experience a breach of our systems containing personal health records, we
will be required to provide these notices and may be subject to penalties. Violations of these requirements may be prosecuted
by the FTC as an unfair or deceptive act or practice and could result in significant harm to our reputation.
Health
Insurance Portability and Accountability Act of 1996 and the Health Information Technology for Economic and Clinical Health Act
of 2009
The
Health Insurance Portability and Accountability Act of 1996 and its implementing regulations (“HIPAA”), govern how
various entities and individuals can use and disclose protected health information. If we begin transmitting individually identifiable
health information in connection with certain standard transactions regulated by HIPAA, we would likely have to implement a HIPAA
compliance program to ensure our uses and disclosures of health information are done in accordance with the regulations. Under
the federal Health Information Technology for Economic and Clinical Health Act, (the “HITECH Act”), we may be subject
to certain federal privacy and security requirements relating to individually identifiable health information we maintain. We
may be required to enter into written business associate agreements with certain health care providers and health plans relating
to the privacy and security of protected health information, to the extent our customers are covered entities under HIPAA and
to the extent we receive, use or disclose protected health information on their behalf. Under the HITECH Act, we would be required
by federal law to comply with those business associate agreements, as well as certain privacy and security requirements found
in HIPAA and the HITECH Act as they relate to our activities as a business associate. If we are a covered entity or business associate
under HIPAA and the HITECH Act, compliance with those requirements would require us to, among other things, conduct a risk analysis,
implement a risk management plan, implement policies and procedures, and conduct employee training. The HITECH Act would also
require us to notify patients or our customers, to the extent that they are covered entities subject to HIPAA, of a breach of
privacy or security of individually identifiable health information. Breaches may also require notification to the Department
of Health and Human Services and the media. Experiencing a breach could have a material impact on our reputation. The standards
under HIPAA and the HITECH Act could be interpreted by regulatory authorities in ways that could require us to make material changes
to our operations. Failure to comply with these federal privacy and security laws could subject us to civil and criminal penalties.
Civil penalties can go as high as $50,000 per violation, with an annual maximum of $1.5 million for all violations of an identical
provision in a calendar year.
State
Legislation
Many
states have privacy laws relating specifically to the use and disclosure of healthcare information. Federal healthcare privacy
laws may preempt state laws that are less restrictive or offer fewer protections for healthcare information than the federal law
if it is impossible to comply with both sets of laws. More restrictive or protective state laws still may apply to us, and state
laws will still apply to the extent that they are not contrary to federal law. Therefore, we may be required to comply with one
or more of these multiple state privacy laws. Statutory penalties for violation of these state privacy laws varies widely. Violations
also may subject us to lawsuits for invasion of privacy claims, or enforcement actions brought by state Attorneys General. We
have not conducted an exhaustive examination of these state laws.
Many
states currently have laws in place requiring organizations to notify individuals if there has been unauthorized access to certain
unencrypted personal information. Several states also require organizations to notify the applicable state Attorney General or
other governmental entity in the event of a data breach, and may also require notification to consumer reporting agencies if the
number of individuals involved surpasses a defined threshold. We may be required to comply with one or more of these notice of
security breach laws in the event of unauthorized access to personal information. In addition to statutory penalties for a violation
of the notice of security breach laws, we may be exposed to liability from affected individuals.
Regulation
of Government Bid Process and Contracting
Contracts
with federal governmental agencies are obtained by primarily through a competitive proposal/bidding process. Although practices
vary, typically a formal Request for Proposal is issued by the governmental agency, stating the scope of work to be performed,
length of contract, performance bonding requirements, minimum qualifications of bidders, selection criteria and the format to
be followed in the bid or proposal. Usually, a committee appointed by the governmental agency reviews proposals and makes an award
determination. The committee may award the contract to a particular bidder or decide not to award the contract. The committees
consider a number of factors, including the technical quality of the proposal, the offered price and the reputation of the bidder
for providing quality care. The award of a contract may be subject to formal or informal protest by unsuccessful bidders through
a governmental appeals process. Our contracts with governmental agencies often require us to comply with numerous additional requirements
regarding recordkeeping and accounting, non-discrimination in the hiring of personnel, safety, safeguarding confidential information,
management qualifications, professional licensing requirements and other matters. If a violation of the terms of an applicable
contractual provision occurs, a contractor may be disbarred or suspended from obtaining future contracts for specified periods
of time. We have never been disbarred or suspended from seeking procurements by any governmental agency.
Health
Care Reform
The
Patient Protection and Affordable Care Act (“Affordable Care Act”), will likely have a dramatic effect on health care
financing and insurance coverage for Americans. A portion of the Affordable Care Act, referred to as the “Physician Sunshine
Payment” provisions, requires applicable manufacturers and distributors of drugs, devices, biological, or medical supplies
covered under Medicare, Medicaid or the Children’s Health Insurance Program to report annually to the Department of Health
and Human Services certain payments or other transfers of value to physicians and teaching hospitals. They also require applicable
manufacturers and applicable group purchasing organizations to report certain information regarding the ownership or investment
interests held by physicians or the immediate family members of physicians in such entities. Final regulations implementing the
Physician Sunshine Payment provisions were issued on February 8, 2013 and became effective on April 9, 2013. The required data
was required to be reported to the Centers for Medicare and Medicaid Services by March 31, 2014. Civil monetary penalties apply
for failure to report payments, transfers of value, or physician ownership interests.
The Company had no issues with
the implemented Affordable Care Act.
Risk
Management
The
testing, marketing and sale of human healthcare products entails an inherent risk of product liability claims. In the normal course
of business, product liability claims may be asserted against us in the future related to events unknown at the present time.
We have obtained and maintain insurance with respect to product liability claims in amounts we believe are appropriate. However,
product liability claims, product recalls, litigation in the future, regardless of outcome, could have a material adverse effect
on our business. We believe that our risk management practices are reasonably adequate to protect against reasonable product liability
losses. However, unanticipated catastrophic losses could have a material adverse impact on our financial position, results of
operations and liquidity.
Competitive
Conditions
We
compete with many companies in the molecular diagnostics industry and the homeland defense and clinical markets. We believe that
Luminex Corporation, Cepheid, Roche, BioMerieux, and Thermo Fisher Scientific will be competitors for our molecular diagnostics
products. We believe Welch Allyn, Braun and Exergen, which markets a line of oral, infrared, tympanic and axillary thermometers,
is our main competitor in the clinical-use thermometry market. In our ENG business, we believe our competitors include GermFree
Laboratories, Inc., LDV Inc., and Farber Specialty Vehicles.
Key
characteristics of our markets include long operating cycles and intense competition, which is evident through the number of bid
protests (competitor protests of U.S. government procurement awards) and the number of competitors bidding on program opportunities.
It is common in the homeland defense industry for work on major programs to be shared among several companies. A company competing
to be a prime contractor may, upon ultimate award of the contract to another competitor, become a subcontractor for the ultimate
prime contracting company. It is not unusual to compete for a contract award with a peer company and, simultaneously, perform
as a supplier to, or a customer of, that same competitor on other contracts, or vice versa.
Research
and Development
The
principal objectives of our research and development program are to develop high-value molecular diagnostic products such as Firefly
Dx and M-BAND, as well as to improve the accuracy of our thermometer products so that we can complete development of and introduce
our next-generation line of human thermometers to healthcare professionals and institutions. We focus our efforts on five main
areas: 1) engineering efforts to extend the capabilities of our systems and to develop new systems; 2) assay development efforts
to design, optimize and produce specific tests that leverage the systems and chemistry we have developed; 3) target discovery
research to identify novel micro RNA targets to be used in the development of future assays; 4) chemistry research to develop
innovative and proprietary methods to design and synthesize oligonucleotide primers, probes and dyes to optimize the speed, performance
and ease-of-use of our assays; and 5) developing hardware and software for all our new thermometer models, and further clinical
studies for validation.
Employees
As
of March 22, 2017, we had 29 full-time employees, of which 3 were in management; 5 were in finance and administration; 5 in sales,
marketing and business development; 6 in research, development and engineering; and 10 in manufacturing. We consider our relationship
with our employees to be satisfactory and have not experienced any interruptions of our operations as a result of labor disagreements.
None of our employees are represented by labor unions or covered by collective bargaining agreements.
Item
1A. Risk Factors
The
following risks and the risks described elsewhere in this Annual Report on Form 10-K, including the section entitled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” could materially affect our business, prospects,
financial condition, operating results and cash flows. If any of these risks materialize, the trading price of our common
stock could decline, and you may lose all or part of your investment.
Risks
Related to the Operations and Business of PositiveID
We
have a history of losses and expect to incur additional losses in the future. We are unable to predict the extent of future losses
or when we will become profitable
.
For
the years ended December 31, 2016 and 2015, we experienced net losses of $13.1 million and $11.4 million, respectively and our
accumulated deficit at December 31, 2016 was $157.2 million. Until our ENG, Caregiver, Firefly and M-BAND businesses and products
are profitable on a combined basis, we do not anticipate generating significant operating profits. We have submitted, or are in
the process of submitting, bids on various potential new U.S. Government contracts; however, there can be no assurance that we
will be successful in obtaining any such new or other contracts.
We
expect to continue to incur operating losses for the near future. Our ability in the future to achieve or sustain profitability
is based on a number of factors, many of which are beyond our control. Even if we achieve profitability in the future, we may
not be able to sustain profitability in subsequent periods.
Our
financial statements indicate conditions exist that raise substantial doubt as to whether we will continue as a going concern.
Our
annual audited financial statements for the years ended December 31, 2016 and 2015 indicate conditions exist that raise substantial
doubt as to whether we will continue as a going concern. Our continuation as a going concern is dependent upon our ability to
obtain financing to fund the continued development of products, and working capital requirements. If we cannot continue as a going
concern, our stockholders may lose their entire investment.
Government
contracts and subcontracts are generally subject to a competitive bidding process that may affect our ability to win contract
awards or renewals in the future.
We
bid on government contracts through a formal competitive process in which we may have many competitors. If awarded, upon expiration,
these contracts may be subject, once again, to a competitive renewal process if applicable. We may not be successful in winning
contract awards or renewals in the future. Our failure to renew or replace existing contracts when they expire could have a material
adverse effect on our business, financial condition, or results of operations.
Contracts
and subcontracts with United States government agencies that we may be awarded will be subject to competition and will be
awarded on the basis of technical merit, personnel qualifications, experience, and price. Our business, financial condition,
and results of operations could be materially affected to the extent that U.S. government agencies believe our competitors
offer a more attractive combination of the foregoing factors. In addition, government demand and payment for our products may
be affected by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely
affecting demand for our products. Our success in this process is an important factor in our ability to increase stockholder
value.
Compliance
with changing regulations concerning corporate governance and public disclosure may result in additional expenses.
There
have been changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley
Act, and new regulations promulgated by the SEC. These new or changed laws, regulations and standards are subject to varying interpretations
in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and
higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with
evolving laws, regulations and standards are likely to continue to result in increased general and administrative expenses and
a diversion of management time and attention from revenue-generating activities to compliance activities. Our board members and
executive officers could face an increased risk of personal liability in connection with the performance of their duties. As a
result, we may have difficulty attracting and retaining qualified board members and executive officers, which could harm our business.
If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory
or governing bodies, we could be subject to liability under applicable laws or our reputation may be harmed.
Changes
in the regulatory environment could adversely affect our business, financial condition or results of operations.
Our
operations are subject to varying degrees of regulation by the FDA, other federal, state and local regulatory agencies and legislative
bodies. Adverse decisions or new or amended regulations or mandates adopted by any of these regulatory or legislative bodies could
negatively impact our operations by, among other things, causing unexpected or changed capital investments, lost revenues, increased
costs of doing business, and could limit our ability to engage in certain sales or marketing activities.
We
depend on key personnel to manage our business effectively, and, if we are unable to hire, retain or motivate qualified personnel,
our ability to design, develop, market and sell our systems could be harmed.
Our
future success depends, in part, on certain key employees, including William J. Caragol, our Chairman of the Board of Directors
(the “Board”) and Chief Executive Officer and Lyle Probst, our President, and on our ability to attract and retain
highly skilled personnel. The loss of the services of any of our key personnel may seriously harm our business, financial condition
and results of operations. In addition, the inability to attract or retain qualified personnel, or delays in hiring required personnel,
particularly operations, finance, accounting, sales and marketing personnel, may also seriously harm our business, financial condition
and results of operations. Our ability to attract and retain highly skilled personnel will be a critical factor in determining
whether we will be successful in the future.
We
may be unable to make or successfully integrate acquisitions.
Our
business and growth strategies depend in large part on our ability to identify and acquire suitable companies. Delays or failures
in acquiring new companies would materially and adversely affect our planned growth.
Strategic
acquisitions, investments and alliances are intended to expand our ability to offer, high quality detection and diagnostic products
and services. If we are unsuccessful in our acquisitions, investments and alliances, we may be unable to grow our business significantly
or may record asset impairment charges in the future. The success of any acquisition, investment or alliance that we may undertake
in the future will depend on a number of factors, including:
●
|
our
ability to identify suitable opportunities for acquisition, investment or alliance, if at all;
|
|
|
●
|
our
ability to finance any future acquisition, investment or alliance on terms acceptable to us, if at all;
|
|
|
●
|
whether
we are able to establish an acquisition, investment or alliance on terms that are satisfactory to us, if at all;
|
|
|
●
|
the
strength of the other company’s underlying technology and ability to execute;
|
|
|
●
|
intellectual
property and pending litigation related to these technologies;
|
|
|
●
|
regulatory
approvals and reimbursement levels, if any, of the acquired products, if any; and
|
|
|
●
|
our
ability to successfully integrate acquired companies and businesses with our existing business, including the ability to adequately
fund acquired in-process research and development projects.
|
Any
potential future acquisitions we consummate will be dilutive, possibly substantially, to the equity ownership interests of our
shareholders since we intend to pay for such acquisitions by issuing shares of our common stock, and also may be dilutive to our
earnings per share, if any.
Our
acquisition strategy may not have the desired result, and notwithstanding effecting numerous acquisitions, we still may be unable
to achieve profitability or, if profitability should be achieved, to sustain it.
We
will continue to incur the expenses of complying with public company reporting requirements.
We
have an obligation to continue to comply with the applicable reporting requirements of the Exchange Act, which includes the filing
with the SEC of periodic reports, proxy statements and other documents relating to our business, financial conditions and other
matters, even though compliance with such reporting requirements is economically burdensome at this time.
Directors,
executive officers, principal stockholders and affiliated entities own a significant percentage of our capital stock, and they
may make decisions that you do not consider to be in the best interests of our stockholders.
As
of March 22, 2017, our current named directors and executive officers beneficially owned, in the aggregate, approximately 85.9%
of our outstanding voting securities, including 46.6% owned by our Chairman of the Board and Chief Executive Officer. As a result,
if some, or all of them acted together, they would have the ability to exert substantial influence over the election of the Board
and the outcome of issues requiring approval by our stockholders. This concentration of ownership may also have the effect of
delaying or preventing a change in control of the Company that may be favored by other stockholders. This could prevent transactions
in which stockholders might otherwise recover a premium for their shares over current market prices.
The
Company’s officers, directors and management hold preferred shares that give them voting control of the Company.
From
September 30, 2013 through April 6, 2016, the Company issued 2,025 shares of Series I Preferred Stock to its officers, directors
and management as management and director compensation and payment of deferred obligations. Each of the Series I preferred is
convertible into the Company’s Common Stock, at stated value plus accrued dividends, at the closing bid price on the issuance
date, any time at the option of the holder and by the Company in the event that the Company’s closing stock price exceeds
400% of the conversion price for twenty consecutive trading days. The Series I Preferred Stock had voting rights equivalent
to twenty-five votes per common share equivalent.
On
July 25, 2016, the Board authorized a Certificate of Designations of Preferences, Rights and Limitations of Series II Convertible
Preferred Stock (the “Certificate”). The Certificate was filed with the State of Delaware Secretary of State on July
25, 2016. The Series II Preferred ranks: (a) senior with respect to dividends and right of liquidation with the common stock;
(b) pari passu with respect to dividends and right of liquidation with the Company’s Series I Preferred and Series J Convertible
Preferred Stock; and (c) junior to all existing and future indebtedness of the Company. The Series II Preferred has a stated value
per share of $1,000, subject to adjustment as provided in the Certificate (the “Stated Value”), and a dividend rate
of 6% per annum of the Stated Value. As with the Series I Preferred, the Series II Preferred has 25 votes per common share equivalent.
The Series II Preferred is subject to redemption (at Stated Value, plus any accrued, but unpaid dividends (the “Liquidation
Value”)) by the Company no later than three years after a Deemed Liquidation Event (as defined in the Certificate) and at
the Company’s option after one year from the issuance date of the Series II Preferred, subject to a ten-day notice (to allow
holder conversion). The Series II Preferred is convertible at the option of a holder or if the closing price of the common stock
exceeds 400% of the Conversion Price for a period of twenty consecutive trading days, at the option of the Company. Conversion
Price means a price per share of the common stock equal to 100% of the lowest daily volume weighted average price of the common
stock during the subsequent 12 months following the date the Series II Preferred was issued.
On
August 11, 2016, the Board of PositiveID agreed to exchange 2,025 shares of its Series I Preferred, which have a stated value
of $2,025,000 and redemption value of $2,261,800 for 2,262 shares of Series II Preferred, which have a stated value of $2,262,000,
held by its directors, officers and management, namely, our CEO, acting CFO and Chairman, William J. Caragol, our President, Lyle
L. Probst, and our three non-employee directors, Jeffrey Cobb, Michael Krawitz, and Ned L. Siegel, as well as Allison Tomek, our
Senior Vice President of Corporate Development, and Kimothy Smith, our Chief Technology Advisor (the “Exchange”).
The Series II have an aggregate stated value equivalent to the redemption value of the Series I at the exchange date. Pursuant
to the Exchange, each existing holder of Series I Preferred exchanged their Series I Preferred shares for Series II Preferred
shares having equivalent per share stated value, maintaining the same voting rights as they had as holders of the Series I Preferred.
Both the Series I Preferred and the Series II Preferred have a stated value per share of $1,000, and a dividend rate of 6% per
annum. All shares of Series I Preferred previously issued have become null and void and any and all rights arising thereunder
have been extinguished. The Series II Preferred is only forfeitable after the exchange date up to January 1, 2019 upon termination
for cause and is subject to acceleration in the event of conversion, redemption and certain events. The total Series I Preferred
shares exchanged for Series II Preferred shares on August 11, 2016 is detailed as follows:
|
|
|
|
Preferred Series I
|
|
|
Preferred Series II
|
|
Name
|
|
Position
|
|
Shares Issued
|
|
|
Common Shares Issuable Upon Conversion
|
|
|
Total Votes
|
|
|
Shares Issued
|
|
|
Common Shares Issuable Upon Conversion
|
|
|
Total Votes
|
|
William J. Caragol
|
|
Chairman and Chief Executive Officer
|
|
|
956
|
|
|
|
10,884,308
|
|
|
|
272,107,685
|
|
|
|
1,077
|
|
|
|
10,884,308
|
|
|
|
272,107,685
|
|
Michael E. Krawitz
|
|
Director
|
|
|
151
|
|
|
|
1,712,993
|
|
|
|
42,824,823
|
|
|
|
169
|
|
|
|
1,712,993
|
|
|
|
42,824,823
|
|
Jeffrey S. Cobb
|
|
Director
|
|
|
138
|
|
|
|
1,558,948
|
|
|
|
38,973,711
|
|
|
|
154
|
|
|
|
1,558,948
|
|
|
|
38,973,711
|
|
Ned L. Siegel
|
|
Director
|
|
|
114
|
|
|
|
1,274,550
|
|
|
|
31,863,751
|
|
|
|
126
|
|
|
|
1,274,550
|
|
|
|
31,863,751
|
|
Lyle Probst
|
|
President
|
|
|
415
|
|
|
|
4,614,955
|
|
|
|
115,373,862
|
|
|
|
456
|
|
|
|
4,614,955
|
|
|
|
115,373,862
|
|
Allison F. Tomek
|
|
SVP of Corporate Development
|
|
|
151
|
|
|
|
1,677,563
|
|
|
|
41,939,080
|
|
|
|
166
|
|
|
|
1,677,563
|
|
|
|
41,939,080
|
|
Kimothy Smith
|
|
Chief Technology Advisor
|
|
|
50
|
|
|
|
553,761
|
|
|
|
13,844,034
|
|
|
|
55
|
|
|
|
553,761
|
|
|
|
13,844,034
|
|
Caragol Family Irrevocable Trust
|
|
|
|
|
50
|
|
|
|
592,487
|
|
|
|
14,812,184
|
|
|
|
59
|
|
|
|
592,487
|
|
|
|
14,812,184
|
|
Total
|
|
|
|
|
2,025
|
|
|
|
22,869,565
|
|
|
|
571,739,130
|
|
|
|
2,262
|
|
|
|
22,869,565
|
|
|
|
571,739,130
|
|
As
a result of the exchange, there were nil and 2,262 shares of Series I and Series II Preferred shares, respectively, issued and
outstanding as of December 31, 2016.
As
of March 22, 2017, our officers, directors and management (in addition to the five people who make up the Majority Stockholders,
this includes Allison Tomek, our Senior Vice President of Corporate Development, and Kimothy Smith, our Chief Technology Advisor)
have an aggregate of 292,670,729,287 votes on any matter brought to a vote of the holders of our common stock, including an aggregate
of 293,089,001,370 votes, or 98% of the total vote, through the ownership of Series II Preferred Stock, and 99,467 votes through
the ownership of shares of our common stock. As a result, our named officers, directors, and management have voting control over
the 299,128,900,750 of the outstanding voting shares of the Company.
Our
Board may, at any time, authorize the issuance of additional common or preferred stock without common stockholder approval, subject
only to the total number of authorized common and preferred shares set forth in our certificate of incorporation. The terms of
equity securities issued by us in future transactions may be more favorable to new investors, and may include dividend and/or
liquidation preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a
further dilutive effect. Since management has voting control over the Company, it also has the ability to approve any increase
in the amount of authorized shares of common or preferred stock thus, there are no limitations on management’s ability to
continue to make dilutive issuances of securities.
Risks
Related to Our Product Development Efforts
We
anticipate future losses and will require additional financing, and our failure to obtain additional financing when needed could
force us to delay, reduce or eliminate our product development programs or commercialization efforts.
We
anticipate future losses and therefore may be dependent on additional financing to execute our business plan. In particular, we
will require additional capital to continue to conduct the research and development and obtain regulatory clearances and approvals
necessary to bring our products to market and to establish effective marketing and sales capabilities for existing and future
products. Our operating plan may change, and we may need additional funds sooner than anticipated to meet our operational needs
and capital requirements for product development, clinical trials and commercialization. Additional funds may not be available
when we need them on terms that are acceptable to us, or at all. If adequate funds are not available on a timely basis, we may
terminate or delay the development of one or more of our products, or delay establishment of sales and marketing capabilities
or other activities necessary to commercialize our products.
Our
future capital requirements will depend on many factors, including: the research and development of our molecular diagnostic products,
the costs of expanding sales and marketing infrastructure and manufacturing operations; the number and types of future products
we develop and commercialize; the costs, timing and outcomes of regulatory reviews associated with our current and future product
candidates; the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual
property-related claims; and the extent and scope of our general and administrative expenses.
Our
industry changes rapidly as a result of technological and product developments, which may quickly render our product candidates
less desirable or even obsolete. If we are unable or unsuccessful in supplementing our product offerings, our revenue and operating
results may be materially adversely affected.
The
industry in which we operate is subject to rapid technological change. The introduction of new technologies in the market, including
the delay in the adoption of these technologies, as well as new alternatives for the delivery of products and services will continue
to have a profound effect on competitive conditions in this market. We may not be able to develop and introduce new products,
services and enhancements that respond to technological changes on a timely basis. If our product candidates are not accepted
by the market as anticipated, if at all, our business, operating results, and financial condition may be materially and adversely
affected.
Industry
and Business Risks Related to E-N-G Mobile Systems, Inc.
We
expect a number of factors to cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult
to predict our future performance.
Our
revenues and operating results could vary significantly from quarter to quarter and year-to-year because of a variety of factors,
many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be
meaningful. In addition to other risk factors discussed in this section, factors that may contribute to the variability of our
quarterly and annual results include:
●
|
our
ability to accurately forecast revenues and appropriately plan our expenses;
|
|
|
●
|
the
impact of worldwide economic conditions, including the resulting effect on consumer spending;
|
|
|
●
|
our
ability to maintain an adequate rate of growth;
|
|
|
●
|
our
ability to effectively manage our growth;
|
|
|
●
|
our
ability to attract new customers;
|
|
|
●
|
our
ability to successfully enter new markets and manage our expansion;
|
|
|
●
|
the
effects of increased competition in our business;
|
|
|
●
|
our
ability to keep pace with changes in technology and our competitors;
|
|
|
●
|
our
ability to successfully manage any future acquisitions of businesses, solutions or technologies;
|
|
|
●
|
the
success of our marketing efforts;
|
|
|
●
|
interruptions
in service and any related impact on our reputation;
|
|
|
●
|
the
attraction and retention of qualified employees and key personnel;
|
|
|
●
|
our
ability to protect our intellectual property;
|
|
|
●
|
costs
associated with defending intellectual property infringement and other claims;
|
|
|
●
|
the
effects of natural or man-made catastrophic events;
|
|
|
●
|
the
effectiveness of our internal controls; and
|
|
|
●
|
changes
in government regulation affecting our business.
|
As
a result of these and other factors, the results of any prior quarterly or annual periods should not be relied upon as indications
of our future operating performance, and any unfavorable changes in these or other factors could have a material adverse effect
on our business, financial condition and results of operation.
We
may face strong competition from larger, established companies.
We
likely will face intense competition from other companies that provide the same or similar custom specialty vehicle manufacturing
and other services that compete with acquired businesses, virtually all of which can be expected to have longer operating histories,
greater name recognition, larger installed customer bases and significantly more financial resources, R&D facilities and manufacturing
and marketing experience than we have. There can be no assurance that developments by our potential competitors will not render
our existing and future products or services obsolete. In addition, we expect to face competition from new entrants into the custom
specialty vehicle business. As the demand for products and services grows and new markets are exploited, we expect that competition
will become more intense, as current and future competitors begin to offer an increasing number of diversified products and services.
We may not have sufficient resources to maintain our research and development, marketing, sales and customer support efforts on
a competitive basis. Additionally, we may not be able to make the technological advances necessary to maintain a competitive advantage
with respect to our products and services. Increased competition could result in price reductions, fewer product orders, obsolete
technology and reduced operating margins, any of which could materially and adversely affect our business, financial condition
and results of operations.
Growth
may place significant demands on our management and our infrastructure.
We
plan for substantial growth in our business, and this growth would place significant demands on our management and our operational
and financial infrastructure. If our operations grow in size, scope and complexity, we will need to improve and upgrade our systems
and infrastructure to meet customer demand. The expansion of our systems and infrastructure will require us to commit substantial
financial, operational and technical resources in advance of an increase in the volume of business, with no assurance that the
volume of business will increase. Continued growth could also strain our ability to maintain reliable service levels for our customers
and meet their expected delivery schedules, develop and improve our operational, financial and management controls, enhance our
reporting systems and procedures and recruit, train and retain highly skilled personnel.
Managing
our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary
level of efficiency in our organization as it grows, our business, operating results and financial condition would be harmed.
Industry
and Business Risks Related to Thermomedics, Inc.
Cost
and quality issues might arise from our dependence on a third-party, sole source manufacturer.
We
currently buy our products from one third-party, sole source supplier who produces our products in its plant in Taiwan. Although
we have the right to engage other manufacturers, we have not done so. Accordingly, our reliance on this supplier involves certain
risks, including:
●
|
The
cost of our products might increase, for reasons such as inflation and increases in the price of the precious metals, if any,
or other internal parts used to make them, which could cause our cost of goods to increase and reduce our gross margin and
profitability if any; and
|
|
|
●
|
Poor
quality could adversely affect the reliability and reputation of our products.
|
Any
of these uncertainties also could adversely affect our business reputation and otherwise impair our profitability and ability
to compete.
We
may not be able to compete effectively.
Our
competition includes Welch Allyn, Braun and Exergen, all of which market a line or lines of thermometers. Each competitor has
national distribution and a longer operating history than we do; and these brands have greater brand name recognition and significantly
greater financial, technical sales, marketing, distribution and research and development resources. We may be unable to compete
successfully against this competition.
Our
research and development may be unsuccessful; our next generation products may not be developed, or if developed may fail to win
commercial acceptance.
Our
business is characterized by extensive research and development, and rapid technological change. Developments by other companies
of new or improved products or technologies, especially of thermometers for use by consumers on pet dogs may make our products
or proposed products obsolete or less competitive and may negatively impact our net sales. We should, subject to having adequate
financial resources (which we currently do not possess), devote continued efforts and financial resources to develop or acquire
scientifically advanced technologies, apply our technologies cost-effectively across our product lines and markets and, attract
and retain skilled electrical engineering and other development personnel. If we fail to develop new products or enhance existing
products, it would have a material adverse effect on our business, financial condition and results of operations.
In
order to develop new products and improve current product offerings, we are focusing our research and development programs largely
on the development of next-generation models intended for the professional health care markets, principally with greater accuracy
than our current models. If we are unable to develop, launch these products as anticipated, and have them accepted commercially,
our ability to expand our market position may be materially adversely impacted. Further, we are investigating opportunities to
further expand our presence in, and diversify into, medical treatment technologies and other medical devices. Expanding our focus
beyond our current business would be expensive and time-consuming. There can be no assurance that we will be able to do so on
terms favorable to us, or that these opportunities will achieve commercial feasibility, obtain regulatory approval or gain market
acceptance. A delay in the development or approval of these technologies or our decision to reduce our investments my adversely
impact the contribution of these technologies to our future growth.
Product
shortages may arise if our contract manufacturer fails to comply with government regulations.
Medical
device manufacturers are required to register with the FDA and are subject to periodic inspection by the FDA for compliance with
its Qualify System Regulation requirements, which require manufacturers of medical devices to adhere to certain regulations, including
testing, quality control and documentation procedures. In addition, the Federal Medical Device Reporting regulations require a
manufacturer to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused
or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious
injury. Compliance with applicable regulatory requirements is subject to continual review and is monitored rigorously through
period inspections by the FDA. Our manufacturer and supplier is International Standards Organization (“ISO”) certified,
but if it were to fail to adhere to quality system regulations or ISO requirements, this could delay production of our products
and lead to fines, difficulties in obtaining regulatory clearances, recalls, enforcement actions, including injunctive relief
or consent decrees, or other consequences, which could, in turn, have a material adverse effect on our financial condition and
results of operations.
Our
medical devices may not meet government regulations.
Our
products and development activities are subject to regulation by the FDA pursuant to the Federal Food, Drug and Cosmetic Act (“FDC
Act”), and, if we should sell our products abroad, by comparable agencies in foreign countries, and by other regulatory
agencies and governing bodies. Under the FDC Act, medical devices must receive FDA clearance or approval before they can be commercially
marketed in the U.S. The FDA is reviewing its clearance process in an effort to make it more rigorous, which may require additional
clinical data, if any, time and effort for product clearance. In addition, most major markets for medical devices outside the
U.S. require clearance, approval or compliance with certain standards before a product can be commercially marketed. The process
of obtaining marketing approval or clearance from the FDA for new products, or with respect to enhancements or modifications to
existing products, could:
●
|
Take
a significant period of time;
|
|
|
●
|
Require
the expenditure of substantial resources;
|
|
|
●
|
Involve
rigorous pre-clinical and clinical testing, as well as increased post-market surveillance;
|
|
|
●
|
Require
changes to products; and
|
|
|
●
|
Result
in limitations on the indicated uses of products.
|
Countries
around the world have adopted more stringent regulatory requirements that have added or are expected to add to the delays and
uncertainties associated with new product releases, as well as the clinical, if any, and regulatory costs of supporting those
releases. Even after products have received marketing approval or clearance, product approvals and clearances by the FDA can be
withdrawn due to failure to comply with regulatory standards or the occurrence unforeseen problems following initial approval.
There can be no assurance that we will receive the required clearances for new products or modifications to existing products
on a timely basis or that any approval will not be subsequently withdrawn or conditioned upon extensive post-market study requirements.
In
addition, regulations regarding the development, manufacture and sale of medical devices are subject to future change. We cannot
predict what impact, if any, those changes might have on our business. Failure to comply with regulatory requirements could have
a material adverse effect on our business, financial condition and results of operations. Later discovery of previously unknown
problems with a product could result in fines, delays or suspensions of regulatory clearances, seizures or recalls of products,
physician advisories or other field actions, operating restrictions and/or criminal prosecution. We also may initiate field actions
as a result of our manufacturer’s failure to strictly comply with our internal quality policies. The failure to receive
product approval clearance on a timely basis, suspensions of regulatory clearances, seizures or recalls of products, physician
advisories or other field actions, or the withdrawal of product approval by the FDA, could have a material adverse effect on our
business, financial condition and results of operations.
We
may not be able to protect our intellectual property.
The
medical device market in which we primarily participate is largely technology driven. Consumers historical move quickly to new
products and new technologies. As a result, intellectual property rights, particularly patents and trade secrets, play a significant
role in product development and differentiation. However, intellectual property litigation is inherently complex and unpredictable.
Furthermore, appellate courts can overturn lower court patent decisions.
We
face intellectual property risks that may negatively affect our brand names, reputation, revenues, and potential profitability.
In
our second-generation products we will be depending upon a variety of methods and techniques that we regard as proprietary trade
secrets. We are also dependent upon a variety of trademarks and designs to promote brand name development and recognition, and
we rely on a combination of trade secrets, patents, trademarks, and unfair competition and other intellectual property laws to
protect our rights to such intellectual property. However, to the extent that our products violate the proprietary right of others
we may be subject to damage awards or judgments prohibiting the use of our intellectual property. See Item 3, “Legal Proceedings,”
for a description of a pending legal proceeding seeking to invalidate one of our design patents. In addition, our rights in our
intellectual property, even if registered, may not be enforceable against any prior users of similar intellectual property. Furthermore,
if we lose or fail to enforce any of our proprietary rights, our brand names, reputation, revenues and potential profitability
may be negatively affected.
In
addition, competing parties frequently file multiple suits to leverage patent portfolios across product lines, technologies and
geographies and to balance risk and exposure between the parties. In some cases, several competitors may be parties in the same
proceeding, or in a series of related proceedings, or litigate multiple features of a single class of devices. These forces frequently
drive settlement not only of individual cases, but also of a series of pending and potentially related and unrelated cases. In
addition, although monetary and injunctive relief is typically sought, remedies and restitution are generally not determined until
the conclusion of the trial court proceeding and can be modified on appeal. Accordingly, the outcomes of individual cases are
difficult to time, predict or quantify and are often dependent upon the outcomes of other cases in other geographies.
Patents
and other proprietary rights are and will continue to be essential to our business, and our ability to compete effectively with
other companies will be dependent upon the proprietary nature of our technologies. We rely upon trade secrets, know-how and continuing
technological innovations to develop, maintain and strengthen our competitive position. We pursue a policy of generally seeking
patent protection in the U.S. for patentable design or subject matter in our devices and attempt to review third-party patents
and patent applications to the extent publicly available in order to develop an effective patent strategy, avoid infringement
of third-party patents, identify licensing opportunities and monitor the patent claims of others. We own three U.S. design patents
and have one U.S. utility patent application pending. We are not a party to any license agreements pursuant to which patent rights
have been obtained or granted in consideration for cash, cross-licensing rights or royalty payments. No assurance can be made
that any pending or future patent application will result in the issuance of patents, or that any future patents issued to, or
licensed by, us will not be challenged or circumvented by our competitors. In addition, we may have to take legal action in the
future to protect our patents, if any, trade secrets or know-how or to assert them against claimed infringement by others. Any
legal action of that type could be costly and time consuming, and no assurances can be given that any lawsuit will be successful.
The
invalidation of key patent or proprietary rights that we may own, or an unsuccessful outcome in lawsuits to protect our intellectual
property, could have a material adverse effect on our business, financial position and results in operations.
Our
trademarks are valuable, and any inability to protect them could reduce the value of our products and brands.
Our
trademarks, trade secrets, and other intellectual property rights are important assets for us. Our trademarks “Thermomedics,”
“Babytemp,” “Temp4sure,” Tempmature,” “Elitemp”, “Caregiver”, and “TouchFree”
are registered with the U.S. Patent and Trademark Office. Protecting these intellectual property rights could be costly and time
consuming, and any unauthorized use of our intellectual property could make it more expensive for us to do business and which
also could harm our operating results.
Product
warranties and product liabilities could be costly.
We
typically warrant the workmanship and materials used in the products we sell. Failure of the products to operate properly or to
meet specifications may increase our costs by requiring replacement or monetary reimbursement to the end user. To the extent we
are unable to make a corresponding warranty claim against the manufacturer of the defective product, we would bear the loss associated
with such warranties. In the ordinary course of our business, we may be subject to product liability claims alleging that products
we sold failed or had adverse effects. We maintain liability insurance at a level which we believe to be adequate. A successful
claim in excess of the policy limits of the liability insurance could materially adversely affect our business. There can be no
assurance, however, that recourse against a manufacturer would be successful, or that our manufacturer maintains adequate insurance
or otherwise would be able to pay such liability.
Industry
and Business Risks Related to Our Legacy Healthcare Businesses
The
sale and license of our legacy healthcare products may not produce royalty streams.
In
2013, we licensed the assets related to our iglucose™ technology to Smart Glucose Meter and in 2015 we licensed our breath
glucose detection system and its underlying patent, which was granted in 2014. Pursuant to these agreements, we are due royalties
based on future product sales, if any. Should these businesses not generate significant revenues, we will not achieve royalty
streams from these sales and licenses.
Implantation
of our implantable microchip may be found to cause risks to a person’s health, which could adversely affect sales of our
systems that incorporate the implantable microchip
.
The
implantation of the VeriChip, which we sold to VeriTeQ, may be found, or be perceived, to cause risks to a person’s health.
Potential or perceived risks include adverse tissue reactions, migration of the microchip and infection from implantation. There
have been articles published asserting, despite numerous studies to the contrary, that the implanted microchip causes malignant
tumor formation in laboratory animals. If more people are implanted with our implantable microchip, it is possible that these
and other risks to health will manifest themselves. Actual or perceived risks to a person’s health associated with the microchip
implantation process could result in negative publicity and could damage our business reputation, leading to loss in sales of
our other systems targeted at the healthcare market which would harm our business and negatively affect our prospects.
In
connection with its acquisition of the VeriChip business, VeriTeQ agreed to indemnify us for any liabilities relating to the implantable
microchip. Further, we are aware that VeriTeQ has sold the assets of the business to an unaffiliated third party who is using
it as an identification device inside of a cosmetic implant, which does not involve direct in vivo use in people. If VeriTeQ or
the buyer of the assets is unable to fulfill indemnity obligations, we could be responsible for payment of such liabilities, which
could have a material adverse impact on our financial condition.
Risks
Related to Our Common Stock
Future
sales of our common stock may depress the market price of our common stock and cause stockholders to experience dilution.
The
market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market,
including shares issuable on the conversion of convertible notes payable. We may seek additional capital through one or more additional
equity or convertible debt transactions in 2017; however, such transactions will be subject to market conditions and there can
be no assurance any such transaction will be completed.
Current
stockholders may experience dilution of their ownership interests because of the future issuance of additional shares of our common
stock issued pursuant to convertible preferred stock and debt instruments.
In
the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership
interests of our present stockholders and the purchasers of our common stock offered hereby. We are currently authorized to issue
an aggregate of 20,000,000,000 shares of capital stock consisting of 19,995,000,000 shares of common stock and 5,000,000 shares
of preferred stock with preferences and rights to be determined by our Board. As of March 22, 2017, there are 6,039,899,380 shares
of our common stock, 2,262 of our Series II preferred stock and 71 of our Series J preferred stock outstanding. There are 3,619,449
shares of our common stock reserved for issuance pursuant to stock option agreements. We also have 2,692,800 shares of
our common stock issuable upon the exercise of outstanding warrants. We also have convertible notes with approximate principal
and accrued interest balances of $6,149,161 as of March 22, 2017. These notes and our Series II preferred stock are convertible
into common stock in the future at prices determined at the time of conversion. The Series II, Series J and convertible notes
would convert into shares of common stock, based on the closing bid price of $0.0002 on March 22, 2017, as follows:
|
|
Principal/
|
|
|
Common
Share Conversion
|
|
|
|
Liquidation
|
|
|
At
Current
|
|
|
At
25%
|
|
|
At
50%
|
|
|
At
75%
|
|
|
|
Value
|
|
|
Market
|
|
|
Discount
|
|
|
Discount
|
|
|
Discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
II (1)
|
|
$
|
2,344,343
|
|
|
|
11,721,712,500
|
|
|
|
15,628,950,000
|
|
|
|
23,443,425,000
|
|
|
|
46,886,850,000
|
|
Series J (2)
|
|
|
71,000
|
|
|
|
355,000,000
|
|
|
|
473,333,333
|
|
|
|
710,000,000
|
|
|
|
1,420,000,000
|
|
Convertible
Notes (3)
|
|
|
6,149,161
|
|
|
|
48,770,412,944
|
|
|
|
40,994,405,349
|
|
|
|
61,491,608,024
|
|
|
|
122,983,216,047
|
|
|
|
$
|
8,564,504
|
|
|
|
60,847,125,444
|
|
|
|
57,096,688,682
|
|
|
|
85,645,033,024
|
|
|
|
171,290,066,047
|
|
|
(1)
|
Represents
liquidation value, including accrued dividends, on 2,262 shares of Series II and convertible shares at the closing
bid price of $0.0002 on March 22, 2017, at discounts of 25%, 50% and 75% from the closing price on March 22, 2017.
|
|
|
|
|
(2)
|
Represents
liquidation value on 71 shares of Series J and convertible shares at the closing bid price of $0.0002 on March 22,
2017, at discounts of 25%, 50% and 75% from the closing price on March 22, 2017.
|
|
|
|
|
(3)
|
Represents
liquidation value, including accrued interest, on the outstanding convertible notes and convertible shares at the closing
bid price of $0.0002 on March 22, 2017, at discounts of 25%, 50% and 75% from the closing price on March 22, 2017.
|
Any
future issuance of our equity or equity-backed securities may dilute then-current stockholders’ ownership percentages and
could also result in a decrease in the fair market value of our equity securities, because our assets would be owned by a larger
pool of outstanding equity. As described above, we may need to raise additional capital through public or private offerings of
our common or preferred stock or other securities that are convertible into or exercisable for our common or preferred stock.
We may also issue such securities in connection with hiring or retaining employees and consultants (including stock options issued
under our equity incentive plans), as payment to providers of goods and services, in connection with future acquisitions or for
other business purposes. Our Board may at any time authorize the issuance of additional common or preferred stock without common
stockholder approval, subject only to the total number of authorized common and preferred shares set forth in our certificate
of incorporation. The terms of equity securities issued by us in future transactions may be more favorable to new investors, and
may include dividend and/or liquidation preferences, superior voting rights and the issuance of warrants or other derivative securities,
which may have a further dilutive effect. Also, the future issuance of any such additional shares of common or preferred stock
or other securities may create downward pressure on the trading price of the common stock. There can be no assurance that any
such future issuances will not be at a price (or exercise prices) below the price at which shares of the common stock are then
traded.
We
do not anticipate declaring any cash dividends on our common stock.
Any
future determination with respect to the payment of dividends will be at the discretion of the Board and will be dependent upon
our financial condition, results of operations, capital requirements, general business conditions, terms of financing arrangements
and other factors that our Board may deem relevant. In addition, our Certificates of Designation for shares of Series I, Series
II and Series J Preferred Stock prohibit the payment of cash dividends on our common stock while any such shares of preferred
stock are outstanding.
Our
shares may be defined as “penny stock,” the rules imposed on the sale of the shares may affect your ability to resell
any shares you may purchase, if at all.
Shares
of our common stock may be defined as a “penny stock” under the Exchange Act, and rules of the SEC. The Exchange Act
and such penny stock rules generally impose additional sales practice and disclosure requirements on broker-dealers who sell our
securities to persons other than certain accredited investors who are, generally, institutions with assets in excess of $5,000,000
or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 jointly with spouse, or
in transactions not recommended by the broker-dealer. For transactions covered by the penny stock rules, a broker-dealer must
make a suitability determination for each purchaser and receive the purchaser’s written agreement prior to the sale. In
addition, the broker-dealer must make certain mandated disclosures in penny stock transactions, including the actual sale or purchase
price and actual bid and offer quotations, the compensation to be received by the broker-dealer and certain associated persons,
and deliver certain disclosures required by the SEC. Consequently, the penny stock rules may affect the ability of broker-dealers
to make a market in or trade our common stock and may also affect your ability to resell any shares you may purchase in this offering
in the public markets.
The
success and timing of development efforts, clinical trials, regulatory approvals, product introductions, collaboration and licensing
arrangements, any termination of development efforts and other material events could cause volatility in our stock price.
Since
our common stock is thinly traded, its trading price is likely to be highly volatile and could be subject to extreme fluctuations
in response to various factors, many of which are beyond our control, including (but not necessarily limited to):
●
|
success
or lack of success in being awarded, as a subcontractor to The Boeing Company, the next stage procurement related to the BioWatch
system;
|
|
|
●
|
success
or lack of success in being awarded research and development contracts with U.S. Government agencies, related to our Firefly
Dx product, or otherwise;
|
|
|
●
|
success
or lack of success being granted patents for its core biological diagnostic and detection technologies;
|
|
|
●
|
introduction
of competitive products into the market;
|
|
|
●
|
receipt
of payments of any royalty payments under the sale and licensing agreements related to our legacy healthcare products;
|
|
|
●
|
unfavorable
publicity regarding us or our products;
|
|
|
●
|
termination
of development efforts of any product under development or any development or collaboration agreement.
|
In
addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. These market fluctuations may also significantly affect the market price
of our common stock.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
Our
corporate headquarters is located in Delray Beach, Florida, where we occupy approximately 3,000 square feet of office space, under
a non-cancelable operating lease that expires on October 18, 2018. We also have operations in Pleasanton, California, where we
lease approximately 6,250 square feet of laboratory and office space under a non-cancelable operating lease that expires on September
30, 2018. Additionally, we have operations in Concord, California, where we lease 12,000 square feet of office and plant space
on a month-to-month basis for approximately $7,600 per month.
Item
3. Legal Proceedings
The
Company is a party to certain legal actions, as either plaintiff or defendant, arising in the ordinary course of business, with
the exception of the Exergen and LG Capital litigation described below, none of which is expected to have a material adverse effect
on its business, financial condition or results of operations. However, litigation is inherently unpredictable, and the costs
and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings,
whether civil or criminal, settlements, judgments and investigations, claims or charges in any such matters, and developments
or assertions by or against the Company relating to it or to its intellectual property rights and intellectual property licenses
could have a material adverse effect on the Company’s business, financial condition and operating results.
Exergen
Litigation
On
October 10, 2012, Thermomedics and its former parent company, Sanomedics(together “Sano”), received a cease and desist
demand letter from Exergen Corporation(“Exergen”), claiming that Sano infringed on certain Exergen patents relating
to Sano’s non-contact thermometers. On May 21, 2013, Exergen filed a complaint in the U.S. District Court of the District
of Massachusetts against Sano. On September 3, 2013, Sano filed its answer to Exergen’s complaint and asserted counterclaims
and affirmative defenses for non-infringement and invalidity of certain patents. On March 26, 2015, Exergen and Sano filed a partial
dismissal that removes Sano’s previous product, the Talking Non-Contact Thermometer, from the lawsuit. On September 15,
2015, the United States District Court – District of Massachusetts, entered an order granting Sano’s motion for summary
judgment, ruling that the patent claims made by Exergen against Sano were invalid. On June 22, 2016, the U.S. Court of Appeals
affirmed the United States District Court – District of Massachusetts’ summary judgment decision in favor of Sano
that the patent claims asserted against Sano by Exergen are invalid. The period for Exergen to object has expired.
LG
Capital Funding Litigation
On
March 7, 2017, LG Capital Funding, LLC(“LG”), filed a complaint in the U.S. District Court of the Eastern District
of New York, related to a 10% Convertible Redeemable Note issued by us to LG on July 7, 2016 in the amount of $66,150(the “LG
Note”). The LG Note provides that LG is entitled to convert all or any amount of the outstanding balance and accrued interest
of the LG Note into shares of our Common Stock. The complaint alleges breach of contract and anticipatory breach of contract,
asserting, among other things, that we failed to deliver shares of stock to LG pursuant to a notice of conversion, and failed
to reserve a sufficient number of shares of stock issuable under the terms of the LG Note. The Company will answer and defend
against this complaint.
Item
4. Mine Safety Disclosures
Not
applicable.
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
1.
Organization
PositiveID
Corporation, including its wholly-owned subsidiaries PositiveID Diagnostics Inc. (“PDI”), E-N-G Mobile Systems, Inc.
(“ENG”), and Thermomedics, Inc. (“Thermomedics”), (collectively, the “Company” or “PositiveID”),
develops molecular diagnostic systems for bio-threat detection and rapid medical testing; manufactures specialty technology vehicles;
and markets the Caregiver® non-contact clinical thermometer, respectively. The Company’s fully automated pathogen detection
systems and assays are designed 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 developing Firefly Dx, an automated pathogen detection system for rapid diagnostics,
both for clinical and point-of-need applications. The Company also manufactures specialty technology vehicles focused primarily
on mobile laboratory and communications applications. The Company’s Caregiver® thermometer is an FDA-cleared infrared
thermometer for the professional healthcare market.
Authorized
Common Stock and Reverse Stock Split
As
of December 31, 2016, the Company was authorized to issue 3.895 billion shares of common stock (see below for additional increase).
On February 25, 2016, the Company filed the Seventh Amendment to the Second Amended and Restated Certificate of Incorporation,
as amended, with the State of Delaware to increase the number of authorized common shares to 3.895 billion shares, from 1.97 billion
shares. On June 27, 2016, the Company’s Board of Directors approved a reverse stock split in the ratio of 1-for-50 and the
Company filed the Eighth 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, effective July 5, 2016. The reverse split
only affected outstanding common stock and the number of authorized shares was not adjusted. All share amounts in our historical
consolidated financial statements have been adjusted to reflect the 1-for-50 reverse stock split.
On
November 30, 2016, the Company filed its Third Amended and Restated Certificate of Incorporation with the State of Delaware, to
permit stockholders to act by written consent, and to permit stockholders of different classes of the Company’s capital
stock to vote as a single class with regard to certain changes to the Company’s certificate of incorporation. The Third
Amended and Restated Certificate of Incorporation filed also changed in the par value of the Company’s common stock from
$0.01 to $0.001.
On
January 30, 2017, the Company filed the First Amendment to the Company’s Third Amended and Restated Certificate of Incorporation
with the State of Delaware, to increase the Company’s authorized capital stock from 3.9 billion shares to 20 billion shares
(19.995 billion common) and to change the par value of the Company’s common stock from $0.001 to $0.0001.
All
dollar values in the accompanying historical consolidated financial statements have been adjusted to reflect the change in the
par value of the common stock.
Going
Concern
The
Company’s consolidated financial statements have been prepared assuming the Company will continue as a going concern. As
of December 31, 2016, we had a working capital deficit, stockholders’ deficit and accumulated deficit of approximately
$10.3 million, $8.9 million and $157.2 million, respectively. Net loss and net cash used in operations was $13.1
million, and $3.6 million, respectively, in 2016 compared to a working capital deficit of approximately $10.7 million,
a stockholders’ deficit of approximately $11.8 million and an accumulated deficit of approximately $144.2 million
of December 31, 2015. The change in the working capital deficit was primarily due to operating losses for the period and capital
raised through convertible debt financings.
We
have incurred operating losses and net cash used in operating activities since the merger that created PositiveID. The current
2016 operating losses are the result of research and development expenditures, selling, general and administrative expenses related
to our molecular diagnostics and detection and Caregiver products. We expect our operating losses to continue through 2017. It’s
management’s opinion that these conditions raise substantial doubt about our ability to continue as a going concern.
Our
ability to continue as a going concern is dependent upon our ability to obtain financing to fund the continued development of
our products and to support working capital requirements. Until we are able to achieve operating profits, we will continue to
seek to access the capital markets. In 2015 and 2016, we raised approximately $5.9 and $3.8 million, respectively from the issuance
of convertible debt and debentures.
The
Company intends to continue to access capital to provide funds to meet its working capital requirements for the near-term future.
In addition, and if necessary, the Company could reduce and/or delay certain discretionary research, development and related activities
and costs. However, there can be no assurances that the Company will be able to negotiate additional sources of equity or credit
for its long-term capital needs. The Company’s inability to have continuous access to such financing at reasonable costs
could materially and adversely impact its financial condition, results of operations and cash flows, and result in significant
dilution to the Company’s existing stockholders. The Company’s consolidated financial statements do not include any
adjustments relating 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.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
2.
Summary of Significant Accounting Policies
Principles
of Consolidations
The
consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries of which all are inactive
except for PDI, Thermomedics and ENG. All intercompany balances and transactions have been eliminated in the consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates during the reported periods include valuation of assets acquired and liabilities assumed in business
combinations, allowance for doubtful accounts receivable, inventories valuation, valuation of goodwill and intangible assets,
valuation of loss and other contingencies, product warranty liabilities, valuation of derivatives, valuation of beneficial conversion
features, estimate of contingent earn-out liabilities, valuation of stock-based compensation and an estimate of the deferred tax
asset valuation allowance.
Cash
and Cash Equivalents
For
the purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at December 31, 2016 and
2015, respectively. The Company maintained its cash in various financial institutions during the years ended December 31, 2016
and 2015. Balances were insured up to Federal Deposit Insurance Corporation (“FDIC”) limits. At times, cash deposits
exceeded the federally insured limits. There were no cash deposits that exceeded the federally insured limits as of December 31,
2016.
Accounts
receivable
Accounts
receivable are stated at their estimated net realizable value. The Company reviews its accounts to estimate losses resulting from
the inability of its customers to make required payments. Any required allowance is based on specific analysis of past due accounts
and also considers historical trends of write-offs. Past due status is based on how recently payments have been received from
customers. The Company’s collection experience has been favorable reflecting a limited number of customers. No allowance
was deemed necessary at December 31, 2016 and 2015.
Inventories
Inventory
consists of finished goods of our Caregiver® non-contact thermometers, and in our Mobile Lab Segment consists of finished
goods, standard and manufactured frames and bodies of vehicles, components of mobile units and other materials and is stated at
lower of cost and net realizable value on average basis (see Note 3). The Company early adopted ASU 2015-11 “Simplifying
the Measurement of Inventory” on January 1, 2016, and there was no material impact. Reserves, if necessary,
are recorded to reduce inventory to net realizable value based on assumptions about consumer demand, current inventory levels
and product life cycles for the various inventory items. These assumptions are evaluated periodically and are based on the Company’s
business plan and from feedback from customers and the product development team; however, estimates can vary significantly. As
of December 31, 2016 and 2015, inventory reserves were not material.
Reserves
for Warranty
The
Company records a reserve at the time product revenue is recorded based on historical rates. The reserve is reviewed during the
year and is adjusted, if appropriate, to reflect new product offerings or changes in experience. Actual warranty claims are tracked
by product line. The warranty reserve was $17,000 as of December 31, 2016 and is included in accrued expenses and other
liabilities.
Equipment
Equipment
is carried at cost less accumulated depreciation, computed using the straight-line method over the estimated useful lives. Leasehold
improvements are depreciated over the shorter of the lease term or useful life, software is depreciated over 5 years, and equipment
is depreciated over periods ranging from 1 to 8 years. Repairs and maintenance which do not extend the useful life of the asset
are charged to expense as incurred. Gains and losses on sales and retirements are reflected in the consolidated statements of
operations. Depreciation expense for 2016 and 2015 was $42,000 and $4,403, respectively.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
Equipment
consists of the following (in thousands):
|
|
|
|
December 31,
|
|
|
|
Est. Useful Lives
|
|
2016
|
|
|
2015
|
|
Furniture and equipment
|
|
3-5 years
|
|
$
|
62
|
|
|
$
|
83
|
|
Machinery and equipment
|
|
1-8 years
|
|
|
71
|
|
|
|
59
|
|
Autos
|
|
3 -5 years
|
|
|
35
|
|
|
|
35
|
|
Leasehold improvements
|
|
1-3 years
|
|
|
7
|
|
|
|
14
|
|
Total equipment
|
|
|
|
|
175
|
|
|
|
191
|
|
Less accumulated depreciation
|
|
|
|
|
(46
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net
|
|
|
|
$
|
129
|
|
|
$
|
163
|
|
Intangible
Assets and Goodwill
Intangible
assets are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful lives.
Customer contracts and relationships are being amortized over a period of 3 years, patents and other intellectual property are
being amortized over a period of 5 years, and non-compete agreements are being amortized over 2 years (see Note 5).
The
Company continually evaluates whether events or circumstances have occurred that indicate the remaining estimated useful lives
of its definite-lived intangible assets may warrant revision or that the remaining balance of such assets may not be recoverable.
The Company uses an estimate of the related undiscounted cash flows attributable to such asset over the remaining life of the
asset in measuring whether the asset is recoverable.
The
Company records goodwill as the excess of the purchase price over the fair values assigned to the net assets acquired in business
combinations. Goodwill is allocated to reporting units as of the acquisition date for the purpose of goodwill impairment testing.
The Company’s reporting units are those businesses for which discrete financial information is prepared. ASC 350, “Intangibles
— Goodwill and Other” requires that intangible assets with indefinite lives, including goodwill, be evaluated on an
annual basis for impairment or more frequently if an event occurs or circumstances change that could potentially result in impairment.
The goodwill impairment test requires the allocation of goodwill and all other assets and liabilities to reporting units. If the
fair value of the reporting unit is less than the book value (including goodwill), then goodwill is reduced to its implied fair
value and the amount of the write-down is charged to operations. We are required to test our goodwill and intangible assets with
indefinite lives for impairment at least annually.
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 upon completion and delivery in accordance with the customer contract or purchase
order.
If
at the outset of an arrangement, the Company determines that collectability is not reasonably assured, revenue is deferred until
the earlier of when collectability becomes probable or the receipt of payment. If there is uncertainty as to the customer’s
acceptance of the Company’s deliverables, revenue is not recognized until the earlier of receipt of customer acceptance
or expiration of the acceptance period. If at the outset of an arrangement, the Company determines that the arrangement fee is
not fixed or determinable, revenue is deferred until the arrangement fee becomes estimable, assuming all other revenue recognition
criteria have been met.
To
date, the Company has generated revenue from three sources: (1) professional services, (2) technology
licensing, and (3) product sales.
Specific
revenue recognition criteria for each source of revenue is as follows:
|
(1)
|
Revenues
for professional services, which are of short term duration, are recognized when services are provided;
|
|
(2)
|
Technology
license revenue is recognized upon the completion of all terms of that license. Payments received in advance of completion
of the license terms are recorded as deferred revenue; and
|
|
(3)
|
Revenue
from sales of the Company’s products is recorded when risk of loss has passed to the buyer and criteria for revenue
recognition discussed above is met. Payments received in advance of delivery and revenue recognition are recorded as deferred
revenue.
|
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
If
these criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized
ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered
element is delivered. If these criteria are met for each element and there is a relative selling price for all units of accounting
in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative
selling price.
Concentrations
Concentration
of Deferred Revenue
As
of December 31, 2016, the Company had deferred revenue of approximately $0.4 million of which 54% and 20% were from two of the
Company’s customers. As of December 31, 2015, the Company had deferred revenue of approximately $1.8 million of which 21%,
22% and 38% were from the Company’s three largest customers.
Concentration
of Revenues
During
the year ended December 31, 2016, the Company had revenue of approximately $5.6 million of which 26%, 13% and 12% were from three
of the Company’s customers. During year ended December 31, 2015, the Company had revenue of $2.9 million of which 91% was
from one customer.
Concentration
of Accounts Receivable
As
of December 31, 2016, the Company had accounts receivable of approximately $0.3 million of which 55% and 14% were from two of
the Company’s customers. As of December 31, 2015, the Company had accounts receivable of approximately $0.6 million of which
60% and 19% were from two of the Company’s customers.
Advertising
Costs
Advertising
costs are expensed as incurred. Advertising costs for the years ended December 31, 2016 and 2015 were minimal.
Shipping
and Handling
Costs
incurred by the Company for freight in and freight out are included in costs of revenue. Freight in and freight out costs incurred
for the years ended December 31, 2016 and 2015 were minimal.
Legal
Expenses
All
legal costs are charged to expense as incurred.
Convertible
Notes With Fixed Rate Conversion Options
The
Company has entered into convertible notes, some of which contain fixed rate conversion features, 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 to interest expense on the note issuance date.
Accounting
for Derivatives
The
Company evaluates its convertible debt, options, warrants or other contracts to determine if those contracts or embedded components
of those contracts qualify as derivatives to be separately accounted for. The result of this accounting treatment is that under
certain circumstances the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability.
In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations
as other income or expense. Upon conversion or exercise of a convertible note containing an embedded derivative instrument, the
instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity and the note is reclassified
to equity without gain or loss. Equity instruments that are initially classified as equity that become subject to reclassification
under this accounting standard are reclassified to liability at the fair value of the instrument on the reclassification date.
Debt
Issue Cost
Debt
issuance cost paid to lenders, or third parties are recorded as debt discounts and
amortized over the life of the underlying debt instrument.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
Fair
Value of Financial Instruments and Fair Value Measurements
The
Company measures its financial and non-financial assets and liabilities, as well as makes related disclosures, in accordance with
ASC Topic 820,
Fair Value Measurements and Disclosures
(“ASC Topic 820”). For certain of our financial instruments,
including cash, accounts receivable, accounts payable and accrued liabilities, the carrying amounts approximate fair value due
to their short maturities. Amounts recorded for notes payable, net of discount, also approximate fair value because current interest
rates available to the Company for debt with similar terms and maturities are substantially the same.
ASC
Topic 820 provides guidance with respect to valuation techniques to be utilized in the determination of fair value of assets and
liabilities. Approaches include, (i) the market approach (comparable market prices), (ii) the income approach (present value of
future income or cash flow), and (iii) the cost approach (cost to replace the service capacity of an asset or replacement cost).
ASC Topic 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The following is a brief description of those three levels:
|
Level
1:
|
Observable
inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
|
|
Level
2:
|
Inputs
other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets
or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not
active.
|
|
|
|
|
Level
3:
|
Unobservable
inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which
reflect those that a market participant would use.
|
Stock-Based
Compensation
Stock-based
compensation expenses are reflected in the Company’s consolidated statements of operations under selling, general and administrative
expenses and research and development expenses.
The
Company estimates the fair value of stock-based compensation awards on the date of grant using the Black-Scholes-Merton (“BSM”)
option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions
and are freely transferable. In addition, option valuation models require the input of highly subjective assumptions including
the expected stock price volatility. The BSM option pricing model considers, among other factors, the expected term of the award
and the expected volatility of the Company’s stock price. Expected terms are calculated using the Simplified Method, volatility
is determined based on the Company’s historical stock price trends and the discount rate is based upon treasury rates with
instruments of similar expected terms. Warrants granted to non-employees are accounted for in accordance with the measurement
and recognition criteria of ASC Topic 505-50, Equity Based Payments to Non-Employees.
Compensation
expense for all stock-based employee and director compensation awards granted is based on the grant date fair value estimated
in accordance with the provisions of ASC Topic 718, Stock Compensation (“ASC Topic 718”). The Company recognizes these
compensation costs on a straight-line basis over the requisite service period of the award, which is generally the vesting term.
Vesting terms vary based on the individual grant terms.
Income
Taxes
The
Company accounts for income taxes under the asset and liability approach for the financial accounting and reporting of income
taxes. Deferred taxes are recorded based upon the tax impact of items affecting financial reporting and tax filings in different
periods. A valuation allowance is provided against net deferred tax assets when the Company determines realization is not currently
judged to be more likely than not.
The
Company follows a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax
position for recognition purposes by determining if the weight of available evidence indicates it is more likely than not that
the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement.
The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic
adjustments and which may not accurately anticipate actual outcomes. Accordingly, the Company reports a liability for unrecognized
tax benefits resulting from the uncertain tax positions taken or expected to be taken on a tax return and recognizes interest
and penalties, if any, related to uncertain tax positions as interest expense. The Company does not have any uncertain tax positions
at December 31, 2016 and 2015.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
Research
and Development Costs
The
principal objective of our research and development program is to develop high-value molecular diagnostic products such as Firefly
Dx and M-BAND. We focus our efforts on four main areas: 1) engineering efforts to extend the capabilities of our systems and to
develop new systems; 2) assay development efforts to design, optimize and produce specific tests that leverage the systems and
chemistry we have developed; 3) target discovery research to identify novel micro RNA targets to be used in the development of
future assays; 4) chemistry research to develop innovative and proprietary methods to design and synthesize oligonucleotide primers,
probes and dyes to optimize the speed, performance and ease-of-use of our assays. Research and development cost are expensed as
incurred. Total research and development expense was $0.4 million and $1.4 million for the years ended December 31, 2016 and 2015,
respectively.
Segments
The
Company follows the guidance of ASC 280-10 for “Disclosures about Segments of an Enterprise and Related Information.”
During 2015, the Company only operated in one segment – Diagnostics and Detection. Beginning January 1, 2016, the Company
operated in three business segments: Molecular Diagnostics, Medical Devices and Mobile Labs (see Note 13).
Loss
Per Common Share
The
Company presents basic net income (loss) per common share and, if applicable, diluted net income (loss) per share. Basic income
(loss) per common share is based on the weighted average number of common shares outstanding during the year and after preferred
stock dividends. The calculation of diluted income (loss) per common share assumes that any dilutive convertible preferred shares
outstanding at the beginning of each year or the date issued were convertible at those dates, with preferred stock dividend requirements
and outstanding common shares adjusted accordingly. It also assumes that outstanding common shares were increased by shares issuable
upon exercise of those stock options and warrants for which the average period market price exceeds the exercise price, less shares
that could have been purchased by the Company with related proceeds. Additionally, shares issued upon conversion of convertible
debt are included.
The
following potentially dilutive equity securities outstanding as of December 31, 2016 and 2015 were not included in the computation
of dilutive loss per common share because the effect would have been anti-dilutive (in thousands):
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Common shares issuable under:
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
13,287,432
|
|
|
|
10,930
|
|
Convertible Series I Preferred Stock
|
|
|
—
|
|
|
|
1,796
|
|
Convertible Series II Preferred Stock
|
|
|
3,308,394
|
|
|
|
—
|
|
Convertible Series J Preferred Stock
|
|
|
101,429
|
|
|
|
116
|
|
Stock options
|
|
|
3,620
|
|
|
|
492
|
|
Warrants
|
|
|
2,693
|
|
|
|
270
|
|
Unvested restricted common stock
|
|
|
69
|
|
|
|
67
|
|
|
|
|
16,703,637
|
|
|
|
13,671
|
|
The
Common shares issuable under the convertible notes, convertible Series I, Series II and Series J Preferred Stock was calculated
using the closing bid prices at December 31, 2016 and 2015 which were $0.0007 and $0.0215, respectively.
Recent
Accounting Pronouncements
There
are no new accounting pronouncements during the year ended December 31, 2016 other than those described below that affect the
consolidated financial position of the Company or the results of its operations. Accounting Standard Updates which are not effective
until after December 31, 2016, and the potential effects on the Company’s consolidated financial position or results of
its’ operations are discussed below.
ASU
2017-04:
In
January 2017, FASB issued Accounting Standards Update (“ASU”), 2017-04 — Intangibles—Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairment. Under the amendments in this Update, an entity should perform its annual,
or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should
recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however,
the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should
consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill
impairment loss, if applicable. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying
amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment
test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of
goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
A
public business entity that is an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill
impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017. This updated guidance is not expected to have a material impact
on our results of operations, cash flows or financial condition.
ASU
2016-20:
In
December 2016, FASB issued Accounting Standards Update (“ASU”), 2016-20 — Technical Corrections and Improvements
to Topic 606, Revenue from Contracts with Customers. The amendments in this Update affect the guidance in Update 2014-09, which
is not yet effective. The effective date and transition requirements for the amendments are the same as the effective date and
transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09
by one year. This updated guidance is not expected to have a material impact on our results of operations, cash flows or financial
condition (see ASU 2016-12 and ASU 2014-09 below).
ASU
2016-16:
In
October 2016, FASB issued Accounting Standards Update (“ASU”), 2016-16 — Income Taxes (Topic 740): Intra-Entity
Transfers of Assets Other Than Inventory. The amendments in this Update eliminate the exception for an intra-entity transfer of
an asset other than inventory. Two common examples of assets included in the scope of this Update are intellectual property and
property, plant, and equipment. It also aligns the recognition of income tax consequences for intra-entity transfers of assets
other than inventory with International Financial Reporting Standards (IFRS). Specifically, IAS 12, Income Taxes, requires recognition
of current and deferred income taxes resulting from an intra-entity transfer of any asset (including inventory) when the transfer
occurs.
For
public business entities, the amendments are effective for annual reporting periods beginning after December 15, 2017, including
interim reporting periods within those annual reporting periods. For all other entities, the amendments are effective for annual
reporting periods beginning after December 15, 2018, and interim reporting periods within annual periods beginning after December
15, 2019. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements
(interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim
period if an entity issues interim financial statements. This updated guidance is not expected to have a material impact on our
results of operations, cash flows or financial condition.
ASU
2016-15:
In
August 2016, FASB issued Accounting Standards Update (“ASU”), 2016-15 — Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments. The amendments in this Update provide guidance on the following eight
specific cash flow issues:
|
1.
|
Debt
Prepayment or Debt Extinguishment Costs
|
|
2.
|
Settlement
of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to
the Effective Interest Rate of the Borrowing
|
|
3.
|
Contingent
Consideration Payments Made after a Business Combination
|
|
4.
|
Proceeds
from the Settlement of Insurance Claims
|
|
5.
|
Proceeds
from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies
|
|
6.
|
Distributions
Received from Equity Method Investees
|
|
7.
|
Beneficial
Interests in Securitization Transactions
|
|
8.
|
Separately
Identifiable Cash Flows and Application of the Predominance Principle
|
Effective
for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.
For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within
fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity
early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that
includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. This updated
guidance is not expected to have a material impact on our results of operations, cash flows or financial condition.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
ASU
2016-12:
In
May 2016, FASB issued Accounting Standards Update (“ASU”), 2016-12— Revenue from Contracts with Customers (Topic
606): Narrow-Scope Improvements and Practical Expedients. The amendments in this Update affect the guidance in Accounting Standards
Update 2014-09, Revenue from Contracts with Customers (Topic 606
)
, which is not yet effective. The effective date and transition
requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and
any other Topic amended by Update 2014-09). Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic
606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year to December 15, 2017. This updated
guidance is not expected to have a material impact on our results of operations, cash flows or financial condition (see ASU 2016-20,
10 and ASU 2014-09 below).
ASU
2016-10:
In
April 2016, FASB issued Accounting Standards Update (“ASU”), 2016-10—Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing. The amendments in this Update affect the guidance in Accounting Standards
Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition
requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and
any other Topic amended by Update 2014-09). Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic
606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year to annual reporting periods beginning
after December 15, 2017. This updated guidance is not expected to have a material impact on our results of operations, cash flows
or financial condition (see ASU 2016-20, 12 above and ASU 2014-09 below).
ASU
2016-09:
In
March 2016, FASB issued Accounting Standards Update (“ASU”), 2016-09— “Compensation—Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting”. The areas for simplification in this Update involve
several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification
of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification
apply only to nonpublic entities.
|
●
|
Accounting
for Income Taxes
|
|
●
|
Classification
of Excess Tax Benefits on the Statement of Cash Flows
|
|
●
|
Forfeitures
|
|
●
|
Minimum
Statutory Tax Withholding Requirements
|
|
●
|
Classification
of Employee Taxes Paid on the Statement of Cash Flows When an Employer Withholds Shares for Tax-Withholding Purposes
|
|
●
|
Practical
Expedient—Expected Term
|
|
●
|
Intrinsic
Value
|
In
addition to those simplifications, the amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after
the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. This should not result in a change in practice because
the guidance that is being superseded was never effective.
For
public business entities, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods
within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December
15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity
in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected
as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all
of the amendments in the same period. This updated guidance is not expected to have a material impact on our results of operations,
cash flows or financial condition.
ASU
2016-02:
In
February 2016, FASB issued Accounting Standards Update (“ASU”), 2016-02— “Leases (Topic 842), Section
A—Leases: Amendments to the FASB Accounting Standards Codification; Section B—Conforming Amendments Related to Leases:
Amendments to the FASB Accounting Standards Codification; Section C—Background Information and Basis for Conclusions”.
Effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for any of
the following:
|
1.
|
A
public business entity
|
|
|
|
|
2.
|
A
not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on
an exchange or an over-the-counter market
|
|
|
|
|
3.
|
An
employee benefit plan that files financial statements with the U.S. Securities and Exchange Commission (SEC).
|
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
For
all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim
periods within fiscal years beginning after December 15, 2020. Early application of the amendments in this Update is permitted
for all entities. This updated guidance is not expected to have a material impact on our results of operations, cash flows or
financial condition.
ASU
2014-09:
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 (see
ASU 2016-20, 12 and 10 above).
3.
Inventories
Inventories
consisted of the following (in thousands):
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Finished goods of non-contact thermometers
|
|
$
|
28
|
|
|
$
|
15
|
|
Materials inventory
|
|
|
462
|
|
|
|
966
|
|
Mobile vehicle inventory
|
|
|
188
|
|
|
|
787
|
|
|
|
$
|
678
|
|
|
$
|
1,768
|
|
4.
Acquisitions/Dispositions
ENG
Mobile Systems Acquisition
On
December 24, 2015, the Company acquired all of the outstanding common stock of E-N-G Mobile Systems, Inc. (“ENG”)
from its sole shareholder (the “Seller”). Pursuant to the Purchase Agreement, as consideration at the time of closing
of the Acquisition, PositiveID paid the Seller $750,000 in cash and issued a convertible secured promissory note to the Seller
in the amount of $150,000. The Company has also entered into a two-year consulting agreement with the Seller. The consulting agreement
was determined not to represent additional purchase price.
The
Purchase Agreement also provided for earn-out payments that could be earned by ENG to the benefit of the Seller. Each Earn-Out
Payment, was calculated at 5% of the revenue actually recognized and realized from each of the contracts and purchase orders identified,
with an earn-out value indicated for each on the signed backlog schedule (the “Signed Backlog Schedule”) subsequent
to Closing. The Earn-Out Payments were subject to adjustment in conjunction with the finalization of the net asset adjustment
provided for in the Purchase Agreement. The Company recorded a contingent earn-out liability of approximately $123,000, as a current
liability, as reflected in the consolidated balance sheet as of December 31, 2015, and an offsetting recovery asset of approximately
$111,000. During the year ended December 31, 2016, the Company and the seller of ENG agreed to the final measurement of the earn-out
consideration taking into account the finalization of the net asset balance, with total earnout payments of approximately $39,000.
As a result, the Company recorded an additional expense of $27,300 during the year ended December 31, 2016 which is included in
change in acquisition obligations in the accompanying consolidated statement of operations. The contingent earn-out liability
related to ENG had no balance as of December 31, 2016.
The
estimated purchase price of the acquisition totaled $912,000, comprised of $750,000 in cash, a convertible seller note of $150,000
(“ENG Note”), and the fair value of the contingent consideration estimated at approximately $123,000, less an estimated
recovery based on the closing net worth of ENG estimated at $111,000 at December 31, 2015. The fair value of the contingent consideration
was estimated based upon the present value of the expected future payouts of the contingent consideration and was subject to change
upon the finalization of the purchase accounting which occurred during the year ended December 31, 2016, as discussed in the paragraph
above.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
The
ENG note matured on December 31, 2016 and had an outstanding balance of $157,664 on the maturity date. The ENG note was amended
on December 31, 2016. Pursuant to the amendment, beginning January 1, 2017 (i) the holder agrees to waive all events of default
so long as the Company meets the obligations under this amendment; (ii) the note will accrue 8% interest per annum; (iii) the
Company will make monthly payments of $8,000 for the first six months of 2017; (iv) the remaining outstanding principal and interest
balance of the note will be paid in a lump sum in the seventh month of 2017, which payment shall be accelerated under certain
circumstances as described in the amendment.
The
Company acquired ENG for a number of reasons including the experience of its workforce, the quality and long history of its product
offerings, its prospects for sales and profit growth, and the Company’s ability to leverage its business relationships to
create new growth opportunities.
In
connection with the issuance of the ENG Note, the Company computed a premium of $50,000 as the note is considered a stock settled
debt under ASC 480, all of which was amortized immediately as a non-cash expense charged to interest expense. The principal amount
and premium are included in short-term convertible debt in the balance sheet as of December 31, 2016.
Thermomedics
Acquisition
On
December 4, 2015, the Company entered into several agreements related to its acquisition of all of the outstanding common stock
of Thermomedics, Inc. (“Thermomedics”). One of those agreements was a Management Services and Control Agreement, dated
December 4, 2015 (the “Control Agreement”), between the Company, Thermomedics, and Sanomedics, Inc. (“Sanomedics”),
whereby PositiveID was appointed the manager of Thermomedics. In a separate agreement, the Company entered into a First Amendment
to the Stock Purchase Agreement (the “Amendment”) with Sanomedics. The original Stock Purchase Agreement (“Purchase
Agreement”) was entered into on October 21, 2015, and defines the agreed upon terms of the Company’s acquisition of
all of the common stock of Thermomedics from Sanomedics. As a result of the Company assuming control of Thermomedics on December
4, 2015, it determined, pursuant to ASC 805-10-25-6, that December 4, 2015 was the acquisition date of Thermomedics for accounting
purposes.
The
estimated purchase price of the acquisition totaled $484,000, comprised of $175,000 in cash, Series J preferred stock consideration
of $125,000, and the fair value of the contingent consideration estimated at approximately $184,000. The fair value of the contingent
consideration was estimated based upon the present value of the expected future payouts of the contingent consideration and is
subject to change upon the finalization of the purchase accounting.
On
December 4, 2015, the Board of Directors authorized and on December 7, 2015, the Company filed with the State of Delaware, a Certificate
of Designations of Preferences, Rights and Limitations of Series J Preferred Stock. The Series J Preferred Stock ranks; (a) senior
with respect to dividends and right of liquidation with the Company’s common stock (b) pari passu with respect to dividends
and right of liquidation with the Company’s Series I Convertible Preferred Stock; and (c) junior with respect to dividends
and right of liquidation to all existing and future indebtedness of the Company. Without the prior written consent of Holders
holding a majority of the outstanding shares of Series J Preferred Stock, the Company may not issue any Preferred Stock that is
senior to the Series J Preferred Stock in right of dividends and liquidation. At any time after the date of the issuance of shares
of Series J Preferred Stock, the Corporation will have the right, at the Corporation’s option, to redeem all or any portion
of the shares of Series J Preferred Stock at a price per share equal to 100% of the $1,000 per share stated value of the shares
being redeemed. Series J Preferred Stock is not entitled to dividends, interest and voting rights. The Series J Preferred Stock
is convertible into the Company’s common stock, at stated value, at a conversion price equal to 100% of the arithmetic average
of the VWAP of the common stock for the fifteen trading days prior to the six-month anniversary of the Issuance Date.
On
August 25, 2016, PositiveID completed the acquisition and entered into an agreement with the Sanomedics and Thermomedics (the
“August Agreement”), which amends certain terms of the Purchase Agreement and terminates the Control Agreement. The
amendments to the Purchase Agreement include: (a) that any legal expense or losses incurred by PositiveID after June 30, 2016
related to the Exergen litigation shall have the effect of reducing any future earnouts that may be owed to the Sanomedics, dollar
for dollar; (b) PositiveID and the Sanomedics also agreed to settle the final closing net working capital adjustment through a
reduction of the Series J Preferred Stock shares to be released from escrow. As a result, the 125 shares of Preferred Series J
stock originally issued shall be released from escrow as follows: 71 shares to Sanomedics and 54 shares returned to the Company’s
treasury.
As
of August 25, 2016, and December 31, 2016, the Series J preferred stock consideration has a fair value of $71,000, and the estimated
fair value of the contingent consideration was nil based on the fair value analysis as of December 31, 2016.
In
connection with the acquisition, the Company issued a Convertible Promissory Note to Keith Houlihan, the former CEO of the Sanomedics
and President of Thermomedics (the “Holder”), dated August 25, 2016 in the aggregate principal amount of $75,000 (the
“Note”). The Note bears an interest rate of 5%, and is due and payable before or on August 25, 2017. The Note may
be converted by the Holder at any time after February 28, 2017 into shares of Company’s common stock at a price equal to
a 10% discount to the average of the three lowest daily VWAPs (volume weighted average price) of the Company’s common stock
as reported on the OTCQB for the 10 trading days prior to the day the Holder requests conversion. Any conversion will be limited
by: (i) Holder may not make more than one conversion every ten trading days, and (ii) the amount of conversion shares at any conversion
may not be more than the total number of shares of Common Stock traded over the ten trading days preceding the conversion notice
multiplied by 5%. The Note is a long-term debt obligation that is material to the Company. The Note may be prepaid in accordance
with the terms set forth in the Note. The Note also contains certain representations, warranties, and events of default including
if the Company fails to pay when due any amount owed on the Note, and increases in the amount of the principal and interest rates
under the Note in the event of such defaults. In the event of default, at the option of the Holder and in the Holder’s sole
discretion, the Holder may consider the Note immediately due and payable. The Company recorded this expense of $75,000 in the
change in acquisition obligations in the accompanying consolidated statement of operations.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
In
consideration for the Note, the Company entered into a Consent and Release by and between the Company, Thermomedics, the Holder
and Vitacura LLC, a Florida limited liability corporation (“Vitacura”), which is wholly owned by the Holder (the “Release”),
pursuant to which the Holder and Vitacura agreed to release the Company and Thermomedics from any and all causes of action.
In
connection with the acquisition, additional earn-out payments of up to $750,000 for each of the fiscal years ending December 31,
2016 and 2017 may be earned by the Thermomedics if certain revenue thresholds are met as described in the Purchase Agreement.
Such earn-out payments, if any, will consist of 25% in cash, up to $187,000 and 75% and in shares of preferred stock of the Company,
up to 563 shares of Preferred Stock, for each of the fiscal years ending December 31, 2016 and 2017, respectively. The Company
recorded a contingent earn-out liability of $184,000, as a non-current liability, as reflected in the balance sheet as of December
31, 2015. The Company adjusted the contingent earn-out liability to its fair value during the year ended December 31, 2016. As
of December 31, 2016, the estimated value of the earnout liability was nil.
As
a result of the August Agreement and the revaluation of the earnout, the Company reduced other assets by $12,000, reduced goodwill
by $17,000, reduced Preferred Series J by $54,000, reduced the contingent earn-out liability by $184,000 and recognized a net
gain of $209,000 included in change in acquisition obligations in the accompanying consolidated statement of operations.
The
Company acquired Thermomedics for a number of reasons including the quality of its Caregiver® product, its prospects for sales
and profit growth, its management team strengths in sales and marketing FDA cleared medical devices, and their regulatory experience.
Under
the acquisition method of accounting, the estimated purchase price of the acquisitions was allocated to net tangible and identifiable
intangible assets and liabilities of Thermomedics and ENG assumed based on their estimated fair values. The estimated fair values
of certain assets and liabilities have been estimated by management and are subject to change upon the finalization of the fair
value assessments.
|
|
Thermomedics
|
|
|
ENG
|
|
Assets acquired:
|
|
|
|
|
|
|
|
|
Net tangible assets
|
|
$
|
35
|
|
|
$
|
2,584
|
|
Customer contracts and relationships
|
|
|
240
|
|
|
|
238
|
|
Other assets
|
|
|
12
|
|
|
|
7
|
|
Patents and other intellectual property
|
|
|
178
|
|
|
|
-
|
|
Goodwill
|
|
|
108
|
|
|
|
200
|
|
|
|
|
573
|
|
|
|
3,029
|
|
Liabilities acquired:
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
(89
|
)
|
|
|
(2,116
|
)
|
Long term debt
|
|
|
-
|
|
|
|
(1
|
)
|
Total estimated purchase price
|
|
$
|
484
|
|
|
$
|
912
|
|
Contingent
earn-out liability for Thermomedics and ENG as of December 31, 2016 is as follows (in thousands):
Contingent Earn-Out Liability (In thousands):
|
|
|
|
|
Balance of contingent earn-out liability as of January 1, 2015
|
|
$
|
—
|
|
Change in liability during 2015
|
|
|
307
|
|
Balance of contingent earn-out liability as of December 31, 2015
|
|
$
|
307
|
|
Payment during 2016
|
|
|
(39
|
)
|
Change in FV of liability during 2016 included in change in acquisitions,
net
|
|
|
(268
|
)
|
Balance of contingent earn-out liability as of December 31, 2016
|
|
$
|
—
|
|
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
The
results of operations of Thermomedics and ENG are included in the Company’s consolidated statement of operations from the
date of the acquisition of December 4, 2015 and December 24, 2015, respectively, including approximately $120,000 of net loss
and $30,000 of net income, respectively. The following supplemental unaudited pro forma information assumes that these acquisitions
had occurred as of January 1 for the period presented (in thousands except per share data):
|
|
Year Ended
December 31,2015
|
|
|
|
(unaudited)
|
|
Revenue
|
|
$
|
8,323
|
|
Net loss
|
|
$
|
(12,043
|
)
|
Loss per common share – basic and diluted
|
|
$
|
(2.00
|
)
|
The
unaudited pro forma financial information is not necessarily indicative of the results that would have occurred if these acquisitions
had occurred on the dates indicated or that may result in the future.
Sale
of VeriChip Business to Former Related Party
Throughout
the course of 2012 through 2014, the Company and VeriTeQ, a business run by a former related party (CEO of the Company through
2011), entered into a number of agreements for the intellectual property related to the Company’s embedded biosensor portfolio,
which ultimately resulted in a GlucoChip and Settlement Agreement, entered into on October 20, 2014 (the “GlucoChip Agreement”),
under which the final element of the Company’s implantable microchip business was transferred to VeriTeQ.
Pursuant
to the VeriTeQ agreements, the Company holds a Note that was received as payment for shared services payments that the Company
made on behalf of VeriTeQ during 2011 and 2012 which Note had an original value of $222,115. The note has been fully reserved
in all periods presented. The Company also holds a five-year warrant dated November 13, 2013, with original terms entitling the
Company to purchase 300,000 shares of VeriTeQ common stock at a price of $2.84. Pursuant to the terms of the warrant, in particular
the full quantity and pricing reset provisions, the warrant had an original dollar value of $852,000 and can be exercised using
a cashless exercise feature.
On
October 20, 2014, the Company entered into the GlucoChip Agreement with VeriTeQ to transfer the intellectual property related
to its GlucoChip development and to provide financial support to VeriTeQ, for a period of up to two years, in the form of convertible
promissory notes. VeriTeQ issued the Company Convertible Promissory Notes in total principal amount of $200,000, and agreed to
provide VeriTeQ with continuing financial support through the issuance of additional convertible promissory notes up to an additional
amount of $205,000. As of December 31, 2016, the Company had issued Notes with a principal value of $200,000 under the GlucoChip
Agreement. As VeriTeQ is in default of its agreements with the Company, there is no intention to provide any additional notes
until such time as all defaults are cured.
On
October 19, 2015, VeriTeQ received a default notice from its senior lender and a Notice of Disposition of Collateral advising
the Company that the senior lender, acting as collateral agent, intended to sell the assets at auction, which it did on November
4, 2015. On November 25, 2015, VeriTeQ entered into a stock purchase agreement with an unaffiliated company whereby VeriTeQ agreed
to acquire all of the issued and outstanding membership interests of that company, and on May 6, 2016, VeriTeQ completed the closing
of that agreement.
Pursuant
to the cashless exercise feature of the VeriTeQ warrant, and subsequent sale of the underlying shares, the Company realized
$335,600 of income which was recorded under other income in the consolidated Statement of Operations during the year ended
December 31, 2015. As VeriTeQ is an early stage company, not yet fully capitalized, the Company plans to continue to fully reserve
all note receivable and warrant balances. If and when proceeds are realized in the future, gains will be recognized. As of December
31, 2016, the Company had outstanding convertible notes receivable from VeriTeQ of $422,115 and is owed default principal and interest of which a full reserve has been established as noted above.
License
of iglucose
On
February 15, 2013, the Company licensed its FDA cleared
iglucose
™ system 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.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
iglucose
™
uses machine-to-machine technology to automatically communicate a diabetic’s glucose readings to the
iglucose
™
online database.
iglucose
™ is intended to provide next generation, real-time data to improve diabetes management
and help ensure patient compliance, data accuracy and insurance reimbursement.
In
consideration for the rights and licenses, SGMC shall pay to the Company the amount set forth below for each glucose test strip
sold by SGMC and any sublicenses of SGMC for which results are posted by SGMC via its communications servers (the “Consideration”):
|
(i)
|
$0.0025
per strip sold until SGMC has paid aggregate Consideration of $1,000,000; and
|
|
(ii)
|
$0.005
per strip sold thereafter until SGMC has paid aggregate Consideration of $2,000,000; provided, however, that the aggregate
Consideration payable by SGMC pursuant to the SGMC Agreement shall in no event exceed $2,000,000.
|
To
date, no royalties have been realized from this agreement.
5.
Intangible Assets and Goodwill
Intangible
assets consist of the following as of December 31, 2016 and 2015 (in thousands):
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer contracts and relationships
|
|
$
|
708
|
|
|
$
|
(330
|
)
|
|
$
|
378
|
|
|
$
|
708
|
|
|
$
|
(234
|
)
|
|
$
|
474
|
|
Patents and other intellectual property
|
|
|
1,401
|
|
|
|
(1,287
|
)
|
|
|
114
|
|
|
|
1,401
|
|
|
|
(1,126
|
)
|
|
|
275
|
|
Non-compete agreements
|
|
|
169
|
|
|
|
(169
|
)
|
|
|
-
|
|
|
|
169
|
|
|
|
(169
|
)
|
|
|
-
|
|
|
|
$
|
2,278
|
|
|
$
|
(1,786
|
)
|
|
$
|
492
|
|
|
$
|
2,278
|
|
|
$
|
(1,529
|
)
|
|
$
|
749
|
|
Amortization
of intangible assets amounted to approximately $257,000 and $253,000 for the year ended December 31, 2016 and 2015 respectively.
Estimated future amortization expense is as follows (in thousands):
2017
|
|
|
154
|
|
2018
|
|
|
154
|
|
2019
|
|
|
95
|
|
2020
|
|
|
89
|
|
|
|
$
|
492
|
|
In
assessing potential impairment of the intangible assets recorded in connection with the PDI, ENG and Thermomedics, as of December
31, 2016, we performed a discounted cash flow analysis on a per segment basis. Based on our analysis, we have concluded based
on information currently available, that no impairment of the intangible assets exists as of December 31, 2016. The Company performed
its annual impairment test of goodwill as of December 31, 2016. As a result of this annual test, it was determined that the goodwill
balance as of December 31, 2016 was not impaired.
Goodwill
consists of the following as of December 31, 2016 and 2015 (in thousands):
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
PDI
|
|
$
|
510
|
|
|
$
|
510
|
|
Thermomedics
|
|
|
91
|
|
|
|
108
|
|
ENG
|
|
|
199
|
|
|
|
199
|
|
|
|
$
|
800
|
|
|
$
|
817
|
|
6.
Deferred revenue
During
the course of its typical projects, the Company’s subsidiary, ENG requires front end funding to acquire the required materials
and begin production. Frequently, customers are billed in advance of production to secure the necessary resources to facilitate
timely completion of the project. As of December 31, 2016 and 2015, the Company had $0.4 million and $1.8 million of deferred
revenue, respectively, primarily relating to its ENG subsidiary operations.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
7.
Accrued Expenses
Accrued
expenses and other current liabilities consisted of the following as of December 31, 2016 and 2015 (in thousands):
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accrued compensation
|
|
$
|
467
|
|
|
$
|
526
|
|
Other
|
|
|
340
|
|
|
|
424
|
|
|
|
$
|
807
|
|
|
$
|
950
|
|
8.
Equity and Debt Financing Agreements and Fair Value Measurements
Convertible
Note Financings
Short-term
convertible debt for the years ended December 31, 2016 and 2015 are as follows (in thousands):
|
|
2016
|
|
|
2015
|
|
|
|
Notes
|
|
|
Accrued Interest
|
|
|
Total
|
|
|
Notes
|
|
|
Accrued
Interest
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes with accrued interest accounted for as stock settled debt
|
|
$
|
602
|
|
|
$
|
36
|
|
|
$
|
638
|
|
|
$
|
200
|
|
|
$
|
—
|
|
|
$
|
200
|
|
Conversion premiums
|
|
|
287
|
|
|
|
—
|
|
|
|
287
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
889
|
|
|
|
36
|
|
|
|
925
|
|
|
|
200
|
|
|
|
—
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes with embedded derivatives
|
|
|
4,611
|
|
|
|
819
|
|
|
|
5,430
|
|
|
|
5,984
|
|
|
|
650
|
|
|
|
6,634
|
|
Derivative discounts
|
|
|
(1,367
|
)
|
|
|
—
|
|
|
|
(1,367
|
)
|
|
|
(4,054
|
)
|
|
|
—
|
|
|
|
(4,054
|
)
|
|
|
|
3,244
|
|
|
|
819
|
|
|
|
4,063
|
|
|
|
1,930
|
|
|
|
650
|
|
|
|
2,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original issue discounts and loan fee discounts
|
|
|
(180
|
)
|
|
|
—
|
|
|
|
(180
|
)
|
|
|
(652
|
)
|
|
|
—
|
|
|
|
(652
|
)
|
|
|
$
|
3,953
|
|
|
$
|
855
|
|
|
$
|
4,808
|
|
|
$
|
1,478
|
|
|
$
|
650
|
|
|
$
|
2,128
|
|
Dominion
Convertible Debt Financings
On
November 25, 2014, the Company closed a financing transaction by entering into a Securities Purchase Agreement dated November
25, 2014 (the “Note I SPA”) with Dominion Capital LLC (the “Purchaser”) for an aggregate subscription
amount of $4,000,000 (the “Purchase Price”). Pursuant to the Note I SPA, the Company issued a series of 4% Original
Issue Discount Senior Secured Convertible Promissory Notes (collectively, the “Note I”) to the Purchaser. The Purchase
Price will be paid in eight equal monthly payments of $500,000. Each individual Note was issued upon payment and will be amortized
beginning six months after issuance, with amortization payments being 1/24
th
of the principal and accrued interest,
made in cash or common stock at the option of the Company, subject to certain conditions contained in the Note I SPA. The Company
also reimbursed the Purchaser $25,000 for expenses from the proceeds of the first tranche and the Purchaser’s counsel $25,000
from the first tranche.
On
December 24, 2014, Ironridge and Dominion Capital LLC entered into a purchase and assignment of the debenture, and the Company
and Dominion amended the Debenture, with the total amount owed as of December 24, 2014 at $434,592, making the note a demand note
with terms and conditions identical to Purchaser’s notes pursuant to the $4 Million Financing Agreement. Pursuant to the
amendment the maturity date was extended to May 31, 2015. Additionally, on December 24, 2014 the Company and Purchaser entered
into a $158,400 Senior Convertible, Redeemable Debenture of PositiveID Corporation, which was issued without proceeds as consideration
for the Purchaser’s expenses in conjunction with the purchase and assignment with Ironridge, including legal and transaction
fees. This amount was recorded as a loss on debt extinguishment. As of December 31, 2014, the Company no longer has any outstanding
debt owed to Ironridge.
In
connection with the issuance of the Debenture and the Note, the Company recorded a debt discount of $522,061 related to the embedded
conversion option derivative liability which has been fully amortized during the year ended December 31, 2015. The outstanding
principal and interest on the Debenture was fully converted into 6,775,018 shares of common stock as of December 31, 2015. As
the note conversion includes a “lesser of” pricing provision, a derivative liability of $571,387 was recorded when
the note was entered into. The derivative liability was remeasured at each balance sheet date and $466,035 was reclassified into
equity on a pro-rata basis upon conversion of the note.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
On
August 14, 2015, the Company closed a financing transaction by entering into a Securities Purchase Agreement dated August 14,
2015 (the “Note II SPA”) with Dominion Capital LLC (the “Purchaser”) for an aggregate subscription amount
of $2,400,000 (the “Purchase Price”). Pursuant to the Note II SPA, the Company issued a series of 4% Original Issue
Discount Senior Secured Convertible Promissory Note (collectively, the “Note II”) to the Purchaser. The Purchase Price
was paid in six equal monthly payments of $400,000. Each individual Note was issued upon payment and is amortized beginning six
months after issuance, with amortization payments being 1/24
th
of the principal and accrued interest, made in cash
or common stock at the option of the Company, subject to certain conditions contained in the Note II SPA. The Company also reimbursed
the Purchaser $20,000 for expenses from the proceeds of the first tranche and the Purchaser’s counsel $10,000 from the first
tranche.
The
aggregate principal amount of both Notes I and II are issued with a 4% original issue discount whereby the aggregate principal
amount of Notes I and II is $6,400,000 but the actual purchase price of Notes I and II is $6,144,000. Each of Notes I and II accrue
interest at a rate equal to 12% per annum and with maturity dates, depending on the date funded, between June 26, 2016 and June
30, 2017. Notes I and II are convertible any time after the issuance date of the notes. The Purchasers have the right to convert
Note I into shares of the Company’s common stock at a conversion price equal to 95% of the daily VWAP on the trading day
immediately prior to the closing of each tranche. The Purchasers have the right to convert Note II into shares of the Company’s
common stock at a conversion price equal to $1.40. Additionally, under certain conditions defined in Notes I and II, the notes
would be convertible into common stock at a price equal to 62.5% of the lowest VWAP during the 15 Trading Days immediately prior
to the applicable amortization date. In the event that there is an Event of Default or certain conditions are not met, the conversion
price will be adjusted to equal to 55% of the lowest VWAP during the thirty (30) Trading Days immediately prior to the applicable
Conversion Date. Notes I and II can be prepaid at any time upon five days’ notice to the Holder by paying an amount in cash
equal to the outstanding principal and interest and a 120% premium.
During
2015, the Company had received all eight tranches under the Note I SPA ($500,000 principal in 2014 and $3,650,000 principal in
2015 which includes an additional $150,000 added to one of the agreed $500,000 monthly funding as requested by the Company), with
maturity dates, depending on the date funded, between June 26, 2016 and December 29, 2016, pursuant to a convertible note. Under
the agreement, the Company received $3,540,600, which was net of the $448,400 Purchaser’s expenses and legal fees and $166,000
which represents the 4% original issue discount. As of June 30, 2016, the Company has received, all six tranches under the Note
II SPA ($2,281,250 in principal in 2015 and $208,333 in 2016) with maturity dates of February 15, 2017 and June 30, 2017, pursuant
to a convertible note. Under the agreement, the Company received $2,143,000, which was net of Purchaser’s expenses, legal
fees of $247,000 and a 4% original issue discount of $99,583. 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 connection with the issuance of Notes I and II, the Company recorded a
debt discount of $387,000 in 2014, $5,116,600 in 2015 and $180,000 in 2016, totaling to $5,683,600 of debt discount recorded,
related to the embedded conversion option derivative liability. The amortization expense related to that discount recorded were
approximately $3,331,000 and $3,287,000 as of December 31, 2015 and 2016, respectively. During the year ended December 31, 2016,
$4,064,000 of the outstanding principal and interest on Notes I and II was converted into 1,332,319,530 shares of common stock.
As of December 31, 2016, the outstanding principal and interest on Notes I and II were $2,128,700. As the note conversion includes
a “lesser of” pricing provision, a derivative liability of $8,936,405 was recorded when Notes I and II were entered
into. The derivative liability is re-measured at each balance sheet date and reclassified to equity on a pro-rata basis upon conversion
of the note, the derivative liability balance for Notes I and II at December 31, 2016 was $2,176,258.
On
December 22, 2015, in order to finance the acquisition of ENG, the Company closed a financing transaction by entering into a Securities
Purchase Agreement dated December 22, 2015 (the “Note III SPA”) for an aggregate principal amount of $904,042 and
subscription amount of $865,000, net of OID (the “Purchase Price”). The Company also reimbursed the Purchaser $30,000
for legal fees and expenses from the proceeds of the Note. Pursuant to the Note III SPA, the Company shall issue a 4% Original
Issue Discount Senior Secured Convertible Promissory Note (the “Note III”) to Dominion. Note III was issued upon payment
and will be amortized beginning six months after issuance, with amortization payments being 1/24th of the principal and accrued
interest, made in cash or common stock, on a semi-monthly basis, subject to certain conditions contained in the Note III SPA.
The amortization payments will begin to be due starting on the 15th day of the month immediately following the six-month anniversary
of the Closing Date. The Company received funding for Note III on December 24, 2015, net proceeds of $751,500 (net of the $152,542
of legal fees, expenses and OID). Note III accrues interest at a rate equal to 12% per annum (interest is guaranteed for the first
twelve months) and has a maturity date of June 15, 2017. Note III is convertible any time after its issuance date and Dominion
has the right to convert any or all of Note III into shares of the Company’s common stock at a conversion price equal to
$1.10, subject to adjustment as described in Note III. Additionally, under certain conditions defined in Note III, it may also
be convertible into common stock at a price equal to 62.5% of the lowest VWAP during the 15 Trading Days immediately prior to
the applicable amortization date. In the event that there is an Event of Default or certain conditions are not met, the conversion
price will be adjusted to equal to 55% of the lowest VWAP during the thirty (30) Trading Days immediately prior to the applicable
Conversion Date. Note III can be prepaid at any time upon five days’ notice to the Dominion by paying an amount in cash
equal to the outstanding principal and interest, and a 20% premium. In connection with the issuance of the Note III, the Company
recorded a debt discount of $751,500 when Note III was entered into, related to the embedded conversion option derivative liability.
The amortization expense related to that discount recorded was approximately $10,000 and $510,000 during the year ended December
31, 2015 and 2016, respectively. As of December 31, 2016, the outstanding principal and interest on Note III was $1,013,000. As
the note conversion includes a “lesser of” pricing provision, a derivative liability of $1,267,800 was recorded when
Note III was entered into. The derivative liability is re-measured at each balance sheet date, the derivative liability balance
for Note III at December 31, 2016 was $605,719.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
On
January 28, 2016, the Company closed a financing transaction by entering into a Securities Purchase Agreement dated January 28,
2016 (the “Note IV SPA”) with Dominion Capital LLC (the “Purchaser”) for an aggregate principal amount
of $2,187,500 and subscription amount of $2,100,000 (the “Purchase Price”), net of OID. Pursuant to the Note IV SPA,
the Company shall issue a series of 4% Original Issue Discount Senior Secured Convertible Promissory Notes (collectively, the
“Note IV”) to the Purchaser. The Purchase Price is scheduled to be paid in six equal monthly tranches of $350,000,
subject to the discretion of the Purchaser. Each individual Note will be issued upon payment and will be amortized beginning six
months after issuance, with amortization payments being 1/24th of the principal and accrued interest, made in cash or common stock
at the option of the Company, on a semi-monthly basis, subject to certain conditions and limitations contained in the Note IV
SPA. The amortization payments will begin on the 15th day of the month immediately following the six-month anniversary of the
Closing Date. The Company also reimbursed the Purchaser $20,000 for expenses from the proceeds of the first tranche and the Purchaser’s
counsel $10,000 from the first tranche. During the year ended December 31, 2016, the Company has received a total of $604,763
net proceeds under Note IV (net of the $93,153 of legal fees, expenses and OID). Note IV accrues interest at a rate equal to 12%
per annum (interest is guaranteed for the first twelve months) and has a maturity dates between July 15, 2017 and March 16, 2018.
Note IV is convertible any time after its issuance date and Dominion has the right to convert any or all of Note IV into shares
of the Company’s common stock at a conversion price equal to $1.10 subject to adjustment as described in Note IV. Additionally,
under certain conditions defined in Note IV, it may also be convertible into common stock at a price equal to 62.5% of the lowest
VWAP during the 15 Trading Days immediately prior to the applicable amortization date. In the event that there is an Event of
Default or certain conditions are not met, the conversion price will be adjusted to equal to 55% of the lowest VWAP during the
thirty (30) Trading Days immediately prior to the applicable Conversion Date. Note IV can be prepaid at any time upon five days’
notice to the Dominion by paying an amount in cash equal to the outstanding principal and interest, and a 20% premium. Subsequent
to the funding of the first tranche the Purchaser and the Company agreed to delay further tranches, until such time as the Purchaser
and Company mutually agree, both as to timing and amount. In connection with the issuances of Note IV, the Company recorded a
debt discount of $604,800 when the notes were entered into, related to the embedded conversion option derivative liability. The
amortization expense related to that discount recorded was approximately $263,000 for the during the year ended December 31, 2016.
As of December 31, 2016, the outstanding principal and interest on Note IV was $752,725. As the note conversion includes a “lesser
of” pricing provision, a derivative liability of $941,800 was recorded when Note IV was entered into. The derivative liability
is re-measured at each balance sheet date, the derivative liability balance for Note IV at December 31, 2016 was $465,663.
Pursuant
to the Company’s obligations under Notes I, II, III and IV, the Company entered into a Security Agreement with the Purchaser,
pursuant to which the Company granted a lien on all assets of the Company, subject to existing security interests, (the “Collateral”)
for the benefit of the Purchaser, to secure the Company’s obligations under the Note. In the event of a default as defined
in Notes I, II, III and IV, the Purchaser may, among other things, collect or take possession of the Collateral, proceed with
the foreclosure of the security interest in the Collateral or sell, lease or dispose of the Collateral.
Other
Convertible Debt Financing
On
June 18, 2014, the Company closed a financing agreement whereby the Company borrowed an aggregate principal amount of $247,500
with a 10% original note discount. The note has an interest rate of 10%, and is convertible at the option of the lender into shares
of the Company’s common stock at the lesser of (i) a 40% discount to the lowest closing bid price in the 20 trading days
prior to conversion or (ii) $3.75. 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. The first tranche was funded on June 18, 2014 with a principal amount of $55,000 and net proceeds of $50,000,
with a maturity date of June 17, 2016, pursuant to the convertible note. In connection with the issuance of the note, the Company
recorded a debt discount of $50,000 related to the derivative liability which was fully amortized as of June 30, 2015. As of June
30, 2015, the outstanding principal and interest of the note was fully converted into 88,518 shares of common stock. As the note
conversion includes a “lesser of” pricing provision, a derivative liability of $59,623 was recorded when the note
was entered into. The derivative liability was re-measured at each balance sheet date and was reclassified to equity upon conversion
of the note. The second tranche was funded on September 19, 2014, with a principal amount of $55,000 and net proceeds of $50,000,
with a maturity date of September 19, 2015, pursuant to a convertible note. In connection with the issuance of the notes, the
Company recorded a debt discount of $50,000 related to the derivative liability which was fully amortized as of June 30, 2015.
As of June 30, 2015, the outstanding principal and interest on the notes was fully converted into 139,619 shares of common stock.
As the note conversion includes a “lesser of” pricing provision, a derivative liability of $59,623 was recorded when
the note was entered into. The derivative liability was re-measured at each balance sheet date and was reclassified to equity
upon conversion of the note. The third tranche was funded on December 22, 2014, with a principal amount of $55,000 and net proceeds
of $50,000, with a maturity date of December 22, 2015, pursuant to a convertible note. The Company recorded a debt discount of
$50,000 related to the derivative liability which was fully amortized as of September 30, 2015. As of September 30, 2015, the
outstanding principal and interest of the note was fully converted into 117,147 shares of common stock. As the note conversion
includes a “lesser of” pricing provision, a derivative liability of $62,118 was recorded when the note was entered
into. The derivative liability was re-measured at each balance sheet date and was reclassified to equity upon conversion of the
note. The fourth tranche was funded on January 13, 2016, with a principal amount of $82,500 and net proceeds of $75,000, with
a maturity date of January 13, 2018, pursuant to a convertible note. In connection with the issuance of the note, the Company
recorded a debt discount of $75,000, related to the embedded conversion option derivative liability which has been fully amortized
during the year ended December 31, 2016. As of December 31, 2016, the outstanding principal and interest on the note was fully
converted into 2,078,184 shares of common stock. As the note conversion includes a “lesser of” pricing provision,
a derivative liability of $122,263 was recorded when the note was entered into. The derivative liability is re-measured at each
balance sheet date and reclassified to equity on a pro-rata basis upon conversion of the note.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
On
July 3, 2014, the Company borrowed $115,000 with a maturity date of July 3, 2015, pursuant to a convertible note. Under the agreement,
the Company received $100,000, which was net of legal and due diligence fees. The Note has an interest rate of 8%, and is convertible
at the option of the lender into shares of the Company’s common stock at the lesser of $2.10 per share or a 40% discount
of the lowest closing bid prices in the 15 trading days prior to conversion. The note might be accelerated if an event of default
occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy
events or if the Company is delinquent in its SEC filings. In connection with the issuance of the notes, the Company recorded
a debt discount of $58,571 relating to derivative liability which was fully amortized as of March 31, 2015. As of March 31, 2015,
the outstanding principal and interest on the note was fully converted into 164,974 shares of common stocks. In conjunction with
the Note, the Company granted the lender a warrant for 1,000,000 common shares at a strike price of $4.00. The warrant has a life
of three years and its relative fair value of $41,429 has been recorded as a debt discount and additional paid in capital as of
March 31, 2015. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $59,623
was recorded when the note was entered into. The derivative liability was re-measured at each balance sheet date and was reclassified
to equity upon conversion of the note.
On
July 7, 2014, the Company borrowed $53,000 with a maturity date of March 25, 2015, pursuant to a financing agreement. Under the
agreement, the Company received $50,000, which was net of legal fees. The note bears interest at 8% per annum and is convertible
at the option of the lender into shares of the Company’s common stock at a 39% discount to the price of common shares in
the 10 days prior to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including
the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent
in its SEC filings. In connection with the issuance of the note, the Company computed a premium of $33,885 as the note is considered
stock settled debt under ASC 480, all of which was accreted and charged to interest expense in the year ended December 31, 2014.
As of June 30, 2015, the Company exercised its right to prepay the outstanding principal and interest for a total redemption amount
of $73,629 and recorded a loss on extinguishment of approximately $18,550.
On
July 9, 2014 and August 21, 2014, the Company borrowed from a lender, notes each amounting to $110,000, which matures twelve months
from the date of the respective notes, pursuant the agreement. Each debt was issued at a 10% original issue discount resulting
in net total proceeds of $180,000, net of legal fees. The notes bear an interest rate of 10%, 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 during the 15
days prior to the election to conversion. The notes could have been 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 total premium of
$146,666 as the notes were considered stock settled debt under ASC 480. On December 30, 2014, the Lender and Dominion Capital
LLC entered into a purchase and assignment of these notes. Subsequent to the purchase and assignment, the note was amended by
the Company and the Purchaser, using the form of note identical to the notes used in the $4 Million Financing Agreement. The Company
issued a new note for $222,222 convertible at the lesser of a 37.5% discount to the common stock price on the date of the note
or a 37.5% discount to the price of our common stock price at the time of conversion. In conjunction with the purchase and assignment,
the Company and Purchaser entered into a new note with a principal value of $49,444 as compensation for Purchaser’s costs
related to the purchase and assignment. This $49,444 was expensed as a loss on debt extinguishment. In connection with the issuance
of the notes, the Company recorded a debt discount of $271,666 related to the embedded conversion option derivative liability
which was fully amortized as of June 30, 2015. As of September 30, 2015, the remaining outstanding principal and interest on the
notes was fully converted into 128,685 shares of common stock. As the note conversions includes a “lesser of” pricing
provision, a derivative liability of $289,701 was recorded when these notes were entered into. The derivative liability was re-measured
at each balance sheet date and was reclassified to equity upon conversion of the note.
On
July 17, 2014, the Company borrowed $115,000 with a maturity date of July 17, 2016, pursuant to a convertible note. The debt was
issued at a 10% original issue discount resulting in proceeds of $100,000, has an interest rate of 10%, and is convertible at
the option of the lender into shares of the Company’s common stock at the lesser of $3.00 per share or a 40% discount of
the lowest closing bid prices in the 20 trading days prior to conversion. The note might be accelerated if an event of default
occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy
events or if the Company is delinquent in its SEC filings. In connection with the issuance of the notes, the Company recorded
a debt discount of $100,000 related to the derivative liability which was fully was fully amortized as of June 30, 2015. On January
8, 2015, the Company exercised its right to prepay the outstanding principal and interest for a total redemption amount of $120,750.
As the note conversion includes a “lesser of” pricing provision, a derivative liability of $124,666 was recorded when
the note was entered into. The derivative liability was re-measured at each balance sheet date and was reclassified to equity
on a pro-rata basis upon redemption of the note.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
On
August 19, 2014, the Company borrowed $66,000 with a maturity date of August 15, 2015, pursuant to a convertible note. The debt
was issued at a 10% original issue discount resulting in proceeds of $54,500, net of legal fees. The Note has an interest rate
of 8%, and is convertible at the option of the lender into shares of the Company’s common stock at the lesser of $3.00 per
share or a 60% of the average of the three lowest closing bid prices 15 trading days prior to conversion. The note might be accelerated
if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest
when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the
notes, the Company recorded a debt discount of $54,500 related to the derivative liability which was fully amortized as of June
30, 2015. The outstanding principal and interest on the note was fully converted into 100,000 shares of common stock as of December
31, 2015. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $71,548 was recorded
when the note was entered into. The derivative liability was re-measured at each balance sheet date and was reclassified to equity
on a pro-rata basis upon conversion of the note.
On
September 4, 2014, the Company borrowed $110,000 pursuant to a convertible note with an OID of $10,000 resulting in cash received
of $100,000. The debt matures twenty four months from the date funded, has a one-time 10% interest charge if not paid within 90
days, and is convertible at the option of the lender into shares of the Company’s common stock at the lesser of $2.10 per
share or 60% of the average of the two lowest closing bid prices in the 25 trading days prior to conversion. The note might be
accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal
and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance
of the notes, the Company recorded a debt discount of $100,000 which was fully amortized as of June 30, 2015. As of December 31,
2015, the outstanding principal and interest on the notes was fully converted into 183,907 shares of common stock. As the note
conversion includes a “lesser of” pricing provision, a derivative liability of $119,246 was recorded when the note
was entered into. The derivative liability was re-measured at each balance sheet date and was reclassified to equity on a pro-rata
basis upon conversion of the note.
On
September 22, 2014, Company closed a Securities Purchase Agreement providing for the purchase of two Convertible Redeemable Notes
in the aggregate principal amount of $100,000. The two notes bear interest at the rate of 8% per annum; are due and payable on
September 15, 2015; and may be converted at the option of the lender into shares of Company common stock at a conversion price
equal to a 40% discount of the lowest closing bid price calculated at the time of conversion. The two notes also contain certain
representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates
under the two Notes in the event of such defaults. The first note in the amount of $50,000 was funded on September 22, 2014, with
the Company receiving $45,000 of net proceeds, which was net of legal and due diligence fees. In connection with the issuance
of the first note, the Company computed a premium of $33,333 as the note is considered stock settled debt under ASC 480 which
had been fully amortized as of June 30, 2015. As of June 30, 2015, the outstanding principal and interest on the first note was
converted into 101,918 shares of common stock. The second note in the amount of $50,000 was initially paid for by the issuance
of an offsetting $50,000 secured note issued by the lender to the Company. The second note was funded on April 24, 2015, with
the Company receiving $45,000 of net proceeds, which was net of legal and due diligence fees. In connection with the issuance
of the second note, the Company computed a premium of $33,333 as the note is considered stock settled debt under ASC 480 which
was fully amortized during the as of June 30, 2015. As of December 31, 2015, the outstanding principal and interest of the second
note was fully converted into 104,211 shares of common stock.
On
September 22, 2014, the Company borrowed $54,750 with a maturity date of June 19, 2015, pursuant to a financing agreement. Under
the agreement, the Company received $50,000, which was net of legal and due diligence fees. The note bears interest at 8% per
annum and is convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the
price of common shares in the 10 days prior to conversion. The note might be accelerated if an event of default occurs under the
terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or
if the Company is delinquent in its SEC filings. In connection with the issuance of the note, the Company computed a premium of
$36,500 as the note is considered stock settled debt under ASC 480. On March 10, 2015, the Lender and Dominion Capital LLC entered
into a purchase and assignment of the note (see paragraph below), and the Company and Dominion amended the note, with the total
amount owed as of March 10, 2015 at $56,778, with terms and conditions identical to Purchaser’s notes pursuant to the $4
Million Financing Agreement. Pursuant to the amendment the maturity date was extended to September 30, 2015. Additionally, on
March 10, 2015, the Company and Purchaser entered into a $24,772 Senior Convertible, Redeemable Debenture of PositiveID Corporation,
which was issued without proceeds as consideration for the Purchaser’s expenses in conjunction with the purchase and assignment
with the Lender, including legal and transaction fees (see paragraph below). This amount was recorded as a loss on debt extinguishment.
As of March 31, 2015, the Company no longer has any outstanding debt owed to the Lender. The total recorded premium was accreted
and charged to interest expense upon the assignment of the convertible note.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
On
September 24, 2014, the Company borrowed $75,000 pursuant to the back-end note in conjunction with the March 13, 2014 financing
agreement. The debt has an interest rate of 8% and the Company received proceeds of $67,750, net of fees, In the event that the
original note is not repaid prior to six months from its issuance, the lender has the option of converting the additional note
into shares of the Company’s common stock at a 40% discount to lowest closing bid price in the 20 trading days prior to
conversion, subject to the notes payable to the Company having been paid in full. In connection with the issuance of the note,
the Company computed a premium of $50,000 as the note is considered stock settled debt under ASC 480, all of which was accreted
and charged to interest expense in the year ended December 31, 2014. As of June 30, 2015, the outstanding principal and interest
on the note had been converted fully converted into 99,108 shares of common stock.
On
October 6, 2014, the Company borrowed $53,000 with a maturity date of June 1, 2015, pursuant to a financing agreement. Under the
agreement the Company received $50,000, which was net of legal fees. The note bears interest at 8% per annum and is convertible
at the option of the lender into shares of the Company’s common stock at a 39% discount to the price of common shares in
the 10 days prior to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including
the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent
in its SEC filings. In connection with the issuance of the note, the Company computed a premium of $33,885 as the note is considered
stock settled debt under ASC 480. As of June 30, 2015, the Company exercised its right to prepay the outstanding principal and
interest for a total redemption amount of $73,641. In addition, the remaining premium was accreted and charged to interest expense
upon redemption of the convertible note.
On
October 8, 2014, the Company borrowed $100,000 with a maturity date of March 30, 2015, pursuant to a financing agreement. Under
the agreement, the Company received $85,500, which was net of legal fees of $7,000 and original issue discount of $7,500. The
note bears interest at 10% 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 10 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 as of June 30, 2015. As of June 30, 2015, the outstanding principal and interest on the notes
was fully converted into 151,804 shares of common stock.
On
October 27, 2014, the Company borrowed $36,750 with a maturity date of October 21, 2015, pursuant to a financing agreement. Under
the agreement, the Company received $33,250, which was net of legal and due diligence fees. The note bears interest at 8% per
annum and is convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the
lowest closing bid price in the 20 trading days prior to conversion. The note might be accelerated if an event of default occurs
under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy
events or if the Company is delinquent in its SEC filings. In connection with the issuance of the notes, the Company recorded
a premium of $24,500 as the note is considered stock settled debt under ASC 480, all of which was accreted and charged to interest
expense as of June 30, 2015. As of June 30, 2015, the Company exercised its right to prepay the outstanding principal and interest
for a total redemption amount of $52,892. The Company recorded a loss on extinguishment of approximately $14,700.
On
October 27, 2014, the Company borrowed $161,000 with a maturity date of October 27, 2015, pursuant to a financing agreement. Under
the agreement, the Company received $150,000, which was net of an original issue discount of $11,000. 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 10 days prior to conversion. The note might be accelerated if an event of default occurs
under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy
events or if the Company is delinquent in its SEC filings. In conjunction with the Note, the Company granted the lender a warrant
for 1,000,000 common shares at a strike price of $0.08. The warrant has a life of three years and its relative fair value of $33,404
has been recorded as a debt discount and additional paid in capital as of June 30, 2015. In connection with the issuance of the
note, the Company computed a premium of $107,333 as the note is considered stock settled debt under ASC 480. On April 6, 2015,
Dominion Capital LLC entered into a purchase and assignment of the note (see paragraph below), and the Company and Dominion amended
the note, with the total amount of $166,681, with terms and conditions identical to Purchaser’s notes pursuant to the $4
Million Financing Agreement. Pursuant to the amendment the maturity date was extended to October 24, 2015. Additionally, on April
6, 2015 the Company and Purchaser entered into an $88,319 Senior Convertible, Redeemable Debenture of the Company, which was issued
without proceeds as consideration for the Purchaser’s expenses in conjunction with the purchase and assignment with the
Lender, including legal and transaction fees. This amount was recorded as a loss on debt extinguishment. As of June 30, 2015,
the Company no longer has any outstanding debt owed to the Lender. The total recorded premium was accreted and charged to interest
expense upon the assignment of the convertible note.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
On
March 10, 2015, the Company issued a new note for $56,778 convertible at the lesser of a 37.5% discount to the common stock price
on the date of the note (which was $0.7656) or a 37.5% discount to the price of our common stock price at the time of conversion.
In conjunction with the purchase and assignment, the Company and Purchaser entered into a new note with a principal value of $24,772
as compensation for Purchaser’s costs related to the purchase and assignment. This $24,772 was expensed as a loss on debt
extinguishment. In connection with the issuance of the note, the Company recorded a debt discount of $81,500 related to the embedded
conversion option derivative liability which was fully amortized and the outstanding principal and interest on the notes was fully
converted into 36,545 shares of common stock as of September 30, 2015. As the note conversions includes a “lesser of”
pricing provision, a derivative liability of $96,915 was recorded when these notes were entered into. The derivative liability
was re-measured at each balance sheet date and was reclassified to equity on a pro-rata basis upon conversion of the note.
On
April 6, 2015, the Company issued a new note for $166,681 convertible at the lesser of a 37.5% discount to the common stock price
on the date of the note (which was $0.77) or a 37.5% discount to the price of our common stock price at the time of conversion.
In conjunction with the purchase and assignment, the Company and Purchaser entered into a new note with a principal value of $88,319
as compensation for Purchaser’s costs related to the purchase and assignment. This $88,319 was expensed as a loss on debt
extinguishment. In connection with the issuance of the notes, the Company recorded a debt discount of $255,000 related to the
embedded conversion option derivative liability which has been fully amortized as of December 31, 2015. As of June 30, 2016, the
outstanding principal and interest of the note was fully converted into 636,490 shares of common stock. As of June 30, 2016, the
note has no outstanding balance. As the note conversions includes a “lesser of” pricing provision, a derivative liability
of $305,904 was recorded when these notes were entered into. The derivative liability was re-measured at each balance sheet date
and was reclassified to equity on a pro-rata basis upon conversion of the note.
On
March 9, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of two Convertible Redeemable Notes in the aggregate principal amount of $270,400 (the “Notes”), with the first note
being in the amount of $135,200 (“Note I”) and the second note being in the amount of $135,200 (“Note II”)
with a maturity date of March 9, 2017. Pursuant to Note I, the Company received $125,000 of proceeds, net of original issue discount
of $5,200 and legal fees of $5,000. Note II was initially paid for by the issuance of an offsetting $130,000 secured note issued
by the Lender to the Company (“Secured Note”). The Notes bear an interest rate of 12%; and may be at any time after
180 days of the date of closing converted into shares of Company common stock convertible at the lesser of a 37.5% discount to
the common stock price on the date of the note (which was $1.40) or a 37.5% discount to the price of our common stock price at
the time of conversion. The Notes also contain certain representations, warranties, covenants and events of default, and increases
in the amount of the principal and interest rates under the Notes in the event of such defaults. In connection with the issuance
of Note I, the Company recorded a debt discount of $125,000, related to the embedded conversion option derivative liability which
was fully amortized during the year ended December 31, 2016. As of December 31, 2016, the outstanding principal and interest on
Note I was fully converted into 122,903,769 shares of common stock. During the year ended December 31, 2016, the Company received
$125,000 pursuant to Note II, net of original issue discount of $5,200 and legal fees of $5,000. In connection with the issuance
of Note II, the Company recorded a debt discount of $125,000, related to the embedded conversion option derivative liability which
was fully amortized during the year ended December 31, 2016. As of December 31, 2016, $129,980 of the outstanding principal and
interest on Note II was converted into 155,053,441 shares of common stock. As of December 31, 2016, Note II had an outstanding
balance of $10,213. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $306,000
was recorded when Notes were entered into. The derivative liability is re-measured at each balance sheet date and reclassified
to equity on a pro-rata basis upon conversion of the note, the derivative liability balance for Notes at December 31, 2016 was
$6,634.
On
March 16, 2016, the Company borrowed $53,000 with a maturity date of on December 18, 2016, pursuant to a financing agreement.
Under the agreement, the Company received $50,000 of proceeds, net of $3,000 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 35% discount to the price
of common shares in the ten days prior to conversion. The note also contains certain representations, warranties, covenants and
events of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults.
In connection with the issuance of the note, the Company recorded a premium of $28,538 as the note is considered stock settled
debt under ASC 480, which was fully accreted as of June 30, 2016. On August 19, 2016, the lender entered into a purchase and assignment
agreement with a third lender to sell and assign the outstanding principal and interest of $54,731 (original note). Pursuant to
the purchase and assignment agreement, the third lender and the Company amended the original note (as discussed in the paragraph
below) and issued a replacement note with a principal amount of $61,331, which includes an additional amount of $6,600 from the
original note’s outstanding balance. The additional amount was recorded as a loss on debt extinguishment. As of September
30, 2016, the Company no longer has any outstanding debt owed to the lender. The total recorded premium was on the original note
was reclassified to equity upon extinguishment of the debt.
On
August 19, 2016, The Company entered into an agreement with a lender to issue a replacement note (as discussed in the above paragraph).
The note bears an interest rate of 5%; and maybe converted into shares of Company common stock, convertible at variable conversion
price at a 40% discount of the average of the two lowest closing bid price of the common stock for the 20 trading days prior to
conversion. The note also contains certain representations, warranties, covenants and events of default, and increases in the
amount of the principal and interest rates under the Note in the event of such defaults. In connection with the issuance of replacement
note, the Company recorded a debt discount of $54,731, related to the embedded conversion option derivative liability which was
fully amortized during the year ended December 31, 2016. As of December 31, 2016, the outstanding principal and interest on Note
was fully converted into 7,853,680 shares of common stock. As the note conversion includes a “lesser of” pricing provision,
a derivative liability of $54,770 was recorded when the note was entered into. The derivative liability is re-measured at each
balance sheet date and reclassified to equity on a pro-rata basis upon conversion of the note.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
On
April 1, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of two Convertible Redeemable Notes in the aggregate principal amount of $270,400 (the “Notes”), with the first note
being in the amount of $135,200 (“Note I”) and the second note being in the amount of $135,200 (“Note II”).
Note I was funded on April 1, 2016, with a maturity date of April 1, 2017, pursuant to Note I, the Company received $125,000 of
net proceeds, net of original issue discount of $5,200 and legal fees of $5,000. Note II was initially paid for by the issuance
of an offsetting $130,000 secured note issued by the Lender to the Company (“Secured Note”). Note II was funded on
August 2, 2016, with a maturity date of April 1, 2017, pursuant to Note II, the Company received $125,000 of net proceeds, net
of original issue discount of $5,200 and legal fees of $5,000. The Notes bear an interest rate of 12%; and may be at any time
after 180 days of the date of closing converted into shares of Company common stock convertible at the lesser of a 37.5% discount
to the common stock price on the date of the note (which was $1.40) or a 37.5% discount to the price of our common stock price
at the time of conversion. In connection with the issuance of Notes, the Company recorded a debt discount of $250,000, related
to the embedded conversion option derivative liability. The amortization expense related to that discount recorded was approximately
$172,000 for the year ended December 31, 2016. As of December 31, 2016, the outstanding principal and interest on Notes were $289,300.
As the note conversion includes a “lesser of” pricing provision, a derivative liability of $311,756 was recorded when
Notes were entered into. The derivative liability is re-measured at each balance sheet date and reclassified to equity on a pro-rata
basis upon conversion of the note, the derivative liability balance for Notes at December 31, 2016 was $180,491.
On
April 12, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of a Convertible Redeemable Note in the aggregate principal amount of $58,000, with a maturity date of April 7, 2017, pursuant
to note, the Company will receive $50,000 of net proceeds, net of original issue discount and legal fees. The note bears an interest
rate of 5%; and is convertible at variable conversion price at a 37% discount to the common shares price on the date of the note
or at a 47% discount of the lowest trading price equal to or is lower than $0.25, as described in the note. The note also contains
certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest
rates under the Note in the event of such defaults. In connection with the issuance of note, the Company recorded a debt discount
of $50,000, related to the embedded conversion option derivative liability which was fully amortized during the year ended December
31, 2016. As of December 31, 2016, the outstanding principal and interest on note was fully converted into 19,540,392 shares of
common stock. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $73,505 was
recorded when the note was entered into. The derivative liability is re-measured at each balance sheet date and reclassified to
equity on a pro-rata basis upon conversion of the note.
On
April 18, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of two Convertible Redeemable Notes in the aggregate principal amount of $143,000 (the “Notes”), with the first note
being in the amount of $71,500 (“Note I”) and the second note being in the amount of $71,500 (“Note II”).
Note I was funded on April 18, 2016, with a maturity date of April 18, 2017, pursuant to Note I, the Company received $55,000
of net proceeds, net of original issue discount of $6,500 and legal fees of $10,000. Note II was initially paid for by the issuance
of an offsetting $65,000 secured note issued by the Lender to the Company (“Secured Note”). Note II was funded on
November 21, 2016, with a maturity date of April 18, 2017, pursuant to Note II, the Company received $49,375 of net proceeds,
net of original issue discount of $6,500 and legal fees of $15,625. The Notes bear an interest rate of 10%; and maybe converted
into shares of Company common stock, convertible at variable conversion price at a 38% discount of the average of the three lowest
closing bid price of the common stock for the 20 trading days prior to conversion. The Notes also contain certain representations,
warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the Notes in
the event of such defaults. In connection with the issuance of the Notes, the Company recorded a premium of $85,800 as the notes
are considered stock settled debt under ASC 480, which was fully accreted as of December 31, 2016. During the year ended December
31, 2016, the outstanding principal and interest of the Notes were fully converted into 136,096,419 shares of common stock.
On
April 18, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of two Convertible Redeemable Notes in the aggregate principal amount of $126,000 (the “Notes”), with the first note
being in the amount of $63,000 (“Note I”) and the second note being in the amount of $63,000 (“Note II”).
Note I was funded on April 20, 2016, with a maturity date of April 19, 2017, pursuant to Note I, the Company received $57,000
of net proceeds, net of original issue discount of $3,000 and legal fees of $3,000. Note II was initially paid for by the issuance
of an offsetting $60,000 secured note issued by the Lender to the Company (“Secured Note”). Note II was funded on
November 29, 2016, with a maturity date of April 19, 2017, pursuant to Note II, the Company received $57,000 of net proceeds,
net of original issue discount of $3,000 and legal fees of $3,000. The Notes bear an interest rate of 10%; and maybe converted
into shares of Company common stock, convertible at variable conversion price at a 35% discount of the lowest closing bid price
of the common stock for the 15 trading days prior to conversion. The Notes also contain certain representations, warranties, covenants
and events of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults.
In connection with the issuance of the notes, the Company recorded a premium of $37,846 as the notes are considered stock settled
debt under ASC 480, which was fully accreted as of December 31, 2016. During the year ended December 31, 2016, the outstanding
principal and interest on the notes was fully converted into 140,878,295 shares of common stock.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
On
April 28, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of two Convertible Redeemable Notes in the aggregate principal amount of $437,500 (the “Notes”), with the first note
being in the amount of $218,750 (“Note I”) and the second note being in the amount of $218,750 (“Note II”).
Note I was funded on April 28, 2016, with a maturity date of April 27, 2017, pursuant to Note I, the Company received $190,000
of net proceeds, net of original issue discount of $8,750 and legal fees of $20,000. Note II was initially paid for by the issuance
of an offsetting $210,000 secured note issued by the Lender to the Company (“Secured Note”). Note II was funded on
September 7, 2016, with a maturity date of April 27, 2017, pursuant to Note II, the Company received $200,000 of net proceeds,
net of original issue discount of $8,750 and legal fees of $10,000.The Notes bear an interest rate of 12%; and may be at any time
after 180 days of the date of closing converted into shares of Company common stock convertible at the lesser of a 37.5% discount
to the common stock price on the date of the note (which was $1.40) or a 37.5% discount to the price of our common stock price
at the time of conversion. In connection with the issuance of Notes, the Company recorded a debt discount of $390,000, related
to the embedded conversion option derivative liability. The amortization expense related to that discount recorded was approximately
$247,000 for year ended December 31, 2016. During the year ended December 31, 2016, $21,453 of the outstanding principal and interest
of the note was converted into 38,138,933 shares of common stock. As of December 31, 2016, the outstanding principal and interest
on Notes were $442,080. As the note conversion includes a “lesser of” pricing provision, a derivative liability of
$499,800 was recorded when Notes were entered into. The derivative liability is re-measured at each balance sheet date and reclassified
to equity on a pro-rata basis upon conversion of the note, the derivative liability balance for Notes at December 31, 2016 was
$322,295.
On
May 4, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of two Convertible Redeemable Notes in the aggregate principal amount of $126,000 (the “Notes”), with the first note
being in the amount of $63,000 (“Note I”) and the second note being in the amount of $63,000 (“Note II”).
Note I was funded on May 4, 2016, with a maturity date of May 4, 2017, pursuant to Note I, the Company received $57,000 of net
proceeds, net of original issue discount of $3,000 and legal fees of $3,000. Note II was initially paid for by the issuance of
an offsetting $60,000 secured note issued by the Lender to the Company (“Secured Note”). Note II was funded on November
22, 2016, with a maturity date of May 4, 2017, pursuant to Note II, the Company received $57,000 of net proceeds, net of original
issue discount of $3,000 and legal fees of $3,000. The Notes bear an interest rate of 10%; and maybe converted into shares of
Company common stock, convertible at variable conversion price at a 37.5% discount of the lowest closing bid price of the common
stock for the 15 trading days prior to conversion. The Notes also contain certain representations, warranties, covenants and events
of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults. In
connection with the issuance of the notes, the Company recorded a premium of $75,600 as the notes are considered stock settled
debt under ASC 480 which was fully accreted as of December 31, 2016. During the year ended December 31, 2016, the outstanding
principal and interest on the notes were fully converted into 176,568,018 shares of common stock.
On
May 17, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of a Convertible Redeemable Notes with the principal amount of $55,000 (the “Note”). The Note was funded on May 19,
2016, with a maturity date of May 17, 2017, pursuant to Note, the Company received $49,500 of net proceeds, net of $5,500 legal
fees. The Note bear an interest rate of 10%; and maybe converted into shares of Company common stock, convertible at variable
conversion price at a 35% discount of the lowest closing bid price of the common stock for the 20 trading days prior to conversion.
The Notes also contain certain representations, warranties, covenants and events of default, and increases in the amount of the
principal and interest rates under the Notes in the event of such defaults. In connection with the issuance of the note, the Company
recorded a premium of $29,615 as the note is considered stock settled debt under ASC 480, which was fully accreted as of September
30, 2016. During the year ended December 31, 2016, the outstanding principal and interest on the notes were fully converted into
80,913,285 shares of common stock.
On
June 3, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of two Convertible Redeemable Notes in the aggregate principal amount of $624,000 (the “Notes”), with the first note
being in the amount of $312,000 (“Note I”) and the second note being in the amount of $312,000 (“Note II”).
Note I was funded on June 3, 2016, with a maturity date of June 2, 2017, pursuant to Note I, the Company received $285,000 of
net proceeds, net of original issue discount of $12,000 and legal fees of $15,000. Note II was initially paid for by the issuance
of an offsetting $300,000 secured note issued by the Lender to the Company (“Secured Note”). Note II was funded in
two tranches during the year ended December 31, 2016, with a maturity date of June 2, 2017, pursuant to Note II, the Company received
$285,000 of net proceeds, net of original issue discount of $12,000 and legal fees of $15,000. The Notes bear an interest rate
of 12%; and may be at any time after 180 days of the date of closing converted into shares of Company common stock convertible
at the lesser of a 35% discount to the common stock price on the date of the note (which was $1.10) or a 35% discount to the price
of our common stock price at the time of conversion. The Notes also contain certain representations, warranties, covenants and
events of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults.
In connection with the issuance of Notes, the Company recorded a debt discount of $570,000, related to the embedded conversion
option derivative liability. The amortization expense related to that discount recorded was approximately $288,000 for the year
ended December 31, 2016. During the year ended December 31, 2016, $129,298 of the outstanding principal and interest of the notes
was converted into 359,025,363 shares of common stock. As of December 31, 2016, the outstanding principal and interest on Notes
were $519,860. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $755,690
was recorded when Notes was entered into. The derivative liability is re-measured at each balance sheet date and reclassified
to equity on a pro-rata basis upon conversion of the note, the derivative liability balance for Notes at December 31, 2016 was
$354,542.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
On
June 22, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of two Convertible Redeemable Notes in the aggregate principal amount of $143,000 (the “Notes”), with the first note
being in the amount of $71,500 (“Note I”) and the second note being in the amount of $71,500 (“Note II”).
Note I was funded on June 22, 2016, with a maturity date of June 17, 2017, pursuant to Note I, the Company received $57,000 of
net proceeds, net of original issue discount of $6,500 and legal fees of $8,000. Note II was initially paid for by the issuance
of an offsetting $65,000 secured note issued by the Lender to the Company (“Secured Note”). The Notes bear an interest
rate of 10%; and is convertible into shares of Company common stock at the lesser of a 37.5% discount to the common stock price
on the date of the note (which was $1.10) or a 37.5% discount to the price of our common stock price at the time of conversion.
The Notes also contain certain representations, warranties, covenants and events of default, and increases in the amount of the
principal and interest rates under the Notes in the event of such defaults. In connection with the issuance of Note I, the Company
recorded a debt discount of $57,000, related to the embedded conversion option derivative liability which was fully amortized
during the year ended December 31, 2016. As of December 31, 2016, the Company exercised its right to prepay the outstanding principal
and interest for a total redemption amount of $74,968. The Company recorded a loss on extinguishment of approximately $25,000.
As the note conversion includes a “lesser of” pricing provision, a derivative liability of $72,607 was recorded when
Note I was entered into. The derivative liability is re-measured at each balance sheet date and reclassified to equity on a pro-rata
basis upon conversion or redemption of the note.
On
July 5, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of two Convertible Redeemable Notes in the aggregate principal amount of $416,000 (the “Notes”), with the first note
being in the amount of $208,000 (“Note I”) and the second note being in the amount of $208,000 (“Note II”)
with a maturity date of July 30, 2017. Pursuant to Note I, the Company received $190,000 of proceeds, net of original issue discount
of $8,000 and legal fees of $10,000. Note II was initially paid for by the issuance of an offsetting $200,000 secured note issued
by the Lender to the Company (“Secured Note”). Note II was funded subsequent to year ended December 31, 2016 and the
Company received $190,000 of proceeds, net of original issue discount of $8,000 and legal fees of $10,000. The Notes bear an interest
rate of 12%; and may be at any time after 180 days of the date of closing converted into shares of Company common stock convertible
at the lesser of a 37.5% discount to the common stock price on the date of the note (which was $1.10) or a 37.5% discount to the
price of our common stock price at the time of conversion. The Notes also contain certain representations, warranties, covenants
and events of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults.
In connection with the issuance of Note I, the Company recorded a debt discount, related to the embedded conversion option derivative
liability. The amortization expense related to that discount recorded was approximately $87,200 for the year ended December 31,
2016. As the note conversion includes a “lesser of” pricing provision, a derivative liability was also recorded in
the amount of $210,520. The derivative liability at December 31, 2016 for Note I was $131,728. As of December 31, 2016, the outstanding
principal and interest on the note was $220,241.
On
July 6, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of two Convertible Redeemable Notes in the aggregate principal amount of $132,300 (the “Notes”), with the first note
being in the amount of $66,150 (“Note I”) and the second note being in the amount of $66,150 (“Note II”)
with a maturity date of July 7, 2017. Pursuant to Note I, the Company received $60,000 of net proceeds, net of original issue
discount of $3,150 and legal fees of $3,000. Note II was initially paid for by the issuance of an offsetting $63,000 secured note
issued by the Lender to the Company (“Secured Note”). The Notes bear an interest rate of 10%; and maybe converted
into shares of Company common stock, convertible at variable conversion price at a 35% discount of the lowest closing bid price
of the common stock for the 15 trading days prior to conversion. The Notes also contain certain representations, warranties, covenants
and events of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults.
In connection with the issuance of the note, the Company recorded a premium of $35,619 as the note is considered stock settled
debt under ASC 480, which was fully accreted as of September 30, 2016. As of December 31, 2016, the outstanding principal and
interest on the note was $69,460.
On
August 1, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of a Convertible Redeemable Note with a principal amount of $52,500 (the “Note”) and maturity date of April 29, 2017,
pursuant to Note, the Company received $50,000 of net proceeds, net of original issue discount of $2,500. The Note bears an interest
rate of 10%; and maybe converted into shares of Company common stock, convertible at variable conversion price at a 37.5% discount
of the three lowest closing bid price of the common stock for the 20 trading days prior to conversion. The Note also contain certain
representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates
under the Note in the event of such defaults. In connection with the issuance of the note, the Company recorded a premium of $31,500
as the note is considered stock settled debt under ASC 480, which was fully accreted as of September 30, 2016. As of December
31, 2016, the outstanding principal and interest on the note was $55,130.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
On
August 11, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of a Secured Convertible Promissory Note in the aggregate principal amount of up to $330,000, which shall be funded in six tranches,
each amounting to $50,000. The Note has a 10% original issuance discount to offset transaction, diligence and legal costs. The
Note bears an interest rate of 10% and the maturity date for each funded tranche will be 12 months from the date on which the
funds are received by the Company. Then note is convertible into shares of Company’s common stock at a 37.5% discount to
the lowest volume-weighted average price for the Company’s common stock during the 15 trading days immediately preceding
a conversion date. The Note also contain certain representations, warranties, covenants and events of default, and increases in
the amount of the principal and interest rates under the Note in the event of such defaults. As of the year ended December 31,
2016, the Company had received three of the six tranches amounting to $150,000 of net proceeds, net of the original issue discount
of $15,000. The funded tranches have maturity dates between August 17, 2017 and September 13, 2017. In connection with the issuance
of the note, the Company recorded a premium of $99,000 as the note is considered stock settled debt under ASC 480, which was fully
accreted during as of September 30, 2016. As of December 31, the outstanding principal and interest on the note was $171,420.
On
August 17, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of two Convertible Redeemable Notes in the aggregate principal amount of $105,264 (the “Notes”), with the first note
being in the amount of $52,632 (“Note I”) and the second note being in the amount of $62,632 (“Note II”).
Note I was funded on August 17, 2016, with a maturity date of August 17, 2017, pursuant to Note I, the Company received $45,000
of net proceeds, net of original issue discount of $2,632 and legal fees of $5,000. Note II was initially paid for by the issuance
of an offsetting $50,000 secured note issued by the Lender to the Company (“Secured Note”). Note II was funded subsequent
to year ended December 31, 2016, with a maturity date of August 17, 2017, pursuant to Note II, the Company received $45,000 of
net proceeds, net of original issue discount of $2,632 and legal fees of $5,000. The Notes bear an interest rate of 10%; and is
convertible into shares of Company common stock at the lesser of a 37.5% discount to the common stock price on the date of the
note (which was $1.10) or a 37.5% discount to the price of our common stock price at the time of conversion. The Notes also contain
certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest
rates under the Notes in the event of such defaults. In connection with the issuance of Note I, the Company recorded a debt discount
of $41,900 related to the embedded conversion option derivative liability. The amortization expense related to that discount recorded
was approximately $16,000 for the year ended December 31, 2016. As of December 31, 2016, the outstanding principal and interest
on Note I was $54,590. As the note conversion includes a “lesser of” pricing provision, a derivative liability of
$41,900 was recorded when Note I was entered into. The derivative liability is re-measured at each balance sheet date and reclassified
to equity on a pro-rata basis upon conversion of the note, the derivative liability balance for Note I at December 31, 2016 was
$40,937.
On
November 30, 2016,
the Company closed a Securities
Purchase Agreement (“SPA”) with a lender
, providing for the purchase of three
Convertible Redeemable Notes in the aggregate principal amount of $183,750 (the “Notes”), with the first note being
in the amount of $52,500 (“Note I”), the second note being in the amount of $52,500 (“Note II”), and the
third note being in the amount of $78,750 (“Note III”).
Note I was funded on November 30, 2016, with a maturity
date of December 30, 2017, pursuant to Note I, the Company received $45,000 of net proceeds, net of original issue discount of
$3,150 and legal fees of $3,000.
Note II was initially paid for by the issuance of an offsetting
$50,000 secured note issued to the Company by the lender (“Secured Note”), and Note III was initially be paid for
by the issuance of an offsetting $75,000 secured note issued to the Company by the lender. Funding of Note II and Note III is
subject to the mutual agreement of the lender and the Company. The lender is required to pay the principal amount of the Secured
Notes in cash and in full prior to executing any conversions under Note II and Note III. The Notes bear an interest rate of 10%,
and are due and payable on November 30, 2017. The Notes may be converted by the lender at any time into shares of Company’s
common stock (as determined in the Notes) calculated at the time of conversion, except for Note II and Note III, which require
full payment of the Secured Notes by the Investor before conversions may be made. The Notes (subject to funding in the case of
Note II and Note III)
is convertible into shares of Company’s common stock at a 37.5% discount to the
lowest
closing bid price of the common stock 15 prior trading days including the day upon which a notice of conversion is received by
the Company.
In connection with the issuance of the note, the Company recorded a premium of $31,500 as the note is considered
stock settled debt under ASC 480, which was fully accreted as of December 31, 2016. As of December 31, the outstanding principal
and interest on the note was $53,375.
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, Holland & Knight agreed to terminate its security interest. As of December 31,
2016, the Company had repaid $547,743 of the H&K Note and the outstanding balance was $301,769 which is included in notes
payable on the consolidated balance sheet.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
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. During the year ended December 31, 2015, the Company paid
the outstanding principal and interest on the Caragol Note and there was no outstanding balance on the Caragol note as of December
31, 2015.
On
November 1, 2015, the Company issued a convertible note (the “Note”) to a consultant, in the principal amount of $62,500
with maturity date of November 1, 2017 and bears an interest of 10% per annum, pursuant to a consulting agreement. In connection
with the issuance of Note, the Company recorded a debt discount of $62,500, related to the embedded conversion option derivative
liability. During 2016, the outstanding principal and interest on Note was converted into 309,541 shares of common stock. As the
note conversion includes a “lesser of” pricing provision, a derivative liability of $76,987 was recorded when the
Note was entered into. The derivative liability is re-measured at each balance sheet date and reclassified to equity on a pro-rata
basis upon conversion of the note. As of December 31, 2016, the note has no outstanding balance and the derivative liability recorded
was reclassified to equity upon conversion.
On
March 16, 2016, the Company entered into a factoring agreement with a lender for $105,000 to fund working capital. The Company
also paid $3,150 of origination fees. The agreement requires daily repayments of $862 for an eight-month term, with the total
amount repaid of $144,900. As of September 30, 2016, the Company has repaid the outstanding principal and interest balance of
this note. On June 7, 2016, the Company entered into a second factoring agreement with a lender for $51,000 to fund working capital.
The Company also paid $1,020 of origination fees. The agreement requires daily repayments of $419 for an eight-month term, with
the total amount to be repaid $70,380. As of December 31, 2016, the Company has repaid the outstanding principal and interest
balance of this note. On September 9, 2016, the Company entered into a third factoring agreement with a lender for $105,000 to
fund working capital. The Company also paid $2,100 of origination fees. The agreement requires daily repayments of $862 for an
eight-month term, with the total amount to be repaid $144,900. On November 17, 2016, the Company entered into a fourth factoring
agreement with a lender for $100,000 to fund working capital. The Company also paid $2,000 of origination fees. The agreement
requires daily repayments of $821 for an eight-month term, with the total amount to be repaid $138,000. As of December 31, 2016,
the Company has repaid a total amount of $177,182 of the total outstanding balance of the debt and $153,626, remained outstanding.
Subsequent to the year ended December 31, 2016, the Company entered into a fifth factoring agreement with a lender for $105,000
to fund working capital and received $102,900 net of origination fees.
On
May 2, 2016, the Company, through its wholly owned subsidiary, ENG entered into a revolving line of credit (the “Line”)
with California Bank of Commerce (“CBC”). The terms of the Line allow ENG to borrow against its accounts receivable
and inventory to manage its project based working capital requirements. The $350,000 Line has a maturity date of May 5, 2017 and
borrowings under the Line bear interest at the Wall Street Journal Prime Rate plus 1.5% (currently 5.0%). The Company has provided
a guaranty of the Line to CBC. The Line also contains certain representations, warranties, covenants and events of default, including
the requirement to maintain specified financial ratios. ENG currently meets all such ratios. Breaches of any of these terms could
limit ENG’s ability to borrow under the Line and result in increases in the interest rate under the Line. As of December
31, 2016, $150,000 had been drawn under the Line and $200,000 was available.
During
the year ended December 31, 2016, the Company issued four separate convertible notes (the “Notes”) to a consultant,
three of the notes had the principal amount of $20,000 each and the fourth had a principal amount of $22,500, for an aggregate
principal amount of $82,500 with maturity dates between April 27, 2017 and August 27, 2017, pursuant to a consulting agreement.
The Notes bear interest at 8% per annum and are convertible at a 37.5% discount to lowest closing bid price in the 15 trading
days prior to conversion. In connection with the issuance of the Notes, the Company recorded a total premium of $49,500 as the
notes are considered stock settled debt under ASC 480, which was fully accreted as of December 31, 2016. During the year ended
December 31, 2016, $30,000 of the outstanding principal and interest on Notes were converted into 69,402,868 shares of common
stock. As of December 31, 2016, the outstanding principal and interest of the Notes was $54,700.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
On
December 2015 and August 2016, the Company issued two separate convertible notes (the “Notes”) in relation to the
acquisitions of Thermomedics and ENG (see Note 4). As of December 31, 2016, the total outstanding principal and interest on these
Notes was $233,750.
Embedded
Conversion Option Derivatives
Due
to the conversion terms of certain promissory notes, the embedded conversion options met the criteria to be bifurcated and presented
as derivative liabilities. The Company calculated the estimated fair values of the liabilities for embedded conversion option
derivative instruments at the original note inception dates and as of December 31, 2015, using the Black-Scholes option pricing
model and as of December 31, 2016 using the Monte Carlo option pricing model using the share prices of the Company’s stock
on the dates of valuation and using the following ranges for volatility, expected term and the risk-free interest rate at each
respective valuation date, no dividend has been assumed for any of the periods:
|
|
|
|
December 31,
|
|
|
|
Note Incteption Date
|
|
2016
|
|
|
2015
|
|
Volatility
|
|
195 - 374
|
%
|
|
360
|
%
|
|
|
217
|
%
|
Expected Term
|
|
0.4 - 1.50 years
|
|
|
0.01 - 1.34 years
|
|
|
|
0.03 - 1.46 years
|
|
Risk Free Interest Rate
|
|
0.21 - 2.0
|
%
|
|
0.45
|
%
|
|
|
0.65
|
%
|
The
following reflects the initial fair value on the note inception dates and changes in fair value through:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Balance, January 1
|
|
$
|
7,785,824
|
|
|
$
|
2,151,502
|
|
Note inception date fair value allocated to debt discount
|
|
|
2,775,894
|
|
|
|
6,329,600
|
|
Note inception date fair value allocated to other expense
|
|
|
984,889
|
|
|
|
3,647,873
|
|
Reclassification of derivative liability to equity upon debt conversion
|
|
|
(4,676,258
|
)
|
|
|
(3,122,354
|
)
|
Change in fair value
|
|
|
(2,586,085
|
)
|
|
|
(1,220,797
|
)
|
Embedded conversion option liability fair value
|
|
$
|
4,284,264
|
|
|
$
|
7,785,824
|
|
Fair
Value Measurements
We
currently measure and report at fair value the liability for embedded conversion option derivatives. The fair value liabilities
for price adjustable convertible debt instruments have been recorded as determined utilizing the BSM option pricing model as previously
discussed. The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as
of December 31, 2016:
|
|
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Balance at December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of liability for embedded conversion option derivative instruments
|
|
$
|
7,785,824
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,785,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of liability for embedded conversion option derivative instruments
|
|
$
|
4,284,264
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,284,264
|
|
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
9.
Stockholders’ Deficit
Authorized
Common Stock and Reverse Stock Split
As
of December 31, 2016, the Company was authorized to issue 3.895 billion shares of common stock (see below for additional increase).
On February 25, 2016, the Company filed the Seventh Amendment to the Second Amended and Restated Certificate of Incorporation,
as amended, with the State of Delaware to increase the number of authorized common shares to 3.895 billion shares, from 1.97 billion
shares. On June 27, 2016, the Company’s Board of Directors approved a reverse stock split in the ratio of 1-for-50 and the
Company filed the Eighth 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, effective July 5, 2016. The reverse split
only affected outstanding common stock and the number of authorized shares was not adjusted. All share and per share data in our
historical consolidated financial statements have been adjusted to reflect the 1-for-50 reverse stock split.
On
November 30, 2016, the Company filed its Third Amended and Restated Certificate of Incorporation with the State of Delaware, to
permit stockholders to act by written consent, and to permit stockholders of different classes of the Company’s capital
stock to vote as a single class with regard to certain changes to the Company’s certificate of incorporation. The Third
Amended and Restated Certificate of Incorporation filed also changed in the par value of the Company’s common stock from
$0.01 to $0.001.
On
January 30, 2017, the Company filed the First Amendment to the Company’s Third Amended and Restated Certificate of Incorporation
with the State of Delaware, to increase the Company’s authorized capital stock from 3.9 billion shares to 20 billion shares
(19.995 billion in common stock) and to change the par value of the Company’s common stock from $0.001 to $0.0001.
All
dollar values in the accompanying historical consolidated financial statements have been adjusted to reflect the change in the
par value of the common stock.
Conversion
of Convertible Notes
During
the year ended December 31, 2016 and 2015, approximately 2.7 billion and 5.2 million shares were issued, respectively, in connection
with conversion of approximately $5.3 and $3.4 million of convertible promissory notes, respectively. (see Note 8).
Restricted
Shares for Services
During
the year ended December 31, 2015, the Company issued an aggregate of 2,000 shares of restricted stock, outside of the approved
employee stock incentive plans, to employees valued at $1.50 per share, or an aggregate $3,000 based on quoted common stock prices
on the grant date which was fully expensed as of December 31, 2015.
During
the year ended December 31, 2016, the Company issued, outside of the approved employee stock incentive plans, an aggregate of
728,700 shares of restricted stock to consultants and advisors valued between $0.31 and $1.00 per share and recorded related stock-based
compensation of approximately $219,000 for the vested amounts. During the year ended December 31, 2015, the Company issued, outside
of the approved employee stock incentive plans, an aggregate of 244,000 shares of restricted stock to consultants and advisors
valued between $0.92 and $1.97 per share and recorded related stock-based compensation of approximately $278,000 for the vested
amounts.
As
of March 31, 2016, 1,316 vested shares of the Company’s common stock was returned by a former affiliate.
A
summary of restricted stock outstanding under the stockholder approved plans outstanding as of December 31, 2016 and 2015 and
changes during the years then ended is presented below (in thousands):
|
|
2016
|
|
|
2015
|
|
Unvested at beginning of year
|
|
|
—
|
|
|
|
200
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
—
|
|
|
|
(200
|
)
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Unvested at end of year
|
|
|
—
|
|
|
|
—
|
|
Stock
Option Plans
On
August 26, 2011, the Company’s stockholders approved and adopted the PositiveID Corporation 2011 Stock Incentive Plan (the
“2011 Plan”). The 2011 Plan provides for awards of incentive stock options, nonqualified stock options, restricted
stock awards, performance units, performance shares, SARs and other stock-based awards to employees and consultants. Under the
2011 Plan, up to 1 million shares of common stock may be granted pursuant to awards. As of December 31, 2016, approximately 6,000
options and shares have been granted under the 2011 Plan, and approximately 0.9 million remaining shares may be granted under
the 2011 Plan. Awards to employees under the Company’s stock option plans generally vest over a two-year period, with pro-rata
vesting upon the anniversary of the grant. Awards of options have a maximum term of ten years and the Company generally issues
new shares upon exercise.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
On
December 4, 2015, the Company’s Board of Directors approved and adopted the Thermomedics, Inc. 2015 Flexible Stock Plan
(“Thermomedics 2015 Plan”). The Thermomedics 2015 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 Thermomedics 2015 Plan, up to 5 million shares of common stock may be granted pursuant to awards. As
of December 31, 2016, 342,500 options were issued under the Thermomedics 2015 plan to employees and consultant. These options
had a grant date fair value of $109,600 and will be expensed over the 1 year vesting period of the options.
During
the year ended December 31, 2016, the Company issued, outside of the approved employee stock incentive plans, an aggregate of
2,016,000 options to directors and employees, an aggregate of 1,112,000 options to consultants and recorded related stock-based
compensation of approximately $520,000 for the year ended December 31, 2016. During the year ended December 31, 2015, the Company
issued, outside of the approved employee stock incentive plans, an aggregate of 361,800 options to directors and employees, an
aggregate of 73,000 options to consultants and recorded related stock-based compensation of approximately $113,000 for the year
ended December 31, 2015.
A
summary of option activity under the Company’s option plans and outside of the Company’s option plan for the years
ended December 31, 2016 and 2015 is as follows (in thousands, except per share amounts):
|
|
2016
|
|
|
2015
|
|
|
|
Number
of
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Number
of
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
Outstanding on January 1
|
|
|
492
|
|
|
$
|
8.29
|
|
|
|
57
|
|
|
$
|
63.00
|
|
Granted
|
|
|
3,128
|
|
|
$
|
0.28
|
|
|
|
435
|
|
|
$
|
1.00
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding at year end
|
|
|
3,620
|
|
|
$
|
1.23
|
|
|
|
492
|
|
|
$
|
8.50
|
|
Exercisable at year end
|
|
|
1,593
|
|
|
$
|
2.26
|
|
|
|
84
|
|
|
$
|
43.50
|
|
Shares available for grant within Company’s option plans at year end
|
|
|
1,523
|
|
|
|
|
|
|
|
1,280
|
|
|
|
|
|
|
|
|
Outstanding Stock Options
|
|
|
Exercisable Stock Options
|
|
Range of
Exercise Prices
|
|
|
Shares
|
|
|
Weighted-
Average
Remaining
Contractual
Life (years)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
$
|
0.0003
|
|
|
|
to
|
|
|
$
|
450.00
|
|
|
|
3,619
|
|
|
|
5.05
|
|
|
$
|
0.63
|
|
|
|
1,592
|
|
|
$
|
0.89
|
|
$
|
462.50
|
|
|
|
to
|
|
|
$
|
2,487.50
|
|
|
|
0.7
|
|
|
|
10.07
|
|
|
$
|
506.74
|
|
|
|
0.7
|
|
|
$
|
506.74
|
|
$
|
3,656.50
|
|
|
|
to
|
|
|
$
|
7,187.50
|
|
|
|
0.3
|
|
|
|
10.01
|
|
|
$
|
7,135.43
|
|
|
|
0.3
|
|
|
$
|
7,135.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,620
|
|
|
|
5.05
|
|
|
$
|
1.23
|
|
|
|
1,593
|
|
|
$
|
2.26
|
|
|
Vested options
|
|
|
|
1,593
|
|
|
|
5.09
|
|
|
$
|
2.26
|
|
|
|
|
|
|
|
|
|
There
are inherent uncertainties in making estimates about forecasts of future operating results and identifying comparable companies
and transactions that may be indicative of the fair value of the Company’s securities. The Company believes that the estimates
of the fair value of its common stock options at each option grant date were reasonable under the circumstances.
The
Black-Scholes model, which the Company uses to 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.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
The
fair values of the options granted were estimated on the grant date using the Black-Scholes valuation model based on the following
weighted-average assumptions:
|
|
2016
|
|
|
2015
|
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
Expected stock price volatility
|
|
|
164 - 210
|
%
|
|
|
184 - 204
|
%
|
Risk-free interest rate
|
|
|
1.03 – 1.93
|
%
|
|
|
1.39 – 1.74
|
%
|
Expected term (in years)
|
|
|
5.0
|
|
|
|
5.0
|
|
Warrants
From
time to time the Company issues warrants both for compensatory purposes to consultants and advisors, and to financial institutions
in conjunction with financing activities.
A
summary of warrants activity under the Company’s for the years ended December 31, 2016 and 2015 is as follows (in thousands,
except per share amounts):
|
|
Financing
|
|
|
Compensatory
|
|
|
Total
|
|
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at January 1, 2015
|
|
|
40
|
|
|
$
|
4.00
|
|
|
|
50
|
|
|
$
|
7.00
|
|
|
|
90
|
|
|
$
|
6.00
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
180
|
|
|
|
1.00
|
|
|
|
180
|
|
|
|
2.01
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired/Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2015
|
|
|
40
|
|
|
$
|
4.00
|
|
|
|
230
|
|
|
$
|
2.50
|
|
|
|
270
|
|
|
$
|
2.74
|
|
Granted
|
|
|
23
|
|
|
|
0.75
|
|
|
|
2,480
|
|
|
|
0.04
|
|
|
|
2,503
|
|
|
|
0.04
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired/Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
(80
|
)
|
|
|
1.40
|
|
|
|
(80
|
)
|
|
|
1.40
|
|
Outstanding at December 31, 2016
|
|
|
63
|
|
|
$
|
3.20
|
|
|
|
2,630
|
|
|
$
|
0.21
|
|
|
|
2,693
|
|
|
$
|
0.27
|
|
Exercisable at December 31, 2016
|
|
|
63
|
|
|
$
|
3.20
|
|
|
|
2,597
|
|
|
$
|
0.20
|
|
|
|
2,660
|
|
|
$
|
0.07
|
|
As
of December 31, 2016, 2.69 million warrants to purchase the Company’s common stock have been granted outside of the Company’s
plans and remain outstanding as of December 31, 2016. These warrants were granted at exercise prices ranging from $0.003 to $37.50
per share, are fully vested and are exercisable for a period of five.
On
July 1, 2014 and recorded January 1, 2015, pursuant to a financing agreement, the Company issued immediately exercisable
warrants to purchase 20,000 shares of common stock at an initial exercise price of $4.00 per share and are exercisable for a period
of four years from the vest date. The warrants expire in 2017.
On
October 24, 2014 and recorded January 1, 2015, pursuant to a financing agreement, the Company issued immediately exercisable
warrants to purchase 20,000 shares of common stock at an initial exercise price of $4.00 per share and are exercisable for a period
of four years from the vest date. The warrants expire in 2017.
On
October 1, 2015, pursuant to a consulting agreement with two advisors, the Company issued to each advisor, warrants to purchase
40,000 shares of common stock, of which 32,000 are immediately exercisable and 8,000 are exercisable upon completion of services.
The warrants have an initial exercise price of $1.40 per share and are exercisable for a period of five years from the vest date.
The warrants expire in 2020. On January 7, 2016, these options were forfeited and re issued with a new initial exercise price
of $1.00 per share and new expiration date of 2021, per the agreement.
On
October 28, 2015, pursuant to a consulting agreement with an advisor, the Company issued immediately exercisable warrants to purchase
20,000 shares of common stock at an initial exercise price of $1.50 per share and are exercisable for a period of five years from
the vest date. The warrants expire in 2020.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
On
December 18, 2015, pursuant to a consulting agreement with an advisor, the Company issued warrants to purchase 80,000 shares of
common stock, of which 40,000 are immediately exercisable and 40,000 are exercisable upon completion of services. The warrants
have an initial exercise price of $1.00 per share and are exercisable for a period of five years from the vest date. The warrants
expire in 2020.
On
January 28, 2016, pursuant to a financing agreement, the Company issued immediately exercisable warrants to purchase 23,000 shares
of common stock at an initial exercise price of $0.75 per share and are exercisable for a period of four years from the vest date.
The warrants expire in 2021.
On
November 1, 2016, pursuant to a consulting agreement with two advisors, the Company issued to each advisor, warrants to purchase
600,000 shares of common stock, which are immediately exercisable. The warrants have an initial exercise price of $0.003 per share
and are exercisable for a period of five years from the vest date. The warrants expire in 2021.
On
November 1, 2016, pursuant to a consulting agreement with an advisor, the Company issued warrants to purchase 1,200,000 shares
of common stock, which are immediately exercisable. The warrants have an initial exercise price of $0.003 per share and are exercisable
for a period of five years from the vest date. The warrants expire in 2021.
Series
I and Series II Preferred Stock
On
September 30, 2013, the Board of Directors authorized and in November 2013, the Company filed with the State of Delaware, a Certificate
of Designations of Preferences, Rights and Limitations of Series I Preferred Stock. The Series I Preferred Stock ranks junior
to the Company’s Series F Preferred Stock and to all liabilities of the Company and is senior to the Common Stock and any
other preferred stock. The Series I Preferred Stock has a stated value per share of $1,000, a dividend rate of 6% per annum, voting
rights on an as-converted basis and a conversion price equal to the closing bid price of the Company’s Common Stock on the
date of issuance. The Series I Preferred Stock is required to be redeemed (at stated value, plus any accrued dividends) by the
Company after three years or any time after one year, the Company may at its option, redeem the shares subject to a ten-day notice
(to allow holder conversion). The Series I Preferred Stock is convertible into the Company’s Common Stock, at stated value
plus accrued dividends, at the closing bid price on September 30, 2013, any time at the option of the holder and by the Company
in the event that the Company’s closing stock price exceeds 400% of the conversion price for twenty consecutive trading
days. The Company has classified the Series I Preferred Stock as a liability in the consolidated balance sheet due to the mandatory
redemption feature. The Series I Preferred Stock has voting rights equal to the number of shares of Common Stock that Series I
Preferred Stock is convertible into, times twenty-five. This provision gave the holders of Series I Preferred Stock voting control
in situations requiring shareholder vote.
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 January 8, 2015, the Company filed an amendment to the Amended Certificate of Designation to increase
the authorized shares of Series I Convertible Preferred Stock from 1,000 shares to 2,500 shares. No other terms were modified
or amended in the Amended Certificate of Designation.
On
July 25, 2016, the Board authorized a Certificate of Designations of Preferences, Rights and Limitations of Series II
Convertible Preferred Stock. The Certificate was filed with the State of Delaware Secretary of State on July 25, 2016. The
Series II Preferred ranks: (a) senior with respect to dividends and right of liquidation with the common stock; (b) pari
passu with respect to dividends and right of liquidation with the Company’s Series I Preferred and Series J Convertible
Preferred Stock; and (c) junior to all existing and future indebtedness of the Company. The Series II Preferred has a stated
value per share of $1,000, subject to adjustment as provided in the Certificate (the “Stated Value”), and a
dividend rate of 6% per annum of the Stated Value. As with the Series I Preferred, the Series II Preferred has 25 votes per
common share equivalent. The Series II Preferred is subject to redemption (at Stated Value, plus any accrued, but unpaid
dividends (the “Liquidation Value”)) by the Company no later than three years after a Deemed Liquidation Event
and at the Company’s option after one year from the issuance date of the Series II Preferred, subject to a ten-day
notice (to allow holder conversion). The Series II Preferred is convertible at the option of a holder or if the closing price
of the common stock exceeds 400% of the Conversion Price for a period of twenty consecutive trading days, at the option of
the Company. Conversion Price means a price per share of the common stock equal to 100% of the lowest daily volume weighted
average price of the common stock during the subsequent 12 months following the date the Series II Preferred was
issued.
From
September 30, 2013 through April 6, 2016, the Company has issued 2,025 shares of Series I Preferred Stock to its officers, directors
and management for management and director compensation and payment of deferred obligations. Each of the Series I preferred is
convertible into the Company’s Common Stock, at stated value plus accrued dividends, at the closing bid price on the issuance
date, any time at the option of the holder and by the Company in the event that the Company’s closing stock price exceeds
400% of the conversion price for twenty consecutive trading days. The Series I Preferred Stock has voting rights equivalent to
twenty-five votes per common share equivalent.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
On
August 11, 2016, the Board of PositiveID agreed to exchange 2,025 shares of its Series I Preferred, which have a stated value
of $2,025,000 and redemption value of $2,261,800 for 2,262 shares of Series II Preferred, which have a stated value of $2,262,000.
Pursuant to the Exchange each existing holder of Series I Preferred exchanged their Series I Preferred shares for Series II Preferred
shares having equivalent per share stated value, maintaining the same voting rights as they had as holders of the Series I Preferred.
The Series II have an aggregate stated value equivalent to the redemption value of the Series I at the exchange date. Both
the Series I Preferred and the Series II Preferred have a stated value per share of $1,000, and a dividend rate of 6% per annum.
All shares of Series I Preferred previously issued have become null and void and any and all rights arising thereunder have been
extinguished. The Series II Preferred is only forfeitable after the exchange date up to January 1, 2019 upon termination for cause
and is, subject to acceleration in the event of conversion, redemption and certain events.
Accounting
guidance under ASC 718 dictates that the incremental difference in fair value of Series II and Series I should be recorded as
stock-based compensation expense. As a result of the independent valuation performed, we have recorded the Series II at the fair
value of $2,306,345 at the date of issuance. The Series I had a fair value of $281,345, resulting in a charge of $2,025,000 recorded
as stock based compensation. Additionally, the Series I liability was reclassified to additional paid-in-capital.
Series
J Preferred Stock
On
December 4, 2015, the Board of Directors authorized and on December 7, 2015, the Company filed with the State of Delaware, a Certificate
of Designations of Preferences, Rights and Limitations of Series J Preferred Stock. The Series J Preferred Stock ranks; (a) senior
with respect to dividends and right of liquidation with the Company’s common stock (b) pari passu with respect to dividends
and right of liquidation with the Company’s Series I Convertible Preferred Stock; and (c) junior with respect to dividends
and right of liquidation to all existing and future indebtedness of the Company. Without the prior written consent of Holders
holding a majority of the outstanding shares of Series J Preferred Stock, the Company may not issue any Preferred Stock that is
senior to the Series J Preferred Stock in right of dividends and liquidation. At any time after the date of the issuance of shares
of Series J Preferred Stock, the Corporation will have the right, at the Corporation’s option, to redeem all or any portion
of the shares of Series J Preferred Stock at a price per share equal to 100% of the $1,000 per share stated value of the shares
being redeemed. Series J Preferred Stock is not entitled to dividends, interest and voting rights. The Series J Preferred Stock
is convertible into the Company’s common stock, at stated value, at a conversion price equal to 100% of the arithmetic average
of the VWAP of the common stock for the fifteen trading days prior to the six-month anniversary of the Issuance Date.
On
August 25, 2016, PositiveID completed the acquisition and entered into an agreement with the Sanomedics and Thermomedics (the
“August Agreement”), which amends certain terms of the Purchase Agreement and terminates the Control Agreement. As
a result, the 125 shares of Preferred Series J stock originally issued shall be released from escrow as follows: 71 shares to
Sanomedics and 54 shares returned to the Company’s treasury (see Note 4). As of August 25, 2016, and December 31, 2016,
the Series J preferred stock consideration has a fair value of $71,000.
Stock-Based
Compensation Expense
Stock-based
compensation expense for awards granted to employees is recognized on a straight-line basis over the requisite service period
based on the grant-date fair value. Forfeitures are estimated at the time of grant and require the estimates to be revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company recorded compensation expense
related to stock options, restricted stock and preferred shares of approximately $3.2 million and $0.5 million for the years ended
December 31, 2016 and 2015, respectively. The intrinsic value for all options outstanding was approximately nil as of December
31, 2016 and 2015.
10.
Income Taxes
The
Company accounts for income taxes under the asset and liability approach. Deferred taxes are recorded based upon the tax impact
of items affecting financial reporting and tax filings in different periods. A valuation allowance is provided against net deferred
tax assets where the Company determines realization is not currently judged to be more likely than not.
The
tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities
consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Accrued expenses and reserves
|
|
$
|
575
|
|
|
$
|
411
|
|
Stock-based compensation
|
|
|
2,473
|
|
|
|
1,529
|
|
Intangibles
|
|
|
(93
|
)
|
|
|
(88
|
)
|
Property and equipment
|
|
|
(23
|
)
|
|
|
1
|
|
Net operating loss carryforwards
|
|
|
34,064
|
|
|
|
33,577
|
|
Gross deferred tax assets
|
|
|
36,996
|
|
|
|
35,430
|
|
Valuation allowance
|
|
|
(36,996
|
)
|
|
|
(35,430
|
)
|
Net deferred taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
The
valuation allowance for U.S. deferred tax assets increased by $1.6 million in 2016 due mainly to the generation of U.S.
net operating losses. As a result of the Company’s history of incurring operating losses a full valuation allowance against
the net deferred tax asset has been recorded at December 31, 2016 and 2015.
The
difference between the effective rate reflected in the provision for income taxes on loss before taxes and the amounts determined
by applying the applicable statutory U.S. tax rate are analyzed below:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Statutory tax benefit
|
|
%
|
(34
|
)
|
|
%
|
(34
|
)
|
State income taxes, net of federal effects
|
|
|
(11
|
)
|
|
|
(4
|
)
|
Permanent items
|
|
|
—
|
|
|
|
—
|
|
Change in Tax rate
|
|
|
33
|
|
|
|
1
|
|
Change in deferred tax asset valuation allowance
|
|
|
12
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
%
|
—
|
|
|
%
|
—
|
|
As
of December 31, 2016, the Company had U.S. federal net operating loss carry forwards of approximately $87 million for income
tax purposes that expire in various amounts through 2036. The Company also has approximately $68 million of state net operating
loss carryforwards that expire in various amounts through 2036.
Based
upon the change of ownership rules under IRC Section 382, the Company had a change of ownership in December 2007 exceeding the
50% limitation threshold imposed by IRC Section 382. The Company experienced subsequent changes in ownership during 2008 through
2016 as a result of the Company issuing common shares which could potentially result in additional changes of ownership under
IRC Section 382. As a result, the Company’s future utilization of its net operating loss carryforwards will be significantly
limited as to the amount of use in any particular year, and consequently may be subject to expiration.
The
Company files consolidated tax returns in the United States federal jurisdiction and in the various states in which it does business.
In general, the Company is no longer subject to U.S. federal or state income tax examinations for years before December 31, 2013.
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 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.
On
February 28, 2014, the Company received final notice from the CRA. The Company determined that it will not further appeal the
decision in the final notice and reached a settlement with the CRA, resulting in a partial refund of Stanley’s upfront payment.
As of December 31, 2016, the Company had made payments to Stanley of $665,777, Stanley had received a refund of $129,520. Based
on management’s estimate, including reconciling to Stanley’s accounts, the Company has a recorded tax contingency
liability of approximately $142,000, as reflected on the accompanying consolidated balance sheet as “Tax Contingency”.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
11.
Commitments and Contingencies
Lease
Commitments
The
Company leases certain office space under non-cancelable operating leases, including the Company’s corporate offices in
Delray Beach, Florida under a lease scheduled to expire in October 18, 2018, laboratory and office space in Pleasanton, California
a lease scheduled to expire in September 30, 2018 and office and manufacturing space in Concord, California which is currently
on a month-to-month commitment for approximately $7,600 per month. Rent expense under operating leases totaled approximately $244,000
and $136,000 for the years ended December 31, 2016 and 2015, respectively. Future minimum lease payments under operating leases
at December 31, 2016 are as follows (in thousands):
2017
|
|
$
|
133
|
|
2018
|
|
|
105
|
|
|
|
$
|
238
|
|
Exergen
Litigation
On
October 10, 2012, Thermomedics and its former parent company, Sanomedics (together “Sano”), received a cease and desist
demand letter from Exergen Corporation (“Exergen”), claiming that Sano infringed on certain Exergen patents relating
to Sano’s non-contact thermometers. On May 21, 2013, Exergen filed a complaint in the U.S. District Court of the District
of Massachusetts against Sano. On September 3, 2013, Sano filed its answer to Exergen’s complaint and asserted counterclaims
and affirmative defenses for non-infringement and invalidity of certain patents. On March 26, 2015, Exergen and Sano filed a partial
dismissal that removes Sano’s previous product, the Talking Non-Contact Thermometer, from the lawsuit. On September 15,
2015, the United States District Court – District of Massachusetts, entered an order granting Sano’s motion for summary
judgment, ruling that the patent claims made by Exergen against Sano were invalid. On June 22, 2016, the U.S. Court of Appeals
affirmed the United States District Court – District of Massachusetts’ summary judgment decision in favor of Sano
that the patent claims asserted against Sano by Exergen are invalid. The period for Exergen to object has expired.
LG
Capital Funding Litigation
On
March 7, 2017, LG Capital Funding, LLC (“LG”), filed a complaint in the U.S. District Court of the Eastern District
of New York, related to a 10% Convertible Redeemable Note issued by us to LG on July 7, 2016 in the amount of $66,150 (the “LG
Note”). The LG Note provides that LG is entitled to convert all or any amount of the outstanding balance and accrued interest
of the LG Note into shares of our Common Stock. The complaint alleges breach of contract and anticipatory breach of contract,
asserting, among other things, that we failed to deliver shares of stock to LG pursuant to a notice of conversion, and failed
to reserve a sufficient number of shares of stock issuable under the terms of the LG Note. The Company will answer and defend
against this complaint.
Other
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.
Distributor
and Supplier Agreements
Under
certain agreements the Company may be subject to penalties if they are unable to supply products under its obligations. Since
inception, the Company has never incurred any such penalties.
12.
Employment Contracts and Stock Compensation
On
December 6, 2011, the Compensation Committee approved a First Amendment to Employment and Non-Compete Agreement (“First
Amendment”), between us and William J. Caragol, our CEO, in connection with Mr. Caragol’s assumption of the position
of chairman of the Board effective December 6, 2011. The First Amendment amends the Employment and Non-Compete Agreement dated
November 11, 2010, between us 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 14,778 shares of our restricted
common stock, which vest on January 1, 2016. The remaining $75,000 was paid in 2013. In addition, the First Amendment amends the
change of control provision by increasing the multiplier from 3 to 5 and capping any change in control compensation to 10% of
the transaction value. The First Amendment also obligated us to grant to Mr. Caragol an aggregate of 10,000 shares of restricted
stock over a 4 year period as follows: (i) 2,000 shares upon execution of the First Amendment, which shall vest on January 1,
2014, (ii) 2,000 shares on January 1, 2012, which shall vest on January 1, 2015, (iii) 2,000 shares on January 1, 2013, which
shall vest on January 1, 2018, (iv) 2,000 shares on January 1, 2014, which shall vest on January 1, 2018, and (v) 2,000 shares
on January 1, 2015, which shall vest on January 1, 2018. We and Mr. Caragol agreed to delay the issuance of the first and second
restricted share grants, for a total of 4,000 shares, until we had available shares under one of our stock incentive plans. The
restricted shares were granted on October 4, 2012. These restricted shares have been fully expensed as of December 31, 2016. 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 143 shares of Series I Preferred Stock.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
The
term of Mr. Caragol’s employment agreement ended on December 31, 2015. On April 8, 2016, the Company entered into employment
contracts with both Mr. Caragol and Mr. Probst, effective January 1, 2016. The terms of Mr. Caragol’s employment contract
include a three-year term and a salary of $275,000. Mr Caragol’s salary will automatically adjust to $350,000 at the time
that PositiveID’s common stock is listed on a national exchange. Mr. Caragol is eligible for annual bonuses and was granted
500,000 stock options, which vest; (i) 170,000 on January 1, 2017; (ii) 165,000 on January 1, 2018; (iii) 165,000 on January 1,
2019. These options will expire on January 1, 2021. Mr. Caragol is also entitled to the use of a Company car and related expenses
and an unaccountable expense allowance of $25,000. The terms of Mr. Probst’s employment contract include a three-year term
and a salary of $200,000. Mr Probst’s salary will automatically adjust to $250,000 at the time that PositiveID’s common
stock is listed on a national exchange. Mr. Probst is eligible for annual bonuses and was granted 300,000 stock options, which
vest; (i) 102,000 on January 1, 2017; (ii) 99,000 on January 1, 2018; (iii) 99,000 on January 1, 2019. These options will expire
on January 1, 2021.
If
either Mr. Caragol or Mr. Probst’s employment is terminated prior to the expiration of the term of his employment agreement,
certain significant payments become due. The amount of such payments depends on the nature of the termination. In addition, the
employment agreement contains a change of control provision that provides for the payment of 2.0 times and 2.95 times in the case
of Mr. Probst and Mr. Caragol, respectively of the then current base salary and the same multipliers of the highest bonus paid
to the executive during the three calendar years immediately prior to the change of control. Any outstanding stock options or
restricted shares held by the executive as of the date of his termination or a change of control become vested and exercisable
as of such date, and remain exercisable during the remaining life of the option. The employment agreement also contains non-compete
and confidentiality provisions which are effective from the date of employment through two years from the date the employment
agreement is terminated.
13.
Segments
The
Company operates in three business segments: Molecular Diagnostics, Medical Devices, and Mobile Labs.
Molecular
Diagnostics
The
Company develops molecular diagnostic systems for rapid medical testing and bio-threat detection. The Company’s fully automated
pathogen detection systems and assays are designed 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 developing Firefly Dx, an automated pathogen detection
system for rapid diagnostics, both for clinical and point-of-need applications.
Medical
Devices
Through
its wholly owned Thermomedics subsidiary, the Company markets and sells the Caregiver® product. Caregiver® is an FDA-cleared
for clinical use, infrared thermometer that measures forehead temperature in adults, children and infants, without contact. Caregiver®
is the world’s first clinically validated, non-contact thermometer for the healthcare providers market, which includes hospitals,
physicians’ offices, medical clinics, nursing homes and other long-term care institutions, and acute care hospitals. Our
Caregiver® thermometer with TouchFree™ technology is less likely to transmit infectious disease than devices that require
even minimal contact. It therefore saves medical facilities the cost of probe covers (up to $0.10 per temperature reading), storage
space and disposal costs.
Mobile
Labs
Our
wholly owned subsidiary, ENG, is a leader in the specialty technology vehicle market, with a focus on mobile laboratories, command
and communications applications, and mobile cellular systems. ENG builds mobile laboratories specifically designed for chemical
and biological detection, monitoring and analysis. ENG also provides specialty vehicle manufacturing for TV news vans and trucks,
emergency response trailers, mobile command centers, infrared inspection, and other special purpose vehicles.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
During
2015, the Company operated in a single segment. The following is the selected segment data as of and for the year ended December
31, 2016:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Mobile Labs
|
|
|
Medical
Devices
|
|
|
Molecular
Diagnostics
|
|
|
Corporate
|
|
|
Total
|
|
|
Total
|
|
Revenue
|
|
$
|
5,027
|
|
|
$
|
417
|
|
|
$
|
115
|
|
|
$
|
—
|
|
|
$
|
5,559
|
|
|
$
|
2,940
|
|
Operating income (loss)
|
|
$
|
(257
|
)
|
|
$
|
(462
|
)
|
|
$
|
(828
|
)
|
|
$
|
(5,600
|
)
|
|
$
|
(7,147
|
)
|
|
$
|
(4,426
|
)
|
Depreciation and amortization
|
|
$
|
(79
|
)
|
|
$
|
(109
|
)
|
|
$
|
(111
|
)
|
|
$
|
(1
|
)
|
|
$
|
(300
|
)
|
|
$
|
(258
|
)
|
Interest and other income (expense)
|
|
$
|
(3
|
)
|
|
$
|
(60
|
)
|
|
$
|
22
|
|
|
$
|
(5,873
|
)
|
|
$
|
(5,914
|
)
|
|
$
|
(6,978
|
)
|
Net loss
|
|
$
|
(260
|
)
|
|
$
|
(522
|
)
|
|
$
|
(806
|
)
|
|
$
|
(11,473
|
)
|
|
$
|
(13,061
|
)
|
|
$
|
(11,404
|
)
|
Goodwill
|
|
$
|
199
|
|
|
$
|
91
|
|
|
$
|
510
|
|
|
$
|
—
|
|
|
$
|
800
|
|
|
$
|
817
|
|
Segmented assets
|
|
$
|
1,349
|
|
|
$
|
514
|
|
|
$
|
606
|
|
|
$
|
93
|
|
|
$
|
2,562
|
|
|
$
|
4,695
|
|
Expenditures for property and equipment
|
|
$
|
(7
|
)
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(8
|
)
|
|
$
|
(3
|
)
|
14.
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”). 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.
At
the time of entering into the Boeing Teaming and License Agreements we evaluated the Boeing license revenue recognition and concluded
that all elements necessary to complete the earnings process were complete as of the date of receipt of the $2.5 million of license
fees, with the exception of the completion of the terms of the Teaming Agreement, which is a delivery requirement under the License
Agreement. The Teaming Agreement, as extended, expired in August 2015, and as such the $2.5 million license fee previously received
recorded as deferred revenue was recognized during the year ended December 31, 2015.
15.
Subsequent events
On
January 18, 2017,
the Company
closed
a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase of two Convertible Redeemable
Notes in the aggregate principal amount of $200,000 (the “Notes”), with the first note being in the amount of
$100,000 (“Note I”), and the second note being in the amount of $100,000 (“Note II”). Note I has been
funded, with the Company receiving $70,000 of net proceeds (net of legal fees and OID). Note II will initially
be paid for by the issuance of an offsetting $88,000 secured note issued to the Company by the lender (the “Secured
Note”). The funding of Note II is subject to the mutual agreement of the lender and the Company. The lender is required
to pay the principal amount of the Secured Note in cash and in full prior to executing any conversions under Note II. The
Notes bear an interest rate of 10%, and are due and payable on January 13, 2018. The Note may be converted by the lender at
any time into shares of Company’s common stock at a price equal to
the lesser of a 37.5% discount to the common
stock price on the date of the note or a 37.5% discount
of the lowest trading price for
the Company’s common stock 20 days prior trading days including the day upon which a notice of conversion is received
by the Company.
The Notes also contain certain representations, warranties, covenants and events of default, and
increases in the amount of the principal and interest rates under the Notes in the event of such defaults. In connection with
the issuance of Notes, the Company will record a debt discount, related to the embedded conversion option derivative
liability. As the note conversion includes a “lesser of” pricing provision, a derivative liability will also be
recorded.
On
January 30, 2017, the Company increased the authorized capital stock from 3.9 billion shares to 20 billion shares (19.995 billion
common) and changed the par value of the Company’s common stock from $0.001 to $0.0001.
All
share values in our historical financial statements have been adjusted to reflect the change in the par value of the common stock
(see Note 1).
On
January 31, 2017,
the Company
closed
a Securities Purchase Agreement (“SPA”) with a lender, dated January 30, 2017, providing for the purchase of a Secured
Convertible Promissory Note (the “Note”), in the aggregate principal amount of up to $412,500. The Note
has been funded with the Company receiving $375,000 of net proceeds (net of OID). The Note has a 10% original issuance discount
to offset transaction, diligence and legal costs. The Note bears an interest rate of 10% and matures12 months after the tranches
are funded. The Note may be converted by the lender at any time into shares of Company’s common stock at a price equal to
62.5% of the lowest closing bid price for the Company’s common stock during the 20 trading days immediately preceding a
conversion date.
In connection with the issuance of the note, the Company will record a premium as the note is considered
stock settled debt under ASC 480.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
On
February 2017, the Company received notice from a holder and was told verbally that a second holder intended to send a notice
(the “Notifying Holders”) of convertible redeemable promissory notes with an aggregate face value of approximately
$120,000 (the “Notes”), that certain events of default had occurred. This debt comprises approximately 2% of the Company’s
outstanding convertible debt. The notice received to date asserts and the Company expects that the notice that will shortly be
sent will assert that the Company is in default under the terms of the Notes because the Company failed to tender conversion shares
to the Notifying Holders within three business days of notices of conversion, and failed to reserve the amount of shares required
if the Notes would be fully converted (the “Events of Default”). As a result of the potential Events of Default, interest
on the Notes increases and additional penalties may accrue. The Company is in ongoing discussions with the Notifying Holders regarding
a resolution of the matter.
On
March 7, 2017, LG Capital Funding, LLC (“LG”), filed a complaint in the U.S. District Court of the Eastern District
of New York. The complaint alleges breach of contract and anticipatory breach of contract. The Company will answer and defend
against this complaint (see Note 11).
On
March 13, 2017, the Company received written consent in lieu of a meeting of stockholders (the “Written Consent”)
from holders of shares of voting securities representing approximately 86% of the total issued and outstanding shares of voting
stock of the Company and a unanimous written consent of the Board to approve the following: the granting of discretionary authority
to the Board, at any time for a period of 12 months after the date of the Written Consent, to authorize the adoption of an amendment
to the Company’s Third Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”),
to effect a reverse stock split of the Company’s common stock at a ratio not to exceed 1 for 1,000 to 1 for 3,000, such
ratio to be determined by the Board, or to determine not to proceed with the reverse stock split; and the granting of discretionary
authority to the Board for a period of 12 months after the date of the Written Consent, to authorize the adoption of an amendment
to the Certificate of Incorporation to decrease the Company’s authorized capital stock, from 20 billion shares down to an
amount not less than 50 million shares, such decrease to be determined by the Board, or to determine not to proceed with the decrease
in authorized capital stock (collectively, “the Amendments”). The Company filed a preliminary information statement
on March 17, 2017, and a revised information statement on March 24, 2017, announcing these Amendments. Assuming no further comments
from the SEC, the Company intends to file a definitive information statement within 10 days of the date of filing its revised
information statement. The earliest date that the Amendments can be filed with the Secretary of State of the State of Delaware
and become effective is twenty (20) calendar days after the definitive information statement is first sent or given to the stockholders.
On
March 14, 2017, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of two Convertible Redeemable Notes in the aggregate principal amount of $104,000 (the “Notes”), with the first note
being in the amount of $52,000 (“Note I”) and the second note being in the amount of $52,000 (“Note II”)
with a maturity date of March 14, 2018. Note I has been funded, with the Company receiving $47,500 of proceeds, net of OID
of $2,000 and legal fees of $2,500. Note II was initially paid for by the issuance of an offsetting $52,000 secured note issued
by the Lender to the Company (“Secured Note”). The Notes bear an interest rate of 12%; and may converted be at any
time after 180 days of the date of closing converted into shares of Company common stock convertible at the lesser of a 37.5%
discount to the common stock price on the date of the note or a 37.5% discount to the price of our common stock price at the time
of conversion. The Notes also contain certain representations, warranties, covenants and events of default, and increases in the
amount of the principal and interest rates under the Notes in the event of such defaults. In connection with the issuance of Notes,
the Company will record a debt discount, related to the embedded conversion option derivative liability. As the note conversion
includes a “lesser of” pricing provision, a derivative liability will also be recorded.
On
March 24, 2017
,
the Company
closed a Securities
Purchase Agreement (“SPA”) with a lender, providing for the purchase of two Convertible Redeemable Notes in the aggregate
principal amount of
$89,150
(the “Notes”), with the first note being
in the amount of
$44,575
(“Note I”), and the second note being in the
amount of
$44,575
(“Note II”). Note I has been funded, with the Company
receiving
$35,000
of net proceeds (net of legal fees and OID).
Note II will initially be paid for by the issuance of an offsetting
$39,250
secured
note issued to the Company by the lender (the “Secured Note”). The funding of Note II is subject to the mutual agreement
of the lender and the Company. The lender is required to pay the principal amount of the Secured Note in cash and in full prior
to executing any conversions under Note II. The Notes bear an interest rate of 10%, and are due and payable
December 24,
2017
. The Note may be converted by the lender at any time into shares of Company’s
common stock at a price equal to
the lesser of a 37.5% discount to the common stock price on the date of the note or a
37.5% discount
of the lowest trading price for the Company’s common stock 20 days
prior trading days including the day upon which a notice of conversion is received by the Company.
The Notes also contain
certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest
rates under the Notes in the event of such defaults. In connection with the issuance of Notes, the Company will record a debt
discount, related to the embedded conversion option derivative liability. As the note conversion includes a “lesser of”
pricing provision, a derivative liability will also be recorded.
On
March 29, 2017, the Company, filed a Certificate of Elimination (the “Certificate of Elimination”) for its Series
I Convertible Preferred Stock (“Series I”) with the Delaware Secretary of State to eliminate from its Third Amended
and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), all references to the
Company's Series I. No shares of the Series I were issued or outstanding upon filing of the Certificate of Elimination. The Company
also filed, on March 29, 2017, an Amended Restated Certificate of Designations of Preferences, Rights and Limitations of Series
II Convertible Preferred Stock (the “Amended Certificate of Designation”). The Amended Certificate of Designation
was filed to increase the authorized shares of Series II Convertible Preferred Stock from 3,000 shares to 4,000 shares. No other
terms were modified or amended in the Amended Certificate of Designation.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
The
Company, subsequent to year end
:
|
●
|
issued
shares of Series II Preferred shares
(“Series II”) as follows: (i) 50 shares of Series II were issued to each of three independent board members as
a component of their 2017 compensation (150 shares total); and (ii) 685 shares of Series II were issued to the Company’s
management as a component of their 2016 incentive compensation at a stated value of $1,000 per share. These Series II is only
forfeitable after the exchange date up to January 1, 2019 upon termination for cause and is, subject to acceleration in the
event of conversion, redemption and certain events.
|
|
|
|
|
●
|
received
$235,000 of net proceeds from back end notes and $102,900
of net proceed from a factoring agreement for a total of $337,900 net proceeds (see Note 8).
|
|
|
|
|
●
|
issued
a
non-cash note to a lender in the amount of $15,000,
as penalty.
|
|
|
|
|
●
|
issued
4.1
billion shares of common stock for the conversion of
notes with a principal value of approximately $827,000.
|